Standing in the Way of Development?

A Critical Survey of the IMF's Crisis Response in Low Income Countries

Foreword

Until recently, the IMF was on its way to becoming irrelevant and obsolete. By 2007, it had only one major borrower, Turkey, and thus its revenues had plunged. In October 2007, the Fund attempted to align its payroll with its reduced budget by shrinking its workforce through generous retirement packages. At the same time, the Fund was unable to facilitate effective approaches to counter the growing global imbalance, leaving its supposed role as an ‘international monetary institution’ in question by the international community.

In 2008, the global economic and financial crisis not only restored but also augmented and empowered the IMF’s raison d’être. Despite its poor track record in addressing its member countries’ needs in foreseeing the crisis, the G20 assigned the IMF with the central role of ‘fire-fighting’ the crisis through financial assistance, which its member countries now desperately needed. Within a matter of months between 2008 and 2009, the IMF experienced the most salient transformation in its history – a massive shift from being an institution fading into obsolescence to the most powerful international financial institution in the global financial architecture and political economy.

The crisis put macroeconomic policy at the centrestage in political debates about the role of the state, including in the regulation of finance for the public good. Long out of fashion, “Keynesian” approaches such as deficit-financing, loose monetary policies and counter-cyclical fiscal stimuli have been embraced once again, as policy-makers realise that there are times when fiscal spending, even at the risk of deficits and debt burdens, can rescue an economy from recession or depression.

Many developing countries assert that the US, where the crisis originated as a result of the American financial markets’ reckless approach to market deregulation, has lost its credibility and is no longer in a position to preach the “Washington Consensus” of privatisation, deregulation, and liberalisation in the context of structural adjustment policies. After all, it ignited a massive “fire” in which the visible hand of the market devastated economies and societies as the most vulnerable groups – the poor and vulnerable and women were hit the hardest in both the Global North and the South.

Still, almost two years after the crisis started and after trillions of dollars have been spent by governments and taxpayers to bail out the financial sector and the biggest banks in the world, the international community has yet to see a profound and meaningful rethinking of how economic policies should, and could, work for the equitable economic and social development of societies. Indeed, we have not yet witnessed a sea-change in the way macroeconomic policies could potentially work for the global and national public good by addressing the increased levels of inequality, poverty, and environmental degradation.

The IMF claims that it is implementing significant changes, but the reality is that its institutional dynamics are inflexible. CSOs and external critics challenge that claim. We commissioned this paper in order to subject the Fund’s programs in low-income countries to examination and inform the debate between the IMF and its critics based on empirical evidence. Has the IMF simply tweaked its policy advice or is it undergoing a genuine paradigm shift towards a new-Keynesianism? Has the IMF significantly loosened fiscal deficit targets toward embracing genuine counter-cyclical policies? Or has it simply enacted temporary and marginal changes that will revert back to business-as-usual once the most severe effects of the crisis subside?

There is an urgent need to identify how countries can most effectively employ macroeconomic policy frameworks to implement equitable development strategies and poverty reduction. The latter is not new, but to a great extent this debate is confined to academia and is missing from official political circles.

This must change if the international community is serious about reinvigorating progress toward the Millennium Development Goals by 2015. Strong and consistent political will from both institutions and shareholders will be required not only to withdraw from long addictions to neoliberal ideology, but also to address historical structural imbalances and deeply vested institutional interests that are explicitly tied to the unequal distribution of power and wealth that pre-date colonial independence movements. Although the complex issues behind vested institutional interests are beyond the remit of this report, it is a crucial, if not ultimate, precondition for real change.

We should not be led by the claims of the international financial institutions. Rather, we should carry out our own examinations, formulate our own assessments, and assert our own arguments for how and why structural shifts in the macroeconomic policy paradigm of the IMF must change. If it doesn’t change as a result of the most cataclysmic crisis and recession since World War II, then when will it?

Bhumika Mucchala (TWN)
Nuria Molina (Eurodad)
Nancy Alexander (HB)

To read the full report, please click here (46 pages, pdf, 610KB)