International Monetary Fund

Michel Camdessus, managing director of the International Monetary Fund (IMF), announced that he would step down by mid-February 2000. Camdessus cited personal reasons, and said it was a good time for transition in the institutional leadership. Camdessus suggested that he took the appointment in 1997 knowing he wouldn't serve the full five-year term - but he didn't want a change in leadership in the middle of Asia's financial crisis. Camdessus said that for him to complete his current term "would be inappropriate in a world in permanent need of renewal of its institutions."

His move comes as investigations into possible misappropriation and money laundering of IMF funds from Russia intensify. In addition, the IMF and other international lending institutions have recently admitted that assistance programs linked with stiff austerity requirements may have actually added to the difficulties in some recipient nations in Asia.

His action may be linked to opposition to the IMF's unpopular practice of linking aid to austerity measures as well as the need to keep the IMF from being dragged into the Russia money laundering scandal. Whether IMF officials were directly involved in the Russian bank scandal, or it was simply a case of mismanagement, the IMF is nonetheless faced with a crucial leadership decision.

The debate over the next IMF leader may well leave the institution paralyzed, as factions push for a leader who will redefine policy in their terms. The fundamental battle is between the United States, the IMF's biggest donor, which demands that loans be conditioned on radical free market reforms, and other donors and recipients, who argue that loans should be sensitive to individual concerns and situations.

A key example is found in the underlying tension over whether capital controls are legitimate economic tools. Since Asia's financial crisis, when Malaysian Prime Minister Mahathir Mohamad refused IMF assistance, opting instead for capital controls, the issue has triggered hot debate. Malaysia's economic recovery, independent of IMF assistance and without severe economic reforms and social consequences, has inspired other Asian IMF recipients to support, or at least not condemn, limited capital controls [ http://www.stratfor.com/asia/aiuarchive/b990226.htm ].

Beyond capital controls, the debate is between proponents of a unified, global economic system and proponents of more regional options. With Camdessus no longer at the helm, these factions will attempt to wield their influence during the search for a new managing director.

This will pit nations like the United States - advocates of the one-solution-fits-all free-market policy - against countries like Japan, which is supportive of more regional economic security nets, including an often-proposed Asian Monetary Fund. The United States will likely call for more auditing, tighter controls, transparency and restrictions in light of the Russian bank scandal. However, these very principles have been tearing the IMF apart all along, as they contrast with the desires of nations like Japan and recipient nations, forced to accept stringent reforms while begging for assistance.

As with the long-running debate over the choice of the World Trade Organization (WTO) head earlier this year [ http://www.stratfor.com/SERVICES/GIU/050699.ASP ], the selection of a replacement for Camdessus will likely paralyze the management of the IMF. If accusations of institutional complicity, or even gross mismanagement or neglect, in the Russian scandal are raised, the IMF will be further discredited. The debate opened by Camdessus' resignation, then, threatens the very viability of the organization.

The IMF is the key proponent of the idea of a unified global economy. If it is crippled by infighting and potentially discredited by scandal, such a global economic system itself is in jeopardy. This, in turn, would lend credence to calls for regional systems operating under differing rules. It may also trigger new or relapsed economic crises, as donor nations call in loans and the IMF suspends new distributions. While Camdessus may indeed have resigned for personal reasons at a time of relative financial stability in the world, the result may be an accelerated realignment of the global economy.

Moldova’s parliament voted no confidence in Prime Minister Ion Sturza and his government on Nov. 9 in a disagreement over economic policy. The International Monetary Fund (IMF) had conditioned future loans on a series of Western-style reforms, including government divestiture of the country’s tobacco and wine industries - two of the country’s three chief industries. Though relatively isolated in southeastern Europe, Moldova is now engaged in a struggle that has larger strategic implications for the region.

The parliament voted 58-42 to oust Sturza’s government. The Alliance for Democracy and Reforms, which created the Sturza Cabinet just nine months ago, abstained from the vote. The Communists and the Popular Front will now form a coalition to choose a new government, which will be appointed by President Petru Lucinschi within 10 days.

Essentially, the government fell because of Western demands. With its economy and currency in decline, the country has been due to receive a $35 million installment of funds from the IMF. However the transfer has been contingent on the government meeting certain demands. It must amend its 1999 budget, approve the 2000 budget and privatize the wine and tobacco industries.

