Global Policy Forum

IMF Reform: Aged Wine in a New Wineskin

By Danny Roberts

July 19, 2009

Jamaica is set to re-enter a borrowing relationship with the International Monetary Fund (IMF) and, understandably, there are concerns about the conditionalities, which will apply to secure a short-term balance of payment support through the Fund's Stand-By Arrangements. These concerns are rooted in the bitter experiences of the 1970s when the IMF imposed a set of harsh conditionalities with devastating social, economic and political consequences for Jamaica.

But it was not only our experience which informed us; for certainly in the last 10 to 15 years the crises in Asia, Argentina and Kenya provided further proof that the economic measures imposed by the IMF to stabilize economies and foster economic growth did not work. Just as recently as two years ago, Joseph Stiglitz, the former chief economist at the World Bank, and the IMF's chief nemesis, argued that the Fund's policies do no more than take away economic sovereignty and impose policies intended to enhance repayment to Western creditors, which plunged economies of the borrowing countries into deeper recession and depression.

This should most certainly portend the likely consequences the Jamaican people will have to bear upon entering a loan agreement with the Fund. For anybody to believe that the IMF's reforms have fundamentally altered the doctrinal adherence to liberalization and the free market philosophy should read on to see whether the monetary, exchange rate or fiscal policies, as prescriptions for the loans, are any different from that which was imposed in the last 20 or so years. This time around, according to the IMF, the conditions linked to loan disbursements will be "tailored to the varying strengths of members' policies and fundamentals". In other words, the country must own the prescriptive measures; take responsibility for the harsh economic conditionalities so that in the end, it is not 'the IMF's fault', but mea culpa. That is surely one lesson learnt from the past.

The truth is, the real reform of the IMF has merely to do with the "flexibility in its lending" along with "streamlined conditionality" and nothing to do with a reform of its economic policy thinking. The Fund remains largely monetarist in its outlook, and has been forced to make platitudinous statements about the poor and the vulnerable. The Fund has been and remains part of the broad 'Washington Consensus', which prescribes a set of neoliberal policy prescriptions that are largely responsible for the present global economic crisis.

Historical lessons not learnt

There is, of course, a historical lesson that the Fund has forever ignored. The British economist John Maynard Keynes first mooted the idea for an international financial union to prevent a recurrence of the Great Depression of the 1930s. Franklin D Roosevelt who based his policies upon the public management of the economy led the US recovery in the aftermath of the Depression. Here the State played the leading role in the US by providing jobs, and creating conditions for stability and growth through banking reform laws, emergency relief programs, work relief programs and agricultural programs. Later, FDR introduced laws to protect trade unions, passed the Social Security Act, and implemented programs to aid tenant farmers and migrant workers. What was done domestically in the United States under the New Deal was what the IMF was set up to do globally, to provide finance to countries around the world to encourage deficit spending aimed at stimulating economic recovery. It was out of the need to achieve economic growth while advancing human well-being that the notion of the welfare state was born.

The IMF was therefore largely structured on the economic thinking of Lord Maynard Keynes, who postulated the view that economies are subject to fluctuations - to booms and busts. He argued that the management of the economy cannot simply be left to its own self-regulation, that is to say, while market forces, or Adam Smith's 'invisible hand' may eventually restore an economy to full employment, this is most likely to take place in the long run; and as Keynes said 'in the long run we are all dead'. This reliance on state management of the economy rather than market forces, and the use of fiscal policies to facilitate aggregate demand to boost economic growth underpinned the core economic policy framework of the IMF. It is from this that it has departed.

The Fund's flirtation with the neo-liberal economic orthodoxy, which shunned government intervention and glorified laissez-faire, led to its persistent failures during the 1980s and 1990s. Its growing irrelevance and economic failure all but pronounced the last rites on the IMF until the global economic crisis, similar to the Great Depression, brought it back from the dead.

The IMF and Jamaica: déjà vu

As was the case more than 70 years ago, today the developed countries have turned to the state to stimulate the economy through deficit spending; to rescue private banks, restore business confidence and spur economic activities through government programs. They are also spending huge sums of money to create social safety nets to protect the poor and vulnerable. The United States, for example, is spending a significant portion of the US$825-billion stimulus package on food stamps, unemployment assistance and health care programs.

