Economic Reporting Review
April 17, 2000

Background to the IMF/World Bank Meetings

By Dean Baker, co-Director of the Center for Economic and Policy Research

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INTERNATIONAL MONETARY FUND

"On a Visit to Moscow, Monetary Fund Official Is Bullish on Putin's Program" 
Celestine Bohlen 
New York Times, April 8, 2000, page A6 

This article reports on meetings between acting IMF director Stanley Fischer and Russian
President Vladimir Putin and his top aides. The article includes several comments from Fischer
praising Russia's economic outlook and Putin's policies. The article does not mention the
economic collapse that Russia suffered in the '90s as it followed an IMF transition plan to a
market economy. This collapse shrank Russia's economy by almost 50 percent and led to a
sharp decline in living standards for most of its population. 

At one point the article notes that Russia's economy has been "buoyed by a surge in oil prices
and the boon of a sharp devaluation of the ruble." The article did not note that IMF had insisted
that Russia not devalue the ruble, forcing the country to spend tens of billion of dollars in
foreign exchange in the summer of 1998 in a futile effort to sustain the ruble's previous
exchange rate. (See, e.g., "Yeltsin to Ask Western Help for Ruble as Markets Steady," by
Celestine Bohlen, New York Times, 5/29/98; "Russia Intervenes as Its Currency Takes Dip,"
by Celestine Bohlen, New York Times, 8/25/98.) 

"A Turning Point for Indonesia?" 
Clay Chandler 
Washington Post, April 8, 2000, page E1 

This article reports on the IMF's assessment of Indonesia's economy. The article includes
numerous disparaging comments about the current government's economic policies. For
example, it asserts that Indonesia president, Abdurrahman Walid, is "battling perceptions that
he is uninterested in economic matters." Later it characterizes his performance as being
"lackluster." The article notes that Wahid has been more concerned with dealing with ethnic
conflicts than economic issues. 

While this may be an accurate characterization of Wahid's economic performance, it is worth
noting that IMF's record in Indonesia has not been very good either. When the nation fell victim
to financial panic in 1997, the IMF insisted that it raise its interest rates to 80 percent in order
to support its currency and shrink its trade deficit (by shrinking its economy). This topic and
others is discussed in an article by Joseph Stiglitz, the former chief economist at the World
Bank, in an article in the most recent New Republic ("The Insider,"
http://www.tnr.com/041700/stiglitz041700.html). 

See also "Outstanding Stories of the Week." 

More about the IMF. 

[Top] 


TRADE POLICY

"U.S. Resists Bid to End Tariffs for 3rd World" 
David E. Sanger 
New York Times, April 9, 2000, Section 1 page 1 

This article discusses the Clinton administration's position on a proposal from the world's
poorest nations to allow their goods into industrialized nations without any tariff or quota
restrictions. According to the article, the Clinton administration would like to support the bill,
but it is worried that this could undermine its efforts to get congressional approval for
permanent normal trading relations with China. 

The article characterizes the administration's position as a "quandary," presenting the views of
several officials who claim that they would like to help poor nations. The article goes on to
point out that the administration is supporting debt relief for these countries. 

The article does not note that the limited debt relief supported by the administration would be
contingent on nations' adhering to IMF structural adjustment programs. It could also have
noted other measures that the administration has pursued that have been harmful to the interests
of poor nations. Most importantly, the administration has been a major force behinds the
TRIPs agreement, which extends U.S.-style patent and copyright law to developing nations.
This is likely to raise the price of pharmaceuticals by several hundred percent in many cases,
pricing drugs out of the reach of the vast majority of the population in these nations. It also will
significantly increase the price of recorded music and videos and other copyrighted material,
which will led to large transfers of wealth from these countries. 

"For Labor, China Trade Bill Makes Tough Litmus" 
Frank Swoboda and Matthew Vita 
Washington Post, April 12, 2000, page A2 

"Unions to Hit the Street in Washington" 
Joseph Kahn with Steven Greenhouse 
New York Times, April 12, 2000, page A12 

These articles report on organized labor's opposition to granting permanent normal trading
relations to China. Both articles include assertions that the bill would lead to more exports from
the United States to China. The Post article quotes a member of Congress making this claim,
while the Times article attributes the assertion to "many analysts." 

It is not obvious how this agreement could lead to any significant improvement in the U.S. trade
balance with China. Many of the key features negotiated last fall dealt with access of U.S.
corporations to China's market in financial services such as banking and insurance. The
agreement also opens access to China's telecommunications market. While these markets may
present substantial profit opportunities for U.S. corporations, they are likely to lead to few new
employment opportunities for U.S. workers. 