The IMF played hardball, insisting that these conditions be met quickly and that the reformist Sturza government remain in place. Richard Haass, the IMF mission chief, said Nov. 5 that the government needed to meet all three requirements by early December and that efforts to dismiss the current reformist government would only interfere with loan approval. Sturza’s government tried to push through privatization legislation and the 1999 budget amendments last week. Sturza said he would resign if the bills were not adopted.

The parliament quickly took him up on his offer. It rejected the bills Nov. 5, and the IMF indefinitely suspended all loans to Moldova. Since IMF funds are delayed, other loans are now in jeopardy. Financing from the World Bank, the European Bank for Reconstruction Development and the European Union - totaling $150 million, alongside the IMF funds - could all be postponed.

Moldova’s economy is in dire straits. The value of the leu, Moldova’s national currency, has dropped by 50 percent against the dollar in the past year. The external debt is $235 million, with a heavy amount owed to the Russian oil giant, Gazprom. Perhaps worst of all, Moldova’s economy rests on the success of Russia’s economy.

Moldova’s economy is now in an even more precarious position. In fact, Parliament Chairman Dumitru Diacov said recently that the failure to receive the IMF tranche and its associated World Bank credits will lead to a collapse of the Moldovan budget system. As in Lithuania, Moldova’s national administration is dealing with issues of incredible domestic significance and is opting to risk relative economic stability.

Nearly a decade to the day after the fall of the Berlin wall, former Soviet states along Russia’s western periphery are struggling through a deep crisis. Should they orient themselves to the West or back to the East? The West has charged a high price for entry: imposing wrenching economic reforms that in turn threaten the rigid social and political structures of the former Soviet states. When put to the test, many of these states find that they simply lack the will and wherewithal to continue down the hard path to the West.

Just last month, Lithuania’s government split over a similar economic choice [ http://www.stratfor.com/SERVICES/GIU/102299.ASP ]. Now, Moldova is also struggling with the decision of whether to orient itself towards Russia or the West. Alexander Moshanu, head of the ruling coalition in Chisinau, told ITAR-Tass that the "resignation of the pro-Western Cabinet of Ion Sturza signifies Moldova’s refusal to integrate into Europe and its turn to the CIS and Russia." Russia could exploit the opportunity in Moldova by offering aid, but so far has not.

A disease is taking root in some of the former Soviet states, from the Baltics down into Eastern Europe. The cause is the same but the patient reacts in different ways. Georgia’s parliamentary elections led to victory for the pro-Western faction while Ukraine’s presidential contest has turned into a runoff between the Communist candidate and pro-Western President Leonid Kuchma. In Lithuania, the prime minister and two key ministers resigned rather than take part in spending the country’s treasury on modernizing the oil industry for a western company.

In Moldova, the situation is reversed. The president has remained in power while the pro-Western Cabinet has resigned after a losing battle. It seems that neither Western aid nor approval is worth the cost to Moldova.

The resignation of the leader of the International Monetary Fund, Michel Camdessus, two years before the end of his term is a punctuation mark in economic history. He came into office at a time when the world's major economic issues were Third World debt, the United States' inability to compete with Japan and Gorbachev's attempt to restructure Russia's economy. He leaves at a time when the major issues are the growing irrelevance of the Third World to the global economy, the inability of Japan to compete with the United States and the cataclysmic failure of economic reform in Russia. Camdessus and the IMF were deeply involved in all of these issues. What is fascinating is that despite its involvement, the institution has been largely irrelevant - except when it has been harmful.

It is important not to personalize the failure. This is not about Michel Camdessus. It is not even about the technocrats who manage the IMF and its sister institution, the World Bank. Rather, it is about the impersonal forces that govern the international system and the fantasy that a de-nationalized technocracy can manage that system. The story of Camdessus' tenure is not about incompetence or corruption, although there was plenty of the former and the jury is still out on the latter. Instead, his tenure is about impotence: the inability of the technocrats to either understand or control the forces at work. No one could have done the job. The job was undoable.

Consider the case of Third World debt. Back in the 1980s, Third World countries found themselves unable to repay billions of dollars in debt owed to the world's banks. Had they all gone into default together, they threatened to damage or even sink the global economic system. Under U.S. Secretary of State Nicholas Brady, a scheme for refinancing the debt was devised, with the IMF playing the role of policeman of Third World economies by linking lines of credit to painful austerity. One might take this as a triumph for the IMF and international institutions. Indeed it was, until we recall the origins of the crisis.

