Masters of the Universe

Israel's economic planners have fallen under the sway of the International Monetary Fund, and are hypnotized by the Credit Rating Agencies--despite their abject failures. We need the courage to break free of a false and damaging ideology.

In December this year, the International Monetary Fund, which, though its power and reputation are in decline, over the past 27 years or so has been the most influential international organization in the world, completed its annual mission to Israel, and released “a concluding statement”. Although, like citizens of every democratic nation, we like to think of ourselves as masters of our own fate, particularly when it comes to domestic policy, in actuality the ideas—or perhaps more accurately, the ideology—of the IMF has had a decisive, almost hypnotic influence on Israel’s economic policy- making elite for a very long time.


In fact, Israel’s political and economic elite have been the IMF’s obedient and enthusiastic disciples to such an extent that there has been a kind of blurring of identities. Stanley Fischer, the Netanyahu appointed President of the Bank of Israel, was deputy director of the IMF from 1993-2001 (since the founding of the IMF and the World Bank in 1944, the head of the IMF has always been a European and the deputy director an American, while at the World Bank the roles are reversed.) The Bank of Israel, along with the Treasury Ministry, have so deeply internalized the IMF’s ideology that it is common knowledge that the IMF’s reports on Israel are actually ghost-written by Bank of Israel officials.


The first and most important clause of the December 2007 IMF statement reads as follows:

“The economy is performing exceptionally well, which calls for the continuation of the strong economic policies. Sound policies have played a major role but so has unprecedented global growth. With the return of good times, the pressures to divide up and consume the fruits of the hard-won prosperity are growing. But more work is needed. In particular, the public debt today is not much lower than before the latest recession and the country's vulnerability to economic shocks remains high. More debt reduction is therefore essential to safeguard the government's ability to help people in difficult times. Furthermore, improvements to the financial sector framework need to be carried forward to enhance the economy's robustness against shocks.”


The statement, written with understated confidence, contains both encouragement and warning. The economy is “performing” exceptionally well (a hand of applause for the performance, please), but along with prosperity have come “pressures to divide up and consume the fruits of the hard-won prosperity”. These must be resisted. Hinting at one of their main messages—the need for discipline, hard work, austerity-- “More work is needed”, the IMF-Bank of Israel present their practical recommendations. Instead of surrendering to the understandable but indulgent temptation to use the 7 billion shekel budget surplus to strengthen the collapsing education system, allow elderly holocaust victims to live their remaining years in dignity, or buy life saving drugs for cancer patients, the money should be used to repay the public debt because “the country’s vulnerability to economic shocks remains high.”


There are many important questions that the IMF’s statement raises. What does it mean, for example, to say that “the economy is performing extremely well”? Because the IMF’s measures for judging the performance of an economy do not take into account questions of distribution of wealth within the population, the terrific performance of the economy, in very crude terms, indicates mostly that the rich and super rich—both Israelis and investors from outside the country--have gotten richer (applause again!). Who then is being asked for “more work”, for sacrifice? The answer, as usual, is the middle class and the poor and especially the public institutions that serve them. In the universe of the IMF and other neo-liberals, it is never the millionaires and billionaires who should be required to tuck in the belts on their momentously larger bellies. That could, according to the thinking of the IMF, dampen their incentive to make more money. For it is they themselves—their bank accounts, their lifestyles--that are the living embodiment of the “fruits” of Israel’s superb economic performance, whose “division” must be resisted at all costs.


Later in the article we will return to both of the threat of “economic shocks” in the IMF statement and the Fund’s prescription: Ignore even the most urgent social needs and use the budget surplus to repay the debt. But first let us wonder for a moment at the strangeness of the continuing hold of IMF-style economic policy on the Israeli policy making elite--strange because of the extent to which these policies have been exposed as failures again and again over the last 15 years, and never more so than during the era in which Stanley Fischer reigned as its Deputy Director. Those failures include both the IMF’s role in precipitating the East Asia meltdown in 1997-98 and its handling of this huge crisis once it had begun, along with the wholesale failure of the IMF’s strategy for transforming the Russian economy from communism to capitalism. And there is more, much more. To whom, then, are we listening when we decide to forgo educating the next generation of Israelis or ensuring social solidarity through universal health care?


