While in almost every way the U.S. presidential election results are depressing, in terms of work on the international financial institutions (IFIs), the picture may not be so bleak. The irony is that when it comes to the IMF and World Bank, there is probably more room for progress under a second Bush Administration than there would have been under a Kerry presidency.

Mixed Signals During the First Term

The first Bush Administration had an uneven approach to the IFIs. In large part this was due to neglect; they just were not a priority. The Administration, after all, is a unilateralist bunch, not much interested in how they can play well with others. That has meant two things: the U.S. has failed to take full advantage of the political tools the institutions can be in the hands of a savvy U.S. Treasury Department; and the staffs of the institutions have been left playing a guessing game. What does the most powerful shareholder really want? What will it provide funds for? Does it want to use the institutions differently or make them irrelevant?

The IMF & World Bank staffs are not the only ones scratching their heads. The U.S.’s partners in the G7 (the U.K., France, Canada, Italy, Germany, Japan) are at something of a loss too. Unable to nudge the U.S. into joining in a consensus on the institutions’ direction, their own capacity to make use of the IFIs has been reduced.

Had John Kerry been elected President, it is quite probable that his Administration would have returned to the approach used by the Clinton Administration. That would have meant less talk about reform and redirection, less discussion of debt cancellation, a more united front on how to extend control over Southern country economies, and the persistence of pro-corporate business-as- usual.

When it bothers to pay attention to the IFIs, the Bush Administration makes them a more interesting place. It is clearly not satisfied with the status quo, which is why it opens up more possibilities than Kerry would have. The question instead is whether the Bush Administration’s actions will make things better or worse.

The Meltzer Report & Radical Reform of the IFIs

Looming over the IMF and World Bank since Bush was made President has been “the Meltzer Report” – a study ordered by the Republican-controlled Congress as a condition of approving an $18 billion increase in appropriations to the IMF in 1998. The commission’s chairman, Allan Meltzer, and the majority of its members were Republicans, so the Clinton Administration paid little attention to it when it was released in 2000. But when Bush took office, word went out that the report would serve as a blueprint for the Administration’s IFI policy.

The Meltzer Report is a radical document. Its accusations of unacceptable rates of failure at the institutions helped to tarnish their reputations in the U.S. Congress. The Report contains some dangerous proposals, such as a significant shift from supporting public services to an emphasis on private-sector domination, though the World Bank was already headed in that direction. But it also contains ideas that no one in a position of influence had dared utter before, such as getting the IMF out of Africa and other deeply impoverished regions altogether, and getting the World Bank out of the business of financing projects in middle-income countries that could easily get financing from other sources. Despite its emphasis on the private sector, it bluntly questioned the legitimacy of the World Bank’s private-sector department, the International Finance Corporation (IFC), which frequently ends up investing in projects led by large multinational corporations.

The logic employed by the Meltzer Report for arriving at positions similar to those that groups like the 50 Years Is Enough Network take was an extreme application of “market fundamentalism.” The report takes seriously the “invisible hand” theory of capitalism: if government intervention is eliminated and markets are allowed to run their natural course, everyone will benefit. It is this simple faith in the power of capital and markets to cure all ills – a prescription that usually benefits those with capital a great deal more than those without – that makes the IFIs so destructive. The saving grace of the Meltzer Report is that its proposed remedies are sweeping enough to open up space for fundamental change.

The Bush Administration was slow to push for any Meltzer- style reforms at the institutions – again, because it was not high on their agenda. Its first Treasury Secretary, Paul O’Neill, was a maverick given to making the occasional lacerating comment about IMF policy prescriptions, but on the whole had little interest in developing countries (apart from his public relations tour of Africa with rock star Bono). John Snow, O’Neill’s successor, showed no more interest in the IFIs, and was not inclined to off-the-cuff critiques. John Taylor, the Undersecretary of the Treasury for International Affairs, who is the day-to-day point person on IFI issues, has managed to focus more on the institutions since Snow came into office.

Moving from Loans to Grants

The Administration’s first reform agenda was aimed at the World Bank, and was announced by Bush himself in 2002 when he was trying to demonstrate that he had something other than threats and bombs for the rest of the world. He was committed, he said, to getting the World Bank to stop giving loans to severely impoverished countries; instead it should be giving grants. The proposal was that the Bank immediately convert half its lending portfolio in impoverished countries to grants.