During the 1970s, the world saw a massive increase in the price of global commodities, led by oil. The conventional wisdom was that commodity prices would only go higher. The Club of Rome and other sophisticated observers of history pointed out that we were running out of scarce resources. The world was compared to a space ship: resources were being exhausted by growing populations and intensified industrial use. It followed that the price of commodities like oil, copper and wheat could only go up. If the price of commodities went up forever, it followed that the best place to invest your money was in commodities. This was rocket science, right? The primary producers of commodities were Third World countries that lacked industrial capability but controlled natural resources sorely needed by the industrial world. Any sane investor in the 1970s knew that investing in industries that purchased raw materials was dumb, while investing in producers of raw materials was smart.

So everyone, particularly the international banking community and the World Bank, began pouring billions of dollars into ventures from Mexico to the Philippines to Nigeria, all designed to produce raw materials. Since oil was going to cost 40, 50 or even 100 dollars a barrel on spaceship earth, the cost of production was not critical. The price was going up and it was important to get in while the getting was good. All of the technocrats simply knew this and the entire international economic system became skewed toward investing and lending to Third World commodity producers.

Of course, the inevitable happened. It turned out that while the world may have a finite amount of oil or copper, there were still huge untapped reserves. When Third World megaprojects started production, the price of commodities collapsed. When prices fell below the cost of production, projects went bankrupt. We suddenly had a Third World debt crisis, which Nicholas Brady and the IMF moved in to clean up. The Third World debt crisis originated in an ideology of commodity scarcity that led to an avalanche of investment decisions that wound up invalidating the ideology through its success.

The debt crisis, however, was not resolved by Brady, the IMF or any other multinational institution. For Third World countries, the development decisions made by their governments with the encouragement of the international development community created a long-term capital shortage that has left a legacy of misery. Nor is it clear that multinational communities solved the crisis for the first world either. The simplistic projection of a future in which commodity producers dominated industrial commodity consumers was rendered false not only by the collapse in commodity prices. It was also rendered irrelevant by another phenomenon in the early 1980s: Microsoft.

Microsoft, and the endless other software and related companies that appeared during the 1980s, altered the equation that had obsessed the World Bank and most other serious economic thinkers. The emergence of computing technologies meant that it was possible to have increased economic growth without similar increased commodity consumption. Microsoft, after all, produces wealth without consuming commodities in proportion to growth.

The extraordinary growth of the American economy has many causes. There is no doubt that the persistent growth of productivity in the United States is due to the efficiencies introduced by computing. Even Federal Reserve Chairman Alan Greenspan has acknowledged this, while also acknowledging that it is hard to calculate impact. This much is apparent. At a time when productivity should be falling, inflation and interest rates soaring and the economy moving toward recession, growth in productivity - driven by the effects of computing - is maintaining growth at unprecedented levels.

When Camdessus came to the IMF, Japan produced cars and cameras at lower prices and better quality than the United States. He leaves at a time when the ability to produce cars and cameras is much less interesting than the ability to write software. Production has shifted in a way that is almost metaphysical. The hardware that runs a web server is much less valuable than the immaterial intellectual property that resides on the server. The decoupling of value from physical production, its shift to intellectual production, is a millennial shift whose full meaning will not unfold for many generations. To overstate it, the Japanese bet on hardware while the Americans bet on software.

It has been said that the IMF mishandled the Asian crisis. The reason for this is simply that the institution and its leadership could not believe that Asia was having a systemic crisis. Camdessus and his peers believed so deeply in the assumption that Asia would be the powerhouse of the 21st century, he could not accept the fact that the entire Asian enterprise was in jeopardy. For Camdessus, Asian industrial efficiency owned the future. The economic problems that arose were merely national problems solvable with a good dose of IMF discipline. Camdessus did not see that Asia as a whole was crumbling because he did not understand that Asia's industrial efficiency was both real and increasingly irrelevant. A new game was being played, in which the Asians weren't able to compete.

There were, of course, other problems. The IMF staff deals in numbers. It assumes the numbers they see are in some sense connected to reality. The IMF missed the extent of Asia's banking problems because no one, including the Asians who collected the data, knew what the real numbers were. The lack of transparency, as the IMF likes to call it, or lying through your teeth, as we prefer, left the institution with a set of bogus numbers. In the case of Russia, the distance between economic statistic and bald- faced lie has always been short but has recently become infinitesimal.