Probably the most thorough account of the failures of the Washington Consensus—the name given to the set of policies pressed on the developing world by the IMF, the World Trade Organization and the World Bank—has been given to us by Joseph Stiglitz, who won the Nobel Prize for Economics in 2001. Stiglitz was the head of President Bill Clinton’s Council of Economic Advisors from 1993 until 1997, when he left to become the chief economist and senior vice president of the World Bank, where he remained until January 2000.

Stiglitz, who now teaches at Columbia University, received the Nobel Prize for Economics for theoretical work that disproves one of the basic beliefs of “market fundamentalists”—a nickname given to disciples of Milton Freedman, of whom Stanley Fischer is one of the most outstanding. Freedmanian market fundamentalists take it as an axiom that “the market”, if left on its own with no interference from the government, is a perfect, unfailing device that stimulates and regulates supply and demand, creates one hundred percent employment and sets prices and mediates values with exactitude.


What Stiglitz’s work proves is that where inequality exists in terms of access to information, with some people having more information and others less, the market does not work perfectly. Since inequality of information exists everywhere and always, Stiglitz adds, the market is never a perfect device, and government interventions are necessary in order to restore balance, to ensure justice, and to help those weakened by the structural flaws built into the market system.


In “Globalization and its Discontents, however, Stiglitz is not talking theory, but practice. Published in 2002, the year after Stiglitz’s Nobel Prize, “Globalization” has had a powerful influence on the reputation of the IMF. Within the IMF itself, Stiglitz book made tsunami-sized waves, and even catalyzed policy changes. Written by the ultimate almost-insider, Stiglitz describes an organization that has developed a culture of secrecy so encompassing that even the US Congress and the IMF’ sister organization, the World Bank, are often kept in the dark about its decisions. Although it is a public international institution, funded by taxpayers, there is no mechanism through which citizens can demand information or participate in decision-making processes of the IMF. (Eretz Acheret readers please note: Stanley Fischer refused to be interviewed for this article.) High-level IMF bureaucrats nearly always hop from the IMF to a highly paid job in the private sector—after the IMF, Stanley Fischer moved directly to Citigroup, one of the financial institutions whose predatory behavior—made possible by agreements to deregulate banking that the IMF imposed on Argentina-- helped trigger the Argentinian financial crisis.


The IMF’s secrecy, as well as its tendency to impose the same plan and conditions on every country it works with, regardless of the country’s unique situation and needs, stems from what Stiglitz describes as its “ideological fervor”, a quasi religious belief, adhered to in the face of an accumulating mass of evidence, in the “supremacy of the market”. Stiglitz, of course, also believes in markets as an important economic force—nearly all economists do. What characterizes the dominant neo-liberal belief however is their rejection of the legitimacy of government intervention or regulation, of the need to adapt economic policies to specific conditions, and their refusal to consider the ethical and political consequences of economic policies.


At the most basic level, Stiglitz says, the IMF has failed in its mission. Created in order to stabilize the world economy, it has presided over some 100 economic crises, which were often precipitated by its policies and then exacerbated by its “solutions”. Over the last decade, Stiglitz says, real poverty and inequality grew even as the world economy grew as well. While China, which designed it’s own transition from communism to a market economy without IMF help, flourished, Russia, guided by the IMF, saw much of its population fall into unprecedented poverty, its life expectancy drop significantly, and its resources fall into the hands of unscrupulous oligarchs, largely because the IMF pushed for privatization during a time when proper regulations and criterion were not in place.


All through the 1990’s, the IMF, by conditioning their loans on obedience to their financial “advice”, forced developing countries to cut social programs, to charge money for education, to minimize health care programs, and to sell off government owned factories that provided much needed jobs with disastrous results. At the same time, while the United States and Europe provided tens of billions of dollars in subsidies to farmers (in reality subsidizing the huge corporations that control most of the food industry today), the IMF made developing countries open their borders to US and European agricultural goods, forcing millions of farmers in the Third World out of business. In many countries in the world, such as Indonesia, where the IMF forced the government to abolish food and kerosene subsidies, IMF policies triggered riots and social unrest that exacerbated already challenged economic situations. In other places, such as Thailand, IMF forced cuts in health expenditures have resulted in an increase in new AIDS cases. Poor families in many developing countries, faced with having to pay for school for their children under the IMF’s “cost recovery program” made the heartbreaking choice not to send their daughters to school. With its one dimensional focus on economics as seen through the eyes of the commercial and corporate community, the IMF, over and over again, has shown itself incapable of comprehending the tapestry of interdependent political, social and economic factors that together create a healthy society.


