http://www.globalexchange.org/campaigns/wbimf/imfwbReport2001.html

How the International Monetary Fund and the World Bank Undermine Democracy and Erode Human Rights:
Five Case Studies

September 2001
Published by Global Exchange

Introduction

The policies of the International Monetary Fund and the World Bank have systematically undermined democratic principles and eroded human rights protections in dozens of countries around the globe.

By insisting that national leaders place the interests of international financial investors above the needs of their own citizens, the IMF and the World Bank have short circuited the accountability at the heart of self-governance, thereby corrupting the democratic process. The subordination of social needs to the concerns of financial markets has, in turn, made it more difficult for national governments to ensure that their people receive food, health care, and education — basic human rights as defined by the Universal Declaration of Human Rights. The Bank’s and the Fund’s erosion of basic human rights and their perversion of the democratic process have made the institutions a clear and present threat to the well being of hundreds of millions of people worldwide. The institutions, Global Exchange strongly believes, must be abolished and redesigned from scratch through a genuinely democratic, inclusive and transparent process involving all of the world’s nations.

For more than 50 years, the IMF and the World Bank have advanced a form of economic “development” that prioritizes the concerns of wealthy lenders and multinational corporations in the industrialized north while neglecting the needs of the world’s poor majority. The institutions work as a kind of international loan shark, exerting enormous influence over the economies of more than 60 countries. In order to get loans, international assistance, and debt relief, countries must agree to conditions set by the Bank and Fund. Under the guise of promoting “free trade,” market liberalization, and financial stability, these two institutions have forced cuts in health care, education and other social services for millions of people across the planet, thereby deepening poverty and increasing inequality. By elevating concerns about macroeconomic financial stability above all other competing values, the institutions have created a human rights catastrophe.

The Universal Declaration of Human Rights, adopted by the United Nations General Assembly in 1948, is the foundation of modern international human rights defense and promotion. The Declaration is built on the principle that human rights come from the “inherent dignity” of every person. This dignity, and the rights to freedom and equality which derive therefrom, are inalienable.

Though best known as guarantor of liberties such as freedom from repression, freedom of expression and freedom of association, the Declaration places as much importance on the guarantee of economic rights as it does on the protection of political and civil liberties. The Declaration is unequivocal and explicit in its demand that economic security is just as central to human dignity as freedom of conscience.

For example, the Declaration establishes “the right to work, to free choice of employment, to just and favorable conditions of work and to protection against unemployment” as a basic human right. The “right to equal pay for equal work” as well as a worker’s “right to form and to join trade unions for the protection of his interests” are considered central to human dignity. Basic, and free, education is also established as a universal human right. More broadly, the Declaration asserts: “Everyone has the right to a standard of living adequate for the health and well-being of himself and of his family, including food, clothing, housing and medical care and necessary social services, and the right to security in the event of unemployment, sickness, disability, widowhood, old age or other lack of livelihood in circumstances beyond his control.”

Together, the economic security articles of the Declaration underscore that political rights can be enjoyed only when basic human needs have been satisfied. Without economic security, freedom of conscience — the liberty to grow as an individual — is impossible. As Article 22 states: “Everyone … has the right to social security … [and] the economic, social and cultural rights indispensable for his dignity and the free development of his personality.”

In dozens of countries around the world, the IMF and the World Bank have violated that “right to social security.” The institutions have forced debtor countries to cut social spending on health, education, and other public services. They have pressured poor nations to charge their own citizens for the use of public schools and public hospitals. And they have demanded that countries keep their wage levels low, a policy which harms ordinary citizens but benefits multinational corporations.

In compelling countries to adopt such policies, the IMF and the World Bank have not only threatened communities’ right to social security — they have also undermined countries’ democratic systems. Democracy rests on the principle that government officials and elected representatives are servants of the citizenry at large. Elected leaders’ ultimate accountability is to the people they serve. The Bank and the Fund have severed that chain of accountability by making national leaders more concerned with the interests of international investors than with the needs of their own people. As soon as government officials begin worrying more about what Wall Street will think than what their own people think, democracy has been perverted.

Since 1976, at least 100 protests against Fund and Bank policies have occurred in dozens of countries around the world (see Appendix 1). Clearly, ordinary citizens are outraged with the institutions’ policies. The continued adoption of those policies reveals the democracy disconnect fostered by the IMF and the World Bank.

The IMF’s and World Bank’s history of socially irresponsible and environmentally unsustainable policies are too long to present in a brief statement. It is necessary, then, to focus on just a few examples of how these institutions’ policies have threatened human rights and democracy throughout the world.

In Haiti and Mexico, the Fund and the Bank have actively worked to keep wages low, making it more difficult for ordinary citizens to support themselves. Throughout Africa, the IMF’s and World Bank’s imposition of “user fees” for health services and the institutions’ resistance to meaningful debt relief have worsened the AIDS crisis ravaging that continent. In Colombia, the IMF has demanded social service cuts even as the country suffers from recession and civil war. In Brazil, as in many other countries, the World Bank has meddled in domestic politics by inserting itself into one side of a heated social debate. And in all of these places, as in many more not mentioned here, the institutions have directed the most political of decisions — the allocation of national resources — thereby undermining national democracies.

