Let’s Abolish the Colonial IMF on Its 80th Birthday

Yves here. This is running a bit after the IMF’s birthday, but the article remains instructive. It skips over the immediate post-World War II period of IMF activities, taking it as a give that the bank was operating in a colonialist manner. That may very well be true but I’d like to see that firmed up. Recall that in the 1970s, private banks led by then Citibank stepped up in a big way to finance governments in Latin America, resulting in the so-called Latin American bank crisis of the late 1970s/early 1980s.

The IMF started behaving in what many correctly view as a counterproductively punitive manner in the early 1980s with its embrace of Structural Adjustment Programs. That was based on the neoliberal fiction that economies going through hard times can improve their fiscal positions via budget cuts and worse, labor reforms, as in squeezing worker wages. The result, almost without exception, was that debt to GDP ratios rose. The budget cuts (and reduction in worker incomes) shrank GDP at a higher rate than any improvement in the budget position.

Even though the IMF continues to engage in economic malpractice, we have warned against naive assumptions that new international lenders under BRICS auspices will be all that much nicer. Admittedly, they will probably not insist on neoliberal measures like deregulation or other anti-worker measures.

However, as we have regularly pointed out, the BRICS lender, the New Development Bank, has been criticized by former insiders for not amounting to much. From a post earlier this year, Are the BRICS and Their New Development Bank Offering Alternatives to the World Bank, the IMF?. From our intro:

This post takes stock of how far BRICS have gotten, and seem likely to get over the near and intermediate terms, with their various new currency and new monetary organization initiatives. The short version is not very far. Even though it comes comparatively late in the post, author Eric Toussaint points out that two BRICS new programs, launched in the mid-teens, the Contingent Reserve Arrangement and New Development Bank, have not done much. One issue that Toissant does not spell out (no doubt due to space constraints) is both were very much oversold. Fans have called the Contingent Reserve Arrangement a “BRICS Monetary Fund” when it is no such thing. It’s a short term currency swaps facility. By contrast, the New Development Bank can in theory do more but it really can’t because permitted loans are in proportion to each member state’s paid in capital. And on top of that, the New Development Bank has been criticized by former senior officers for being cautious and slow-moving.

The structure of the New Development Bank will continue to seriously limit its operations, with the result that the IMF will continue to be the big loan shark backstop until this is remedied. I have not read of any plans to do so.

More generally, and this is why I may seem to be giving BRICS boosters an unduly hard time: the limits (so far) on New Development Bank lending indirectly reflects a not-well-acknowledged issue: lending to small and/or developing countries is very risky business. The Latin American bank and other crises indirectly suggest that charging enough in interest to compensate for the risk would make the loans very costly at the outset. They might also lead to adverse selection: that only the desperate or deluded would take them.

And then when a country or big corporate borrower is in trouble, it pretty much has to choose among the few rescue packages on offer, no matter how draconian they seem.

Keep in mind that most members of the planned-to-expand BRICS will not be wealthy countries. Only this year was Russia acknowledged to be in the high income category.

If a state is to assist another state, there are only three ways to do it: foreign aid, loans, or some form of equity (as in buying or taking interest in assets). Poor countries in particular will not want to provide foreign aid since it comes at the cost of reduced domestic spending, unless it can be justified as advancing national interests, such as security. States when not run by corrupt grifters are loath to sell the family china, as in equity-type economic interests. And within BRICS, that type of activity would be anti-national sovereignity and would directly contradict a widely-assumed objective of BRICS, to promote multipolarity.

So the main way to assist emerging and crisis-afflicted economies with development capital and in crises will be, as before with the IMF, with loans. And the test will be if it handles workouts in a less punitive manner than the IMF. While that would seem to be a low bar, no BRICS lender has been meaningfully tested.

By Arthur Larok, a Ugandan human rights activist and Secretary General of ActionAid International. Originally published at openDemocracy

Mass protests rocking Kenya in the past month have once again laid bare the predatory lending practices of the International Monetary Fund (IMF). ​​Placards read “IMF keep your hands off Kenya,” and “We ain’t IMF bitches”, calling on President William Ruto to withdraw an IMF-driven finance bill set to ramp up austerity and regressive taxes.

Founded 80 years ago this week as 730 delegates from 44 ‘allied countries’ wrapped up the Bretton Woods Conferencein the UK, the IMF was supposed to encourage collaboration and growth in all post-war economies.

But of course, the world in 1944 looked very differently from how it does today – and so what emerged was a financial system with a particular vantage point, where the interests of the US and colonial powers were prioritised at the expense of developing nations.

Despite some very minor reforms to its voting and decision-making over the past 80 years, the IMF continues to serve these same interests, giving almost no voice to countries that subsequently achieved independence (with just three board seats allocated for the whole of Africa). For context – there are a total of 24 seats, with the UK, US, France, Germany, Saudi Arabia, Japan and China each having individual seats – and the US having the power to veto any big decisions.

