Serious issues in IMF programmes: time for urgent reform

‘Augusto Pinochet’s coup in Chile is widely seen as inaugurating the global neoliberal era. As the 1970s progressed, neoliberal ideas and policies came increasingly to shape the agendas of international financial institutions, including the World Bank and International Monetary Fund, which imposed neoliberal economics on indebted nations in Africa, Latin America, and Asia.

In return for debt relief or loans, “structural adjustment programs” were demanded, which included privatisation, deregulation, trade liberalization, the abandonment of capital controls, and “fiscal austerity”, which meant slashing state spending on health, education, and other public services.

These decisions were imposed without people being given the chance to vote on them: the poorer nations had no choice but to implement them, regardless of what their populations thought.’ An excerpt from a (2024) published book ‘Invisible Doctrine: The Secret History of Neoliberalism’.

Notwithstanding the fact that in recent years, at the back of over-board practice of monetary austerity, the special drawings rate (SDR) rate on loans from International Monetary Fund (IMF) has been over four percent, unlike the routine in general when it remains much less – for instance, it was close to zero percent before the current rise – and the fact that it is the ‘lender of last resort’, it is more than just a multilateral bank, given it attaches ‘conditionalities’ while giving loans to member countries.

Such conditionalities have come under severe criticism over the years, especially in the wake of the expanded role of IMF after firstly the withering away of the ‘par value system’ in the early 1970s, which enhanced its scope from mainly the monitoring role of seeing to it that countries should adjust their exchange rate in line with the rate of either US dollar, or gold, and did not whimsically and arbitrarily brought changes to the value of their domestic currency, while disturbing global financial flows as a result.

Hence, especially after the global debt crisis of early 1980s – which mainly happened as a fallout of adoption of floating exchange rate – and then later on after the collapse of Soviet Union, which saw scores of newly independent countries requiring support of IMF.

Hence, in the initial years after the formation of IMF, its role was only limited to surveillance – as indicated above, and had very few policy conditionalities, if at all, and that too had insignificant imprint of Neoliberalism, which showed up mainly in the wake of its practice in Chile in 1970s through the ‘Chicago boys’ – and the role it played in the process of reconstruction of Europe post-Second World War was very limited, which mainly developed due to initial strong institutional and human capital base of these countries, and because of deep financing provided to them under the Marshall Plan.

Here, in its limited role IMF mainly gave special favour to these countries by allowing liberal timelines to settle their international payment obligations, while providing very limited and temporary financial support to countries in Europe facing trouble meeting payment obligations.

Yet, the increasingly neoliberal basis of IMF programmes since the 1970s – when the neoliberal practices made a comeback due to mainstreaming of these policies by liberals, but not in the classical sense of the word ‘liberal’ since the policies were neither ‘new’ nor ‘liberal’ – did not allow programme countries to achieve macroeconomic stability on any meaningful extent of sustained basis, even after giving a lot of economic growth sacrifice. At the same time, strong footing of these conditionalities in market fundamentalism, austerity, and pro-cyclical nature of policies saw significant increase in inequality both within countries, and among countries.

Hence, for those who at best naively believe that IMF has been a success story have clearly gone overboard, given the entrenchment of ‘structural adjustment policies’ in Neoliberalism that research indicates that a number of programme countries, not only became prolonged users of IMF resources, many had better stability, and growth record before they entered IMF programme.

The writers (2016) Springer published book ‘The economic impact of International Monetary Fund programmes’ pointed out the overboard focus of IMF policy conditionalities on squeezing aggregate demand or, in other words, adopting austerity policies, while not putting enough focus on the aggregate supply, and within it on policies that improved institutional quality.

Moreover, the book pointed out for instance: ‘IEO ([Independent Evaluation Office of IMF] 2002, p. 119) pointed out that Pakistan’s yearly economic growth was on average around 6 – 7 % during the 1970s to the later part of 1980s, and the country was able to sustain its deficits in the fiscal and external sectors, without needing any major foreign assistance. This situation changed during late 1980s when economic growth started to deteriorate and inability to deal successfully with deficits led to build up of debt.

Hence, the country entered successive IMF programmes in the years to follow, starting around the later part of 1980s. Looking back, the experience proved to be worse in terms of yearly economic growth during 1988–2000, which on average stood at around a little less than 4 %,while at the same time major macroeconomic indicators, for example, inflation rate, foreign direct investment, export growth, and import cover in terms of foreign exchange reserves, all slacked when compared to the earlier two decades (IEO2002, pp. 119–121). Since 2000, the situation has not changed much in terms of sustained macroeconomic stability and economic growth, although Pakistan continues to rely on IMF resources….’

A few countries that did show some success while being in IMF programmes had generally strong inflow of foreign direct investment due to some sort of elaborate free trade agreement with a developed country, or had deep financial sector to start with.

For instance, Thailand achieved some sense of stability through IMF programme not primarily as a result of structural adjustment policies, but as summed up in the abstract of a (1999) ASEAN Economic Bulletin published article ‘Villain of the Asian Crisis: Thailand or the IMF?’ as follows: ’This article traces the roots of the Asian financial crisis in the weakness of the Thai economy.

By using an accounting framework, the author demonstrates that the IMF/World Bank structural adjustment programme in the 1980s failed to achieve resource switching from the non-tradable to tradable sector, as successive devaluations had to be matched with upward adjustment of minimum wages due to political reality. The improvement in the fiscal position was achieved primarily by a politically easier route of cutting infrastructure investment with detrimental effects on long-term growth. Thus, the seed of the crisis was sown in the straightjacket IMF/World Bank programmes of the 1980s.’

