IMF’s policy needs deeper political economic thinking

‘“Escalating protests in Pakistan against rising costs linked to IMF demands, which follow similar protests in other countries, should serve as a wake-up call to the IMF ahead of its upcoming Annual Meetings in October,” said Sarah Saadoun, senior researcher and advocate on economic justice and rights at Human Rights Watch.

“Despite its promises at the beginning of the pandemic to learn from past mistakes, the IMF is pushing policies that have a long track record of exacerbating poverty and inequality and undermining rights.”

The IMF’s own internal research indicates that these policies also are generally not effective for reducing debt, which is their chief objective. IMF’s World Economic Outlook published in April 2023 observed that fiscal consolidations– a term usually linked to austerity programmes – “do not reduce debt ratios, on average.”’ – An excerpt from a September 25, 2023 published news item ‘Bandage on a Bullet Wound: IMF Social Spending Floors and the Covid-19 Pandemic’ by Human Rights Watch (HRW) on its recently published report

Recently speaking to the media, managing director (MD) of International Monetary Fund (IMF), Kristalina Georgieva, reportedly indicated: ‘What we are asking in our programme is that please collect more taxes from the wealthy and please protect the poor people of Pakistan. I do believe that this is in line with what people in Pakistan would like to see for the country.’

The comments by IMF’s MD regarding taxing the rich are quite limited, since they do not reflect the political and economic difficulty of this happening in a weak democracy like Pakistan in the short-term while the demands in terms of high gross financing needs to avoid defaulting on foreign loan repayments, coming out of stagflation, and making much-needed development and welfare spending are urgently needed.

The comments by IMF’s MD are also limited, given in the first place, following significant austerity policies – including under IMF programmes –by the country over the years in general, have perpetuated rich class power due to lack of public investments to empower the large segments of demos, especially in terms of their political voice, which has diminished considerably over the years relative to the rise in influence of wealthy, powerful vested interest groups over public policy.

So, while it is indeed important to tax the rich, the IMF should understand the political economic context, the urgent needs of the economy in the absence of such tax reforms taking place, and IMF’s own lacking role in terms of provision of adequate level of special drawing rights (SDRs), and no meaningful debt relief provided, including not even cancelling its ‘surcharge’ policy for Pakistan, where under such policy fines are imposed on countries in terms of late repayments against loans.

Highlighting the significant role of elite capture in terms of perpetuating their control over policy decisions in favour of serving their vested interest, renowned economist, Clara E. Matai pointed out in her book ‘The capital order: how economists invented austerity and paved the way to fascism’ published in 2022, as follows: ‘If one subscribes to the argument that austerity is a tool for managing a capitalist economy, as Keynesian economists did and do, then one might believe that a continued deployment of austerity across societies and economies is a form of political irrationality – a wrong economic policy based on wrong economic theory that has never succeeded in achieving its stated ends. …Against its promise to stabilize the world economy, the austerity project of the 1920s was a spectacular failure: its reduction of aggregate demand… is cited by many as a cause of the Great Depression… austerity’s capacity to impose and reinforce class structure is the true measure of its efficacy; it was a servant to, and indeed the primary safeguard of, capital order.’

Here, it needs to be pointed out that while the media lauds the comments of IMF MD with regard to calling the government to tax the rich more appropriately, it should also bring to light more glaringly the arguments being highlighted above, and which are otherwise quite evident even given the lagging role of the IMF, and overall weak spirit of multilateralism in terms of meaningfully revisiting the serious economic misery causing austerity policies.

On the contrary, the high monetary, and fiscal austerity demands under the IMF programme could have been needfully rationalised in line with the political economic difficulties of significantly taxing the rich in the short term, and in terms of escaping the otherwise high growth sacrifice that austerity policy require as sacrifice for generally short-lived and rather shallow macroeconomic stability, especially given the stagflationary, and poverty and income inequality raising consequences as a result of the wide-scale recession-causing Covid pandemic, and the global aggregate supply shock that the pandemic produced, not to mention the damages done to economies, including Pakistan in the shape of catastrophic floods last year, by fast-unfolding climate change crisis.

Hence, such a rationalisation of balancing austerity demands by the IMF from programme countries – as against putting virtually unrealistic demands on developing countries like Pakistan to place aggressive taxes on the rich rather quickly, when such adoption of policies require an environment of strongly rooted democracies, which clearly Pakistan is not currently –could have come from a more appropriately formulated, and relatively large-scale allocation of SDRs, including an annual release of climate-related SDR- related allocation to highly climate vulnerable countries (including Pakistan) – as advised under the ‘Bridgeton Initiative’ by Prime Minister of Barbados, Mia Mortley and others.

The ‘Bridgetown Initiative’ pointed out with regard to SDR allocation, IMF’s surcharge policy, and providing greater debt relief as ‘The first step is to immediately provide liquidity to stop the debt crisis in its tracks. We call upon the Board of the International Monetary Fund to: 1. Return access to its unconditional rapid credit and financing facilities to previous crisis levels; 2. Temporarily suspend its interest surcharges; 3. Re-channel at least US$100 billion of unused Special Drawing Rights (SDRs) to those who need it, and; 4. Operationalise the Resilience and Sustainability Trust by October 2022.

