The International Monetary Fund came under fire at the G-20 finance ministers meeting in Brazil on November 9 for what France described its “imperialist” approach in offering loans to the crisis-hit developing countries.
French economy minister Christine Lagarde said: “I think that the old-school IMF has left some scars and I think there is a real work of communication and may be changing the methods.” The Fund, he said, needed to change its approach of lending to the countries in trouble. Some states, he said, still remember the IMF’s ‘imperialist’ methods in its conditionality prescriptions.
Argentina, which attended the G-20 moot, is one of the IMF’s biggest critics. Relations between Argentina and the IMF soured during the country’s 2001-2002 financial crisis. Argentina complained that the conditions the IMF imposed on its loans were partly responsible for the ensuing crisis. The then president Nestor Kirchner had recently said there was “no way in hell” he would ever agree to another IMF accord. Russia also bears a grudge against the IMF which, it said, provided advice for many ill-fated market reforms in the 1990s.
The East Asian states also remember what they consider a ‘hostile’ role the IMF played in 1997 financial crisis. Instead of bailing them out under its $95 billion loan package, what the IMF did was to bail out their western lenders. The crisis-hit states – Thailand, South Korea, Indonesia – were subjected to a bitter medicine and forced to cut spending, raise interest rates, carry out structural reforms and sell state-owned industries. Joseph Stiglitz, the Noble laureate economist, later observed that the IMF itself had at that time “become a part of the problem rather than part of the solution.” The crisis later caused a crash of Russia’s ruble and Brazil’s real.
Brazil, Argentina and Indonesia paid back their loans to the IMF quite early and informed the Fund that they were no more interested in its loans. Angola, flush with oil cash and billions of dollars in aid from China, rebuffed IMF overtures to become a client last year. By the end of 2007, IMF lending had shrunk to $16 billion. For the last few years, the IMF has been dormant because it was being avoided by the needy states for its role in the past. Now it is becoming relevant again in the wake of the financial crisis in the West and the affected countries have begun reaching it for aid.
During the debt crises of 1980s and 1990s it has become amply clear that there was something deeply wrong with the architecture of the IMF’s facility regime. Since the West was not affected by the Fund’s way of fixing an economy, it did not feel the need for seriously looking into its functioning and improving its governance in the light of complaints, nor took measures to change its methods. In fact, the West favoured its stringent style of opening up the client state’s economy for it served its neo-liberal agenda albeit in a crude manner.
Now that it is the West itself which is at the centre of the storm, it is showing an urgency not only in reforming the IMF but also in strengthening the Fund itself. On November 7, the 27-nation European summit in Brussels decided that the IMF should become the “pivot of a renewed international system” and asked the United States to sign on to a 100-day deadline for action on strengthening the IMF.
A study issued by the IMF’s Independent Evaluation Office (IEO) in January 2008 reveals that the Fund had dramatically increased both the number of structural conditions and their intrusiveness in recipient countries’ domestic affairs. The study covered a limited period of time after the Conditionality Guidelines (CG) were approved in 2002. It assessed operations approved between 1995 and 2004.
The story of conditionalities is a story of glacial change at best, and a move backwards in some respects. According to IMF data, during the first two years after the Guidelines were approved the Fund attached an average of 12 conditions per loan granted to a poor country. After the 2005 review, the number of conditions increased to 13.
However this average conceals a much higher conditionality incidence for some countries. For instance, the Fund attached 28 structural conditions to Haiti’s 2006 PRGF which is too heavy a burden for a government to implement. Moldova faced 22 structural conditions in the PRGF approved in the same year. In both cases, the Fund attached highly sensitive conditions such as requiring withdrawal of the Haitian Central Bank from the state-owned telecommunications company.
These are only the average number of structural conditions. If all conditions – both structural and quantitative – are taken into account, the average numbers increase to 24 per loan after the CG were approved and 25 after the first review of the Guidelines took place in 2005.
A report by the European Network on Debt and Development (Eurodad) assessing more recent IMF loans says that since the Conditionality Guidelines were approved, the IMF has not taken steps, despite bitter criticism, to decrease the number of structural conditions attached to their development lending.
These conditionalities are having serious social consequences because the Fund continues to push for privatisation and liberalisation in poor client states, interfering with their regimes’ domestic priorities and needs. In Mali, the IMF and the World Bank forced the country to even privatise the cotton sector. The result is that cotton farmers face an even harder future. Privatisation of water and electricity has excluded the poorest from availing the basic services.
It is interesting to note that the IMF and World Bank sometimes impose the same condition on a country. Lack of coordination between the two has been a long-standing problem. During the last twenty years, at least nine reports have been issued to address this problem but it remains unresolved. The last report in February 2007 warned that “The Fund’s financing activities in low-income countries is an area where it has moved beyond its core responsibilities and moved into activities that increase its overlap with the work of the Bank.”
In 2006, the IMF required the Afghan government to “adopt a comprehensive restructuring/divestment plan for the public entities and government agencies engaged in commercial activities but not covered by the state-owned enterprises (SOEs) law.” This condition duplicates current World Bank policy in Afghanistan which will lead to the privatisation of more than 50 state-owned enterprises. The case of Mali is even more controversial as privatisation plans were openly opposed by the government. The Fund put a privatisation condition in their development finance, thus duplicating conditions by the World Bank.
Dominique Strauss-Kahn, who took over as IMF chief last year, says the Fund’s role is now changing in low-income countries. There is now talk of a ‘new IMF’ among top officials who claim it will now be less focused on forcing nations to adopt tough cost-cutting measures and more on ensuring that they don’t make mistakes that could trigger the kind of financial crises that hit Asia in the late 1990s and Latin America in the early 2000s.
But such a realisation comes at a time when the IMF is losing its importance as a lender of the last resort and when developing nations have more lending options than ever before. That is particularly true as the Chinese and Indians are currently lending to states in Africa and other regions billions of dollars at low or no interest, often in exchange for access to oil and minerals but carrying no demands for fiscal restraint or free-market reforms.
In Latin America, Venezuela’s leader Hugo Chávez is acting as an alternative to the IMF, offering massive aid to needy countries on such terms that have enabled some of them to pay back loans early. In May, East Asian countries decided to bypass the IMF and set up an Asian Monetary Fund to help crisis-hit countries in the region to avoid a 1997-type crisis.
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