An even more important lesson for Israel is that many of the world’s most outstanding examples of economic success are nations who flourished not because they prioritized some abstract idea of fiscal discipline, but because they invested massively in their population. Korea, Japan, Taiwan and the other Asian tigers created a universal education system for all their children—this, as much as any other single factor, according to the Nobel Prize winning economist Amyarta Sen, is responsible for their ability to compete on the global scene. For countries like Korea and Taiwan, redistribution of wealth in the form of land reform preceded and stimulated economic growth. Huge plots of land owned by wealthy landholders were broken up and given to sharecroppers, who had previously had to give up 50% of their crops in a kind of tax collected by the rich. Although the plight of landless sharecroppers enslaved to huge absentee landholders is one of the most debilitating aspects of Third World economies, strategies such as land reform, which impose discipline on the rich rather than the poor, are never part of the IMF’s agenda. As Stiglitz writes, “The IMF rails against high tax rates that are imposed on the rich, pointing out how they destroy incentives, but nary a word about these hidden taxes [on the landless poor].”


Stiglitz’s book is full of examples of countries that succeeded because they chose to defy the IMF—among them Uganda, which created a universal free education system for all its children and was rewarded by a huge rise in school attendance and thus in the economic capacity of its population. My favorite recent story about the rewards of defying the IMF and its institutional allies is from the New York Times, and is entitled: “Ending Famine Simply by Ignoring the Experts”. Malawi, writes Times correspondent Celia Dugger in November 2007, one of the poorest African countries, has spent the last two decades with much of its population on the verge of starvation. With a decreasing land per person ratio because of rising population, the government subsidized fertilizer in order to increase farmer’s yields until the late 1980’s, when the World Bank, acting in tandem with the IMF and promoting “Washington Consensus” ideas, forced them to stop the subsidies or risk losing loans and aid. Subsidies for fertilizer would constitute interference in the workings of the free market--in their eyes the only legitimate mechanism for the distribution of services and goods. Finally, after a disastrous harvest in 2005, after which 5 million out of Malawi’s population of 13 million needed emergency food aid, Malawi’s president decided that enough was enough. In 2006 fertilizer was subsidized. By 2007, Malawi had more food than it could possibly use, and began to export grain its neighbors. Subsidizing fertilizer in order to prevent starvation seems to me an apt emblem for many of the ways in which a government might rightfully want to invest in its population. Aren’t education, health and other investments in welfare and social solidarity forms of fertilizer necessary for preventing a society from turning into a desert of alienation and inequality?


The East Asia crisis, the IMF’s most spectacular failure, was caused by another of the Fund’s obsessions: the pursuit of “financial market liberalization”. Sovereign countries have usually maintained some control on the flow of money and investment coming in from outside their borders, if only in order to safeguard their own currency. “Hot” money, money that moves into a country at high speed looking for a quick killing, through currency or real estate speculation, is usually destined to shoot right out again at some point, leaving the economy in shambles. After the IMF pressured Thailand and the other East Asian countries to deregulate the flow of outside investment that is exactly what happened. The result was the deepest, most frightening economic meltdown since the great depression. The crisis began in Thailand in 1997 and quickly spread to Indonesia, the Philippines and other East Asian countries as well as to Russia and South America. The IMF’s response—including instructions to raise interest rates and cut social budgets in the midst of massive unemployment and despair—exacerbated the crisis to the point that in several Asian countries the crisis is simply called “IMF”.


By demonstrating how financial market liberalization, which is like a green light singling forward the flow of “hot” money, has made every country potentially vulnerable to financial meltdown, the East Asian crisis had a profound affect on the economies of many nations. In an article entitled “Reverse Foreign Aid” Tina Rosenberg of the New York Times last March described its most diabolical affect. “For the last ten years,” the article begins, “people in China have been sending me money. I also get money from countries in Latin America and sub-Saharan Africa—really from every poor country. I’m not the only one who’s so lucky. Everyone in a wealthy nation has become the beneficiary of the generous subsidies that poorer countries bestow upon rich ones…Economic theory holds that money should flow downhill,” Rosenberg continues. “Increasing the transfer of capital from rich nations to poorer ones is often listed as one justification for economic globalization.”


