Capital and Revenge

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Capital and Revenge: The IMF and EthiopiaAuthor(s): Robert Hunter WadeReviewed work(s):Source: Challenge, Vol. 44, No. 5 (SEPTEMBER-OCTOBER 2001), pp. 67-75Published by: M.E. Sharpe, Inc.Stable URL: http://www.jstor.org/stable/40722096 .Accessed: 23/12/2012 15:55

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The roblemsfCapital

CapitalndRevenge:The MF nd thiopiaRobert unter Wade

Ever ince he inancial risis f1997,the nternationalMonetary und and the U.S.Treasury avebeen essinsistent n opening apital markets round he world.But the uthor as ittle oubt hat when hedustsettles, he ush or unrestricted apital lows willstrengthen gain.Ethiopia rovides casestudy f heinterest nvolved.

THEannualmeetings f the World ank nd the n-ternational onetary und IMF)nHongKong n1997,the governing ody of the Fund the nterim ommit-

tee) ndorsed planto change he rticles f greement or nlythe fourth ime n the Fund's history. he changewould addthe promotion f capitalflows'7 o the goalsof the Fund and

add the capital ccount o the urisdiction f the Fund. Cur-rently he rticles re silent n both apital lows nd the apital

ROBERT HUNTERWADEis professor fpolitical conomy t the London chool f Economicsandfellow f the nstitute fAdvanced tudy, erlin, 000-2001. He isfinishing book bout heWorld ank, heUnited tates, nd the nvironment.

Challenge,ol. 4,no. ,September/October001pp. 7-75.2001M.E.harpe,nc. ll ightseserved.ISSN577-51320019.500.00. Challenge/September-October 001 67

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account. he proposed hange n the Fund's constitution as

only nethrust n a much bigger ampaign f he Fundand theU.S.Treasurysupported trongly y heU.K.Treasury) hrough-out he 990s o ncrease he reedom f apitalmovement orld-wide. The Financial ServicesAgreement f the World TradeOrganization, igned nDecember 997, nd theMultilateraln-vestment greement egotiated hrough heOrganization orEconomicCooperation nd Development OECD)but thenaborted n 1998, re other hrusts f the ampaign.

Since heEastAsianfinancial risis f 1997-1999,he MF andthe U.S. Treasury ave become quieter n the ssue. Theyre-main ommitted ofreeing p capitalmarkets round heworldbut re not ctively ushing t.Onecanexpect, hough, hat b-sent nother major financial risis n a country r region hatmatters or he ore conomies, hepush willbegin gain soon.Financehas becomethe dominant ector n the United States

and Europe, nd financial irms ive top priority osecuringaccess to business n emergingmarkets. hey want to see re-strictions emoved n both capitalflows nd the entry f for-eign financial ervice firms, uch as banks and insurancecompanies. hefinancial ector samajor omponent f he up-port ase for heFund nd the U.S.Treasury, othey avetopaya lotof ttention owhat t wants hem o do. Once memories f

the Asian crisis ade, heFund and the Treasury re likely omoveagainto secure he ifting f restrictions n capitalmove-mentsworldwide.1

How far re the Fund and the Treasury repared ogo?ThecaseofEthiopia stelling. efore he Asiancrisis roke, thiopiacame under the strongest ressure rom he Fund to open itscapital ccount to ift estrictions n money lows n or out andon foreign nvestment n the domestic conomy), ith he deathat thiopiawould ater lso ift estrictions n the ntry ffor-eignfinancial-serviceirms othedomesticmarket. hepoint f

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Capital nd Revenge: he MF and Ethiopia

the tory s that thiopia s one of the poorest ountries n the

world, f negligible nterest oforeign peculators r nvestorsat the moment, nd yet heFund gavespecial ttention o mak-ing the government pen the financial ystem.

