Springtime at the IMF

For the world's developing economies, a movement away from the dependence on the IMF is in order. Vijay Prashad writes.

For the world's developing economies, a movement away from the dependence on the IMF is in order. Vijay Prashad writes.

All his tactics are dictated
By problems he himself created.

-- Auden.

A photograph from South  Korea during the 1997 Asian financial crisis captured the prevailing  mood about the International Monetary Fund: a white collar worker held  up a sign that read, “I’M Fired.”

The habits of “sound money” and  “austerity” had become the Fund’s orthodoxy since the 1980s, and, as the  Greeks now know, it is unchanged.

Since 2003, the Fund had become less relevant.  Countries of the South had come to rely increasingly on the private  sector, and to investments from the new giants, principally China (in  2005, the IMF lent just over $1 billion whereas private flows totaled  $491 billion). The Fund operated as a kind of credit rating agency,  giving its blessings to a country, which would then be able to borrow  money from the private market. The Fund smuggled in its orthodoxy, but  now no longer in the flamboyant way that it had done so in the high-days  of Structural Adjustment. The appeal of China’s finance was that it  came absent the IMF orthodoxy.

The apotheosis of Dominique Strauss-Kahn (DSK) was  premised on his ostentatious attempt to bring the Fund back to  center-stage. DSK had to deal with two major challenges to the Fund: (1)  the lack of democracy in the management at the Fund, (2) the  discredited ideology of the Fund. The Fund recovered its profile, but it  has operated largely unchanged. That was the legacy of DSK:  neoliberalism with a French accent, néolibéralisme.  

Democracy at the IMF   

One of the myths of the IMF is that the voting  shares in the IMF’s executive board are indexed to the investment of  individual countries in the Fund. Since 1968, the Fund has fully  recompensed its creditors. Just after that date, the other countries  began to clamor for a more democratic board. Currently, the United  States has the largest bloc of votes in the board (16.80 per cent), with  Japan in second (6.25 per cent). By “convention” the IMF has been  headed by a European (hence the rapid consensus that the next head  should be the French Finance Minister Christine Lagarde). But the  Europeans do not control the IMF. In 1997, the New York Times  let slip that the IMF “acts as the lapdog of the U. S. Treasury.”  Because of the “consensus” system, the U. S. effectively has a veto (in  1987 and in 1991, the U. S. overruled the Fund’s attempt to strengthen  conditions on loans to Mubarak’s Egypt).  

After the credit crunch of 2007, the Group of 8 and  the IMF pleaded with the locomotives of the Global South to put some of  their surplus capital into the IMF. The BRICS states – Brazil, Russia,  India, China, South Africa – complied. They put billions of dollars into  the Fund, and the G8 countries shifted 6 per cent of the voting shares  to them (the U. S. used to control 17.11 per cent, for instance). But  even then the voting shares in the BRICS states are very limited (they  total 14.18 per cent, less than the U. S. alone): Brazil (1.72 per  cent), Russia (2.40 per cent), India (2.35 per cent), China (3.82 per  cent) and South Africa (0.77 per cent). China now has the second largest  economy in the world, and according to the IMF’s World Economic Outlook for 2011, it is poised to overtake the U. S. by 2016, if not sooner. 

Since the 1980s, the funds disbursed by the Fund  have largely come not from the North but from the South itself. Income  from debt servicing payments provided the down payment for the Fund’s  disbursements. The slogan from the Global South is familiar: no taxation  without representation.

Ideology at the IMF 

The economic disorders provoked by IMF policy are  now legion. Little divides the ill-effects of IMF policy whether one  looks at India or Zambia. In 1996, the World Bank reported that on  average the debt service payments from Sub-Saharan Africa amounted to  about five per cent of the Gross Domestic Product; spending on health was  about two per cent. “The burden of debt service payments on the provision  of social services becomes starkly obvious,” the Bank reported (Taking Action for Poverty Reduction in Sub-Saharan Africa). Health is less important than bond ratings. 

The United Nations Development Program’s Human Development Report (2010)  contains new data on poverty using the Multidimensional Poverty Index.  What it shows is that eight Indian provincial states contain more poor  people than twenty-six of the poorest African countries. Since 1991,  when India opened the door to liberalization, social distress has  increased dramatically. It is only old-school racism that retains  “Africa” as the symbol of poverty; the global poor house is overrun by  Indians. 

These are the social consequences of the IMF’s  orthodoxy as far as the Global South is concerned. The Fund’s “science”  of economic growth never applied to the United States itself. Between  1997 and 2005, half a trillion dollars of hard-earned reserves went from  South to North as debt servicing and reserve accumulation. The Atlantic  banks leveraged this money into the financial sector, building up the  huge ponzi scheme that masquerades as a stock market. Into this mix came  Alan Greenspan’s “put,” the injection of liquidity into the system to  protect (that is, inflate) asset prices, to create the bubbles that  would explode first in 2000 (the dotcom bubble) and then in 2007 (the  housing bubble). 

The IMF’s self-study of the debacle found that it  had “praised the United States for its light-touch regulation and  supervision that permitted the rapid financial innovation that  ultimately contributed to the problems in the financial system”  (Independent Evaluation Office of the International Monetary Fund, IMF Performance in the Run-up to the Financial and Economic Crisis, 2004-07, January 10, 2011). Mirroring Greenspan, the IMF “recommended to other advanced countries  to follow the U. S./U. K. approaches to the financial sector,” and  remarkably, “did not sufficiently analyze what was driving the housing  bubble or what roles monetary and financial policies might have played  in the process.” Neither the IMF nor the Federal Reserve warned against  the lack of leverage limits and the lack of risk management. Few  complained about the dangerous inflation of the asset bubbles by  Greenspan. High rates of inequality in the United States combined with  high rates of financial manipulation by the banks created a toxic  environment that had to collapse. 

DSK appeared on the scene with a few bromides about  inequality and de-regulation. But he did not try to shift the course of  the Fund. It was all rhetoric. This was clear in southern Europe, where  the Fund stood with the creditors, keeping money “sound” and asking the  people to undertake “austerity.” The code-words are the same. 

Creativity is the order of the day. Pedro Páez, a  former minister of the government of Ecuador, proposes to decouple the  world’s economies “from the dollar’s crisis logic.” The “commercial  dependency (and intra-firm trade) with the North is sky high,” Páez  noted. He proposed a series of Regional Monetary Arrangements and  regional currencies. If these came into effect, the South could reduce  “the artificial need for dollars in the regional trade, financial  markets, and therefore, the technical need for reserves through the  deployment of intra-continental system of settlements.” Such a project  would bring countries within regions closer together and prevent distant  climes from complete capitulation to the wiles of the U. S. Federal  Reserve Bank and the gargantuan banks of Wall Street, the City of London  and the Finanzplatz. Páez’ ideas take us some way from the ancient  rubbish heap of IMF thought. Better late than never. 

Vijay Prashad  is the George and Martha Kellner Chair of South Asian History and  Director of International Studies at Trinity College, Hartford, CT His  most recent book, The Darker Nations: A People's History of the Third World, won the Muzaffar Ahmad Book Prize for 2009. He can be reached at: vijay.prashad@trincoll.edu.