While many welcomed the idea as one that could begin to stop the cycle of loans and indebtedness most impoverished countries find themselves in, the proposal also generated skepticism. Would Bush simply make the announcement and then do little to make it happen? Was this a way of trying to destabilize the Bank, and make the U.S. government an even bigger player in determining development policy? Would the grants be aimed chiefly at the private- sector initiatives the Bush Administration was pushing at the Bank, and in essence subsidize privatization of essential services such as water provision in the most vulnerable and impoverished countries? Would the grants be even more heavily conditioned than the usual World Bank loans?

The grants proposal met with substantial opposition from the other G7 countries, which feared that it would signal a gradual defunding of the Bank, since it would be getting less money in the form of repayments. Less money would mean less power and influence, and other governments are very aware that their influence is magnified by being part of the Bank’s power structure. But the U.S. played hardball for many months, and eventually settled for the conversion of about 20% of World Bank programs to grants. Most of the grant money is, at this point, being channeled to HIV/AIDS programs and other relatively non-controversial endeavors. Thus far, the grants have not been used to impose extra conditions, and it remains unclear whether they will be used to subsidize private-sector takeovers of public services

There can be no doubt that it is preferable to have HIV/AIDS programs – or indeed any programs – paid for through grants rather than loans, provided the conditions attached are no more onerous. The Bush Administration’s motivation for pushing the grants proposal is probably to make development more efficient, in a capitalist sense – i.e., the cycle of borrowing, rescheduling, and repaying is in itself costly, and inhibits countries from becoming part of the global economy. The quest for efficiency is not the same as the quest for justice, but perhaps the two are not entirely contradictory. The question for activists is how suspicious we need to be: when can we be sure no new conditions are going to pop up? How do we accept that what is on offer is better than what has existed previously without suggesting that it is sufficient?

At the same time as the grants proposal, the Administration announced its Millennium Challenge Account program. Its headline was that it would substantially increase the U.S. foreign aid budget. Its funds would go to a limited number of impoverished countries that met the U.S.’s standards on economic policy, human rights, and democracy. (Some of the rankings were essentially outsourced to the right-wing Heritage Foundation.) Some welcomed the pledge of increased aid, but for many the MCA seemed to confirm the suspicion that Bush wanted to supplant the World Bank with a direct method the U.S. could use to shape international development policy. The MCA has now finished just one cycle of funding – and at lower levels than promised. Suspicion about the program’s intentions and impacts still seems to be the general reaction in the progressive development community.

New Noises on Debt

In the last few months, the Bush Administration has been challenging economic justice activists again – this time on the subject of debt. But it has also been challenging the other G7 governments, and now we find ourselves in the unfamiliar and uncomfortable position of defending the Bush Administration from the suspicions of European governments and European activists.

The U.K., traditionally the leader on debt issues, was the first to go public with a new debt proposal at the June 2004 G8 (the G7 + Russia) Summit meeting in the U.S. It proposed that the heavily indebted and impoverished countries that have been led along by the Heavily Indebted Poor Countries (HIPC) initiative of the IMF and World Bank be offered “up to 100%” multilateral debt relief, and that the cancellation be “financed” by increased contributions from wealthy governments and by selling or revaluing some of the IMF’s gold stocks, which are worth about $40 billion. The U.S., to the surprise of many, did not reject the idea. Its officials entered into negotiations with those from the U.K., but failed to reach a joint position either at the G8 summit or in October at the G7 Finance Ministers’ meeting, when the U.S. had a more concrete proposal: 100% multilateral debt cancellation for over 30 (possibly over 40) countries, “ financed” from the IMF and World Bank’s own resources.

The general assumption was that the U.S. government’s incentive to cooperate on debt cancellation was the importance it placed on obtaining nearly complete cancellation of Iraq’s foreign debt cancelled. The Bush Administration’s initial calls for debt cancellation for Iraq sounded a great deal like the arguments debt campaigners have been making about odious and illegitimate debt for decades: the debt results from loans taken by an anti-democratic dictator who used the monies to oppress rather than benefit his people. Debts accumulated by Marcos in the Philippines, Mobutu in Zaire/Congo, the apartheid regime in South Africa, Suharto in Indonesia, Duvalier in Haiti, the military junta in Argentina, and Somoza in Nicaragua – to name a few – have been the subject of identical arguments, bolstered by the doctrine of “odious debt,” which was used by the U.S. to disavow Puerto Rico’s debts after the Spanish-American War. The Administration tried to insist that its arguments in the case for Iraq should not be applied elsewhere. Campaigners in the U.S. were left wanting to make use of a precedent in the case of Iraq, if the international community should go along, while at the same time not wishing to support a maneuver that seemed to shore up the U.S. invasion and occupation.

