People have protested against the International Monetary Fund (IMF) in country after country that has borrowed from it, be it Argentina, Ecuador, Egypt, Greece, Jordan, Kenya, Nigeria, Pakistan or Tunisia. The placards held by the protesters often accuse the IMF, the global lender of last resort, of promoting debt imperialism and worsening economic inequality.
Why is the IMF so unpopular even though one of its key functions is providing its “resources to member countries in need”?
Free markets fundamentalism
Much of the bitterness against the IMF comes from the conditions it attaches to its loans. These conditions stem from free markets extremism: cutting down the role of the government because of an unshakeable belief in the supremacy of markets. “Free markets may not be perfect but they are probably the best way to organise an economy,” reads the tagline of an article on finance and development on the IMF’s website — summarising the problematic mindset criticised by many over the years.
Over the years, the notion of free markets has been the subject of a great deal of critique. For example, Ha-Joon Chang, an economist from Cambridge University, explains that there is no such thing as a free market to begin with and regulations restrict the freedom to contract in all markets, from restricting child labour to requiring banks to hold capital.
The late Mahboobul Haque, a Pakistani economist and finance minister, who earned widespread respect for his work on human development, articulated his practical observation as follows: “Markets are not very friendly to the poor, to the weak, to the vulnerable, either nationally or internationally. Often we act as if markets are free. They are not. I have seen that in my country. The markets are often the handmaiden of powerful interest groups, and they are greatly affected by the prevailing distribution of income.”
Shock therapy that doesn’t cure
The conditions attached to IMF’s loans, known as structural adjustments, tend to be quite standard, such as cutting government expenditure, liberalising trade, removing restrictions on flow of capital, privatising state-owned enterprises, cutting subsidies, increasing taxes, and so on.
To be fair, the structural adjustments often include things which the borrower country ought to have done on its own, such as broadening the tax base and strengthening its institutions like the central bank. However, even the justifiable adjustments are put together as a shock therapy. Countries are required to somehow complete in a few years what they have been struggling to do over decades. Little wonder then that Pakistan has been reaching borrowing agreements with the IMF since 1958 and commenced multiple programmes without fixing its economic fundamentals.
Empirical studies on results of IMF’s structural adjustments are divided. However, a consistent criticism is that the IMF overestimates growth and underestimates the suffering caused by the adjustments. The IMF’s own 2018 review of programme design and conditionality doesn’t seem to disagree: “Directors shared the assessment that growth assumptions were often too optimistic, driven largely by global forecasting errors and the underestimation of the impact of policy adjustment and overestimation of structural reform payoffs.”
Sovereign debt is replete with spillover costs (or externalities) including inter-generational injustices. Debt is contracted at the hands of the ruling elite but it is paid back by generations of ordinary citizens through the nose. It is because of the injustice in debt-financing that the IMF is facing protests by the Kenyans for approving $2.34 billion three-year financing for Kenya.
The IMF’s adjustments do not address the economic injustice inherent in the current political economy of the indebted country. Inevitably, it is what hurts the people at large that gets done — such as a rapid devaluation — rather than what may discomfort the ruling elite, such as bringing the untaxed rich in the tax net.
The people of Pakistan would probably have been thankful if the IMF conditions required the government to take immediate and decisive action against those evading taxes in different sectors such as real-estate, tobacco, and sugar. The IMF’s conditionalities could have drawn loud cheers if they required the government to go after those who have been transferring billions and billions abroad by using fake bank accounts opened in the name of the poor.
A call for help through the Stolen Assets Recovery initiative to its rich member-countries where Pakistan’s ill-gotten wealth finds a home, estimated to be far greater than the IMF’s $6 billion loan, could have seen praises for IMF trending on Pakistan’s social media. But no such luck.
Instead, the IMF has required Pakistan's government to take steps like raising the energy tariff. The dramatic increase in the price of natural gas shocked users and resulted in a jump in the price of naan across Pakistan in 2018. The statement of the IMF’s executive director included in the latest country report rightly describes food inflation in Pakistan as “a matter of considerable concern at present” (p. 102). However, the report doesn’t explain how it would address this considerable concern when the IMF’s conditions are an underlying cause.
Analyse: Will IMF learn?
According to the 2019-20 survey on social and living standards by the Pakistan Bureau of Statistics, 16.4 per cent of the population reported moderate to severe food insecurity — that’s nearly 35 million people, close to the entire population of Canada. This is many more people than can be covered by cash interventions like BISP or Ehsaas.
The ground reality in Pakistan for some time is that the pre-existing price level of food items, and not just further inflation, has been making people’s life difficult. Had the IMF cared about the vulnerable Pakistanis, to which its report makes several references, it would have come up with a different set of conditions focusing on the tax evaders and the corrupt, whether individuals or entities. As the poet Habib Jalib would ask, “Charagar dardmandon kae bantae ho kiyoon?” (Why do you pretend to be the healer of the hurt?)
