The Case of the Missing Report – Part 1

This blog post is a long time in gestation and I could have written in 2009 which is the relevant year of the events that I will document in this two-part series. My conversations with government officials during my working trip to the Philippines last week highlighted several things, including their sheer terror of IMF intervention and the ratings agency. I will write separately about that in a later post. But the IMF watches these types of nations like a hawk and is ready to pounce to enforce their authority at the slightest departure from the neoliberal macroeconomic policy line. As long as these types of nations concede to the IMF bullying they have very little hope of developing towards being advanced states. And IMF bullying is what this blog post is about. This is Part 1 of a two-part story that might be summarised as the ‘Case of the Missing Report’. I will solve the mystery in Part 2, which will be published on Thursday of this week.

The IMF in 1976

As I noted last week, the hotel I stayed at in Manila was built in September 1976 to host the IMF-World Bank Annual Meeting of that year.

In September 1976, the British Chancellor at the time, Denis Healey, set out to attend the Commonwealth Finance Ministers conference in Hong Kong, and then was to fly onto the IMF meeting in Manila the week after.

He got to Heathrow on September 28, 1976 and decided to turn back because he fell for the blackmail from the financial markets that they would send the nation broke.

He then went immediately to the infamous Annual British Labour Party Conference at Blackpool where he claimed the UK had to borrow funds from the IMF to stay solvent.

Britain was, instead represented by one – Derek Mitchell – who was, at the time, the Second Permanent Secretary at H.M. Treasury.

Healey’s games with the public led to much media speculation and constituted, what we now call, ‘fake news’.

The Sunday Times, for example, wrote on October 24, 1976 (an article by Malcolm Crawford, the economics editor) that the UK had negotiated with the IMF to devalue the pound by some 8.5 per cent (a huge shift) as part of the loan arrangements.

Subsequent scrutiny demonstrated that report to be false (without foundation).

However, it fed the frenzy in the financial markets which Healey was petrified of.

Two things about that:

1. The British currency was not floating so speculators knew that they could sell it short and probably make a profit.

2. That belief was reinforced by the fact that the British government at the time, unable to get over its lost Colonial power, still hung on to the notion that the pound’s value was somehow a status measure of its national worth as a dominant force in the world.

Which meant that the financial markets knew that the Government would be reluctant to devalue, which made it even more likely that they could profit from speculation.

I wrote about all this in some detail in this sequence of blog posts:

1. The British Left is usurped and IMF austerity begins 1976 (June 29, 2016).

2. The conspiracy to bring British Labour to heel 1976 (June 15, 2016).

3. The 1976 British austerity shift – a triumph of perception over reality (June 13, 2016).

4. The British Cabinet divides over the IMF negotiations in 1976 (June 8, 2016).

5. British Left reject fiscal strategy – speculation mounts, March 1976 (May 18, 2016).

6. The Bacon-Eltis intervention – Britain 1976 (May 11, 2016).

Instead of going to Manila, Healey turned up in Blackpool and hectored the Labour Party faithful into accepting his Monetarist version of economic policy choices – which were straight out of the IMF ‘neoliberal’ handbook on how to wreck a nation and redistribute national income to capital away from workers.

To their eternal shame, Prime Minister Callaghan and Healey used the TINA dodge well before Margaret Thatcher made it an indispensable part of her economic policy making.

Healey was the first to address the Conference, followed by Callaghan’s famous admission that he no longer believed that government could do anything about employment.

The pair of them just parroted IMF Groupthink speak.

Healey’s speech was in fact based on the letter that he had sent to the IMF requesting ‘standby credit’.

Healey promised to cut public spending and increase unemployment – all IMF aspirations.

On September 29, 1976, Healey told the British public that the Government was applying to the IMF for credit to avoid the bond markets refusing to buy government debt.

The IMF turned up in Britain in secret and booked rooms at the luxury 5-star Brown’s Hotel in London.

The IMF used a false check-in name for its group – Mrs Boff (Source).

We subsequently learned that “as part of the spending cuts that followed the agreement with the IMF, one of the efficiencies was the abolition of HM Treasury’s Historical Section.”

One never wants to leave a smoking trail, does one?

Mrs Boff might be making a reprise in the Smith Family Manga – stay tuned.

The whole charade demonstrated the way the IMF works to undermine the capacity of elected governments to act in the best interests of their citizens.

In Manila last week, I learned about the way the IMF treats countries like the Philippines.

It is similar to the way the European Commission technocrats treat Member States of the common currency.

I remember reading an account of the way the IMF treated South Korea during the 1997 Asian Debt Crisis.

A swathe of IMF technocrats flew into Seoul and holed up in a hotel demanding documents from various government departments.