French President Jacques Chirac made clear that a well- endowed country like Iraq should not receive deeper and more rapid debt cancellation than the more impoverished countries that have been paying debts for decades. Unfortunately neither he nor other powerful opponents of U.S. policy took the step of saying that dozens of countries warranted the same treatment the U.S. was suggesting for Iraq; instead they argued that Iraq should be treated the same as other middle-income countries like Sri Lanka. It was left to the U.S. to take up the challenge by offering to go further than ever on debt cancellation for the world’s most vulnerable countries.

An agreement on the Iraq debt question was reached shortly after the U.S. election: the G7 and other creditors will cancel 80% of Iraq’s debts – well short of the U.S.’s stated objective of 95%. Activists feared that if the Administration’s proposal for broader debt cancellation was designed in part to appeal to voters, its interest would drop sharply after November 2nd, and that a deal on Iraqi debt would remove any incentive. But the U.S. proposal seems to be going forward. A concerted campaign by the Jubilee USA Network and its allies succeeded in focusing attention on the two proposals; those efforts likely helped provoke U.S. Treasury Secretary John Snow to make his first public statement on the U.S. debt position on debt, a move which makes it harder for the U.S. to walk away.

It is also just possible – however implausible it may sound – that the Administration is serious about its stated goal. Again, the Administration’s motivation may be less political than ideological, with principles of capitalistic efficiency trumping the old reliance on debt cycles for control of Southern economies. If this path of market fundamentalism intersects with the positions of global justice advocates, how suspicious should we be? Is the U.S. proposal – far more expansive than anything suggested during the Clinton Administration – worth supporting?

Comparing the Two Debt Proposals

In mid-December, the U.K. government released the full, detailed version of its proposal. Early analyses indicate that it falls far short of the hopes that Gordon Brown, the U.K. finance minister, encouraged with his announcement in late September. Only governments that have proven themselves loyal IMF students will be eligible, so adherence to the IMF’s standard prescriptions is the de facto conditionality of the program. It also emerges that the plan does not call for cancellation, but rather for donor countries to pay the debt service of the beneficiary countries for a period of ten years, with a possible extension for countries judged to have not achieved the U.N.’s Millennium Development Goals. For countries not receiving an extension, the principal would be altered very little, and in ten years’ time the countries will have their old debts plus the new ones they’ve accumulated.

In contrast to the U.K. proposal, the U.S.’s has never been written down and released publicly, making it harder to compare the two. We thus do not know if it would impose conditions, and if so what sort, on countries benefiting from cancellation. Nor do we know how the conditions would be imposed. Under the U.S. plan, the IMF would be making far fewer loans to crisis countries, so other vehicles for imposing conditions would have to be found.

What we do know about the two proposals is this: the U.S. supports 100% multilateral debt cancellation for between 33 and 42 countries (as opposed to the suspension of debt service payments for the 22 or so in the U.K.’s plan). The British plan calls for a new revaluation of IMF gold stocks – a method of raising money used once before, in 1999, for debt relief. The U.S., fearful that Congress would step in to stop or condition a revaluation, proposes only using funds left over from the 1999 process. What the U.S. does not accept is that it is necessary to fully compensate the IFIs for the money they would not be receiving as a result of the debt cancellation. The U.S. suggests re-arranging IFI funds, and makes specific suggestions on how that could be done. One is to shift all the funds in the IMF’s Poverty Reduction and Growth Facility (PRGF) – the outrageous euphemism the IMF has adopted for its structural adjustment loans – and close down the PRGF for good. Doing this would represent a two-for-one deal: erasing the debt and eliminating the money the IMF uses to make coercive loans with destructive conditions.

The U.S. proposal would not require any new allocations to the IMF or World Bank from the donor countries. This may be part of the Administration’s desire to weaken the institutions. But it may be just as much a recognition of political reality: Congress is very unlikely to approve any additional funding for the IFIs at this time, and the Japanese and German governments have made it clear that they will not provide any such funding either. If the three largest donors to the institutions do not provide new finances, it seems apparent that the U.K. proposal cannot work, even on its own limited terms.

The Potential Danger

Debt cancellation and weakening the IMF: sound great – so what’s the catch? The U.S. proposal, as it has been explained so far, makes no explicit mention of conditions attached to the debt cancellation. But in a speech shortly before the IMF/World Bank annual meetings, Treasury Secretary Snow said that he would support the creation of a “new IMF facility” which could continue to “monitor” developing countries’ economic policies even without making any loans. If this idea goes forward – and a recent statement from Canadian Finance Minister Ralph Goodale suggests it is gathering momentum – it could be a disaster. Such a facility could institutionalize the IMF’s role as “gatekeeper” for all sorts of aid funds and allow the institution to control economies it would otherwise have no purchase on. In other words, it could end up making the IMF stronger and at the same time relieve it of providing any funds.