* * *

In the 1990s, he MF ntroduced program alled heExtendedStructural djustment rogram ESAP),designed ogive ligiblepoor countries heaper ccess to Fund credits. SAP member-ship mattered ot ust because of cheapFund credits, ut alsobecause heapfunds rom heWorld ankwere onditional pona country's eing n the Fund's ESAPprogram, s also was bal-ance-of-paymentsupport rom heEuropeanCommunity ndaid from ilaterais. country adtomeet n array f onditionssetbytheFund o beeligible nd wasgrantedmembership orthree-year eriod.Butthe Fund moneywas tranched. fter n

initial rant t the tart f the program, urther ranches ereconditional pon the country'smeeting set of more pecific,time-bound enchmark onditions f the kind Bydate XyouwillhavedoneY. Theconditions elated o thegrowth fmoneysupply, hefiscal eficit, oreign xchange eserves, stablishinga market ntreasury ills, etting nterest ates e determined ysupply nd demand, nd important orwhat ollows remov-

ingrestrictions n flows f money n and out.Needless osay, he nnual review f country's rogress f-forded Fund officials reat discretion n how they udged acountry's ulfillment f he onditions, ecause omeof he on-ditionsmight e largely utside he ontrol f the government,and conditions uchas establish market n treasury ills oropen foreign xchange ureaus permit f degrees. herefore

Fund officials lsohave great ower over whether country'sESAPprogram ontinues not onlywhether new three-yearprogram s negotiated ut whether n existing rogram s car-

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ned through o its conclusion and therefore lso power over

all the other ources f cheap funds hat re cross-conditionalon a country's eing n the ESAPprogram.Theboardof heFundapproved n ESAPprogram or thio-

pia in 1996.Then n 1997 hemanagement f the Fund decidedto stop the program. o more ranches ould be given othe

No more ranches ould egiven o the

government-he overnment fone of the world'spoorest ountries nd an obvious andidate or nESAPprogram.Why?

government the government f one of the world's poorestcountries nd an obvious andidate or n ESAPprogram.Why?

Alargepart f the reason s this. After he program ad been

initiated n 1996, heEthiopian overnment isbehaved n theeyesof the Fund, heU.S.Treasury, nd a prominent mericanbank.Ethiopian irlines, state-owned nterprise, ad earlierbought our oeing ircraft ith loanfrom he American ank.The terms f the oanwereonerous o the irline nd lucrativeto the American ank,becauseat the ime Ethiopiahad a veryadverse isk ating. ot onlywas the nterest ate ery igh, heloan terms lso contained he unusual

provisionhat ll four

planeswouldbemortgaged otheAmerican ank until he oanwaspaid in ts ntirety. y ate1996, thiopian irlineswantedto renegotiate he oan.TheAmerican ank refused. o the gov-ernment ent thiopian irlines he money opayoff he oan nits entirety. he American ank was furious. t complained othe U.S.Treasury hat he Ethiopians ad acted nbad faith.

Next, heU.S. executive irector t the Fund began to raiseangry uestions bout thiopia's SAP status. egotiations erejustbeginning etween he Fund and the government ver he

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Capital nd Revenge: he MFand Ethiopia

release f the 1997 ranche. he Fund officials egotiating ith

Ethiopia egan to say the government ad failed o meet omeof hebenchmarks. oronething, hegovernment ad failed omeet heforeign xchange eserves arget hat ad been set s acondition f 1997membership. n paper, hiswastrue, utmis-leading. hegovernment ailed omeet he arget ecause thadlent part of the reserves o EthiopianAirlines o pay off he

Theterms f the oan were nerous o the irlineand ucrative o the American ank, ecause tthe ime thiopia ad a very dverse isk ating.

American oan.Sothe Fund's objection as largely technical-ity, ecausethe ssets nd contingent iabilities f the wholeofthe public ector emained nchanged. he Fund officials lso

said the Ethiopians ad failed n their uty o obtain pprovalfrom heFundbefore sing hereserves n thisway.TheFundofficials urther aidthat, s anecessary utnotnec-

essarily ufficient ondition fbeing ligible or henext ranchein 1997, hegovernment ad to agree oopenthe apital ccount,and therefore lsoagree oallow both nterest ates nd the x-change ate o be determined y themarket ineffect, dding

new conditions othe nitial nes, hifting hegoalposts).Thegovernment lsohad to promise o fulfill he pirit, ot ust theletter, f heprior greement o do other hings omarketize hedomestic inancialystem, uch s establish Treasury illmar-ket in country hosewhole inancialystem ad assets quiva-lent oa smallregional ank n the United tates).

