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IMF's Poorer Beneficiaries Look At Scandal And Ask: Time For Fund To Change Its Ways?

Mykhaylo Linetskyy finds his pension doesn't go as far these days.
Mykhaylo Linetskyy finds his pension doesn't go as far these days.
Mykhaylo Linetskyy is one Ukrainian who says he's had enough of economic reform.

Linetskyy, a 65-year-old pensioner in the capital Kyiv, worked as a teacher his entire life and looked forward to retiring with a small but stable income.

But after years of tariff hikes on everything from electricity to railway transportation, Linetskyy's monthly pension of just $100 is hardly enough to survive on.

"I have the minimal pension, about 800 hryvnas," he says. "These high tariffs have had a terrible impact on me; much of my pension goes just to pay for utilities. I think recently everything's become at least 50 percent more expensive."

To be able to pay for everything, Linetskyy says, his pension would need to be at least twice as big. But instead, the government in Kyiv is looking to cut pension benefits in half -- a step it has to take if Ukraine is to receive much-needed credits from the International Monetary Fund.

The IMF stepped in as the Ukrainian economy was reeling in the wake of the global financial crisis, offering a $14.9-billion loan in 2010. But in return, they demanded a number of austerity measures, including the proposed pension reform -- a painful bloodletting in a country where nearly one out of every three citizens is over the age of 50.

The move stirred massive resentment in Ukraine over the paternalistic role of the IMF and other international lenders who critics say prescribe harsh tactics with little or no concern for the hardships of ordinary people.

So the arrest on May 14 in New York of the IMF's managing director Dominique Strauss-Kahn on sexual assault charges may have elicited a few grim smiles in Ukraine -- a rare moment where the bad behavior emanated from the Fund itself, and not the countries they assist.

But Myroslav Yakybchuk, the head of Ukraine's National Forum of Trade Unions, says with resignation that the Strauss-Kahn scandal isn't going to change the way the IMF does business.

"The fact that the head of this organization was accused of sexual harassment doesn't change the fact that Ukraine will be cooperating with the IMF. But the question is under what conditions Ukraine will have to cooperate with them," he says. "In Ukraine, it seems that there's no alternative to the IMF as the last remaining source that can help finance the state."

'Drinking Coffee, Eating Lunch'

Throughout the developing world, the news of Strauss-Kahn's arrest -- which included details about his $3,000-a-night hotel suite and the privilege of automatic Air France business-class seating even when showing up announced -- has lent fresh heat to old arguments about the IMF's role in struggling countries.

The IMF was founded in 1944 with the purpose of ensuring the stability of the international monetary system, increasing living standards, and fighting poverty.

The Fund found its significance dwindling by the end of the 20th century as the global economy adjusted to accommodate growing powers in Asia and Latin America.

But the financial crisis pushed it back to center stage, as the Fund and Strauss-Kahn gained credit for helping the global economy steer clear of the worst economic ravages.
That work continues even as the IMF chief now sits in a New York prison, with the Fund playing a key role in the current EU bailout talks on Portugal and Greece.

That included a raft of post-Soviet countries like Armenia, an IMF member since 1992 and where the Fund currently represents the country's second-largest lender.

In 2009, the IMF provided Armenia with a 28-month $540-million loan to help it deal with payment instabilities in the wake of the financial crisis. But today, critics in the South Caucasus country say the aid came with conditions that threw a wrench in the government's own plans to stimulate the economy, including a tax break for manufacturers promised by President Serzh Sarkisian.

Local observers have also criticized international donor organizations, including the IMF, for encouraging the country to increase its foreign debt, which now stands at over $3.3 billion. Economist Bagrat Asatrian says the IMF has encouraged the government to take a massive economic risk.

IMF head Dominique Strauss-Kahn is taken out of a police station in New York on May 15.

"The IMF says $4-5 billion is not a large amount. But for our economy, these are terribly large amounts," he says. "The IMF has a terribly bureaucratic approach, as if they come here only to put their signature on things and then leave. I see them having relaxing parties, drinking coffee, eating lunch, and having conversations -- all in our country, and all at our expense."

Many Armenian entrepreneurs have criticized the IMF's strictures, particularly the tax-break ban. The Armenian Chamber of Commerce, the Union of Industrialists and Manufactures were among the groups to sign off on an open letter to the IMF's local representative, Guillermo Tolosa, saying the ban will have a dampening effect on production and innovation. (Tolosa, apparently unmoved, has noted acidly that Armenia has the lowest tax revenues of any country besides Tajikistan in the post-Soviet bloc.)

Gurgen Arsenian is an economist and former lawmaker who currently chairs an Armenian-Cypriot tobacco company. He says his business and others like it have failed to benefit from IMF intervention, despite the Fund's pledge to bolster the local economy.

"I'm convinced that these programs only squander these borrowed resources," he says. "They don't bring any real use to Armenia. They don't enhance Armenia's economic strength, they don't promote Armenia's economic competitiveness, they don't provide the stability of our internal systems."

On The Ground, Real Struggles

Another country questioning the "real use" of the IMF is Pakistan, where the Fund is still negotiating the terms of an $11.3-billion loan offered after skyrocketing oil prices in 2008 sparked a payment crisis in the South Asian nation. Continuing tranches are badly needed. But the IMF preconditions for stringent budget cuts have sparked massive political infighting and social unrest, with the country's poor protesting fuel and utility hikes imposed by the government.

"Life isn't the same as it was before," says Ashfaq, a taxi driver in the city of Rawalpindi. "It's getting very hard."

He runs down his list of monthly expenses -- school fees for his four children, fees to the taxi owner, plus gas and food. He says he is only able to save between $5-7 a day from his fares, particularly following a 13-percent price hike on fuel last month.

