Inherent internal conflict in IMF programmes as the elephant in the room

In its first review of the ongoing Standby Arrangement (SBA) programme with Pakistan, the International Monetary Fund (IMF, or simply the ‘Fund’) emphasized continuation of monetary and fiscal austerity policies – primarily through tight monetary policy, and ensuring primary surplus – and couple it with greater neoliberal oriented structural reforms – like increasing deregulation, and greater privatization – to control inflation, enhance domestic resource mobilization, and put economic growth on a strong footing, increase employment, encourage exports and foreign investments.

Such policy approach has an internal conflict, whereby it needs a serious revisit in the light of significant evidence coming through lack of economic resilience, and which was deeply exposed under a lackluster performance during Covid pandemic, and unfolding of the climate change crisis, not to mention weak supply chains and excessive profiteering, causing significant seller’s inflation, and accentuated income and wealth inequality in recent years.

Moreover, in moving away from this internal conflict, major players in its decision-making process, the rich, advanced countries need greater clarity on the backfiring performance of neoliberal and austerity policies, in weakening political voice for pushing for dismantling the political and economic extractive institutional design, and in creating economic resilience against the existential threat of climate change.

For IMF, the advanced economies in general, and the traditionally highly ‘Chicago Boys’-influenced policy mindset of programme countries like Pakistan, this ‘internal conflict’ is the elephant in the room.

It is not like the chicken-and-egg situation as far as the possible contribution of the IMF programmes with regard to significantly supporting programme countries like Pakistan in reaching sustained macroeconomic stability and economic growth beyond the short-term, and overall becoming climate change, and ‘Pandemicene’ resilient economies.

For this, the multilateral organization will need to learn meaningfully more from the lessons of the Global Financial Crisis 2007-08 in particular, and the deep misgivings of the overall around four decades of neoliberal and austerity project that both the IMF, and the ‘Chicago Boys’ school of thought, including learning from its own research department.

For instance, in its April last year’s World Economic Outlook (WEO) report emphasized the importance of economic growth, and countercyclical policy, rather than fiscal consolidation (or austerity) policies to effectively reduce debt distress.

The Report indicated as follows: ‘adequately timed (for example, during economic expansions) and appropriately designed (for example, more expenditure- than revenue-based in advanced economies) fiscal consolidations have a high probability of durably reducing debt ratios. The debt-reducing effects of fiscal adjustments are reinforced when accompanied by growth-enhancing structural reforms and strong institutional frameworks.

At the same time, because these conditions and accompanying policies may not always be present, and partly because fiscal consolidation tends to slow GDP growth, consolidations on average have negligible effects on debt ratios.’

Moreover, the Report, in addition to calling for lack of fiscal consolidation (or non-austerity) policies, also called for positive impact of counter-cyclical policies on aggregate demand- and supply and, in turn, on economic growth. Higher economic growth means therefore greater fiscal space to provide deep social safety net – which the IMF rightly emphasizes – including providing meaningful energy related subsidies.

Having said that, the report with regard to the first review of the current SBA programme justifies practice, and emphasizes continuation of austerity policies, as indicated in the review report as ‘Monetary policy needs to stay tight and proactive, and the Monetary Policy Committee (MPC) should respond swiftly and forcefully if signs of inflationary pressures reemerge. … Fiscal performance has also improved, with the general government registering a primary surplus in FY24Q1. …The authorities’ measures to safeguard the FY24 primary surplus target are welcome, but further fiscal reforms remain essential to reduce debt to more sustainable levels.’

It is strange then to say the least that virtually country after country under IMF programmes, including Pakistan since it actively started to enter IMF programmes back in late 1980s, and the country even outside the programme but under similar neoliberal, austerity, pro-cyclical policies, has not achieved any sustained- macroeconomic stability and high economic growth, IMF’s executive board still puts so much trust in similar policies under current SBA by stating in the IMF’s first review ‘Pakistan’s program performance under the Stand-By Arrangement has supported significant progress in stabilizing the economy following significant shocks in FY2022-23.

There are now tentative signs of activity picking-up and external pressures easing. Continued strong ownership remains critical to ensure the current momentum continues and stabilization of Pakistan’s economy becomes entrenched.’

While inflation remains mainly stubborn, especially the sensitive price index, and economic growth prospects outlook has not improved much over the next two years, there is both current analysis, and the burden of history of IMF programmes’ performance both providing little evidence for this trust by the executive board, and by some of the leading economic policymakers in the country.