At this point, heEthiopian overnment aid, Enough. Forall its need for he cheap financing o which ESAPwas thegatekeeper, t was not prepared o open the capital account,which t considered oorisky iven hat he government ould




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then ose control f the nterest ate and the exchangerate.

Through WorldBankofficial, t approached heredoubtableJoseph tiglitz, he hief conomist nd senior ice president tthe WorldBank, nd persuaded him to visit AddisAbaba andadvise t on how to negotiate ith he Fund.Stiglitz lew ut nlate 1997, nd was deeply mpressed y the development om-mitment ndcompetence f he overnment, specially he rimeminister nd his senior fficials. tiglitz evoted ime o work-ing through he government's egotiating trategy ith theFund.When he Fund found ut, t was apoplectic t Stiglitz'sbetrayal/7 he Fund's anger and Treasury's oo made the

event milestone n route o Stiglitz' eventual iring rom heWorld ank n 2000.2

Bythis ime, heFundhad succeeded n giving thiopia badname.Fund officials ent round aying hat thiopiawas areluctant eformer, nd the country was off rack. n fact,Ethiopia ad met most f he Fund's conditions o a degree hatastonished tiglitz nd other World Bankofficials, speciallycompared othe ther frican ountries nESAPprograms. utthe Fund officials ealingwith Ethiopiahad now decided thatthe country's SAP status had to lapse until he governmentbecamemore ooperative. heword cooperative s mportant.Fundofficials re not used to poor country overnments, spe-

ciallyAfrican nes, rguing ith hem nd presenting ounter-proposals. The fact hat the Ethiopian government id justthis and worse, heprimeminister alledhimself Marxistmade them etermined ostrike ack.

On his return rom ddis Ababa, tiglitz rote strong ack-to-office eport oWorld ankPresident amesWolfensohn ndrepeated ispoints o several enior eople n the Fund.Then,in January 998,Wolfensohn isited Ethiopia as part of hisAfrica rip.Bankofficials ut the ESAP issue at the top of hisbriefing ook, and he and the prime minister iscussed t at




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length.Wolfensohn romised e would take t up. On his re-

turn, e raised t with the Fund's managing director, ichelCamdessus, t their egular reakfasts, t east wice.Thispressure rom he opof he World ank o the opof he

Fundworked. he Fund resumed egotiations or new ESAPprogram or thiopia.Meanwhile he EastAsianfinancial risiswas in full pate, nd many nalysts were saying hatprema-ture pening f the capital ccount y the EastAsian countrieswas an important roximate ause of the crisis and the Fundwascoming n for trong riticism or nsisting hat omeof hecrisis-affectedountries pen their apital ccount venfurtheras a condition fFund mergency inancing.oin thenewroundofnegotiations ith he Ethiopians, heFund did not press hecapital ccount ssue.And instead f nsisting hat he govern-ment llow market etermination f nterest ates, he Fundagreed with the government's roposalto make a significantstep n that irection ut not o goto full market etermination.TheFund agreed n the new program nApril1998.

Theprimeminister ookpersonal harge f Ethiopia'smeet-ing the conditions, nd the conditions ere met to a high de-gree. or he econd-year egotiations,n 1999, hegovernmentsent team of very enior nd very well prepared fficials oWashington. ut heFundofficials eclined o extend thiopia's

status or he econd year. hey nvoked hewarbetween thio-pia and Eritrea s one of the mainreasons. ut lmost ertainlythey melled evenge. heofficials adagutdislike f heMarxistgovernment, hey id not ike heway t argued ack, hey awthemselves s having ost the rgument hepreviousyear dueto he illegitimate)ntervention f heWorld ank. hey houghtthat hegovernment ad been et off hehook, nd now theywere going to bring t to heel by not agreeing o continueEthiopia's SAPstatus, ven though he conditions ad beenfulfilled.




