Should the “ultimate guardian of the interests of capitalists and bankers doing international business” hold the fate of ordinary citizens in its hands? Since 1944, the answer, apparently, has been yes.
What is the IMF?
When World War II ended, tensions on the global economic stage were merely beginning. Crumbling economies, rapidly depreciating currencies, and drops in international trade levels were among the many problems that led 44 Allied countries to convene at the Bretton Woods Conference in New Hampshire to re-establish economic cooperation in a world still reeling from the aftershocks of conflict.
The International Monetary Fund was one such means. The IMF’s original mandate was to encourage “international monetary cooperation,” endorse “the expansion of trade and economic growth,” and dissuade “policies that would harm prosperity.” More specifically, this meant regulating international exchange rates and helping economically stricken countries finance their balance of payments. Since the global economy made a marked transition to a floating exchange rate system in the late 20th century, the IMF’s central mission has shifted slightly. Beyond overseeing exchange rates, the IMF now plays an active role in surveilling, recommending, and enacting policy — particularly in economically fragile states — to catalyze economic recovery and stop the ramifications of financial crises from reaching global levels.
Today, the IMF includes 190 member states. Membership is contingent on each country fulfilling its monetary quota: an amount decided by the size of each country’s role in the international economic system. In turn, voting power within the IMF depends on quota size; it follows, then, that those at the helm of the IMF’s decision-making process are also the most economically dominant. Hence, although developing countries comprise a significant portion of the world’s population, their economic interests are often underrepresented. The IMF’s 14th General Review of Quotas caused a quota and voting share increase of over six percent to “dynamic emerging market and developing countries, and under-represented countries”; however, the United States, Japan, and China remain the most influential members in the IMF, respectively.
Conditional Loans: Hand Up or Handout?
Since its inception, the IMF has undergone numerous institutional overhauls, but its overarching objective — international economic growth and sustainability — has not. The IMF operates under the assumption that the global financial market is flawed in that lesser economically developed countries face disproportionately large barriers to growth, barriers that the IMF’s balance of payment financing and conditional loan structures aim to ameliorate.
When countries come into significant debt, the IMF can provide loans with pooled funds from its member country quota system. To deter governments from squandering this capital, however, the IMF makes almost all of its loans conditional. That is, each loan is contingent on countries implementing the conditions outlined in the IMF’s Structural Adjustment Programs. Alternatively known as SAPs, they aim to increase capital inflow so that countries have the means to recover from debt and are unlikely to default on their loans. Common asks of the IMF include austerity measures such as tax increases coupled with budget reductions in sectors like infrastructure, research, and education; financial liberalization policies like reducing trade restrictions; privatization of state-run corporations; measures to increase government accountability and transparency; programs that increase a country’s export and resource mining levels; and the reduction of price regulations and unions.
Although SAPs have existed since the 1950s, many less economically developed countries have remained in significant debt, raising criticisms that SAPs promote economic growth at the cost of economic degradation, political instability, and worker mistreatment, among other impacts. In 2014, the European Network on Debt and Development even compared the IMF’s conditional loaning to negotiating with economically stricken countries “at the barrel of a gun”, with the justification that all the loans the IMF had granted from 2012 to 2014 had been contingent on an average of 20 requests.
Accordingly, the IMF has been the target of many accusations of neocolonialism. While traditional colonial practices involved the subjugation of countries through military and political dominance, neocolonialist states leverage the pulls of conditional loans, cultural hegemony, and economic superiority to sway another country’s foreign policy — generally under the pretense of economic assistance. Hence, although the asymmetries in power are more tacit, neocolonialist nations retain control over other countries through continued financial dependence or sizable political influence. In the IMF, wealthy states carry much of this power; in fact, the US alone holds so many votes that it has an effective veto over any of the IMF’s policy decisions, many of which involve interventions in economically stricken countries.