In June 2009, the IMF in a Staff Position Paper said, "Countries should give priority to expanding social safety nets as needed to cushion the impact of the crisis on the poor."

Since the 1990s, the Fund has tried to give its structural adjustment programs an anti-poverty focus, with even the name being changed to the "Poverty Reduction and Growth Facility". But changing names is one thing, changing the way you do things is quite another.

In an article in The Economist in March of the year, the IMF advocated fiscal stimuli for Africa as one way of coming out of the recession. The article noted, "This is rather new for the IMF, which has rarely advocated loosening purse strings in poor countries. But its economists believe that some sub-Saharan African countries are better placed to implement fiscal expansion in this crisis than in previous ones."

The issue boils down to whether the IMF's rhetoric is matched by the reality. Whether in fact its fiscal and monetary programs offer an alternative to the harsh conditionalities, however administered.

The bulk of IMF loans continue to be the Stand-By Arrangements (SBA), which is the facility most applicable to Jamaica's need for short-term balance of payment support. The length of the SBA is normally 12 - 24 months, and repayment is due within 3 - 5 years of disbursement.

Some nine countries have entered into Stand-By Arrangements with the IMF between September 2008 and January 2009. In the case of El Salvador and Serbia, the loans are "precautionary"; the Serbia programme, however, requires the IMF approval for any public sector pay or pension increases. El Salvador secured a US$800-million loan for 14.5 months, while Serbia has a loan of US$523 million for 15 months, which is perhaps what Jamaica may be required to borrow to meet the huge budgetary shortfall in the 2009/2010 budget.

The fiscal policy measures which are applicable to these loans are worthy of examination, because it is here that the extent of the reform will be evident and the objectives of the Fund to boost economic growth and generate employment will be tested.

In every case involving the nine countries, the fiscal deficit is targeted to be reduced. The effect of this is that in Ukraine, which entered into an IMF Agreement in October 2008, for example, it meant the freezing of public sector wages, pensions and other social transfers. In addition, minimum wage increases had to be postponed for two years and imported gas prices passed on to the consumer. Hungary, in its November 2008 Agreement, had to also freeze public sector wages, and eliminate the 13th month salary, capping pension payments and postponing social benefits as well as canceling the planned tax cuts for 2009. Iceland, in its November 2008 Agreement, set out 'a fiscal consolidation plan', which consisted "primarily of significant wage reductions in the incomes policy agreement with social partners". Latvia has seen where "incomes policy will cut public sector wages and bonuses by 25 per cent in 2009 in order to improve competitiveness and curb currency overvaluation."

In Belarus, the aim was "to contract demand and consumption and slow investment and wage growth". Only in two countries is there any mention of social expenditure. In Pakistan, "spending on social safety nets to increase from 0.6 per cent to 0.9 per cent of GDP", but that comes after a 3.2 per cent reduction in public spending, an 18 per cent increase in electricity tariffs and the elimination of tax exemptions.

These fiscal policies are also supported by monetary and exchange rate policies designed to tighten public spending and manage inflation. In most cases, the Agreement included the need for a flexible market-based exchange rate and domestic demand contraction to curb wages and price inflation.

In Ireland, the IMF 2009 Article IV Consultation praised the government for the reduction in public sector wage bill by 7.5 per cent and argued that the consolidation can only be achieved by a further cut in the public sector wage bill. As far as employment in the public sector goes, the IMF sees the need to evaluate the scope of government provisions and its effectiveness. Recall that the scope of government is to be reduced through the privatization of public institutions and the reduced role of government in economic activities.

So that while the major countries of the world are engaged in expansionary spending and the provision of social safety nets to protect the poor and vulnerable, developing countries are fed economic prescriptions which, as Stiglitz says, are to ensure the payback to Western creditors. There is certainly nothing in the IMF's prescription to the last nine countries that offers any hope that Jamaica might be spared from severe hardships over the next two years.

The real issue is certainly not whether we should enter into an IMF Agreement or not, for the country is left with no option. The public discussion should focus on Jamaica's medium- to long-term future and what precisely will be the macroeconomic model to bail us out of our present predicament in the post-IMF period and put us on a sustainable path to economic development.


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