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The IMF made it part of the agreement for Mexico not to establish a labor force in order to receive funds. If there is no labor force then it makes it hard for the government to tax people in order to pay off the loan.
This I found out from a Mexican lawyer fighting for the maquiladoras in Mexico for severence pay. His few sentences answered the question for me of why there are mexican immigrants coming into the US.
| quote: | For Its Loans, Mexico Will Pay A Weighty Price in Sovereignty : The Rescue of the Peso: A Humbling Experience
By Alan Friedman International Herald Tribune
Thursday, February 2, 1995
Mexico will pay a heavy price, ceding a significant chunk of its national sovereignty, in order to tap into nearly $50 billion of emergency U.S. and international loans that are designed to stanch its financial crisis.
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While President Ernesto Zedillo Ponce de León has been quick to tell domestic audiences that the new loan package will not threaten "the sovereignty of the nation," the reality is that the economic conditions expected to be imposed by the International Monetary Fund mean that his government will effectively share control of its destiny for many months to come.
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The IMF guidelines, while in theory only tied to $17.5 billion of the rescue money, will almost certainly set the standard for the other major components of the package, including $10 billion of loans from the world's leading central banks and $20 billion from the U.S. Treasury.
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The details of the global rescue for Mexico are going to top the agenda when finance ministers from the Group of Seven nations meet in Toronto on Friday and Saturday. But it is already clear that at the heart of any program of economic measures will be the need to burst the inflationary bubble that is resulting from Mexico's bungled devaluation of the peso. Among the conditions most likely to be set are:
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That Mexico offer future oil revenue as collateral against the $20 billion of U.S. Treasury credits and the $10 billion of non-U.S. central bank loans that are to be coordinated by the Basel-based Bank for International Settlements, the central bankers' clearinghouse.
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That Mexico carry out a much more rigorous management of its money supply, meaning higher interest rates that will slow down economic growth and could even plunge Mexico into a recession.
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That Mexico tighten its fiscal policy, meaning a range of public spending cuts.
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That Mexico impose stronger controls on credits for the development of Mexican industry that have been handed out to companies by the government much too freely.
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Some Mexico-watchers may argue that this is what Mexican policymakers would have had to do under any circumstances. But there is no doubt that the conditions attached to the international rescue package will act as a powerful discipline, just as was the case in 1982, when the IMF forced Mexico into a severe austerity program following its debt crisis.
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The conditions will force President Zedillo to take steps that might have been otherwise hard to push through. Yet, they will also give him an argument to use against critics, namely that without such measures the country would not have gained access to desperately needed funds and would have faced financial chaos.
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Robert D. Hormats, a former senior U.S. financial official and the vice-chairman of Goldman Sachs (International) Inc., noted in an interview Wednesday that "any country that has an IMF agreement has to meet certain conditions and loses a certain amount of its own sovereignty by virtue of the fact that it has to adhere to those conditions." He added, however, that the likely conditions did not appear to be unreasonable given the situation.
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Meanwhile, in domestic Mexican political terms, what almost every foreign financial official involved in the rescue agrees upon is that tough as the economic measures may be, the new loan package will hurt national pride far less than would have been the case if Mexico had been on the receiving end of congressional conditions attached to the Clinton administration's aborted $40 billion package of loan guarantees.
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Among the conditions being proposed in Congress were drastic limits on Mexico's political and economic relations with Cuba, steps to clamp down on illegal emigrants headed for the United States, an increase in Mexico's minimum wage and the setting up of a currency board to keep the peso pegged to the U.S. dollar.
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Most of these conditions - and especially the restrictions on ties to Cuba or the boosting of a minimum wage - were either impractical or just purely political, and they bore little relation to the curing of Mexico's liquidity crisis. Some were simply leftover ideas that congressional critics of the North American Free Trade Agreement failed to attach to that trade deal before it was approved in late 1993.
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Among the sharpest consequences of the conditions that will soon be imposed on Mexico in exchange for its rescue package is the danger of recession.
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"The last time the IMF imposed conditions on Mexico they caused a recession, they caused national output to drop by 15 percent in one quarter, and they caused one in three Mexicans employed in the nonenergy manufacturing sectors to lose their jobs," said Carl Weinberg, an economist at the New York-based High Frequence Economics. "This time the catastrophic contraction of money supply that will result from the conditions imposed will lead to a catastrophic recession," he added. |
| quote: | April 26, 1999
The IMF Promotes Poor Banking Practices
by Gerald P. O'Driscoll, Jr., Ph.D., and Brett D. Schaefer
Executive Memorandum #592
In the wake of recent financial crises, experts are advancing proposals for strengthening the international financial system. In many of these plans, the International Monetary Fund (IMF) figures prominently as a source of emergency credit and promoter of sound banking practice.