"If we focus on our children's education, we can't buy clothes for them," he says. "A poor man struggles to get the basic necessities, and getting one thing means giving something else up. Driving a taxi used to be a good job, but it's lost its charm. I start work in the morning and I keep going until nighttime."

The IMF has been pressing Islamabad to raise taxes on petroleum products and remove fuel subsidies. The fragile coalition government, led by President Asif Ali Zardari, has repeatedly failed to muster the political will needed to push through IMF-mandated reforms, and Pakistan's upcoming presidential and parliamentary elections in 2013 make it even less likely that tough decisions will be made.

The reluctance of national governments to carry out unpopular reforms imposed by jet-setting IMF bureaucrats points to another inherent weakness in the Fund. "I think the IMF should realize that there are limits to which the government can go through adjustment programs in the face of internationally adverse circumstances," says Sartaj Aziz, a former Pakistani finance minister, who adds Strauss-Khan's likely departure could -- but probably won't -- be a prime opportunity to sweeten what he calls the IMF's "bitter medicine."

"I don't think Dominique Strauss-Kahn's departure will make any difference," he says. "The IMF has an institutional arrangement that has remained relatively the same over time -- some people think too orthodox and too rigid. But on the whole, I don't think his departure from the IMF will make much difference to Pakistan and its program."

A Break With 'Western' Tradition?

That rigidity in dealing with developing and poor countries has prompted many critics to characterize the IMF as a Western body imposing Western solutions. In part, such descriptions are valid -- since its inception, the IMF has always been led by a European, while its counterpart, the World Banks, has traditionally been headed by an American. The system is credited to a "gentleman's agreement" forged in the wake of World War Two, where the center of global economic gravity rested firmly in the United States and Europe.

Nearly 70 years later, many people say it's time the Western club showed a little diversity. Even at the time of Strauss-Kahn's election as IMF chief in 2007, speculation was already rife that he might be the last European to serve successively at the Fund.

German Chancellor Angela Merkel has already signaled her anxiety at such a prospect, saying May 16 the ongoing economic crises in the eurozone states were "good reasons" for seeking a European successor.

But a number of high-profile non-European candidates have already been put forward as potential replacements, including former Turkish Economy Minister Kemal Dervis and Agustin Carstens, the governor of the Bank of Mexico. And rising powers like China, Brazil, and India are lobbying hard for the top slot to finally fall outside the European realm, although the United States and the European Union still hold the bulk of the voting shares -- and provide the majority of its $340 billion in funding -- among the IMF's 187 member states.

Morris Goldstein, a senior fellow at the Peterson Institute for International Economics who held several senior IMF positions in the 1970s and '80s, says developing nations are not only vocal, they're big and getting bigger, with forecasts over the next decade showing precipitous growth. He says there's a 60-40 chance the next IMF directorship will go to a developing-nation candidate.

"I think the emerging economies are arguing they have a much bigger weight in the world economy now and they haven't had a chance at the leadership. So it's more than [a question of] diversity, it's a question of their increasing weight in the world economy," he says. "The problem that the emerging economies have had in the past in these kinds of things is it's taken them a long time to agree on who their candidate is -- and the Europeans do it very quickly."

Calls for Flexibility, Responsibility

A symbolic change at the top may not result in substantive change at the bottom, however. Many IMF-watchers applaud Strauss-Kahn for being one of the first managing directors to loosen the Fund's approach in dealing with poorer countries.

Nuria Molina, the director of Eurodad, a Brussels-based group that monitors the work of the IMF, gave Strauss-Kahn high marks for adapting the Fund's lending conditions for low-income countries like Ukraine, Pakistan, and Central Asian nations like Kyrgyzstan. But she said the massive social unrest still unfolding in those countries is something the IMF should acknowledge and take some responsibility for.

"Despite flexibilization, there are some conditions and policy reforms that the IMF is still pushing in low-income countries and in developing countries which we are still very critical about," she says. "The IMF is not the only game in town, and the governments of these countries -- and also other lobbies, including private-sector lobbies -- are all too often responsible for these types of reforms. But I would say yes, the IMF bears part of the responsibility."

Some politicians admit that on a local level, however, the IMF and other international donors make a convenient scapegoat when it comes to pushing through difficult decisions. In Ukraine, lawmaker Volodymyr Vyazivskyy, who sits on the parliament's social policy and labor committee, says it is the government's responsibility -- and not the IMF's -- to make sure that reforms are compassionate towards society's weakest members.

"The IMF sees how to solve the issue. It's testing the mechanism of debt reduction by increasing tariffs," he says. "But the government, in turn, should have thought about how to protect poor Ukrainians. The state actually takes that problem to the foreign institutions, which lend money but don't consider it necessary to lend a shoulder to the poorest people in Ukraine. This is a problem."

It's a problem, in fact, that may not be addressed by the IMF -- under Strauss-Kahn or whoever may replace him. The fundamental detachment between global donor organizations and their all-too-earthly recipients is unlikely to change even once the shock of Strauss-Kahn's arrest and his $3,000-a-night suite have long since been forgotten.

"Basically, what happened to Strauss-Kahn is a setback to the IMF and its authority," says Miroslav Prokopijevic, a Belgrade-based professor of economics and European studies. "But the main problem with the IMF is not Strauss-Kahn. I would say it's the guiding principles of the operation of the IMF, that they don't actually pay the cost of the engagement. If you have a business operation, you risk 100 percent as a private person. If you're the IMF, your risk is very low."

With additional reporting from Olena Removska and Mykola Zakalyuzhny in Kyiv; Riaz Musakhel in Islamabad; Ruben Meloyan and Suren Musayelyan from Yerevan; and Heather Maher in Washington

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