At the same time the G20 should agree an ambitious Debt Service Suspension Initiative that includes all Multilateral Development Bank (MDB) loans to the poorest countries, and COVID-related loans to the middle-income. Major issuers of debt to the markets should help normalise Natural Disaster and Pandemic Clause in all debt instruments to absorb shocks better. …Most climate-vulnerable countries do not have the fiscal space to adopt new debt. …And we need a new issuance of 500 billion SDRs (US$650 billion) or other low-interest, long-term instruments to back a multilateral agency that accelerates private investment in the low carbon transition, wherever it is most effective.’

Movement towards these initiatives has been very slow, and which are easier to do, given the trillions of dollars in stimulus major economies provided to their countries during the pandemic, and which otherwise have a heavy financial and policy say in boards of multilateral institutions, including the IMF.

In addition, the IMF should have played a more revisionist role in terms of internalizing in its policy prescription the significant role of aggregate supply shock in inflation determinacy in both developed, and even more so in developing countries, and reflected this in terms of advising adoption of a lack of aggregate demand squeeze policies (or austerity policies) accordingly both to programme countries, and major central banks, which otherwise seemed to have went over-board in terms of monetary austerity, subjecting in turn their own economies, and the developing countries in particular to strong recessionary headwinds; which in developed countries in general have become stagflationary.

Instead, developing countries, which have weak democracies in general, are highly debt distressed, have seen increasing poverty and inequality during recent years, and which need resilient economies in the face of likely more pandemics, and fast-unfolding climate change crisis, to fill their fiscal gap through bringing the rich – the otherwise powerful group of wealthy – under the tax net, and in a way to deal with acute fiscal space needs of an urgent nature.

Here, it needs to be pointed out that developing countries, including Pakistan, which are significantly debt distressed, and where high imported, and cost-push inflation, were provided insignificant levels of enhanced SDR allocation in August 2021 – in the first place almost one-a-half-year delay into the Covid pandemic – on the back of IMF following the routine formula of quota sharing for allocation of SDRs in the extraordinary times of the pandemic.

Hence, out of the total allocation of $650 billion – while the general consensus among policymakers globally was that such allocation should have been around $3 trillion, for which the US Congress’s nod was needed as the IMF could only provide $650 billion – more than half went to already rich countries, and for instance, Pakistan only received $2.75 billion!

More so, the process of relocation of SDRs to developing countries also remained lukewarm, while despite several calls globally no further enhanced SDR allocations were made by the IMF, that in turn could have saved countries from significant austerity policies that otherwise they had to follow.

For instance, unlike the urgent needs to provide much-needed stimulus spending as close to 40 percent of the population is below the poverty line, as per World Bank’s recently published estimates, and given lack of subsidy provision, and little shifting of direct taxes on the rich under a democratically weak environment, in turn, putting a lot of burden on masses in the shape of high electricity, and fuel costs, the country is subjected to over-board monetary austerity – policy rate being at 22 percent – and fiscal austerity policies – IMF programme requirement of reaching primary surpluses, that means cutting of development expenditure, which is otherwise needed to reach resilience in public health sector while the ‘Pandemicene’ phenomenon looms large, and in creating climate change related preparedness in the face of fast-unfolding climate change crisis.

It needs to be pointed out that the continued austerity emphasis of the IMF in its programmes, even when her MD had strongly hinted towards a departure to more inclusive policymaking in the wake of the pandemic, taking more cue for instance, from epidemiological and climate change causing consequences, is indeed worrisome.

A recently released report by Human Rights Watch (HRW) ‘Bandage on a Bullet Wound: IMF Social Spending Floors and the Covid-19 Pandemic’ pointed out in this regard: ‘As the Covid-19 virus began to spread, shuttering businesses and upending economies, the Managing Director of the International Monetary Fund (IMF), Kristalina Georgieva, saw opportunity in the recovery from the unraveling crisis. Georgieva had already identified income and wealth inequality as a central challenge facing the global economy.

In her view, the pandemic brought both the risk that poverty and inequality would exponentially worsen and a “once in a lifetime opportunity” to invest in recoveries that transform economies to make them “greener, smarter, and fairer.” …This vision – what Georgieva called a “new Bretton Woods moment” – carves out a different approach to the one the Fund took following the 2008 Financial Recession and continues a significant evolution in how it sees its role in promoting global economic stability. …The report makes several key findings.

First, it finds that the Fund continues to rely on its traditional approach of expecting governments to reduce debt through fiscal consolidation, which raises significant human rights concerns.

While “fiscal consolidation” refers broadly to reducing debt by cutting public spending or increasing revenues, the report finds that programs routinely include conditionalities that impose cuts to public spending and raise the tax burden in ways that disproportionately burden people on low incomes, and they do not adequately explore alternative approaches that are more protective of rights.’

Copyright Business Recorder, 2023