The agreement does also reduce tariff and quota barriers to many U.S. manufactured goods,
but there are few cases where it is likely to be profitable for firms to produce items in the
United States for export to China. It is more likely that U.S. firms will produce these items for
the Chinese market either in China or elsewhere in the region. 

The Clinton administration has claimed that the China trade agreement will lead to more jobs.
However, it has a long history of making exaggerated claims about the benefits of trade
agreements, which it later had to retract. For example, prior to its passage, the Clinton
administration claimed that NAFTA would create 200,000 new jobs (see The Economic
Report of the President 1994, p. 230). Virtually no economists view this claim as credible
today, as the U.S. trade surplus with Mexico turned into a large deficit in the post-NAFTA
period. 

The Clinton administration also made claims of huge gains to the United States ($100 billion to
$200 billion in annual GDP) from the Uruguay Round of GATT (see The Economic Report of
the President 1994, p. 234). Even the president's own Council of Economic Advisors now
estimates the gains to be less than half the low end of this range. (See "America's Interest in the
World Trade Organization: An Economic Assessment," CEA, 1999; p. 2.) 

The Times article also notes that the AFL-CIO has opposed the Clinton administration on an
African trade bill, and then raises the question of whether they have become "knee-jerk
protectionists." The article does not point out that the Clinton administration has worked to
increase protectionism in U.S. trade with Africa. It has been leading the effort to apply
U.S.-style patents and copyrights in Africa and the rest of the developing world. These forms
of protection raise the price of goods by several hundred or even several thousand percent
over their free market price. 

Recorded music or videos that may sell for $1 to $2 in a competitive market (or be transferred
costlessly over the Internet), instead can sell for $10 to $30 as a result of copyright protection.
In the case of pharmaceuticals, the price increase attributable to patent protection may cost
millions of lives, for example when it makes AIDS drugs altogether unaffordable in the
developing world. 

"Castro Denounces Lenders at Meeting of Poor Nations" 
Associated Press 
New York Times, April 13, 2000, page A12 

This article reports on a speech by Cuban President Fidel Castro before the Group of 77, an
organization that includes 133 developing nations. At one point the article asserts that, "the
organization was likely to seek less radical solutions than his." The one proposal it then
mentions is a 1 percent tax on all financial transactions to support a global development fund. 

It is not clear that this a particularly radical proposal. John Maynard Keynes proposed such a
tax in the thirties. More recently, James Tobin, a Nobel Prize-winning economist and a member
of President Kennedy's Council of Economic Advisors has also called for a tax. Treasury
Secretary Lawrence Summers and Joseph Stiglitz, formerly the Chief Economist at the World
Bank and Chairman of President Clinton's Council of Economic Advisors, are among the other
prominent economists who have at one time supported some sort of financial transactions tax. 

More about trade. 

[Top] 


FEDERAL BUDGET

"Senate Backs Tax Cut in $1.8 Trillion Budget" 
Eric Pianin and Helen Dewar 
Washington Post, April 12, 2000, page A1 

"Senate Sets Stage for a Major Fight With Budget Plan" 
Eric Schmitt 
New York Times, April 8, 2000, page A1 

These articles discuss the debate and approval of a budget bill by the Senate. Neither article
provides readers with a clear basis for assessing its impact on spending for next year. 

For example, the Post article notes that total discretionary spending will "rise slightly next year,
to $596.5 billion." Actually, this would be a small decrease in nominal dollars from the $603
billion that the Congressional Budget Office projected would be spent in fiscal year 2000. After
adjusting for inflation, the cut in spending would be more than $20 billion. Since the Senate bill
would increase spending on the military from $290.6 billion this year to $311 billion next year,
the implied cut in non-military discretionary spending is $26.9 billion before adjusting for
inflation. After adjusting for the effect of inflation, the proposed cuts would be more than $30
billion, or roughly 10 percent of current spending levels. 

[Top] 


INTERNET TAXES

"Plan to Keep Internet Tax-Free Advances" 
John Schwartz 
Washington Post, April 8, 2000, page E1 

"Internet Tax Panel To Deliver Report" 
John Schwartz 
Washington Post, April 12, 2000, page E3 

These articles report on the progress of a commission that is studying taxation of the Internet.
Both articles include comments from members of the commission who are opposed to applying
state sales taxes to the Internet. In the first article they assert that "taxes are an impediment to
economic growth." The second article includes an assertion from Virginia Gov. James Gilmore,
the chair of the commission, that the Internet must remain free from taxation "to nourish the
growth of electronic commerce." 

