Has the IMF lost its development significance?

Monday, October 8, 2012 - 11:59

In 1988 I spent a few months in West Berlin to learn German and saw for myself the most extreme display of the Cold War’s contradictions.

A little over a year later, I watched on TV as Germans from both sides tore down the Wall. A couple years later Germany was reunified, the USSR gone, and the Cold War effectively over. The Berlin I knew in 1988 was gone forever.

This showed me that history isn’t restricted to the past. The facts do change, sometimes unpredictably and with remarkable speed. As they say in Nigeria, “no condition is permanent”. It has been an important lesson for me as an activist.

Although the photo ops haven’t been as good as the fall of the Berlin Wall, the shifts in the global economy in the last ten years also illustrate this point. 

Recently, I received a whole stream of e-mails from the International Monetary Fund (IMF) about a new report on conditionality in IMF programmes. A couple of years ago I would have pounced on it, now I take a different view. 

‘Conditionality’, is the IMF’s term for the conditions it attaches to the loans it gives to countries with debt or currency troubles. It’s what civil society groups hate most about the IMF.

These conditions have encouraged, or forced, developing countries to open up their economies to foreign corporations, slash their own government programmes, and shift to providing cheap commodities and labour for richer countries rather than developing their own industry.

In short, the conditions of the ‘structural adjustment programmes’ (SAPs) the IMF began imposing in developing countries in the early 1980s created the contemporary version of globalisation, with developing countries pressured to move from aspirations of self-sufficiency to dependence on, and vulnerability to, global deregulated free trade. 

The creation of the World Trade Organisation (WTO) in 1995, coming after 15 years of SAPs and the fall of the Soviet bloc, gave teeth to the pledges to liberalise trade and investment. It marked the triumph of the ‘market fundamentalism’ that the IMF was imposing on Africa, Asia, Latin America, and the Caribbean.

‘There is no alternative’

For more than 15 years I’ve been part of the civil society that has been criticising and protesting against the IMF. But since joining ActionAid, my focus on the IMF has shifted. While it’s partly a matter of my job putting other demands on me, it’s also the case that the IMF and the World Bank seem, rather suddenly, less important.

I still think the IMF was the single institution most responsible for the debt-and-poverty trap in developing countries and it clearly remains an important institution to watch for those concerned about the fate of developing countries.

In a short period of time, the world has changed – the intersection of Pennsylvania Avenue and 19th Street in Washington where the IMF and World Bank sit is no longer ground zero in the world of development.

Interestingly, the IMF’s apparent declining importance in developing countries may actually be the result of its triumph. By 1995, the market fundamentalist doctrines enforced by the IMF had also become dominant in the economics departments of leading universities. Margaret Thatcher’s famous phrase “there is no alternative” actually became true in terms of what was being taught, and soon what was being practiced in finance ministries around the world. 

By 2005 the new technocrats, including some finance ministers, who had trained in those orthodox university programs and worked a few years at the IMF or World Bank, were now more orthodox than the IMF ever was. In a strange reversal, it is now becoming common to find the IMF trying to soften finance ministries’ plans for slashing government spending and tightening credit.

Now that ‘IMF logic’ had infiltrated finance ministries around the world, the IMF itself seemed more dispensable. Middle-income countries – the booming ‘emerging economies’ – were ready to chart a new path, and were able to do so.

In 2005, Brazil decided to pay off its IMF loans ahead of schedule in order to free itself of further conditionality. In rapid succession, all the other middle income countries with substantial loans from the IMF, apart from Turkey, settled their accounts.

By 2007 the IMF was facing its first-ever budget crisis because of declining revenue flows and low demand for loans. Dominique Strauss-Kahn was brought in as Managing Director, and he introduced a plan for institutional shrinking, including substantial layoffs.

Opportunity in times of crisis

The rapid rise of the emerging economies – especially Brazil, China, and India - meant rich countries such as the US, Canada, Japan, and Western Europe could no longer decide the direction of the global economy on their own.

When the global financial crisis hit in 2008, it was clear that a dramatic shift had taken place. The G8 was superseded by the G20 once the financial crisis hit. In a reversal no-one could have predicted, the IMF’s relevance was rescued by that crisis: no European country had taken an IMF loan since 1975, but once Iceland opened up the floodgates in 2007, Europe became, overnight, the most substantial part of the IMF’s business. China, India, and Brazil became power-brokers, contributing billions to fund the bailouts and demanding, and getting, increased power on the IMF board in return. 

The shifts in global power also made the IMF less powerful in developing countries. Especially in the low-income countries, the IMF had been a ‘gatekeeper’ for any aid or external investment: donors and investors insisted on a positive assessment from the IMF before sending money in. The IMF still does those assessments, but the emerging economies, led by China, don’t read those reports before ploughing massive investment and aid into Africa and other developing regions.

Low-income countries have a serious alternative to the established donors and lenders for the first time since the end of the Cold War. When Angola, for example, didn’t like the IMF’s conditions on a proposed loan, it got more generous financing from China. The availability of that alternative dramatically changed the power dynamics for developing countries.

Alongside those big changes, DSK was introducing more flexibility and some important policy shifts at the IMF. Although he was forced out of office in 2011 after a monumental scandal, he changed the institution more than anyone thought possible, and in less than four years.

The IMF is still an enforcer of economic orthodoxy, and its conditions are still obstacles to development, but it’s not the monster it once was.

I have even had the disorienting experience of having to view the IMF as allies on certain issues – particularly in the crucial matter of domestic resource mobilisation. The IMF has been trying to get governments to eliminate the ‘tax holidays’ offered to multinational corporations in the name of attracting foreign direct investment, and raise the taxes charged on mining and oil companies. These are precisely the kinds of changes ActionAid will be demanding in its upcoming multi-country campaign for tax justice.

Seven years after leaving Washington and full-time targeting of the IMF, I will probably end up using its materials to support our campaign.