Johannes Witteveen became the Managing Director of the International Monetary Fund in 1973 just as the OPEC international petroleum price crisis began and he left in 1978. Since the IMF had been formed to manage the international aspects of currency exchange rates under the gold standard which was abandoned in 1971, many doubted that the IMF had a future. The petroleum crisis created the conditions of slumpflation which combined rising inflation and unemployment.
Presidents Nixon and Ford urged Witteveen to criticise OPEC. However, Witteveen was a Moslem of the Sufi sect and who went by the name of Murshid Karimbakhsh Witteveen, sought to solve the ensuing financial crisis by encouraging, mainly Islamic OPEC members to lend parts of their rising sovereign fund accumulations to the IMF, who in turn lent these funds to developing countries to be able to afford to purchase petroleum. These funds, which transformed into sovereign wealth funds, also created investment flows and purchases in the West and mainly the USA.
For developing countries the IMF set up loans using Arab finance to help lower income countries purchase their petroleum requirements. Although this was promoted as the IMF "helping" oil-consuming nations pay for their petroleum imports and sustaining world trade, this move very much favoured the expansion of Middle Eastern oil producers because flow of oil as very high prices continued and the imports paid interest on their loans and thereby raised the cost of imports. In reality the proportion of such recycling handled by the IMF was small and private institutions took over this process acclaimed as an example of international cooperation. By various means the IMF became increasingly involved in the use of petroleum export-generated funds raising the loans issues by the IMF seven fold over the period 1973 and 1977 (from less than $1 billion to around $7 billion).
Going in the wrong direction
While providing "finance" during the slumpflation period, the IMF did nothing to effectively tackle inflation. As described in Part 1 of this article, Witteveen encouraged the British Government to double down of harsh loan conditions by intensifying the abandonment of incomes policies by Denis Healey when the British government negotiated an IMF loan in 1976. Productivity agreements were abandoned and the UK returned to the politic of wage-earner shakedowns for the sake of the balance of payments. This failed because nothing was done to address productivity. The fact that such conditions were agreed with Britain was considered to be a feather in the cap of Witteveen who headed the IMF side of the negotiations. This bolstering of confidence of the logic of the IMF "recovery" policies applied in Britain encouraging the IMF to repeat of this approach throughout the world in advanced, transition and low income economies alike. The problem was that having considered slumpflation and declining balance of payment to be a monetary phenomenon the broadening range of credit for petroleum consumers meant the efforts to substitute petroleum with more economic alternatives was put off or to advance the necessary research to identify was put off, essentially for about 30 years. As a result the period 1975 through to 2021 saw a devastation of some low income country petroleum production zones and a rise in the intensity of greenhouse gas emissions and pollution associated with petroleum derivatives.
A timely solution
Just as quantitative easing in the last 12 years has generated outcomes that debunk the monetarists Quantity Theory of Money, the slumpflation of the 1970s+, in reality, provided similar evidence. Initiated in 1975, the work on what became the Real Incomes Approach had resulted in a general macroeconomic theory and derived policy designed to maintain the sustained process of innovation necessary to bring about effective petroleum substitution. However, rather than understanding the flawed nature of monetary theory and recognising this fact, this period, under the influence of the IMF and larger private banks, saw the role of monetarism as the principal driver of macroeconomic policy take hold. This paradigm has been embraced by alternative Conservative and Labour governments ever since, while lower income countries have become increasingly indebted. Over the whole period the addiction to petroleum and its derivatives increased and petroleum exporters became increasingly influential in the politics of surrounding countries. Therefore, starting in the 1970s, petroleum is the commodity that has provided exporting countries with a disproportionate influence over the politics of importing countries, including the United Kingdom.
There does not appear to have been any analysis of the degree to which Witteveen's assistance to the petroleum exporting countries in supporting their campaign to punish countries who supported Israel in the Israeli-Palestinian conflict was, in reality, a Moslem assisting nations of Islam. Or was it simply that his status as a monetary economist was sufficient to write off this calamity to an misguided judgement on international finance. Certainly, if a Real Incomes Policy had been adopted where the risk of investments would have been lower and today the energy problems confronting the world would have diminished with the advance in the state of art substitution technology which would have advanced well beyond today's capabilities.
It is doubtful if anyone knows what Witteveen's inner motivations were, but his decisions, although appearing to be helpful and well meaning at the outset, set in train policy transitions and spheres of influence that have not been positive, in the slow down in the necessary transitions in technology, the continued absence of productivity incentives in macroeconomic policy or in reducing the inordinate financial power of petroleum exporters who can still, almost 50 years after their turning petroleum into a political weapon, still remain fully capable of inflicting the same sorts of damage on importing nations at their will. It is notable that when Witteveen passed away in 2019 at the age of 97, it is notable that the first organization to publicize his death was the website of the Sufi Muslim organization.
It is notable that the Wikipedia page on Witeveen does not mention the fact that we was a leading member of the Universal Sufi sect but acknowledges only hat he was a lobbyist for this group and prolific author having written more than a dozen books since 1947 about Politics, Finances, Economics, Business and Sufism.
1 Hector McNeill is director of SEEL-Systems Engineering Economics Lab
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