To some, the impacts of SAPs — in terms of both sustainable economic growth and domestic political stability — provide a basis for these criticisms. The neoliberal nature of the IMF means that it favors macroeconomic strategies such as raising tax rates; reducing welfare services; privatizing public goods like water, education, or health; and cutting wages and subsidies to offset low corporate taxation and economic inflation rates. While these measures may well facilitate growth in developed, globalized economies, in states with emerging markets, these policies generally benefit those who are already wealthy, while the economically vulnerable pay the price. Indeed, a paper published by the Boston University Global Development Policy Center concluded that in 79 countries from 2002 to 2018, the IMF’s austerity measures were “significantly associated with the highest earners receiving more at the expense of the bottom 80 percent.”
Privatization does generally beget greater economic efficiency and profit for business owners, multinational corporations, and foreign investors. However, its aftershocks — inaccessible essential services and increased unemployment among them — overwhelmingly shake everyday citizens. When foreign companies enjoy a significant share of profits from newly-privatized companies — as is the case in Ecuador, where around 90 percent of mining firms are Canadian-owned — they may prove antithetical to local growth by exporting more profit back to their home countries than a locally-owned business would. Indeed, “IMF programs have profound distributional implications and very often who benefit are big businesses and banks based in the Global North,” noted Dr. Alexander Kentikelenis, associate professor of sociology and political economy at Bocconi University, in an interview with the HPR.
Along a similar vein, fiscal austerity measures tend to leave the economically vulnerable equally worse off, particularly by making necessary services like healthcare and education more difficult to access. Such conditions may increase countries’ debt rates as they attempt to salvage domestic conditions, perpetuating the cycle of poverty that keeps these nations dependent on international loans in the first place. The “dozens of countries [continually] dependent on the IMF for assistance” is, by some measure, “an indicator that some part of its advice is failing to deliver,” Kentikelenis said.
Conditional loans can also trigger broader ramifications in borrower nations. By their very nature, structural adjustment programs infringe on a country’s sovereignty by preventing them from making decisions about their own economic policy and path of development. More worryingly, interventionist economic policies imposed by the IMF are often the root of much political upheaval in borrower states. “¡Fuera FMI!” or “IMF out!” is a common protest slogan in Latin American countries where anti-IMF sentiments run rampant, including Honduras, Peru, Brazil, and Argentina. In Jordan, widespread demonstrations against IMF-imposed austerity measures even contributed to the 2018 resignation of Prime Minister Hani Mulki.
An Illusion of Choice
As a counterpoint, some argue that countries make an active choice to accept loans and their attached conditions from the IMF, thereby negating accusations of neocolonialism. But, as New York University Professor of Economics William Easterly explained in an interview with the HPR, there remain “obvious parallels between the colonial era and the IMF model.” Countries on the brink of defaulting often have no option but to turn to the world’s “lender of last resort,” raising concerns of whether the decision to enter a stringent agreement with the IMF is a decision at all.
The IMF loaned over USD 165 billion to 83 countries in 2020 alone, but the organization played particularly significant roles in the Asian Financial Crisis, the Latin American Debt Crisis, and Africa. During the 1997 Asian financial crisis, the IMF offered conditional bailout packages to countries like Indonesia and Thailand to prevent them from defaulting. These SAPs entailed letting weaker banks collapse, reducing government spending, and increasing interest rates to reduce economic inefficiency and further currency depreciation. In Thailand, for example, the IMF offered bailout packaging totaling nearly USD 20 billion. Although unemployment, poverty, and inequality rates soared in the interim, Thailand had repaid its debt to the IMF by 2003—well in advance of its original 2007 deadline.