Unfortunately, the record of the IMF as banker to governments in financial distress does not inspire confidence. The IMF egregiously violates sound banking practices, calling into question its condemnation of the poor financial systems of loan recipients. Most recently, the decision to lend to Russia, a country that has defaulted on its debt and shows little dedication to economic reform, demonstrates that the IMF is a poor role model for sound banking.
Poor Banking Policy Contributes to Crises
Although the circumstances leading to financial crisis in Latin America, Asia, and Russia differed in many respects, a common thread was a lack of adequate banking supervision, transparency, and oversight.
Many countries use the banking system as an instrument of development strategy. The government chooses industries and ventures it believes will contribute to development. It then directs credit to these "winners," often by encouraging commercial lenders to favor those industries. This policy undermines the growth of a sound banking system by preventing banks from assessing loan applications on the basis of such criteria as likelihood of repayment and available collateral.
These highly regulated banking systems provide the perfect means for corrupt officials to funnel funds to politically connected industries and individuals. Overall financial instability increases because loan assessments based on economic and business criteria, including financial viability, are suppressed in favor of loans made for political priorities. Such a system produces more bad loans and losses than a banking system based on sound credit practices.
Nontransparent accounting to conceal lax lending policies also frequently hinders these systems. The lack of transparency conceals the nature of the lending institutions' overall risk and exposure, increasing the likelihood that sound financial institutions will enter into business with these corrupted banks. This system exacerbated the Asian financial crisis in 1997-1998, which otherwise would likely have been a limited, regional crisis.
Setting a Poor Example
In exchange for billions in credit to governments around the world, the IMF requires countries to implement specific policy changes to address the cause of the financial instability. Broad financial service reform, especially of commercial banking, has become a favorite IMF policy prescription. Typically, this includes writing off bad loans, closing bankrupt institutions, and improving oversight of banking practices.
Would that the IMF followed its own advice. Instead of restricting or denying credit to countries with a record of resisting economic reform, the IMF eagerly enters into loan after loan. The most recent and glaring example of this practice is Russia. Despite over $27 billion in IMF credits since 1992, the Russian government has been unwilling or unable to reform the economy. It has defaulted on much of its debt. It has even admitted that as much as $50 billion in Central Bank reserves, including IMF loan proceeds, was siphoned off for questionable purposes with the cooperation of Russian
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Yet the IMF continues to serve as Russia's banker. A preliminary agreement was reached on March 29 between IMF Managing Director Michel Camdessus and Russian Prime Minister Yevgeny Primakov to provide $4.8 billion in new loans to Russia in 1999. Not so coincidentally, this is almost exactly the amount that Russia owes the IMF in 1999 for past loans.
The IMF proposal to lend additional funds to Russia, despite its defaults, is simply bad banking practice. It is not unlike a banker's lending to a friend who subsequently defaults on the loan. Then, perhaps out of friendship or a desire to conceal the error in making the original loan, the banker lends additional funds to enable the friend to keep current on the first loan. Whatever the motivation, the banker is perpetrating an accounting fraud that likely will land him in deep trouble. Bank examiners could compel him to write down the value of the loan and take a charge against earnings for the portion of the loans not recoverable. The entire loan might have to be written off. Additionally, the bank could be cited for bad banking practices and the banker cited individually for his actions.
The IMF, by contrast, is rewarded with ever-greater funds to cover its errors.
Russia is only the most recent example of decades of poor banking practice on the part of the IMF. Another is Peru, which entered into 17 different arrangements with the IMF between 1971 and 1977 despite repeated failure to meet many of the reform conditions that accompanied the loans. In effect, these IMF loans financed the destructive economic policies that made Peru less able to repay its debt. A third example is the $3.4 billion IMF loan to Mexico only one year after that country had initiated the 1982 Latin American debt crisis by defaulting on its debt.
Conclusion
Despite the IMF's vocal support for sound banking principles, its actions tell a different story. The IMF exports poor banking practice by example. It damages the international financial system when it continues to lend to countries like Russia, a financial black hole.
In an October 1998 statement, the IMF noted that "Markets do not operate well when...transparency and accountability are lacking, and market participants do not operate under an internationally accepted set of principles or standards." The world economy will continue to suffer so long as IMF actions fail to match IMF rhetoric.
Gerald P. O'Driscoll, Jr., Ph.D., is Senior Fellow in Economic Policy, and Brett D. Schaefer is Jay Kingham Fellow in International Regulatory Affairs, in The Kathryn and Shelby Cullom Davis International Studies Center at The Heritage Foundation.
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