IMF loans: still pinching vulnerable countries where it hurts most

15 April 2010

Guest analysis by Bhumika Muchhala, Third World Network, and Nuria Molina, Eurodad

Recent papers by academics and civil society reveal that the IMF’s claims of reform on conditionality do not stand up to close scrutiny.

New research released by NGOs Third World Network and Eurodad in April, which analyses the Fund’s conditions in low-income country (LIC) loans over the course of the global financial crisis, finds that the greater flexibility granted to LICs is merely short-term. The paper, authored by researchers at the School of Oriental and African Studies (SOAS), finds that the marginal shifts away from conditionality were already reversed in 2009 or 2010. The Fund is returning to the business-as-usual of short-term and deflationary economic policies that constrain countercyclical and development policies led by long-term public investments.

marginal shifts away from conditionality were already reversed

Although the IMF claims that it has allowed borrowers greater policy space (see Update 69, 68, 67), in reality fiscal deficit targets were increased by less than 2.5 per cent of GDP in 7 of the 13 country cases covered in depth in the study. The majority of countries in the sample are facing tighter fiscal constraints in 2010. While this increase does entail greater policy space compared to the Fund’s previous targets, these are only marginal adjustments to initially restrictive recommendations, while the underlying ideology and its attendant biases remain intact. The authors state that to “refer to this approach as evidence of an expansion of ‘policy space’, as claimed by the IMF, indicates a lack of imagination, or misconstruing (if not hijacking) of the meaning and practice of policy space – a term traditionally associated with those advocates of a policy regime prioritising a longer term and more development-oriented perspective.”

The authors argue that the Fund’s programmes are still premised on an “excessive preoccupation with monetary and financial indicators” such as fiscal balances, price stability and inflation, low interest rates, and high international reserve levels. This focus is to the detriment of the “performance of real variables, (real levels of output, income and employment).” IMF programmes still insist that the scope for boosting domestic demand through public spending depends on the “availability of financing from external sources on concessional terms”, the use of “domestic resources in a non-inflationary manner”, the preservation of international reserves, and the need for domestic budget spending to avoid “crowding out the domestic private sector.”

This focus reveals that the capacity to service external debt still takes precedence over the urgent need for debt relief and public spending. It also shows that the IMF believes in the superiority of domestic private sector over the public sector in stimulating domestic economic recovery. This seriously limits the ability of LICs to undertake policies that could create employment, invest in public services, adopt broader social policies, and support growth and development strategies to diversify the economy and enhance its resilience to external shocks.

According to the report, the Fund also insists that public expenditure on subsidies, large public employment and transfers to the industrial sector should be reduced. Monetary policy was tightened across most LIC countries with IMF programmes, exchange rate flexibility and price liberalisation were encouraged, while “protectionist” measures such as tariffs and quantitative restrictions on imports were discouraged. Ironically, the stimulus programmes of developed countries have entailed many of the exact policies the Fund has discouraged — such as significant investments in large public employment, protectionist trade policies, conscious management of the exchange rate, and subsidies for local industries.

The Fund could play a role in “supporting concerted countercyclical policy interventions and pro-actively laying the foundations for sustained growth and poverty reduction.” However it is only prepared to entertain important but limited changes, such as social protection for the poor and the strengthening of automatic fiscal stabilisers. An alternative approach would be to start with the premise that all macroeconomic policies entail distributive relations and institutional structures that result in a variety of social outcomes, which need to be made explicit before implementing any economic measures. This would require an explicit departure from the IMF’s shackles of short-sighted budget tightening and inflation targeting.

Another new report by civil society organizations including the Center of Concern and ESRCnet, Bringing human rights to bear in times of crisis, concurs with the SOAS report on the importance of countercyclical policies for development and highlights the impact of government responses to the economic crisis on human rights. It states that, “the lack of countercyclical policies in times of crisis often risks jeopardising hard-fought gains in housing, education, health, water and employment.” The report stresses the need to pay detailed attention to how the economically disadvantaged will benefit from national stimulus policies, asserting that “economic stimulus packages which fail to measure, involve and target the economically disadvantaged will likely only reinforce their exclusion.”

Differing advice

While the Fund continues to dole out contractionary policies for poor countries, for the rich countries, a February IMF report on exit strategies notes that the “bold, extraordinary measures taken in response to the crisis have helped lessen the severity of the global recession and stabilised financial markets, allowing normalcy to return in many countries.” In fact, the Fund’s board recommended rich countries maintain fiscal and monetary stimulus policies well into 2010 and begin their withdrawal in 2011 if “developments proceed as expected.” The Fund’s advice is that loose monetary policy is strategic for advanced economies where unemployment is high, but in cases where signs of inflation are rising, such as in some emerging market economies experiencing growing credit booms, “monetary policy may have to be tightened relatively soon.”

However, an analysis by intergovernmental organisation the South Centre on economic recovery reaches a different conclusion. A March report by their chief economist Yilmaz Akyüz argues that economic recovery requires the US to solve its over-consumption problem while Germany, Japan and China need to boost their domestic consumption through wage growth. Akyüz suggests a combination of policies promoting higher wages, eliminating the gap between productivity and wage growth, increased budgetary transfers especially to rural households, and increased public spending on health, education and housing in order to reduce precautionary savings by households.

Need for coherence

In a reflective and analytical view of the diverse ways in which countries have responded to the crisis, Ilene Grabel of the University of Denver argues that the chaotic response to the current global crisis by the IMF and national governments represents a historical moment of “productive incoherence”. She is optimistic because this incoherence has displaced the “neoliberal coherence” of the past several decades.

Grabel observes that change at the Fund has been uneven, “taking one step back for every two steps forward.” While the IMF has indeed made several fundamental changes in its policies (see page 10), it still has a long way to go to demonstrate that its orthodox market-fixated ideology can make way for more development-oriented economic policies and theories. Until then, the incremental changes in the Fund’s views and policies should be duly recognised, while premature applause should be avoided.