Without any cultural or historical sensitivity they then applied the ‘one-size-fits-all’ neoliberal macroeconomic model which leaves a trail of devastation and promptly flew back to Washington with their own fat salaries intact after a weekend of analysis (drinking fine wines and eating like there was no tomorrow).

The IMF treats nations like the Philippines in a similar fashion.

Jetting in, bullying officials in government departments, and forcing the ‘one-size-fits-all’ austerity approach to be accepted along the TINA lines.

If a nation steps out of line, the response from the IMF is brutal.

This self-selected dependency on the IMF makes it almost impossible for nations to escape the poverty trap.

It also provides plenty of largesse for the PMC who do the IMF’s dirty work within the nations themselves once the pack of technocrats have gone back to Washington.

So that is background for my story today.

Back to 2009

In 2008 and 2009, I did a lot of work for the Asian Development Bank (ADB), which is headquartered in Manila.

The ADB was the initiative of the Japanese, who felt that the IMF and the World Bank could be supplemented by a new financial aid institution in South East Asia.

In fact, the Japanese were miffed that they were dealt out of having any significant influence of those organisations on account of their behaviour during the Second World War.

The initial proposals in the 1950s and 1960s were scuttled by US government resistance (who effectively controlled the IMF) and the World Bank, who saw it as an having the potential to undermine their activities.

Eventually the proposal gained support and the ABD commenced operations in Manila (after considerable horsetrading over the local of the head office, which the Japanese were deeply disappointed about) in 1966.

The two main donors became Japan and the US (both contributing 15.571 of the total capital), and those nations had ‘extensive’ control of the ‘lending, policy and staffing decisions’ of the Bank (Source).

Various organisations such as Oxfam, the UN Environmental Program and others, have heavily criticised the ABD for its lending practices – “insensitivity to local communities … detrimental outcomes for poor and marginalized communities … ADB’s large scale projects cause social and environmental damage” and so on

The projects I worked on through ABD contracts covered the nations within the – Central Asia Regional Economic Cooperation Program (CAREC) and the following year, we provided a specialised analysis of the situation in Pakistan, which is also a CAREC Member Country.

The ABD “serves as the CAREC Secretariat” and the IMF and World Bank, among other multilateral agencies are institutional partners.

The aim is “to encourage economic cooperation among countries” within the CAREC zone to help them develop.

It was very interesting work and travelling to places like Almaty (Kazakhstan) provided really good learning opportunities, particularly in enhancing my understanding of the consequences of the – Shock Therapy – that was inflicted on the post-Soviet satellite nations, most of which are CAREC Members.

Economists such as Jeffrey Sachs were prominent advocates of the programs which devastated these CAREC nations.

I note he now holds himself out as a progressive and I laugh when I see that, recalling what I saw in, for example, Kazakhstan during my field trips.

In this blog post – W comes before V (June 12, 2009) – I wrote:

As an aside I have had a very interesting encounter with the IMF in the last few weeks which I will report on soon – when I am allowed to! I am calling it the “Case of the Missing Report” although Sherlock Holmes is not required. The case is solved and the criminals known. It will make your hair stand on end!

Well now I can safely provide details some 16 years after the fact.

The reason that the history I am documenting here remains relevant relates to the ongoing way multilateral institutions enforce the neoliberal Groupthink around the world, which effectively places nations in straitjackets, unable to solve their rampant poverty and dysfunction.

We produced many reports as part of our work with the ADB, most of which were internal briefing documents.

I was working on these papers with Randy Wray under guidance from Dr Jesus Felipe, who was then a senior economist at the ADB overseeing the Central and West Asia Department.

He is now a Professor at De La Salle University in Manila and that is the reason I can now write this account.

He is no longer with the ADB.

One of the projects concentrated on Pakistan, which at the time was enduring an economic crisis.

The Economist Magazine article (October 23, 2008) – The last resort – reported that:

… Pakistan faces economic meltdown … The economy is close to freefall. Inflation is running at about 30%. The rupee has devalued by about 25% in just three months. The fiscal deficit is a whopping 10% of GDP. Foreign-exchange reserves cover just six weeks of imports. A $500m Eurobond matures next February, but the market has already decided it is junk. The country needs at least $3 billion in short order, and a further $10 billion over the next two years to plug a balance-of-payments gap. Without it, default abroad might well coincide with political anarchy at home.

There were a lot of similar mainstream reporting on the crisis, which tended to concentrate on the financial aspects of the crisis and expressed an overriding view among economists that there was a gross imbalance between insufficient aggregate supply and excessive aggregate demand in Pakistan (each moving in opposite directions) which had generated inflation and rising imports.

In November 2008, Pakistan was bullied into signing a stabilisation program with the IMF, which, in our estimation (at the time), would depress investment in the nation and cause rising unemployment.

Moreover, we considered that the IMF program would not create the conditions that Pakistan needed for sustainable long-term development.