Once again we have to say, “Enough!” The IMF and World Bank say their policies are designed to succeed in the “long run.” But after more than 20 years of managing dozens of economies, the institutions have created more inequality, more environmental destruction, and no real security. It is long past time for the US and the other wealthy nations that enjoy de facto control over the institutions to call for the abolition of the IMF and the World Bank and to begin work to create multilateral financial institutions that are truly committed to human rights and democracy and which can effectively respond to the new realities of the 21st century. Policy makers everywhere must recognize that another world is possible.

Mexico: A “model student”?

For nearly 20 years, Mexico has followed almost every economic policy mandate from the International Monetary Fund and the World Bank. Mexico’s compliance with IMF dictates has been so reliable, in fact, that in 1994 the IMF and the World Bank lauded the country as a “model student” that other Latin American countries should emulate. Some model. Since Mexico first adopted the IMF prescriptions of trade “liberalization,” privatization and deregulation, real wages have fallen, poverty and inequality have increased, and the country’s massive debt burden has grown.

Mexico’s experience with IMF policies offers a clear example of how the Fund sacrifices the well being of ordinary people to suit the interests of international investors. In an effort to head off short- term financial crises — and calm investors’ fears — the IMF has undermined Mexico’s chances of creating a stable, well-balanced economy.

The IMF Arrives in Mexico

Many US citizens assume that Mexico’s entry into the new global economy occurred when the country signed the North American Free Trade Agreement (NAFTA) in 1993. But Mexico’s economy was opened up to the forces of corporate-led globalization long before NAFTA went into effect. Before anyone had heard of NAFTA, the IMF was already setting Mexico on the structural adjustment path.

In 1982, a fall in international oil prices combined with a rise in interest rates in international financial markets forced Mexico to announce that it was on the verge of defaulting on its foreign debt. The “debt crisis” of 1982 also impacted countries throughout Latin America, Africa and Asia, giving the IMF the chance to determine the fiscal and monetary policies of countries around the world.

Mexico asked the IMF for assistance, and the Fund obliged with a $3.9 billion credit package. The IMF’s 1982 assistance package was strictly quid-pro-quo. To receive the new loan — and the Fund’s all-important seal of approval, which opens the door to other public and private credit — Mexico would have to embark on a series of market reforms. Public spending would have to be cut, government enterprises would need to be privatized, industry would have to be deregulated, and the country would have to open up to more foreign trade and investment. Subsequent agreements with the IMF in 1986 and 1989 further cemented this policy path.

In an effort to boost foreign investment in Mexico and decrease the country’s imports — which would hopefully lower the country’s trade (or current account) deficit — the IMF in the late 1980s sought to contract economic activity and stabilize wages. The IMF worked with the Mexican government and the country’s businesses and government-controlled labor unions to establish a set of social pacts, or “Pactos,” to keep wages in check. Workers’ earnings were indexed to “expected” levels of inflation. Unfortunately for Mexican workers, inflation rose more than expected. Between the implementation of the first Pacto in December 1987 and May 1994, the minimum wage increased by 136 percent, while the cost of a basic basket of consumer goods rose by 371 percent.

That sort of decrease in real earnings would lead Mexicans to call the 1980s the “lost decade.” During the 1980s, real wages (adjusted for inflation) declined by more than 75 percent, and between 1981 and 1990 workers’ share of national income fell from 49 to 29 percent. Government investments in education, research and development, and infrastructure were reduced. The IMF policies, which supposedly were intended to make Mexico more internationally competitive, were actually doing the opposite by limiting investment in the very areas needed to make a country more productive. It was a development “strategy” doomed to fail.

The Cost of Privatization

While ordinary wage earners saw their incomes plummet, they were confronted with increasing consumer prices. Since 1983, Mexico has sold off nearly 1,000 public enterprises. These privatizations were intended to inject come cash into government coffers. While the sell-offs did, in the short term, earn the government new money, the privatizations hurt ordinary consumers. The privatization of Telmex, the country’s phone system, is just one example of how the IMF privatization agenda hurt average citizens more than it helped them.

In 1990 President Carlos Salinas de Gortari sold off the country’s profitable phone system, Telmex. The World Bank provided substantial technical assistance to the Mexican government to help with the sale. The winners were multinational communication corporations Southwestern Bell and France Telecom. Mexican phone users were the losers. In the months before the sale — in an attempt to make the Telmex a more attractive buying prospect — the government increased rates on local calls from 16 pesos per minute to 115 pesos per minute.

In a 1992 report, the World Bank admitted that “the privatization of Telmex, along with its attendant price-tax regulatory regime, has the result of ‘taxing’ consumers — a rather diffuse, unorganized group — and then distributing the gains among more well-defined groups, shareholders, employees, and the government.” The Bank predicted that rates would decrease in the long run. But the long run still hasn’t arrived. Although rates on international calls have dropped, that decrease has been offset by a rise in the cost of long distance calls within Mexico.

