No Blank Check for the IMF
This month's G20 meeting ended with one overriding tangible agreement: A commitment by the rich countries to provide more than $1 trillion in assistance (mostly in the form of loans) to developing countries.
This money is desperately needed. Although they had nothing to do with mortgage-backed securities or credit default swaps, developing countries are getting worst hit by the global economic meltdown. The World Bank conservatively estimates that 53 million more people will be trapped in deep poverty due to the crisis.
Fleeing foreign investors, plummeting remittance earnings, falling commodity prices and shrinking export markets are devastating developing countries, leaving them in dire need of infusions of hard currency.
So, the G20 move is to be applauded ... except that the entire purpose of the G20's assistance may be thwarted by the institution through which the G20 countries chose to channel most of the money: the International Monetary Fund (IMF). (There's also the matter that the $1 trillion figure overstates what will actually be delivered, and includes previously pledged money.)
The logic of providing assistance to developing countries is to help them adopt expansionary policies in time of economic downturn. Yet the IMF is forcing countries in financial distress to pursue contractionary policies -- exactly the opposite of the stimulative policies carried out by the rich countries (and supported by the IMF, for the rich countries).
The good news is this: The U.S. Congress can fix the problem, if it imposes conditions on the IMF before it agrees to authorize the U.S. contributions to the Fund.
For three decades, the IMF has imposed "structural adjustment" on the developing world, using different names. In exchange for providing loans and, more importantly, a stamp of approval needed to access donor money, the IMF requires countries to adopt a series of market fundamentalist policies. These include deregulation (including of financial services), privatization, opening to foreign investment, orienting economies to export markets, removing protections for local producers growing food or manufacturing for the local market, removing labor rights protections, cutting government budgets, raising interest rates, and more.
Furious at being subject to IMF dictates, over the past decade almost all middle-income countries paid back their loans to the IMF and refused to have anything to do with the institution. Only African and other poor countries remained under IMF control.
The financial crisis has breathed new life into the IMF. Now headed by a new Managing Director, Dominique Strauss-Kahn, the Fund proclaims that it has changed. The days of harsh conditionality are over, it says.
That's a pronouncement to be applauded ... except that the evidence of actual change in IMF policy is disturbingly hard to find.
The Fund's loans since September 2008 to countries rocked by the financial crisis almost uniformly require budget cuts, wage freezes, and interest rates hikes. These are exactly the opposite of the policies that make sense in recessionary conditions. They are exactly the opposite of the huge stimulus measures taken in the United States and other rich countries. They are the opposite of the interest rate reductions in the United States (now effectively at zero) and other rich countries.
In Ukraine, Georgia, Hungary, Iceland, Latvia, Pakistan, Serbia, Belarus and El Salvador, the IMF has told countries to cut government spending, an analysis by the Third World Network shows. This means less money for health, education and other vital priorities. Earlier this month, the IMF told Latvia -- where the economy is expected to contract 12 percent this year -- that its loans would be suspended until it further cuts spending.
The IMF has also instructed almost all of these countries to raise interest rates, the Third World Network analysis shows.
The IMF has ballyhooed a new, low-conditionality lending program, known as the Flexible Credit Line. But that is available only to "good performing" countries -- which will be the countries least in need of loans.
In some countries, there may be a modest loosening of Fund conditions. But the basic framework remains in place.
Putting on its best face at a meeting it convened in Tanzania on the impact of the financial crisis on Africa, the Fund said in a policy paper that a few poor countries might have some capacity to undertake small stimulative programs. "A few countries may have scope for discretionary fiscal easing to sustain aggregate demand depending on the availability of domestic and external financing." But even then: "All this must be done carefully so as not to crowd out the private sector through excessive domestic borrowing in the often thin financial markets."
But for countries in weak positions -- the vast majority -- "the scope for countercyclical fiscal policies is limited."
And, the Fund continues to counsel against capital controls, which could limit the ability of foreign funds to enter and flee a country easily. This is of central importance, because it is concern about a currency attack that is the rationale for why poor countries cannot undertake stimulative measures. Capital controls would be the obvious remedy. But since the Fund rules them out a priori, countries are helpless, and denied the right to use the same Keynesian tools available to the rich countries.
The opportunity to win real change at the IMF is this: The new money for the Fund's coffers has not yet arrived. The United States has pledged $100 billion of the $500 billion in new money that G20 countries said they would provide for the Fund (they also announced plans for an additional $250 billion through issuance of Special Drawing Rights, a kind of IMF currency).
Congress must approve the U.S. contribution. Congress can very reasonably attach conditions to any money for the IMF, so that IMF policies do not undermine the very purposes of providing money in the first place. The Congress can say, before the money goes to the IMF, the IMF must agree not to impose contractionary policies during times of recession, or at least provide a reasoned, quantitative justification for any such policies. The Congress can say, before the money goes to the IMF, that the IMF must exempt health and education spending from any government budget caps. The Congress can say, before the money goes to the IMF, that parliaments must be given the authority to approve any deals negotiated between the IMF and finance ministries.
People are growing a little tired of seeing hundreds of billions of dollars allocated without conditions and accountability. Congress must not sign a blank check for the IMF.