While some economists claim that IMF policies caused a spike in unemployment and economic recession, others posit that these reforms laid grounds for expedient economic recovery and growth into the 21st century. A key distinction between these two viewpoints are the metrics used to determine the success of an IMF bailout: while IMF officials are willing to stomach the harms of short-term inequality and temporarily hurting “weak banks and corporations’” in favor of neoliberal, capitalist policies that work well in wealthy developed countries, it is morally objectionable to forget that such stringent economic policies have a human cost, no matter how short term. Accordingly, Easterly clarified that, while “economic growth is a powerful motor out of poverty reduction”, it is “not automatically good” and must be compounded by “protections for the rights of” the economically vulnerable.
This polarity was also evident in the IMF’s response to the Latin American Debt Crisis during the 1970s and 1980s. When the IMF presented conditional loans to states including Brazil, Argentina, Ecuador, and Mexico, it did so with austerity measures and spending restrictions. These public investment reductions, mass layoffs, and lowered labor regulations increased Latin American countries’ capacities to pay off their debts and exposed them to globalized free trade. However, these same policies also caused much of Latin America to experience spikes in unemployment and poverty, a burden that fell primarily on the shoulders of the working and lower class.
While the IMF recognized some of its shortcomings in its response to the Latin American Debt Crisis, it nonetheless posited in 1994 that its intervention “not only overcame the crisis but also produced successful transformations of several major economies in Latin America.” Yet, despite the IMF’s goal of creating long-term financial sovereignty, countries like Argentina have remained some of the IMF’s largest dependents. Today, Argentina’s USD 44 billion in IMF debt and record-breaking five defaults since 1980 keep the country at the institution’s mercy — a power dynamic embodying neocolonialism at its core.
Similarly, in Africa, conditional IMF loans intended to increase raw material exports resulted in lulls in education levels, healthcare access. Much of the profits went toward repaying spiralling debts and importing essential goods from overseas for higher prices rather than stimulating local development and investment. In the late 20th century, the elimination of petroleum subsidies in Nigeria resulted in “severe suffering by the citizenry.” One source even recalled that, in the 1990s, their “family could not eat because of the poor purchasing power of my salary due to galloping inflation in the country.” In other words, while the IMF was at the table striking deals, ordinary citizens were at the other end struggling to secure basic necessities for themselves and their families.
Whether said deals were beneficial remains a question to be answered. In 2005, when the Malian government wanted to increase its healthcare budget to more than three percent of its GDP, the IMF recommended it do the opposite, reasoning that “substantial increases of education and health sector wages […] might eventually prove unsustainable.” As an institution led by multiple former imperial nations, the IMF’s moral grounds to make that choice for economically vulnerable countries remain a concern to be addressed.
Equitable development “has to start from the bottom,” affirmed Dr. Jacob Olupona, professor of African and African American studies and African religious traditions at Harvard University. He further told the HPR that “indigenous knowledge […] cannot be quantified”—so IMF policies “built on pure economic theories and ideas” are predisposed to fail because they do not account for the “cultural [and] social characteristics of the countries involved.”
Simply put: while the IMF employs “very good economists,” according to Easterly, “they are not locals.”
The Way Forward
There are certainly legitimate criticisms of the IMF, but it is important to remember that the IMF is often associated with economic struggle because it is the only organization of its sort able to intervene in such dire circumstances. For that reason, Kentikelenis and Olupona maintain that the IMF is “essential for the functioning of the world economy” and “a necessary evil for Africa,” respectively. For all its shortcomings, it has also had its share of victories: fighting liquidity in Mexico and Greece and helping former Soviet countries become market economies are a few of many.
While the international community has every right to be critical of the IMF, it is equally crucial we refrain from coloring the IMF’s reputation with the backwash of the very economic crises it aims to fix. Assessing its success across its 70-plus years of operation is difficult to do with objectivity, especially given that many countries that remain dependent on IMF loans for prolonged periods often do so because of external, uncontrollable circumstances, such as the COVID-19 pandemic.
Nonetheless, the international economic system is ever-changing. If the IMF’s long-term aim is to achieve long-term, equitable development across the globe, its antiquated lending dynamics ought to reflect that trend.
Image: Ibrahim Boran licensed by Unsplash.