Camdessus was no better and no worse than anyone else in his position. The real issue is whether the world needs his position. The role of the IMF is to provide central management at the highest level for the international financial system. The concept misses this point: the highest level is not where the international economic system is located. While the IMF was focused on refinancing Western debt with petrodollars and novels were being written about Arab world dominance, the real history of the future was being written by unknown companies like Apple and Microsoft. When Michael Dell devised a more efficient way to sell the computer parts Asia could barely make a profit on, creating a multi-billion dollar company in a few years, Camdessus had neither heard of him nor if he had, would have taken him seriously.

Men like Camdessus are infatuated with yesterday's problems and yesterday's elite. They owe their power to those who at the top, and therefore, have nowhere to go but down. Ironically, Karl Marx understood it best when he spoke of capitalism and the "constant revolutionization of the means of production." Capitalism is constantly overthrowing itself, that is its single constant. Camdessus is not a stupid man. The people working at the IMF are not stupid people. But they are institutionally incapable of seeing the forces reshaping the international economy, because their focus is on the capital cities of the world and that is simply not where history is being made. The organizations that will define the next twenty years of history are probably completely unknown to anyone today. Certainly no one in Washington knows of them or takes them seriously. Therefore no one at the IMF can possibly know what is really going on in the world's economy.

The idea that you can manage an economy from the top down is the central fallacy. When the IMF governors meet, they can't possibly know the economic entities and forces redefining the system, precisely because they are no longer down in the trenches, creating the future. That means the IMF will, at best, have some sense of what happened yesterday, maybe - depending on the numbers - it might know what is happening now, but has no way of understanding what will happen tomorrow. Therefore, the governors will not wind up making bad decisions nearly as often as they will wind up making irrelevant ones. That is why, as Michel Camdessus leaves, we can't help but think of him as the man who kept missing the point.

WTO

The World Trade Organization's (WTO) General Council Chairman Ali Mchumo reportedly said that the WTO will pass a resolution requiring foreign industrial investors to use up to 60 percent of host countries' raw materials, reported the Xinhua News Agency Jan. 18. This move would limit trade and be a reversal of WTO policy. In effect, the resolution proposes using the WTO - an international organization committed to free trade - to restrict free trade.

A WTO official in Geneva, however, denied that the resolution was being considered. The official said that if Mchumo, who is also the Tanzanian ambassador to the United Nations, made such a comment, he did so unofficially. The chairman's comments were intended to illustrate the growing sentiment among the WTO's Third World members that the organization's purpose must change.

Mchumo's proposal exemplifies a trend by underdeveloped nations, like China and India, hoping to alter the WTO's direction. Interestingly, China's state news agency Xinhua reported Mchumo's comments. Both China and India have criticized the WTO for neglecting developing nations' interests, hindering their integration into the global economy. [http://www.stratfor.com/SERVICES/giu2000/011100.ASP] Within the WTO, developing and developed nations conflict over trade issues, including preferential market treatment, market integration, regional trading blocs, labor exploitation and infrastructure development.

The underdeveloped nations want to influence the WTO's policies to favor their economic situations. They are trying to transform an organization dominated by developed economies - devoted to open markets and free trade - into an organization designed to protect and build their underdeveloped economies. The main purpose of the proposed resolution would be to force investors in poor countries to invest in those countries' resources and, by extension, their infrastructure.

A major factor limiting most Third World countries' economies is the lack of adequate infrastructure. To meet the proposed requirement that foreign investors utilize up to 60 percent of a host nation's raw materials, adequate infrastructure, such as roads, mines and processing plants, will need to be constructed. This burden would fall on the foreign investors, involving major investment with little immediate return.

Conventional economic wisdom dictates that infrastructure development fuels economic growth and enhances a country's capability to compete internationally. While this may be true, foreign investors accustomed to paying sweatshop wages for cheap labor are unlikely to underwrite such far-reaching Third World development as proposed by Mchumo.

Another effort by Third World nations to bolster their economic position in the global economy involves the current negotiating over the Lome Accord. Originally signed in 1975 and up for renewal this month, the accord is a comprehensive commodity agreement between the European Union (EU) and its 71 African, Caribbean and Pacific (ACP) former colonies. The accord will give these Third World countries preferential access to European markets, allowing them duty-free export of primary products to the European markets.

