Mennonite
Central
Committee

Closing the Gap between the IMF and the Poor

By: Gerhard Pries
August, 2000

The recent anti-WTO protests in Seattle and the subsequent anti-IMF/WB protests in Washington have gotten me thinking. . .

The three Bretton Woods institutions, the World Trade Organization (formerly the General Agreement on Tariffs and Trade), the World Bank, and the International Monetary Fund were set up after the Second World War in order to, respectively:

• open up and balance the international trading arena with a view to increasing global trade;
• inject financial capital into programs and businesses in low income economies with a view to development of the poor;
• inject capital and economic regulations into countries experiencing financial stress with a view to stabilizing the global financial economy.

While the actions of these institutions have been seen by many to be anti-development and anti-equality, we should be careful not to throw them out too quickly. For a variety of reasons, it is reasonable to predict that they will play an ever-larger role in our global economy.

In MEDA, we have a keen interest and deep perspective on the activities of these organizations. Our work plays itself out in the same arena as these entities. MEDA Trade works at alleviating poverty through trading activities. It is reasonable to assume that MTC is therefore quite interested in the work of the WTO. MEDA Investments, particularly through Sarona, works at alleviating poverty through investment activities. As such, it follows fairly closely the objectives and activities of the World Bank. And, as a whole, MEDA is moving ever closer to the domain that the IMF occupies - the world of global finances. In fact, through its debt swap work, MTC has been right in the midst of this world already.

When we first started Micro-Finance programs, we did so from the ground up. We handed out loans directly. Then we built financial institutions to make such loans. We expanded those institutions to offer, not just loans, but a full range of financial services to the micro and small business clients. Then we set up an investment fund to move larger chunks of capital around the world, ensuring that Micro Finance Institutions, among others, remained adequately capitalized. As we have progressed along this trajectory, we have become increasingly interested in national monetary supply, financial liquidity and the finance policies of the partner country. How do the country’s finance policies affect capital flows in and out of the country? How will the country draw in enough foreign investment to remain liquid? Can it democratise its financial economy by strengthening a local stock exchange? Can it draw on innovative financing schemes in order to deliver much needed capital to the poor?

MEDA has been an innovator on several fronts. One of those is closing the gap between micro-finance for the poor and the global financial economy. It appears to me that most development agencies, even those working at micro-finance, haven’t spent enough effort determining how their work fits into the international financial economy. It is, after all, quite a leap from village lending to the machinations of the IMF. And while many development agencies clamour to micro-finance as a saviour, not enough macro-economic analysis has been done on if, how and why it works. Unlike MEDA, most agencies don’t even insist on Micro-Finance-Institution profitability. Fewer yet understand how to muster the strength of international financial markets to serve the poor.

Why is this important? Take, for example, the massive devaluation of the Mexican Peso in 1995. How many jobs were lost as a result? Did these job losses wipe out more or less than all of the gains achieved by micro-finance development in that country over the past twenty years? Did the development agencies that were involved in micro-finance have any idea that the crash was coming? Do they have any idea why it occurred? Did they have any idea how to prevent it? What if all of the resources that had been poured into micro-finance had instead been poured into macro-financial solutions? I also do not know the answers to these questions, but they are important ones to explore. What we do know is that development efforts to help the poor can be at least as effective if aimed at the macro level as those aimed at the micro level. It seems to me that development agencies love to muddle around with the poor, not understanding nor caring much about what happens at the global and national policy level. All too often they play the victim, blasting the IMF or the WTO for their woes without understanding the scenario, nor having made a meaningful contribution to the solution.

There are those who work with the poor and there are those who work with the global financial economy. That gap needs to be closed. MEDA is as well situated as any organization to do just that. Our work already brings us into conversation with the Superintendencies of Financial Institutions in several countries. We work closely, and even co-invest with the World Bank and its affiliates in parts of the world. We are beginning research on an international currency risk insurance initiative. Best of all, we have MEDA members with expertise in debt financing and capital structuring which we can draw on to help create solutions for the poor. I believe that in the coming years we will increasingly be engaging MEDA at higher levels of finance intervention in developing countries - not so much to change our focus, but rather to close the gap between the poor in the villages and the global markets that affect them so dramatically. This will require all of MEDA to increase its general understanding in these fields. It will also require an increase in some specific expert strength in several MEDA departments. Doing this will be good for both the poor and for MEDA. The poor will benefit from improved development focus. And MEDA will benefit, as previously envisioned, by remaining on the leading edge of development.