Global Policy Forum

By Jim Lobe

If U.S. President George W. Bush is serious about his enthusiastic embrace last week at the United Nations of democracy and the Millennium Development Goals (MDGs) to slash global poverty, he will press his treasury secretary and other members of the governing board of the International Monetary Fund (IMF) meeting here this week to stop imposing strict spending limits on poor-country governments.

That is the message of two new reports by ActionAid International (AAI), which charges that IMF anti-inflation policies and the World Bank, which is bound by them, are making it impossible for Third World governments to make much progress either in achieving MDG targets or in promoting democratic institutions. The MDGs include achieving universal primary education, cutting hunger and poverty in half, and sharply reducing maternal and infant mortality by 2015.

"What the IMF and World Bank are doing is effectively tearing the heart out of democracy," said Rick Rowden, (AAI's) senior policy analyst. "Holding periodic elections doesn't mean much when a nation's economic direction is hammered out between the IMF, the central banks, and the finance ministries behind doors that are closed to voters."

The two reports, based on case studies in 13 developing countries, conclude that the indirect control exercised by the IMF over recipient governments' macroeconomic policies is straitjacketing their ability to deal with urgent social, health, and economic issues, such as the HIV/AIDS pandemic, and likewise the ability of their electorates to influence those policies.

Voters in most transitional and democratic governments, according to AAI, strongly favour greater efforts to improve the health and welfare of their poor population, if only because the poor make up the vast majority of their constituents, particularly in Africa, South Asia, and much of Latin America. But even as democratically elected governments struggle to respond to these demands, they are effectively unable to do so given the IMF's policies and power.

This, indeed, has been noted by democratically elected developing country leaders themselves at various times. "We are caught between a rock and a hard place in terms of managing IMF requirements and then dealing with the demands of our electorate," Tanzanian President Benjamin Mkapa asserted last year. AAI also cited a Kenyan education official as complaining that, "The general feeling among the citizenry is that government decisions are subordinate to the IMF rules and directions, and that the country is held captive by these decisions without much recourse."

The first report, "Square Pegs, Round Holes", notes a "fundamental contradiction between the need to greatly scale-up social spending to fight HIV/AIDS and what can actually be spent under the IMF's current low-inflation monetary policy", which traditionally aims to keep annual inflation rates to under five percent. "How can significantly more money be spent in these economies without producing higher levels of inflation than the IMF's low-inflation policy permits?"

Because donor governments and other financial agencies, including the World Bank, treat compliance with IMF targets as the Seal of Good Housekeeping, failure by borrowing governments to meet those targets risks a cut-off of external credit. "The IMF can effectively 'switch off' foreign aid flows to any country that it feels is not satisfactorily adhering to the agreed macroeconomic framework," according to AAI, citing recent examples of such actions in Zambia and Honduras.

The second report, "Contradicting Commitments: How the Achievement of Education for All is Being Undermined by the International Monetary Fund", argues that the MDG target of providing universal primary education by the year 2015 is also threatened by the IMF's imposition of budget targets. To meet the MDG target, according to the report, poor countries must sharply increase their investment in building schools, training and employing teachers, and in making education more accessible to poor and other disadvantaged children by, for example, eliminating school fees.

But in most cases, they cannot do so without exceeding spending limits imposed by the IMF, thus making it effectively impossible for them to meet their MDG commitments and the demands of their electorates. The problem described in the two reports is not new. Indeed, last year AAI and a number of other development and health non-governmental organisations (NGOs) published a major report, entitled "Blocking Progress". It asserted that the IMF's policies in southern Africa, which has the world's highest HIV infection rates, were having a disastrous impact on the ability of governments there to both curb the spread of the disease and treat its victims.

But the constraints faced by governments dependent on the IMF's Seal of Approval have become ever more obvious since the MDGs were first adopted at the Millennium Summit by global leaders in 2000 and now that they have been re-affirmed at last week's World Summit. Indeed, with multilateral agencies, including the IMF's sister organisation, the World Bank, warning that progress in achieving most of the eight MDGs is lagging badly, the IMF's insistence on maintaining stringent budget limits appears increasingly anomalous, particularly in light of the endorsement by leaders of the Group of Eight (G8), including U.S. Pres. George W. Bush, which exercise a preponderant influence on IMF policies.

AAI and other groups have also argued that the five percent inflation ceiling is based on shaky economics and that there is little agreement among economists on the rate that begins to undermine economic growth. "Current IMF monetary policies may have seemed appropriate for combating the crisis of hyperinflation in many developing countries during the late 1970s and early 1980s," according to the first report, "but its tactic of tightly constraining public spending in order to get inflation down and keep it down is at odds with what is needed today: new monetary policies that allow for a major increase in public spending."

The historical record indicates that Latin American in the 1950s and 1960s and East Asia in the 1960s and 1970s experienced very high economic growth rates despite inflation levels that averaged 20 percent per year, the report asserted. As noted by the UNAIDS 2004 Report on the Global Epidemic: "The short-term inflationary effects of increased and additional resources applied towards tackling the HIV epidemic pale in comparison with what will be the long-term effects of half-hearted responses on the economies of hard hit countries. AIDS is an exceptional disease; it requires an exceptional response."

Meanwhile, the fact that the elected governments were effectively boxed in by the IMF is doing nothing to promote confidence in democratic institutions throughout the developing world, according to the AAI. "What this all comes down to is that the IMF acts like a school bully, taking power away from publicly elected officials, particularly in the poorest and weakest countries," said David Archer, the group's director for education. "This is not a recipe for working democracy; instead, it could spell democracy's death knell."

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