Neither democracy nor meritocracy
When people say democracy, they tend to mean a one-person one-vote system to elect their leaders. But unlike its parent, the United Nations, where the General Assembly uses one-country one-vote, the IMF is a shareholders' plutocracy. While there are 190 members of the IMF, the richer countries have most of the voting power that elects its 24-member executive board including its managing director. The US alone has a voting share of more than 16pc, giving it veto power over major decisions at the IMF because they require more than 85pc vote.
The US and Europe have an informal agreement that the head of the IMF will be a European acceptable to the US and the first deputy managing director will be a US national. It goes to show that the IMF is not walking its own talk of good governance, liberalisation and competition. This parochial agreement led to the election of a managing director in 2007 — the consensus European nominee despite a questionable reputation — who earned global notoriety for crass sex scandals. His predecessor was sentenced to four-and-a-half years in jail in Spain for embezzlement, while his successor was found guilty of negligence by a French court.
Critics have long argued and researchers have substantiated that the political alignment between a country and the US, which may be gauged by the voting pattern at the UN General Assembly, influences IMF’s lending decision.
The one who pays the most to the piper may call or, if he so desires, interrupt some of the tunes. In July 2018, the US secretary of state warned that any potential bailout for Pakistan should not provide funds to pay off Chinese lenders. “Make no mistake. We will be watching what the IMF does,” he said in an ominous message because he could.
Despite its layers of governance, the IMF has particularly weak accountability. Its website mentions that it is accountable to its member countries, but that doesn’t mean much when the power is concentrated in the hands of a few. Its website immediately goes on to say that the IMF is scrutinised by many including civil society and academia. In fact, this is scrutiny that applies to any high-profile institution; it is not accountability.
Curiously, despite public scrutiny and in a world full of economics think tanks, the IMF created its own Independent Evaluation Office (IEO) in 2001. The latest external evaluation of this office found that after nearly 20 years, “there is a lack of traction of the work of the IEO,” which is a roundabout way of expressing that nobody at the IMF cares about what it says.
While the IMF routinely prescribes shock therapy to its borrowers, its own reform of its governance and capital moves at a snail’s pace. Its 2010 reform agenda, which was initiated in 2008, was finally reported as put into place in 2016. The voting share of the US, its dominant member, was maintained at above 16pc. While the IMF labelled the change as historic, independent observers saw the voting reforms as having little to no impact. Despite an unenviable record of internal reform, the IMF, which is nearly as old as Pakistan, demands that Pakistan implement a wide range of substantive adjustments within 39 months.
The IMF is known to make costly mistakes in its prescriptions. In a paper published in 2013, an IMF chief economist stated that “stronger planned fiscal consolidation has been associated with lower growth than expected.” This was an implicit confession that a key assumption underlying the IMF’s fiscal austerity in Europe in the wake of the global financial crisis was wrong. The IMF, however, does talk a fair deal about learning from mistakes. That is, when the IMF conditionalities result in grave consequences for millions of people from a borrowing country, the decision makers at IMF may learn from the experience. Whatever this is, it surely is not accountability.
The IMF speaks as if it were a bot and those suffering because of its adjustments are statistics. In the context of the rising gas and electricity prices, the FAQ section on IMF’s Pakistan microsite talks about “adjustments in tariffs and subsidies calibrated to attenuate social and sectoral impacts”. Compare this vague jargon to what was summarised in a news report in the same context, “The common man’s daily bread has just gotten more expensive.”
There is no reason to doubt the integrity of the nearly 2,700 employees at IMF who reportedly come from as many as 150 countries. To do so would be both wrong and distasteful. The problem is the free-market indoctrination of IMF’s decision making, which is culturally alien to a poor country like Pakistan, and an organisational design that does not give voice to those suffering from IMF’s conditions.
The IMF has been described by its senior staff as an international credit union. The analogy is ill-fitting. Credit unions are meant to be local, one-member one-vote democractic entities that are benign by design. The IMF’s annual report 2020 has many photos — perhaps too many — of blue collar workers, micro entrepreneurs and poor students in schools as if it were indeed a credit union helping ordinary people. However, unlike the charter of the UN, the IMF's 136 pages long articles of agreement do not even use the word "people'' or any of its synonyms — and that’s befitting.
This we-care-but-we-don’t approach shouldn’t come as a surprise because the objective of the IMF conditions, in its own words, is to get its money back: “These policy adjustments are conditions for IMF loans and serve to ensure that the country will be able to repay the IMF.”
In sum, the IMF subjects the people already hurt by the failures of their governments to more hurt by the failures of the markets. It is not due to ignorance but because of how the IMF works that people in borrowing countries have no love for the IMF.
Header image: Anti-globalisation activists protest in front of the World Bank headquarters in Washington during the IMF-World Bank spring meeting, April 12, 2008. — Reuters/File