These assertions, in reference to Internet commerce, are absurd on their face. Economists
believe that most taxes have some distortionary effect that reduces economic output. The
question the commission is considering is not whether sales taxes on the Internet would reduce
commerce on the Internet, but whether it is better that other taxes are higher so that the Internet
can remain tax-free. There is no economic rationale for making Internet sales tax free at a time
when sales in traditional retail outlets are subject to tax. 

The claim that Internet sales must be tax free to "nourish the growth of electronic commerce"
implies that Internet retailers offer inferior service to traditional retailers. If their service is
comparable, then they would not require special tax treatment, as Governor Gilmore is
claiming. 

More about Internet. 

[Top] 


JANITORS STRIKE

"Janitors Strike Heats Up in L.A." 
William Booth and Neal Becton 
Washington Post, April 8, 2000, page A3 

This article gives an informative account of a strike by janitors in office buildings in Los
Angeles. At one point the article comments (apparently based on the assertions of the janitorial
companies) that "non-union janitors earn the minimum wage of $5.75 an hour without benefits."

While non-union janitors may start at this wage, it is unlikely that, in the current economic
environment, companies can completely staff their operations with workers receiving this wage.
It is more likely that at least some of their employees receive a higher wage in order to give
them an incentive to stay on the job. 

More about labor. 

[Top] 


GERMANY

"German Proposal to Add Visas Attacked" 
William Drozdiak 
Washington Post, April 9, 2000, page A11 

This article reports on opposition within Germany to plans to grant work permits to 20,000
immigrants with skills in high-tech areas. At one point the article refers to Germany's "larger
demographic problem," which it attributes to its growing population of retirees. It then refers to
a U.N. report that Germany will need at least 500,000 immigrants annually for the next quarter
century in order to sustain its retirement programs. The article goes on to note that such
large-scale immigration is going to face political opposition since there is still very high
unemployment in the states that used to compose East Germany. 

The article does not note that as an alternative to increasing immigration to sustain its retirement
programs, Germany could simply choose to raise taxes. Since productivity has been rising at a
rate of close to 2.0 percent a year, even with substantial tax increases, Germany's workers
could still enjoy large increases in after-tax income. Whether Germany chooses to sustain its
retirement programs with immigration or tax increases is a political, not an economic, decision. 

It is also worth noting that the nation cannot possibly be facing a labor shortage at present if it
has high unemployment rates in large portions of the country. The country could be facing a
shortage of workers with specific skills, in which case the normal market response would be to
bid up the price of this labor, which would then give workers the incentive to acquire the
appropriate skills. However, there cannot be any general labor shortage alongside a high rate
of unemployment among the existing workforce. 

More about Europe. 

[Top] 


OUTSTANDING STORIES OF THE WEEK

"Seattle Protests Are Back With a New Target" 
Joseph Kahn 
New York Times, April 9, 2000, Section 1 page 4 

This article discusses the motivations of the groups that are planning protests at the April 16-17
meetings of the International Monetary Fund and World Bank. The article reports evidence
suggesting these institutions have worsened the situation of people living in developing nations. 

"Rich Nations Warm to Idea of Debt Relief" 
John Burgess 
Washington Post, April 8, 2000, page A8 

This article discusses the growing popular movement in support of canceling the debts of the
world's poorest nations. 

"Push to Free Markets Has Local Costs" 
Michael Dobb 
Washington Post, April 13, 2000, page A1 

This article examines the impact of the policies that the IMF and World Bank have sought to
impose on Haiti. The article points out that these organizations have insisted that Haiti drop
barriers to imports of U.S. rice. This has displaced tens of thousands of rice farmers in Haiti
and made the nation dependent on foreign rice. This coincided with a large decline in the
nation's per capita GDP. 

"Methane Boom in Wyoming Proves to Be Mixed Blessing" 
Michael Janofsky 
New York Times, April 8, 2000, page A1 

This article examines the environmental impact of methane mining in Wyoming. The article
points out that the environmental damage has been severe in many parts of the state. 

"Business's Hill Access Is Booming" 
Juliet Eilperin 
Washington Post, April 8, 2000, page A1 

This article reports on how both parties are making transparent pitches to business for
campaign contributions in exchange for a role in designing legislation to serve their interests. 

[Top] 


Dean Baker is an economist and the co-director of the Center for Economics and Policy
Research (CEPR). His latest book (co-authored with Mark Weisbrot) is Social Security: The
Phony Crisis (University of Chicago Press). ERR is a joint project of FAIR and CEPR. 

ERR is edited by Jim Naureckas.