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Eventually newprogram asnegotiated or thiopia nOc-

tober 000. In the meantime, henamehad been changed romESAP tothePoverty eduction nd Growth acility, RGF.)ButEthiopia'sPRGFprogram was delayed n its presentation orapproval othe board of the Fund until January 001.Mean-while, longside hePRFGprogram, thiopia was supposedtogetdebt elief nder he Highly ndebted oorCountries HIPC)program. ut his greement, oo,was delayed,while ountrieslikeCameroon nd GuineaBissau,which annot omparewiththe Ethiopian overnment n terms f competence, ere ush-ered nto he HIPC debt-relief rogram ith ittle elay.

It s not lear ust how much he Fundwas driven o nsist nEthiopia's pening hecapital ccount before heAsiancrisis)because ts fficials eally hought thiopia like ll countriesshould penthe apital ccount or he ake of ts owndevelop-ment nd for he ake of he world conomy, nd how much he

officials ere cting s the gents f he American ank nd theU.S.Treasury nd therefore inding retexts o make ife verydifficult or he government. orldBankofficials nvolved nthe vents re nnodoubt hatwhile heU.S.Treasury ayhavestiffened he und's resolve n account f he nger f he Ameri-can bank, both the Treasury nd the Fund really did want tomakeEthiopia n object essonforAfrica hat ll African oun-trieswere

xpectedoopen

theirapital

ccounts nd wouldbecutoff rom oncessional unding f hey id not. Thequestiontoday s when the Fund will start o push the same agendaagain, as the East Asian crisis fades from memory even incountries s poor and as unimportant or nternational apitalas Ethiopia.

The other triking oint bout he tory s the nvisible owerof he Fundofficials s the gatekeepers o not only oncessionalfinance ut also country eputation.When they began to callEthiopia reluctant eformer nd to talk about the break-




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downof he program/7 irtually o one who heard hemwasin

a position o know that hese omments ere argely ntruefor xample, hat he apparent ailure o meet the foreign x-changereserve equirement as a technical ailure, ot a realone. Sincethe prime minister id not shrink rom hebiggestpejorative n the nternational inancial ommunity, Marxist/7theblackmark asily tuck. und officials old tories bout heunreliable thiopians, nd other eoplebelieved he tories e-cause mportant eopletold hem. he eaders fmore ompli-ant,more orrupt ountries scaped he pprobrium nd receivedmoregenerous und help.

The essonfor eaders f poordeveloping ountries s clear. fyou want ccessto concessional unding rom heFund and allthe other ources hat re cross-conditional n the Fund,do notargue with Fund officials, o not callyourselfMarxist, o notenlist hehelp of the oppeopleat the WorldBank, nd do not

renegotiate heonerous erms f oans to important mericanbanks.

Notes1. TheTreasury f henewGeorgeW.Bush dministration, hich ook ffice n

January 001, eems obe less obliged oWallStreet han ts predecessors f thepast wodecadeswere.Also, hemanaging irector f he und,HorstKohler, hotook ffice n2000, eems o be less zealous about

apital peninghanhisprede-

cessor,MichelCamdessus, orwhom twasa personal rusade. hese wocontin-genciesmake t speciallynteresting o ee how much riority heGroup f even(group f even major owers), heOECD,the und, hemultilateral evelopmentbanks, heAssociation fSoutheast sianNations, nd other uch conglomerateswillgive ver henext everal ears oforcing pen he inancial ystems f merg-ingmarkets, s compared otheyears f heWall treet-beholden linton dmin-istrations.

2. SeeR. H. Wade, The United tates nd the World ank: he Fight ver eopleand deas, ypescript, issenschaftskolleg,erlin,May2001.

To order eprints, all1-800-352-2210;utside heUnited tates, all 717-632-3535.

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Capital and Revenge