Other privatizations have been equally distressing for average Mexicans. The World Bank has concluded that privatization contributed to a “worsening of the already skewed and concentrated pattern of ownership distribution in the economy.” A glaring example of this is corn, Mexico’s traditional staple crop. For years, small scale farmers have seen government support evaporate as the IMF demanded an end to tariffs and import quotas on the grain and an elimination of government assistance with marketing and distribution of locally grown products. In recent years, a flood of subsidized US corn has caused a 45 percent decrease in the prices corn farmers receive for their commodity. This has pushed millions of farmers off their land and into the urban ghettoes or toward the US. And yet — because of the monopolistic control of the Mexican corn processing industry — consumer prices have not gone down. In fact, tortilla prices have actually increased in the last 15 years.

A “Success” Built on Sand

By the early 1990s, after the “lost decade,” the Mexican economy started to show signs of improvement. Inflation came down, and some economic growth occurred. But it was a success built on sand. The Mexican economy was relying more and more on foreign capital flows, most of which were short-term portfolio investments. The increasingly volatile capital flows boosted the Mexican peso, a benefit for foreign investors, but it worsened the country’s trade deficit by making Mexican exports more expensive.

By mid-1994, foreign investors — assuming the Mexican government would devalue the peso to make exports more competitive — began pulling their money out of Mexico. In December 1994, Mexican officials were forced to devalue the peso. In January 1995, the government again asked the IMF for assistance. The IMF lent the country $7.75 billion, and the US Treasury loaned another $18 billion. A new round of privatizations were prescribed to raise quick cash and pay off the loans. Under the 1995 agreement with the IMF, transportation, banking and finance, railways and the petrochemical industries were all to be sold off. Once again, the IMF was offering policies that responded to the short term financial concerns of international investors rather than to the basic needs of or ordinary Mexicans.

The1995 peso devaluation — combined with an IMF-mandated rise in interest rates designed to lure investors back to Mexico — sparked the worse depression in Mexico in 60 years. Unemployment doubled. More than 12,000 Mexican businesses filed for bankruptcy. And millions of families dropped below the poverty line.

As the Mexican economy came virtually to a standstill, the IMF blamed the Mexicans, complaining that human error and mismanagement of financial variables had led to the crisis. The IMF’s attempt to shift blame for the economic collapse seemed to many Mexicans an insult. The country had followed all of the Fund’s prescriptions. The peso devaluation, after all, was due in large part to the short-term capital flooding the country, and that flood was precipitated by the deregulation of the country’s financial markets which the Fund had demanded.

Trading Away the Future

Even as its economy was shrinking, Mexico was implementing the other pillar of the IMF’s structural adjustment package — trade liberalization. In 1994, NAFTA went into effect, creating a giant “free trade” block among Mexico, the US and Canada. The agreement contained many “reforms” the IMF had long been asking for, among them a provision allowing 100 percent direct foreign ownership of Mexican companies. NAFTA also modified Article 23 of the Mexican Constitution, which had protected communal property, known as ejidos, from being broken up. The article was another long-time object of IMF and World Bank ire. The constitutional change removed many people’s guarantee that they would have access to land, thereby putting more people in financial jeopardy.

In the years following the 1995 crash, Mexico did enjoy some steady macroeconomic growth. But the benefits were not evenly spread. The number of Mexicans living in “severe” poverty (surviving on less than $2 a day) has grown by four million since NAFTA began. Wages, instead of increasing, have declined. Mexican manufacturing workers are today earning almost 10 percent less than they did before NAFTA. The 1990s, just like the ten years before, were a “lost decade.”

Today, after two decades of following IMF prescriptions and seven years of the NAFTA experiment, Mexico remains a country racked by poverty and inequality. A majority of Mexicans live below the poverty line. Even the World Bank concedes that 15 years of trade liberalization in Mexico have not succeeded in closing the gap between rich and poor. In almost every social sector — health, nutrition, housing, education — virtually all of the key indicators show serious deterioration over the last 15 years. Today one can speak not just of a lost decade, but of a lost generation.

The Same Old Policies

And what about the debt burden that started Mexico down the structural adjustment path? It has gotten even worse. In 1982, Mexico’s total foreign public debt was $57 billion. In 1993 it amounted to $80 billion. By 1997, the country owed $99 billion in public debt. This stranglehold of debt continues to force Mexico to attract foreign investment by any means necessary, including trading away the basic rights of its workers and failing to enforce environmental regulations.

Despite the failures of this “model student,” the World Bank and IMF are still prescribing the same old policies for Mexico. In May 2001, the World Bank offered specific recommendations to Mexican President Vicente Fox on the country’s labor policies. The Bank said that if Mexico wanted to attract more foreign investment, it would need to increase the “flexibility” of Mexican labor. The Bank suggested that Mexico eliminate its regulations regarding mandatory severance pay, collective bargaining, obligatory benefits for workers, company-sponsored training programs, and company payments to social security and housing plans.

President Fox said the recommendations were “very much in line with what we have contemplated.” But a leading Mexican industrialist, Claudio X. González, who heads Mexico’s most influential business organization, was surprised by the Bank plan.

“Some of these proposals of the World Bank are not made even to the most developed nations,” González said. “Why are they then being recommended for the emerging countries?”