Capital and Revenge: The IMF and Ethiopia Author(s): Robert Hunter Wade Reviewed work(s): Source: Challenge,

Vol. 44, No. 5 (SEPTEMBER-OCTOBER 2001), pp. 67-75 Published by: M.E. Sharpe, Inc. Stable URL: http://www.jstor.org/stable/40722096 . Accessed: 23/12/2012 15:55
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The Problems ofCapital

and Capital Revenge: The IMF and Ethiopia

Hunter Wade Robert

crisisof1997,theInternational Eversincethe financial havebeenless Fundand theU.S. Treasury Monetary aroundtheworld. on opening insistent capitalmarkets doubtthat whenthedust has little But theauthor thepush settles, capital flowswill forunrestricted a casestudy ofthe provides strengthen again.Ethiopia interest involved.
Bankand theInTHE annualmeetings oftheWorld Fund(IMF)inHongKongin1997, ternational Monetary Committhegoverning bodyoftheFund (theInterim a plantochange thearticles ofagreement for tee)endorsed only The changewould add timein theFund's history. thefourth to thegoals oftheFund and "thepromotion ofcapitalflows'7 add "thecapitalaccount"to thejurisdiction oftheFund.Curaresilent and thecapital thearticles on bothcapitalflows rently
at theLondonSchoolofEconomics ROBERT HUNTER WADE is professor ofpolitical economy andfellow 2000-2001. He isfinishing a book aboutthe Berlin, oftheInstitute ofAdvanced Study, World and theenvironment. Bank,theUnited States,
vol. 2001 67-75. 44,no. 5,September/October , pp. Challenge, Inc. All 2001M.E. reserved. Sharpe, rights

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Wade

was The proposedchangein theFund's constitution account. oftheFundand the in a muchbigger campaign onlyone thrust U.S.Treasury throughstrongly bytheU.K.Treasury) (supported worldmovement thefreedom ofcapital outthe1990s toincrease of the WorldTrade wide. The FinancialServicesAgreement Inand theMultilateral 1997, Organization, signedinDecember theOrganization for vestment negotiated through Agreement EconomicCooperationand Development(OECD) but then in 1998, areother thrusts ofthecampaign. aborted theIMF and SincetheEastAsianfinancial crisis of1997-1999, theU.S. Treasury have becomequieteron theissue. Theyremaincommitted tofreeing markets aroundtheworld up capital butarenotactively it.One can expect, that abpushing though, sentanother crisisin a country or regionthat majorfinancial matters thecoreeconomies, thepushwillbeginagainsoon. for Financehas becomethe dominant sectorin theUnitedStates and Europe,and financial firms to securing give top priority access to businessin emerging markets. Theywantto see restrictions removedon bothcapitalflowsand theentry of forsuch as banks and insurance eign financialservice firms, Thefinancial sector is a major ofthesupcomponent companies. theFundand theU.S. Treasury, havetopay base for so they port a lotofattention todo. Oncememories of towhatitwantsthem are likelyto theAsian crisisfade,theFund and theTreasury ofrestrictions on capitalmovemoveagainto securethelifting ments worldwide.1 to go? The How fararetheFund and theTreasury prepared Before theAsiancrisis case ofEthiopia is telling. broke, Ethiopia theFund to open its from came underthestrongest pressure in oroutand restrictions on money flows (tolift capitalaccount in thedomestic withtheidea investment on foreign economy), offoralso lift restrictions on theentry that wouldlater Ethiopia Thepoint of market. firms tothedomestic eignfinancial-service
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and Revenge: The IMF and Ethiopia Capital