The 50 Years Is Enough Network’s Position

While we are concerned about the possibility of a new IMF facility, the 50 Years Is Enough Network’s position at this point is based on what we have heard about the official proposal.

It has been a longtime policy of the 50 Years Is Enough Network to support unconditional 100% cancellation of multilateral and bilateral debts. We have argued that the debt is illegitimate -- in the face of decades of economic and environmental exploitation -- and that the IFIs need to abandon their claims as a matter of justice. We do not believe that any thought has to be spared on how to “finance” the relief: if the World Bank and IMF are seriously committed to development, they should acknowledge that the best possible development assistance for impoverished countries is the elimination of foreign debt. There should be no higher priority for the institutions, and talk that they cannot “afford” it should be dismissed.

It is pleasing to see a major government share, in part, our position, though that pleasure is greatly tempered by the fact that it is the Bush Administration.

Unfortunately not everyone sees the Bush proposal in a positive light. A number of civil society organizations, particularly those based in Europe, see the Bush proposal as a subterfuge – part of its project of weakening the IFIs. Their main reason for rejecting the proposal, and, in many cases, supporting the U.K. plan, is that the U.S.’s proposal would not insure “additionality of aid” for countries benefiting from debt cancellation. That is, because the U.S. would not seek “financing” for all of the debt cancellation, some countries would likely receive less in total aid than they did before.

The 50 Years Is Enough Network has argued that this position ignores the greater value that debt cancellation represents over new aid funds. Cancellation begins to reduce the grip of the IFIs on countries’ economic policies, makes the economic system more honest and just, gives governments greater flexibility in allocating their resources, and allows civil society the opportunity to have more active involvement in monitoring their countries’ total indebtedness. The aid, of course, is more IMF and World Bank loans and grants, which often cause more damage than improvement. The loans also add to the total debt burden.

The U.K. and the U.S. governments are likely to bring up their proposals again at the meeting of G7 Finance Ministers in early February. Debt campaigners in the U.S. are focusing on that meeting as the first occasion when a decision can be made. The decision is more likely to come at the April meeting of the Finance Ministers, in Washington immediately before the IMF/World Bank spring meetings, but the most likely time for an announcement will be the G8 Summit in the U.K. (Gleneagles, Scotland to be precise) in early July.

The tsunami disaster has spurred talk of a moratorium on debt payments for affected countries, and the U.K. has suggested that outright cancellation may be warranted in some cases. That question is likely to be considered at the February finance ministers’ meeting, and may add some momentum to moves to reach an agreement on the larger debt question.

The 50 Years Is Enough Network supports the U.S. debt cancellation proposal in its current form, as we understand it. It is not perfect: we reject, for example, the limitations put on the list of beneficiary countries. But the proposal has, in our view, broken an important barrier in separating the subject of debt cancellation from the question of “financing.” While many find this aspect troubling, we welcome the recognition that it is not necessary to maintain the current status of the IFIs’ accounts when we discuss something as important as debt cancellation. Too often debt cancellation advocates have been turned into accountants trying to figure out how to keep the IMF and World Bank just as powerful as they are now. If the IFIs are in large part the cause of the debt crisis, which we believe is an established fact, we have to make this choice. It is unfortunate that it is the U.S. government proposing it, since that ensures almost insurmountable suspicion from many quarters. But our job is not to remain politically pure, but to keep our eyes on the prize - wresting control of economic policy from destructive institutions and forces.

We will oppose the U.S. proposal if at any point it calls for conditions in addition to those that countries are already enduring. We will campaign against any move to make the proposal part of a package with a new IMF facility that increases the institution’s power.

Looking Ahead…

Apart from debt cancellation, it is not clear that the ideological stance of the Bush Administration will yield more good news for global justice activists. Most of the U.S. agenda is likely to focus on encouraging private- sector penetration of new markets and privatization of what government-owned entities still remain. But it is possible that the agenda will include other measures that could weaken the IFIs. We are very conscious of the risk of taking power away from the IFIs only to see a fanatical U.S. government assume that power and go on to abuse it even more, subordinating international development policies more completely to the U.S.’s imperialist foreign policy. On the question of debt, we are satisfied for now that the Administration has provided a valuable opening. It will be up to civil society and Southern governments to make sure that opening is exploited not by the U.S. government but for the benefit of the people of developing countries.