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'Excluded' countries should stand up to IMF, says economist

ISTANBUL - Hürriyet Daily News | 10/13/2010 12:00:00 AM | FADIL ALİ RIZA

Low and middle-income countries have been disenfranchised by IMF decisions primarily made by rich countries, according to a leading figure in economic analysis.

Low and middle-income countries have been disenfranchised by International Monetary Fund decisions primarily made by rich countries, according to a leading figure in economic analysis.

Many IMF stipulations, including cutting government subsidies and privatizing public assets, make it “very difficult or impossible for a country to have a development strategy,” Mark Weisbrot, an economist and co-director of the Center for Economic and Policy Research in Washington D.C., recently told the Hürriyet Daily News & Economic Review.

As such, it is now time for such disenfranchised countries to band together and change IMF policy, Weisbrot said.

Countries that have already developed did so largely through protectionist policies, Weisbrot said, adding that current IMF policies are hurting poorer countries since the fund now ensures that countries receiving loans have no protectionist policies.

In this way, free market principles appear to benefit rich countries and maintain a static economic and power balance among countries, he said.

Weisbrot said countries that developed later in the twentieth century, like Japan and South Korea, planned development strategies which envisioned a significant role for the state in the management and protection of the economy.

“To subsidize exports through various means, they used all kinds of restrictions on trade, they created their own industries,” Weisbrot said. “You can go [further] back, to the United States for example. From the 1870s to World War I, [the U.S.] had the highest tariffs of any country in the world. They all found a way to have an industrial and development strategy and the IMF, in its agreements, [now] really makes that difficult or impossible.”

Emerging countries have been pushing for decades, with little success, to have a greater share of voting power within the IMF. At the September G-20 meetings last year, member states voiced support for a shift in country representation at the IMF of at least 5 percent toward dynamic emerging markets and developing countries.

Meanwhile, at the IMF-World Bank annual meeting in Washington last weekend, IMF Managing Director Dominic Strauss-Kahn said he hoped to have an agreement on granting emerging market countries more voting power within the next couple of weeks. U.S Secretary of the Treasury Timothy Geithner also echoed this view, lending his support to greater representation for emerging countries.

However, Weisbrot sees two problems with this move. Quoting the Financial Times, Weisbrot called the 5-percent shift “cosmetic.” “I think it’s too small to really make a difference.”

Furthermore, Weisbrot does not think emerging countries have used the power they already have in the IMF to stand up to richer countries.

“These really small changes don’t have that much impact because the low- and middle- income countries aren’t using the power that they already have. If they’re not willing to fight, then another two seats on the executive board aren’t going to change anything,” said Weisbrot.

Much of the reporting on the IMF-World Bank annual meetings this year focused on the possibility of a “currency war” and the IMF’s role in preventing one. In an interview with the BBC conducted at the meetings, Strauss-Kahn said current currency disputes showed that countries were not co-operating as well as they had during the financial crisis, leading Bloomberg to run the headline, “Finance Leaders Call for IMF Role in Averting Protectionist ‘Currency War.’” However Weisbrot believes rich countries “are looking at it from a different perspective.”

[HH] ‘Currency wars and currency stabilization are different’

“They’re looking at it from a perspective that is unrealistic and counterproductive in a way. They think it’s okay to let what they think are markets determine the value of currencies, and so they see the government that intervenes in order to maintain a stable and competitive real-exchange rate, for example, might be doing something wrong, and I don’t think that’s wrong in the current environment. I think every government should try to do that,” said Weisbrot.

Weisbrot explains that the issues of currency wars and currency stabilization are often confused as the same thing in rich countries. He gives the example of Brazil and how money flowing into the country requires currency stabilization from the Central Bank.

“The dogma of the rich countries’ central banks is that the central bank should never target the exchange rate, they should only target inflation. But in reality a lot of countries target the exchange rate, and it makes sense,” said Weisbrot.

“Look at what’s happening in Brazil. They get big capital inflows, and their currency becomes overvalued, it slows their economy, and destroys a lot of their industry. Now if they intervene to stop that from happening, that’s not a currency war, that’s just trying to stabilize their currency and keep it from appreciating in a way that’s destructive. I don’t think that in the debate that you’re seeing right now, the comments that come from the rich countries or some of the press here, they don’t make that distinction,” he said.

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