thestory is thatEthiopiais one ofthepoorestcountries in the interest to foreign or investors world,ofnegligible speculators at themoment, and yettheFundgave specialattention tomakingthegovernment open thefinancial system. *** In the1990s, a program theIMF introduced calledtheExtended Structural togiveeligible (ESAP),designed Adjustment Program ESAP membercheaperaccess to Fund credits. poor countries but also notjustbecause ofcheap Fund credits, shipmattered Bankwereconditional from theWorld becausecheapfunds upon in as also was balthe Fund's ESAP a country's being program, and theEuropeanCommunity from ance-of-payments support A country had tomeetan array ofconditions aid from bilaterais. a for and was granted setbytheFundtobe eligible membership After an was tranched. three-year period.ButtheFund money were further tranches at thestart oftheprogram, initial grant a set ofmorespecific, conditional meeting upon thecountry's ofthekind"By date X you benchmark conditions time-bound ofmoney related tothegrowth willhavedoneY."Theconditions thefiscal reserves, deficit, establishing exchange foreign supply, be determined interest rates intreasury a market bills, by letting removwhat follows and for and demand, important supply in and out. on flowsofmoney ingrestrictions aftheannualreviewofa country's Needlessto say, progress in how theyjudged a fordedFund officials greatdiscretion becausesomeoftheconfulfillment oftheconditions, country's ofthegovernment, be largely outsidethecontrol ditions might in treasury bills"or a market suchas "establish and conditions Therefore ofdegrees. bureaus"permit exchange "open foreign a country's Fund officials also have greatpoweroverwhether - notonlywhether a new three-year continues ESAP program is carbutwhether an existing is negotiated program program
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Wade

- and therefore also powerover ned through to itsconclusion all theothersourcesof cheap fundsthatare cross-conditional on a country's beingin theESAP program. EthioTheboardoftheFundapprovedan ESAP program for oftheFunddecided pia in 1996.Thenin 1997themanagement No moretranches would be givento the to stoptheprogram.

be giventothe No moretranches would thegovernment ofone oftheworld's governmentcountries andan obvious candidate for an poorest ESAPprogram. Why?
- the government of one of the world's poorest government countries and an obviouscandidate an ESAP program. for Why? A largepartofthereasonis this. After theprogram had been in 1996,theEthiopian initiated in the misbehaved government and a prominent American eyesoftheFund,theU.S. Treasury, bank.Ethiopian a state-owned had earlier Airlines, enterprise, four with a loanfrom theAmerican bank. bought Boeingaircraft The terms oftheloan wereonerousto theairline and lucrative to theAmerican had a very bank,because at thetimeEthiopia adverserisk Notonlywas theinterest ratevery the rating. high, loan terms theunusual provision also contained thatall four totheAmerican bankuntil theloan planeswouldbe mortgaged was paid in itsentirety. Airlines wanted Bylate1996, Ethiopian torenegotiate theloan.TheAmerican bankrefused. So thegovernment lentEthiopian Airlines themoney topayoff theloanin itsentirety. The American bank was furious. It complained to theU.S. Treasury that theEthiopians had actedinbad faith. at theFund began to raise director Next,theU.S. executive ESAPstatus. were aboutEthiopia's angry questions Negotiations between theFund and thegovernment overthe justbeginning
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and Revenge: The IMF and Ethiopia Capital

The Fund officials releaseofthe1997tranche. with negotiating had failedto meetsome Ethiopia beganto say thegovernment Forone thing, thegovernment had failed to ofthebenchmarks. that had beensetas a reserves meettheforeign target exchange butmisOn paper, this was true, condition of1997membership. failed tomeetthetarget becauseithad Thegovernment leading. lentpartof the reserves to EthiopianAirlinesto pay offthe

totheairline onerous oftheloan were Theterms becauseat totheAmerican andlucrative bank, risk adverse had a very thetime rating. Ethiopia
a technicalwas largely American loan.So theFund'sobjection liabilities ofthewholeof becausetheassetsand contingent ity, also The Fund officials remained thepublicsector unchanged. had failedin their said theEthiopians dutyto obtainapproval in thisway. theFundbefore from usingthereserves butnotnecas a necessary further said that, TheFundofficials tranche thenext for ofbeingeligible condition sufficient essarily had toagreetoopenthecapital in1997, thegovernment account, ratesand theexalso agreeto allowbothinterest and therefore ratetobe determined (ineffect, adding by "themarket" change The thegoalposts). to theinitial new conditions ones,shifting thespirit, notjustthe to fulfill also had topromise government the tomarketize todo other oftheprior letter, things agreement billmara Treasury suchas establish financial domestic system, had assets whosewholefinancial ket(ina country equivasystem bankin theUnitedStates). lentto a smallregional theEthiopian At thispoint, said, "Enough."For government to whichESAP was the all its need forthe cheap financing it was not preparedto open the capital account, gatekeeper, would thegovernment toorisky whichitconsidered giventhat
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Wade