Similarly, unlike Russia, which adopted ‘shock therapy policies’ – a bread and butter policy milieu of IMF programmes focusing on fixing adjustment through sharp practice of monetary and fiscal austerity policies – China adopted home-grown reform package of bringing gradual changes in prices, and in a way that supported the strategically important sectors of the economy – through the adoption of ‘dual-track price system’ – and did not subscribe to whole-scale loosening of capital controls, or going for significant privatization; it saw sustained stability, and economic growth.

Noted economist Isabella M. Weber indicated in this regard in her book ‘How China escaped shock therapy’ as ‘What was at stake in China’s market reform debate is illustrated by the contrast between China’s rise and Russia’s economic collapse. Shock therapy – the quintessentially neoliberal policy prescript – had been applied in Russia.’

In the same but lesser vein India, after going once into an IMF programme, did not go for another programme, and cautiously opened up its economy to capital flows. Malaysia also took a home-grown path in the wake of the Asian Financial Crisis, and did not go for an IMF programme.

To give an example in support of Malaysia’s decision to not ask for IMF support, an abstract from a (2004) Singapore Journal of Legal Studies published article ‘An assessment of Malaysia’s response to the IMF during the Asian economic crisis’ pointed out: ’Malaysia was the only country severely affected by the 1997 Asian economic crisis that declined to adopt an IMF program.

This article assesses this decision in terms of principle, and of the outcomes of the unorthodox policies Malaysia implemented. It concludes that Malaysia recovered at least as quickly as any country that implemented IMF policies and gained a number of significant advantages by charting its own course out of the crisis. Saying no to the IMF was right for Malaysia.’

Moreover, the rise of Scandinavian countries, or the rise of South Korea, as against the North Korea, was not due to neoliberal, shock-therapy natures, IMF-styled policies, but because of strong influence of state capitalism – something which IMF discourages, given its programmes are based on neoliberal mindset, which favours little role of the government in economy, and believes in market fundamentalism, something that has backfired in many ways, for instance, accentuating inequality, and lack of build-up of economic resilience – in an inclusive way that is to develop institutional quality on the supply side, while not adopting shock therapy, austerity, pro-cyclical, and market fundamentalism based policies to squeeze aggregate demand, which meant frequent intense growth sacrifices, rise in unemployment, and cost-push inflation, while not achieving any sustained macroeconomic stability.

Hence, so stark was the negative fallout of IMF programme conditionalities, or ‘structural adjustment policies’ especially in the wake of the Global Financial Crisis (GFC) of 2007-08, and the negative impact of austerity policies in Europe in the last decade that IMF internally also started distancing itself, although such efforts have remained weak, and limited, as evidenced from similar programme conditionalities being practiced in current, and virtually all of the programmes in recent years.

A (20223) Oxford University Press (OUP) published book ‘A thousand cuts: social protection in the age of austerity’ pointed out in this regard: ‘In the early 2000s, the IMF’s handling of economic crises and the subsequent design of reform programs came under fire for failing to deliver stability or growth.

Prominent critics, like Nobel prize-winning economist Joseph Stiglitz (2002), forcefully argued that IMF involvement actually worsened crises in a range of low- and middle-income countries…. By mid-2000s demand for its services were at historic lows, resulting in staff layoffs and widespread doubts about its future… In the aftermath of the 2007-2008 Global Financial Crisis, G20 leaders committed $750 billion to enable IMF to step up its operations… the re-emergence of the IMF was also coupled with a sea change in the organization’s rhetoric on the ways in which it offers financial assistance.

As former managing director Christine Lagarde told journalists, “Structural adjustments? That was before my time. I have no idea what it is. We do not do that anymore.’ …Instead, the organization now acknowledges the importance of countercyclical spending to sustain economic activity… the potential utility of capital controls… the perils of high income inequality… [On the contrary] Several studies suggest that the practice of IMF programs in recent years largely reflects business as usual….’

It needs to be indicated here that why this change of heart by the IMF in terms of highlighting the importance of counter-cyclical policy, or supporting greater capital controls for instance, are not being reflected in programmes with countries overall, including Pakistan? To quote from the same book ‘For example, the authors of this book revealed that of the 48 programs commending between January 2010 and May 2016, 58 percent were fiscally contractionary in the initial year of program, and even more became contractionary in the second, third, or fourth years… Similarly, Brunswijck (2018) revealed that 23 out of 26 programs that were approved in 2016 and 2017 were pro-cyclical.’

Hence, while it is important that Pakistan continues to remain in the current IMF programme, was its decision to approach IMF for a programme was essential, given steep financial obligations that it faces over the medium-term, it is exceedingly important that the policymakers on both sides of the table – country authorities and IMF – to push the programme away from its neoliberal, austerity, and pro-cyclical basis, due to the misgivings of these policies – which Pakistan has continued to follow over the last many years, both in, or outside of the IMF programme under the influence of IMF policy conditionalities, and due to the heavy presence of ‘Chicago boys’ mindset in domestic policy circles.

More broadly, reform of IMF – both in terms of design of its programmes, and the philosophical basis of its behavioural assumptions, and greater say of developing countries in these reforms, including allocation of SDRs among climate challenged countries through reforming its governance - is essential, given the fast-unfolding of climate change crisis.

Copyright Business Recorder, 2024