In actuality, though, Rosenberg tells us, “784 billion dollars a year now flows from the poorer countries to the richer ones (in 1997, the year of the East Asia crisis, the balance was even)’ Although some of this crippling negative flow is due to interest on loans and the brain drain, much of it is the result of uncertainty caused by financial market liberalization. Because of the threat of meltdowns caused by currency speculation and enabled by the deregulation of investment and of banking that the IMF has pushed for across the globe nations has nearly tripled the amount of hard currency that they hold in reserve in case of financial crisis—from the equivalent of 3 months of spending on imports to 8 months. The reserves are meant to enable the governments of each country to save their currency by buying it at high exchange rates in the event that investors abandon the country as they did in Thailand and elsewhere in 1997. These are the kind of “economic shocks” that the IMF is warning us about in the “Concluding Statement” with which this article began. In a move that is close to the classic definition of chutzpah, in which the boy kills his parents and then pleads for mercy from the court because he is an orphan, the IMF has first created the reality of a world in which currency speculators and other short term investors have free reign, and then self righteously insists that we follow its financial discipline or risk punishment from the forces that have been unleashed.


Nearly tripling each countries reserves means giving money to the United States because the reserves are virtually always invested in US treasury bills, considered the safest form of savings. Because US treasury bills are so safe, they pay a very low rate of interest. Developing countries—and Israel too—end up borrowing money from US sources at interest rates that top 15 or even 18% and then lending the US money at rates of 4% or less, with the US earning billions of dollars on the margin. Who says you can’t make money from a financial crisis?

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As I mentioned earlier, the IMF has lost much of its cachet internationally, (though not unfortunately, in Israel,) following the East Asia crisis, the breakdown of Argentina’s economy, the fire-sale privatization of Russia and other assorted debacles. But not to worry, another kind of institution, with an identical philosophy as the IMF, has become very powerful, though lately it too has been under attack. I mean the credit rating companies (hevrot dirug ashrai).The importance of the credit rating companies and their influence was brought to my attention by Professor Shlomo Swirksy of Merkaz Adva and I am indebted to him for much of what I am about to say about them. When the IMF-Bank of Israel urges us to use our budget surplus to pay back our debt instead of using the money to transform our education system (the moral equivalent of fertilizer in a knowledge based economy like Israel’s) it is the hevrot ashrai whose shadow is lurking in the background.


Appropriately in the age of privatization, the hevrot dirug ashrai are private businesses, not global public institutions. Three of them—Standard and Poors, Moodies, and Fitch's have a monopoly of 80% in the global market for their services. Using statistics such as GDP's and levels of debt for their analysis, but without taking into account non-economic matters like equality, solidarity, level of education or of health care, credit ranking agencies rank states, as they do companies, in terms of their financial health and their projected ability to pay back loans. The ranking given to a country by the credit rating agencies (AAA, AA, A, A-, B+ and so on), determines among other things the interest rate that a country must pay when borrowing money from private or public sources. The credit rating agencies have become so powerful that they regularly influence fateful economic and budgetary decisions of supposedly independent nations. These companies take great liberties in their suggestions. In 2005, for example, Moody’s mentioned in its recommendations to Israel that it would be “only logical” for inequality—the gap between rich and poor—to continue to develop and widen as a consequence of the sound economic practices it was urging on the country.


One of the key modalities through which the credit rating agencies rate a country is through the ratio of its total debt to its GNP. If, for example, Israel’s GNP were 100 billion dollars a year, and its total debt were 81 billion dollars, Israel’s rating would be 81%. In fact, 81% is Israel’s rating. According to the Bank of Israel and to our Treasury officials, this ratio is too high. In July 2007, on the eve of the debate about Israel’s 2008 budget, Standard and Poors warned that our dirug ashrai ‘alul lehipaga” unless we maintain our “budgetary discipline (mishmat takzivit).