rate and the exchangerate. of the interest thenlose control it approached theredoubtable a WorldBankofficial, Through at and senior vicepresident thechief economist Stiglitz, Joseph theWorldBank,and persuadedhimto visitAddis Ababa and withtheFund.Stiglitz flewoutin adviseiton how tonegotiate comlate1997,and was deeplyimpressed by thedevelopment andcompetence mitment ofthegovernment, theprime especially and his seniorofficials. minister devotedtimeto workStiglitz the government's withthe ing through negotiating strategy Fund.WhentheFund foundout,itwas apoplectic at Stiglitz's The Fund's anger and Treasury's too made the "betrayal/7 eventa milestone en routeto Stiglitz' s eventual from the firing Bankin 2000.2 World theFundhad succeededingiving a bad time, Bythis Ethiopia name.Fund officials wentaroundsayingthatEthiopiawas "a reluctant and the country was "off In fact, track." reformer," had metmostoftheFund'sconditions toa degree that Ethiopia astonished and otherWorldBank officials, Stiglitz especially the to other African in countries ESAP But compared programs. theFund officials had now decidedthat dealingwithEthiopia the country's ESAP statushad to lapse untilthe government becamemore Theword"cooperative" is important. cooperative. Fundofficials arenotused to poorcountry governments, espeAfrican withthemand presenting counterones,arguing cially did just proposals. The factthatthe Ethiopiangovernment this and worse, theprime minister calledhimself a Marxist made them determined back. to strike On hisreturn from AddisAbaba,Stiglitz a strong wrote backto-office BankPresident toWorld Wolfensohn and James report his pointsto severalseniorpeople in theFund.Then, repeated in January visitedEthiopiaas part of his 1998,Wolfensohn Africa Bankofficials trip. put theESAP issue at thetop ofhis discussedit at book, and he and the primeminister briefing
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and Revenge: The IMF and Ethiopia Capital

Wolfensohn he would takeit up. On his relength. promised he raised it withthe Fund's managingdirector, Michel turn, at their at leasttwice. Camdessus, breakfasts, regular thetopoftheWorld Thispressure from Banktothetopofthe TheFundresumed fora new ESAP Fundworked. negotiations Meanwhile theEastAsianfinancial crisis for program Ethiopia. weresayingthatpremawas in fullspate,and manyanalysts tureopeningofthecapitalaccount by theEastAsian countries - and theFund cause ofthecrisis was an important proximate that in for criticism someofthe for was coming insisting strong evenfurther countries crisis-affected capitalaccount opentheir So inthenewround as a condition ofFundemergency financing. theFund did notpressthe withtheEthiopians, ofnegotiations thatthegovernissue.And insteadofinsisting capitalaccount of interest determination mentallow market rates,the Fund proposalto make a significant agreedwiththe government's market determination. butnottogo tofull direction stepin that inApril1998. TheFundagreedon thenew program ofEthiopia'smeettookpersonalcharge The primeminister weremetto a highdeand theconditions ing theconditions, in 1999, thegovernment negotiations, gree.Forthesecond-year to officials senta teamofveryseniorand verywell prepared declined toextend ButtheFundofficials Ethiopia's Washington. Ethiothewarbetween thesecondyear. for status Theyinvoked Butalmostcertainly as one ofthemainreasons. pia and Eritrea oftheMarxist had a gutdislike Theofficials smelled revenge. they saw did notliketheway itarguedback,they they government, theprevious as havinglosttheargument themselves yeardue Bank. intervention oftheWorld tothe(illegitimate) thought They thehook,and now they had been let off thatthegovernment were going to bringit to heel by not agreeingto continue had been even thoughthe conditions Ethiopia'sESAP status, fulfilled.
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Wade

