Chapter 10 Outline

The Tragedy of the Congo (Zaire)

The Democratic Republic of the Congo, formerly known as Zaire, gained its independence from Belgium in 1960. The central African nation, rich in natural resources such as copper, seemed to have a promising future. If the country had simply sustained its pre-independence economic growth rate, its gross national product (GNP) would have been $1,400 per capita by 1997, making it one of the richest countries in Africa. Instead, by 1997, the country was a wreck. Battered by a brutal civil war that led to the ousting of the country's longtime dictator, Mobutu Sese Seko, the economy had shrunk to its 1958 level with a GNP per capita below $100. The annual inflation rate was in excess of 750 percent, an improvement from the 9,800 percent inflation rate recorded in 1994. Consequently, the local currency is almost worthless. Most transactions are made by barter or, for the lucky few, with US dollars. Infant mortality stood at a dismal 106 per thousand live births, and life expectancy stood at 47 years, roughly comparable to that of Europe in the Middle Ages.

What were the underlying causes of the economic, political, and social collapse of Zaire? While the story is a complex one, according to several influential critics, some of the blame must be placed at the feet of two multinational lending institutions, the International Monetary Fund (IMF) and the World Bank. Both institutions were established in 1944 at the famous Bretton Woods conference, which paved the way for the post-World War II international monetary system. The IMF was given the task of maintaining order in the international monetary system, while the role of the World Bank was to promote general economic development, particularly among the world's poorer nations. The IMF typically provides loans to countries whose currencies are losing value due to economic mismanagement. In return for these loans, the IMF imposes on debtor countries strict financial policies that are designed to rein in inflation and stabilize their economies. The World Bank has historically provided low interest rate loans to help countries build basic infrastructure. Both institutions are funded by subscriptions from member states, including significant contributions from all of the world's developed nations.

The IMF and the World Bank were major donors to post-independence Zaire. The IMF's involvement with Zaire dates to 1967, when the IMF approved Zaire's first economic stabilization plan, backed by a $27 million line of credit. Around the same time the World Bank began to make low interest rate infrastructure loans to the government of Mobutu Sese Seko. This was followed by a series of further plans and loans between 1976 and 1981. At the urging of the IMF, Zaire's currency was devalued five times during this period to help boost exports and reduce imports, while taxes were raised in an effort to balance Zaire's budget. IMF and other Western officials were also placed in key positions at the Zairian central bank, finance ministry, and office of debt management.

Despite all this help, Zaire's economy continued to deteriorate. By 1982, after 15 years of IMF assistance, Zaire had a lower GNP than in 1967 and faced default on its debt. Some critics, including Jeffery Sachs, the noted development economist from Harvard University, claim that this poor performance could in part be attributed to the policies imposed by the IMF, which included tax hikes, cuts in government subsidies, and periodic competitive currency devaluations. These policies, claim critics, were ill-suited to such a poor country and created a vicious cycle of economic decline. The tax hikes simply drove work into the "underground economy" or created a disincentive to work. As a consequence, government tax revenues dwindled and the budget deficit expanded, making it difficult for the government to service its debt obligations. By raising import prices, the devaluations helped fuel the phenomenon the IMF was trying to control: inflation. In turn, high inflation of both prices and wages soon brought ordinary Zairians into high tax brackets, which drove even more work into the underground economy and further shrank government tax revenues.

When explaining Zaire's malaise, others point to endemic corruption. In 1982, a senior IMF official in Zaire reported that President Mobutu Sese Seko and his cronies were systematically stealing IMF and World Bank loans. Later news reports suggest that Mobutu accumulated a personal fortune of $4 billion by the mid-1980s, making him one of the richest men in the world at that time.

In 1982, Zaire was initially suspended from further use of its IMF credit line. However, the position was reversed in 1983 when a new agreement was negotiated that included an additional $356 million in IMF loans. The loans were linked to a further devaluation of the Zairian currency, more tax hikes, and cuts in government subsidies. The IMF's decision to turn a blind eye to the corruption problem and extend new loans was influenced by pressure from Western politicians who saw Mobutu's pro-Western regime as a bulwark against the spread of Marxism in Africa. By ignoring the corruption, the IMF could claim it was abiding by IMF rules, which stated the institution should offer only economic advice and stay out of internal political issues. The IMF's decision lent credence to Mobutu Sese Seko's government and enabled Zaire to attract more foreign loans. As a consequence, the country's overall foreign debt increased to $5 billion by the mid-1980s, up from $3 billion in 1978.

Unfortunately, the new loans and IMF policies did little to improve Zaire's economic performance, which continued to deteriorate. In 1987, Zaire was forced to abandon its agreement with the IMF due to food riots. The IMF negotiated another agreement for the 1989 - 1991 period, which included a further currency devaluation. This also failed to produce any tangible progress. The Zairian economy continued to implode while the country's civil war flared. In 1993, Zaire suspended its debt repayments, effectively going into default. In 1994, the World Bank announced it would shut down its operations in the country. About the same time, the IMF suspended Zaire's membership in the institution, making Zaire ineligible for further loans.

In 1997, after a long civil war, Mobutu Sese Seko was deposed from power. The new government inherited $14.6 billion of external debt, including debt arrears exceeding $1 billion. At a formal meeting chaired by the World Bank to discuss rescheduling of the country's debt, delegates from the new government claimed that the World Bank, IMF, and other institutions acted irresponsibly by lending money to Mobutu's regime despite evidence of both substantial corruption and Zaire's inability to service such a high level of debt. In an implicit acknowledgment that this may have been the case, the IMF and World Bank began telling debtor countries to stamp out corruption or lose access to IMF and World Bank loans.

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Source: G. Fossedal, "The IMF's Role in Zaire's Decline," The Wall Street Journal, May 15, 1997, p. 22; J. Burns and M. Holman, "Mobutu Built a Fortune of $4 Billion from Looted Aid," Financial Times, May 12, 1997, p. 1; J. D. Sachs and R. I. Rotberg, "Help Congo Now," New York Times, May 29, 1997, p. 21; H. Dunphy, "IMF, World Bank Now Make Political Judgements," Journal of Commerce, August 21, 1997, p. 3A; and CIA Annual Fact Book (Washington, DC: CIA, 1998).