We considered that the financial problems, however, should not be seen in isolation from the real problems – the constrained supply and the persistently high rates of labour underutilisation.

We argued that taking that tack (concentrating only on the financial ratios) would narrow the range and scope of policy options and, ultimately, would limit the capacity of the economy to redress the real problems.

A viable policy framework must seek to solve both sets of problems and provide a sustainable development path.

We laid out an ‘alternative’ policy path for Pakistan in an extensive report – A reinterpretation of Pakistan’s “economic crisis” and options for policymakers – which we presented at the ADB headquarters in Manila in March 2009.

Note that the link to the paper is to a pre-publication draft and the final version was edited and slightly shorter.

But the draft version (with errors) contains the essence of our argument.

We noted that the IMF wanted a massive fiscal contraction from a fiscal deficit of 7.4 per cent of GDP in 2007-08 to 3.3 per cent in 2009-10.

It also demanded the BSP (central bank) push up interest rates significantly

We contested the view that the inflationary pressures in Pakistan at the time were the product of excessive spending, given that there were substantial levels of redundant resources (unemployed and underemployed) available.

The fiscal position, which the IMF characterised as excessive was really the result of insufficient aggregate demand – with the fiscal deficit endogenously expanding via revenue losses and spending increases when gaps in private spending appear.

We argued that the fiscal position should not be used as evidence of excessive expansionary policy, unless the deficits push the economy beyond full capacity use of its resources.

And in the context of Pakistan at the time, fiscal restraint was not the medicine that was required because the nation was actually living below its means – as indicated by idle or underutilised resources.

All the mainstream narratives were that Pakistan was ‘living beyond its means’.

In its analysis, the IMF had failed to criticise the government’s the consumer-driven growth strategy, given that the Pakistan economy was highly dependent on imported consumer goods.

The speculative money that had flowed in via FDI was concentrated in the consumer-goods sector which had two consequences: (a) it increased demand for foreign exchange; and (b) it created a foreign exchange liability.

The other significant point is that this investment did not generate corresponding amounts of foreign exchange revenue because it did not improve export capacity.

The IMF’s principle plan to hack into government spending would have created deflationary conditions but would not have built productive capacity and the related supporting infrastructure, which meant it offered no growth solution.

We also projected that the IMF plan would actually increase fiscal deficits because it would kill economic growth and reduce tax revenue as employment fell.

We considered history – specifically the way the IMF had responded to international crises of the 1990s and early 2000s – had demonstrated that fiscal discipline had not helped developing countries to deal with financial crises, unemployment, or poverty even if it had reduced inflationary pressures.

We argued that it was necessary to create an alternative package of policies that will maintain price stability while creating jobs and raising domestic living standards as a way to reduce social unrest.

This had to be done while using FDI to build productive capacity rather than to finance consumption.

You can read about our alternative plan if you are interested by downloading the draft document I have placed in the public arena.

The formal visit to the ADB office in Manila to present this particular research resulted in several meetings and presentations.

Within the ADB these presentations and our work was unambiguously well received.

Here is a PDF of our main presentation in Manila in March 2009 – A reinterpretation of Pakistan’s “economic crisis” and options for policy makers.

There was lots of enthusiasm for the work and the way it challenged the IMF orthodoxy and presented new pathways for Pakistan to deal with its development problems.

The draft paper was edited (for typos and prolixity) and published on June 1, 2009 as an official ADB Economics Working Paper No. 163.

It carried the title: ‘A Reinterpretation of Pakistan’s ‘Economic Crisis’ and Options for Policymakers’.

It was indexed by the major indexing services.

For example, here is one entry that still exists today:

Also, note that in the draft paper we offered the standard caveat:

This paper does not reflect the views of the Asian Development Bank, its Executive Directors or those of the members that they represent. We are grateful to Joao Farinha and Norio Usui for their comments and suggestions. The usual disclaimer applies.

As I will document in Part 2, the paper created an instant media storm.

Within hours of our Report being released the Pakistan press were writing about it and suggesting it marked a major change in ADB thinking and put it at odds with the IMF, which had just finalised a Standy-By arrangement (austerity package).

The official link to our ADB Working Paper was http://www.adb.org/Documents/Working-Papers/2009/Economics-WP163.pdf.

If you click that link you will encounter the following error page:

And, if you go to the ADB Working Papers series you will find that another paper – The Optimal Structure of Technology Adoption and Creation: Basic Research vs. Development in the Presence of Distance to Frontier – somehow became Working Paper No 163 and was published in June 2009.

Here is the cover:

So how did our Working Paper No. 163 suddenly become another Working Paper No. 163?

What happened?

Conclusion

In Part 2, to be published on Thursday, January 30, 2025, I will solve the mystery of “The Case of the Missing Report”

That is enough for today!

(c) Copyright 2025 William Mitchell. All Rights Reserved.