The current neoliberal, austerity based, and pro-cyclical-oriented IMF programme, in addition to the same policy inclination shown by countries outside of the IMF programme, but where policy remains highly tilted in favour of such policies under the heavy influence of ‘Chicago Boys’- oriented policymakers has meant that while the IMF for instance continues to ask for adoption of structural reform – like broadening tax base, improving expenditure efficiency, increasing collection of bills in the energy sector, increasing productivity for greater export earnings, or better running of state-owned enterprises (SOEs) for instance by reducing unnecessary political interference – it does not understand that such decisions strengthened political voice in the first place.

Greater investments – both public and private – into provision of important public goods like health, education on one hand, for instance, and better quality and ample employment opportunities – that in turn come with higher economic growth, which requires both meaningful level of ‘finance’, including climate finance, that comes through non-austerity policies and greater multilateral support, like enhanced allocation of IMF’s special drawing rights (SDRs), and increased ‘productivity’ through higher level of economic institutional quality that requires non-neoliberal reform as increasing inequality and frequent financial crises has significantly substantiated for decades now – on the other, improve the quality of democracy, strengthens political voice, and allows putting enough pressure on public representatives to legislate towards structural reforms that the IMF suggests in the first place. Moreover, the needed multilateral support in the foremost should also come as ‘climate compensation’, given major carbon footprint is from a number of rich, advanced countries.

In her 2002 published book ‘The capital order: how economists invented austerity and paved the way to fascism’, noted economist Clara E. Mattei, for instance, pointed out the dangers of carrying austerity policy approach as it does not allow needed investments into public goods that empower political voice and, in turn, perpetuates fascism (or elite capture of resources).

She pointed out in this regard: ‘Call it the austerity effect: the inevitable public suffering that ensues when nations and states cut public benefits in the name of economic solvency and private industry. While austerity policies may not be identified by name, they underscore the most common tropes of contemporary politics: budget cuts (especially in welfare expenditures such as public education, health care, housing, and unemployment benefits), regressive taxation, deflation, privatisation, wage repression, and employment deregulation.

Taken together, this suite of policies entrenches existing wealth and the primacy of the private sector... These outcomes seem to affirm the Keynesian view that austerity fails in its purported objective to boost economic growth. But as this book illustrates, 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.’

Moreover, the IMF should understand that there is a need for greater multilateral support by cancelling, for instance, its notorious ‘surcharge policy’ and more frequent and well allocated SDRs to better enable countries to adopt non-austerity policies, and create greater fiscal space through higher economic growth, accruing greater tax collection, and overall making necessary improvement in political voice, and in creating much-needed climate change resilience. In this regard, a recent ‘Inter Press Service’ published article ‘Advanced economies must let the IMF play a productive role on climate’ of the author, which he co-authored with Dan Beeton of the Center of Economic and Policy Research (CEPR) pointed out: ‘For the Fund to truly begin to join the fight against the climate crisis, it must first end its pointless, unfair, and damaging surcharge policy.

The Biden administration could ensure that the Fund instead plays a crucial role in responding to climate challenges by supporting a major new issuance of IMF reserve assets. …Time is quickly running out. The IMF must be brought into the twenty-first century if it is to play a constructive role in ending the climate crisis.

The IMF should end its punitive, unnecessary, and counterproductive surcharge policy. And there must be a new major allocation of SDRs to enable developing countries to better deal with debt distress and meet their goals for climate-resilient spending.’

Needed change in this economic policy thinking, requires in the first place, greater pressure from the demos in both developing countries, which are mainly the programme countries, many among them seriously under the ‘Chicago Boys’ neoliberal mindset, and in developed countries, which as major shareholders of IMF’s pool of resources, have a deep say in the way IMF programmes are formulated. A November 13, 2023 ‘The Economist’ published article ‘2024 is the biggest election year in history’ indicated that half of world’s adult population will be casting votes in 2024 for significant general and other elections; for the first time at such a large scale in any one year during the entire history of elections. The article pointed out in this regard: ‘In 2024, countries with more than half the world’s population–over four billion people–will send their citizens to the polls.

But many elections are not fully free and fair. Some of these will have no meaningful influence on governments. According to our calculations, 76 countries are scheduled to hold elections in which all voters have the chance to cast a ballot in 2024.’

Therefore, elections hold a meaningful and timely chance to put their burden behind non-neoliberal, non-austerity, counter-cyclical policies, especially in a world of fast-unfolding climate change crisis. Having said that, while this large voting process is indeed an opportunity, but meaningful practice of voting in directions that are truly beneficial to better dealing with deeper economic and political issues requires non-austerity policies in the first place for strengthening political voice but, given this runs counter to perpetuating of power interest under the elite capture, doubling down of this policy prescription, and greater multilateral support are the logical first step for bringing in needed economic change, and not most likely the other way round.

Copyright Business Recorder, 2024