Is 81% really such a high ratio? Too high to allow us the luxury of investing in our children or our sick? Before answering this question I would like to take a moment, as with the IMF, to think about the credit rating agencies. Who are these mysterious entities who we are allowing to determine our future and tell us whether to invest in our children’s education? Are they truly wise and infallible if even on their own terms? In fact, the credit rating agencies have not only often been wrong, they’ve been wrong big time. They continued to give their highest rating—AAA-- to Enron, the gigantic American company built on manipulations and corruptions, right up until the moment it collapsed. Now they have been caught up in a much more consequential blunder. For those who still haven’t heard about it, the US economy is in disarray in great part because of the credit rating agencies. It’s beyond the ken of this article to explain the subprime mortgage crisis that has put the US economy into a serious tailspin. Suffice it to say that many of the most respected investment funds, such as Merril Lynch, invested heavily in a lending scheme that was rotten at its core. The Wall Street Journal, as the subprime crisis unfolded this summer, accused the credit rating agencies of responsibility for the crisis. The hevrot gave their highest ratings—AAA—to dozens of companies who were heavily invested in seedy mortgages. Reality is crumbling around the credit rating agencies just as it has around the IMF. And yet Israel’s economic elite is still willing to mortgage our children’s future to their discredited word.


So what about the 81% ration between Israel’s total debt and its GNP? Is it really so high that we have to pour our budget surplus into paying it back at an accelerated rate even while our education, health and welfare system are crumbling? According to MK Avishai Braverman, the Bank of Israel and the Treasury department is willing to lie in order to make us think so. Braverman, who was himself a senior economist at the World Bank and holds a doctorate in economics from Stanford University, says Israel’s Treasury department has been manipulating statistics in order to make it appear as if Israel’s ratio of debt to GNP is unacceptably high. “They released statistics based on conscious miscalculations in order to make it appear that Europe’s debt to GNP ratio was only 60% while in reality Europe’s ratio is 76 or 77%.—very close to Israel’s 81%. Heads would have rolled for that kind of manipulation of facts in the United States.” As economist Ran Raviv points out, Israel is actually in a better position to pay off its loan than Europe, even though its ratio of debt to GNP is slightly higher because our population is significantly younger than that of Europe, whose aging population is creating a reverse pyramid of productivity.

Why then, the question remains, are the Bank of Israel, the IMF and the Israeli Treasury department so keen on using Israel’s ample surplus to accelerate payment of the debt rather than using it to invest in Israel’s people? One answer is that listening to the credit rating agencies is good for Israel’s super-wealthy no matter how bad it is for the country. A higher credit rating means Israelis raising capital in Europe or America will have to pay a lower interest rate on the loans they take. To the extent that the government and the Bank of Israel identify the good of the very wealthy with the good of the State of Israel—and that is apparently a very great extent—the urgency of satisfying the credit rating agencies is intensified.

Ran Raviv suggests that even this may be only part of the story. Using Israel’s surplus to accelerate payments on its loan appeals to the Treasury Ministry also because it means to cut budgets for the Ministries of Education and Welfare Raviv points to an interview in The Marker with Uri Yogev, until recently the director-general of the Budget department at the Treasury. The greatest accomplishment of the Treasury Ministry over the past few years, says Yogev, has been its success in breaking the back of organized labor, Raviv suggests that cutting the budgets of the health and educational system is also a tool for weakening them, thus justifying privatization and preparing the path for the breakup of powerful unions such as the teacher’s union. If the public health system or education system is working, what excuse would the Otzar and its allies have to privatize them?


Braverman warns that the hold which neo-liberalism has on the country’s economic policymakers is turning Israel into a divided country. Israel’s economic growth is centered in the Tel Aviv area while the social and geographical periphery is deteriorating. “To continue on this path, to allow education to decline, to continue to exclude the periphery puts Israel’s survival at risk more than Iranian nuclear weapons,” says Braverman. “The success of our high tech industry and our science is only because we invested in education. If we don’t invest in infrastructure and education, we will be a third world country.”


In his critique of the IMF’s work in developing countries, Joseph Stiglitz remarks on what he perceives as one of Fund’s deep misconceptions: “[the IMF and the Washington Consensus] does not acknowledge,” says Stiglitz, “ that development requires a transformation of society… systemic change,” the kind of transformation that changes people’s expectations about themselves, about what their children can become. Although some Israelis are succeeding nicely in the global world economy, many more of Israel’s citizens are still waiting for the kind of transformation of which Stiglitz speaks. For this transformation to occur we will need the courage that Malawi has shown: the courage to tell the self styled masters and experts of the world economy that enough is enough.