The Lome Accord endeavors to help underdeveloped nations achieve global economic integration. The problem is that the accord cannot ultimately achieve this goal. The tenuous agreement reached in December proposes a development aid package of $13.7 billion. The ACP calls this insufficient for infrastructure development. Another point of contention between the EU and the ACP has been the eight- year preparatory period allowed for ACP countries to begin the integration.

The underdeveloped nations' ultimate goal may be to change the WTO's agenda, turning it into an organization to manage the international economy, not just trade. And, the coming Lome market integration plan may be the impetus for Mchumo's WTO resolution.

Underdeveloped countries, pushed toward global market integration, are rightly fearful of their inability to compete. More Third World nations are aligning against the West over economics. Mchumo's resolution could help developing nations. But more likely, it would hurt them by pushing developed nations away from the WTO. It could also embroil the organization in an endless squabble over free trade versus managed economic interaction.

Philippine Central Bank Deputy Governor Amando Tetangco Jr. announced on Jan. 26 that foreign currency funds in peso time deposits would be subject to a 90-day holding period before withdrawal. The decision, according to Tetangco, was to "plug the loopholes in the present system" and to "strengthen the procedure of monitoring foreign investments." While the currency controls are a response to domestic economic and political trouble, the underlying situation is endemic of many of the Philippines' neighbors and could signal another regional downturn.

The announcement by the Central Bank was accompanied by an unusual admission: Tetangco said that currency speculation using peso time deposits has declined significantly since 1998. Nonetheless, the Central Bank decided that now was the time to establish greater control over foreign exchange. The timing suggests apprehension that currency speculation may again pose a direct threat to the Philippine economy.

While the government insists that the controls are positive for Philippine markets and will have little or no detrimental effect, the decision acknowledges the weakness of the economy. A report by the Asian Development Bank this month said that the slow pace of financial reforms is hampering economic recovery and "beginning to be a major source of concern for investors."

The delay of financial reforms is a symptom of growing doubts about the viability of President Joseph Estrada's government. [http://www.stratfor.com/asia/specialreports/special102.htm]. In addition, recent government infighting appears to be weakening foreign confidence. For example, there is a political feud between Estrada and Securities and Exchange Commission chief Perfecto Yasay. A member of the Fund Managers Association of the Philippines has suggested that this squabble is helping to reverse a trend in which foreign fund managers have been net buyers of Philippine stocks, according to a report by the Philippine Daily Inquirer.

The imposition of a limited form of capital controls in the Philippines is unlikely to have an immediate and direct impact on the economies of the rest of the region. But there are underlying political and economic instabilities throughout the region. In Indonesia, the new government is relying on foreign investment and assistance to lessen the social stresses that threaten to tear the nation apart [http://www.stratfor.com/SERVICES/giu2000/012000.ASP]. In China, economic reform has uncovered the pervasiveness of corruption within all levels of the government and business. Beijing's national anti-corruption drive is increasingly ineffective as higher-level government and military officials become enmeshed in the scandals [http://www.stratfor.com/asia/specialreports/special106.htm].

While a further weakening of the Indonesian or Philippine economies would not shock investors, the increased economic weakening of China would have greater impact. China has largely avoided being lumped into the list of Asia's financial lepers. Through careful manipulation of economic reports, China initially pretended to be unaffected - even growing - throughout Asia's economic crisis. However, China has since admitted that its economy was deeply affected by the Asian flu, making any future claims of financial stability less likely to be taken at face value by foreigners.

With the current political uncertainties in Beijing, a financial collapse in China could have grave repercussions. Lack of transparency in the Chinese system makes confidence difficult. In short, the question is whether the Philippine situation is one of a kind or a harbinger of things to come in Asia. During the 1997 economic crisis, foreigners were slow to grasp the underlying structural problems of the region. Today, these same issues are at the forefront of the minds of observers and investors.

This increases the possibility that a downturn in the Philippines could spill over into the region at a time of economic and political instability. Asia has yet to pull out of the 1997 financial crisis [http://www.stratfor.com/services/giu/giu1998/1998.asp]. It has failed to seriously tackle its financial structure, focusing instead on maintaining social stability. [http://www.stratfor.com/asia/specialreports/special27.htm]