IMF modus operandi in client states

Lender's funding is sophisticated way to subjugate Global South through loan addiction

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BRUSSELS:

The International Monetary Fund (IMF) was originally established to monitor the international monetary system (IMS) and provide short-term loans to the nations facing balance of payments problems under the Bretton Woods exchange rate system. When the Bretton Woods system of fixed rates of exchange between major currencies finally collapsed in 1973, the IMF has been continuously finding new purposes to extend its influence over countries (mainly in the Global South) in balance of payments crisis or in danger of default by tying its bailouts to excessive austerity measures.

Its loans are tied — to use the IMF jargon — to "structural adjustment programmes". These programmes centre on raising taxes and/or spurning tax rate reductions, balancing the budget at all costs by setting unrealistic and unachievable tax collection targets, devaluing the currency, aggravating inflation and increasing interest rates, leading to higher borrowing costs for all.

These IMF bailout policies are anti-growth and espouse slow-growth stabilisation. GDP growth has shown to be powerful in improving the lives of all classes of citizens, whereas low growth has shown a standard of living in decline.

Macroeconomic stabilisation at the expense of high growth is based on a false premise. Those who advocate stabilisation set a benchmark for debt sustainability, foreign exchange reserves, primary budget surplus and tax revenue targets.

Pro-growth advocates focus on a set of supply-side economic policies: low tax rates on a broad tax base, government spending restraint, free trade, sound money, deregulation and privatisation. If stabilisation is the answer, then why such anti-growth policies, delivered in line with the IMF diktat, have shown in the majority of cases to have actually increased a country's dependence on the IMF over time.

The tragedy is that for the post 50 years the IMF has been peddling wrongheaded advice across the globe to countries seduced by "free" IMF funds and thus compelled to follow economically destructive fiscal and monetary policies, creating a network of loan addicts.

These "free" loans have shown that governments are more likely to spend excessively, embark on coercive income policies and encourage inefficient behaviour from government bureaucrats. Such lending also weakens the incentive to avoid mistakes and reduce the incentive to stay solvent.

Far from justifying the fund's lending as necessary to achieve durable economic adjustment in recipient countries, the evidence shows that it cultivates client states. Of the total membership, 42 countries account for 78% of all cases in which a member country received a standby or extended credit from the IMF.

This is not the result of some "bad luck" or "random accident" but of failed outdated and counterproductive economic policies. In fact, the IMF interventions have exacerbated, rather than prevented debt crisis.

In view of these counter-productive effects of the IMF lending and the increasing role, which is being given to this institution, it seems appropriate to raise the more fundamental question of whether geopolitics also plays a role in loan programmes of the IMF.

Loans tend to be larger and more frequent when a country has a bigger quota, more professional staff comes from a country at the IMF and when a country is more connected politically and economically to the United States and major European states. Even voting patterns in the UN General Assembly by client states in tandem with the United States and European partners prove the political-economy approach to the IMF lending decisions.

This leads us to believe that the IMF is a bureaucratic political organisation taking political/economic decisions, exogenous with respect to economic performance and other variables. The political economy analysis of the determinants of the IMF loan programmes isolates the effects of the loan programmes and shows a direct negative effect on economic reforms and economic growth.

Aware that they can be bailed out, time after time, it encourages countries to avoid serious reforms, keeping them dependent for decades, ie, Pakistan, on the IMF.

The politics of the IMF funding are as clear as it's insidious, it's nothing but a sophisticated way to subjugate the Global South through loan addiction.

The writer is a philanthropist and an economist based in Belgium