The IMF is perhaps most notorious for the imposition of ‘Structural Adjustment Programmes’ in the 1980s – which are widely considered to have stalled development, undermining progress on health, damaging education systems, failing to reduce poverty and deepening inequality. IMF loans were given to countries on the condition that they agreed to balance their deficits, squeeze public spending, open their markets and privatise key sectors of the economy.

And yet, little has changed since the 1990s. Although the IMF’s rhetoric has now moved to focus on poverty reduction and growth – in practice this is just a disguise and the same package of neoliberal policies is enforced, either through loan conditions or coercive policy advice.

After the 2008 financial crisis it seemed that the IMF would really shift, recognising that its tight ‘fiscal consolidation’may have been part of the problem, but again almost nothing has shifted in practice. The IMF continues its default attachment to austerity, urging countries to cut public spending to balance their books. The single most widely recommended IMF policy is to cut or freeze public sector wage bills.

The impression given by the IMF is that this recommendation is about squeezing wasteful government bureaucracy, but the largest groups on the wage bill are teachers and health workers. Most low- and middle-income countries that are forced to accept the IMF’s advice have shortages of teachers and health workers, urgently needing to recruit more of them and sometimes also to pay them a living wage.

But of course, this becomes impossible if your overall wage bill spending is cut – and it creates the single biggest blockto making progress on global health and education goals. Women are triply disadvantaged, losing opportunities for decent public sector jobs, lacking access to public services, and taking on a disproportionate share of the unpaid care work that rises when public services fail.

Some IMF staff have persistently raised concerns that neoliberalism has been oversold and when tasked with producing their own staff analysis on what it would take to properly finance the sustainable development goals, their conclusion was clear. Rather than cutting public spending, the IMF ought to support countries to increase their tax-to-GDP ratios by five percentage points in the medium term. This could allow a doubling of spending on education and health in many countries.

But, despite this being the IMF’s own staff analysis it has never systematically informed its country level advice in practice.

Sometimes the IMF will recommend increasing taxes, but almost invariably this is through value added taxes that pass the burden most onto those who are least able to pay, again disproportionately affecting women, and often triggering protests as we have seen most recently in Kenya.

The IMF still refuses to systematically call for progressive taxes on the income and wealth of the richest individuals and corporations – which is the only fair way to expand revenues for development.

Last year, the IMF held its first annual meetings in Africa for 50 years and it was surely no surprise that many participants condemned the previous decades as representing fifty years of failure in the continent.

Debt Crisis Fuels the IMF

By following the IMF’s prescriptions, often at significant cost to national development goals, one would at least expect countries to have stabilised and avoided debt crisis. But 54 countries are now in a debt crisis and many are spending more on servicing their debt than on financing education or health.

The IMF has actively failed to prevent the present debt crisis which is today more severe than it was in the late 1990s and early 2000s.

Indeed, this hints at a basic problem. Debt is the source of power for the IMF. It is debt that forces countries to come to the IMF as the lender of last resort. It is debt that forces countries to accept the IMF’s harsh loan conditions and coercive advice on austerity, undermining their own development goals. Without debt, the IMF would be powerless!

There is now a growing move to establish a new debt workout mechanism under the United Nations, creating a transparent, binding, and multilateral framework for debt crisis resolution which would remove the IMF from the process.

Such an initiative would address unsustainable and illegitimate debt and provide systematic, timely, and fair restructuring of sovereign debt, including debt cancellation, in a process convening all creditors. It echoes recent successful moves to shift global tax policy setting away from the Organisation for Economic Co-operation and Development club of rich nations to a more representative and inclusive body through a new UN Framework Convention on Tax.

Human rights activists, tax justice campaigners, public service advocates and many civil society organisations hope that the Financing for Development meeting in Spain in 2025 might accelerate progress towards such a fundamental overhaul of the global financial architecture. It is certainly long overdue.

Back in Kenya, the weekly protests haven’t abated, despite a harsh police crackdown using snipers and tear gas, leaving at least 39 people dead. President Ruto has made some concessions including firing his entire cabinet, but whether he’s willing, or indeed able, to part ways with the IMF is yet to be seen.

And Kenya isn’t the only country where the people have had enough of the way in which the IMF exploits debt. Thousands of Argentinians took to the streets this January against the new president’s cost-cutting measures recommended by the IMF. What’s more, the past two years alone have seen mass movements against the IMF in countries as diverse as Nigeria, Pakistan, Ghana and Sri Lanka – and such protests are intensifying.

Meanwhile, the IMF’s annual meeting held in Marrakech last year was met with large demonstrations and a counter-summit.

“This global financial architecture was not established by us, it was not established for us, so it cannot be the financial architecture that will help us today. It’s neocolonial wealth extraction,” Tunisian-American economist Fadhel Kaboub said in an interview outside the IMF counter-summit in Marrakech.

People around the world are rising up and demanding decolonisation. After 80 years, the lumbering colonial institution must be retired or abolished – or at least to have its power over debt forcibly removed. Time’s up for the IMF. Let’s make this its last birthday.