inOcfor a newprogram was negotiated Ethiopia Eventually thenamehad beenchangedfrom 2000.(In themeantime, tober and Growth Reduction ESAP tothePoverty PRGF.)But Facility, for was delayedin its presentation Ethiopia'sPRGF program 2001.Meanapprovalto theboard of the Fund untilJanuary thePRFGprogram, was supposedto while,alongside Ethiopia under theHighly Indebted PoorCountries (HIPC) getdebtrelief Butthisagreement, whilecountries too,was delayed, program. likeCameroon and GuineaBissau,whichcannot with compare in terms theEthiopian of competence, wereushgovernment eredintotheHIPC debt-relief withlittle program delay. Itis notclearjusthow muchtheFundwas driven toinsist on theAsian crisis) Ethiopia's openingthecapitalaccount(before - likeall countries becauseitsofficials really thought Ethiopia shouldopenthecapitalaccount for thesakeofitsown development and for thesakeoftheworldeconomy, and how muchthe officials wereacting as theagents oftheAmerican bankand the and therefore U.S. Treasury to makelifevery finding pretexts difficult forthegovernment. WorldBankofficials involvedin theevents areinno doubtthat whiletheU.S. Treasury mayhave stiffened theFund'sresolve on account oftheanger ofthe American bank,boththeTreasury and theFund reallydid wantto makeEthiopia an object lessonfor Africa thatall African countries wereexpected toopentheir and wouldbe capitalaccounts cutoff iftheydid not.The question from concessional funding today is when the Fund will startto push the same agenda - even in again, as the East Asian crisisfades from memory countries as poor and as unimportant forinternational capital as Ethiopia. Theother is theinvisible power striking pointaboutthestory oftheFundofficials as thegatekeepers tonotonlyconcessional finance but also country Whentheybegan to call reputation. and to talkabout the "breakreformer" Ethiopiaa "reluctant
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and Revenge: The IMF and Ethiopia Capital

was in no one whoheardthem downoftheprogram/7 virtually werelargely untrue a position to knowthatthesecomments exfailure to meetthe foreign forexample,thatthe apparent not a real was a technical failure, requirement changereserve thebiggest did not shrink from one. Sincetheprimeminister in theinternational financial "Marxist/7 community, pejorative aboutthe Fundofficials toldstories theblackmark easilystuck. beand other unreliable peoplebelievedthestories Ethiopians, The leadersofmorecomplicause important peopletoldthem. andreceived countries more ant, escapedtheapprobrium corrupt Fundhelp. moregenerous If is clear. countries leadersofpoordeveloping Thelessonfor theFundand all from funding you wantaccessto concessional on theFund,do not arecross-conditional that sources theother do not do notcall yourself Marxist, arguewithFund officials, thehelp ofthetoppeople at theWorld enlist Bank,and do not American ofloans to important theonerousterms renegotiate banks.

Notes
in which tookoffice W.Bushadministration, ofthenewGeorge 1. TheTreasury the of than its Wall Street to be less to seems 2001, predecessors obliged January who Horst oftheFund, director Kohler, Also,themanaging pasttwodecadeswere. thanhispredein 2000, seemstobe lesszealous aboutcapitalopening tookoffice Thesetwocontincrusade. for whomitwas a personal Michel Camdessus, cessor, the much see how to make it priority GroupofSeven interesting especially gencies the multilateral the the of seven Fund, OECD, development major powers), (group and other suchconglomerates AsianNations, ofSoutheast theAssociation banks, ofemergtoforcing several willgiveoverthenext systems openthefinancial years adminClinton the Wall Street-beholden the of to as markets, years compared ing istrations. Bank: TheFight overPeople andtheWorld States 2. See R.H. Wade,'The United 2001. and Ideas,"typescript, Berlin, Wissenschaftskolleg, May

call 717-632-3535. outsidetheUnitedStates, call 1-800-352-2210; To order reprints,

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