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IMF: Are we seeing bad practice repeating itself?

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Picture: African News Agency (ANA) – Up to 84 percent of IMF loans to countries during the Covid-19 pandemic required the debtor countries to introduce a combination of fiscal austerity or debt consolidation measures as part of the repayment conditions.

By Isobel Frye

In the 1970s and 1980s, international financial institutions notably the World Bank and the International Monetary Fund (IMF) encouraged the developing world to borrow its way into development.

Huge loans were given to fund vast infrastructure projects identified by the local political elites. Debt repayment, however, became a crisis on the back of the global OPEC oil crisis. Countries had to borrow to repay their original debts. The quick fix to development became the curse of Africa and other developing regions.

Post-colonial sovereignty was little more than pomp and ceremony as the IMF and World Bank increasingly imposed conditions with their loans, the basis of the Structural Adjustment Programmes. Neo-liberal principles of small state by privatisation of key state institutions and functions such as education and health care, liberalising financial borders enabling multinational mining and other companies to repatriate profits and avoid paying taxes in the countries of extraction, and increased competitiveness leading to downward pressure on wages became the conditions on which the IFIs lent money to developing countries to repay their debts to the IFIs.

The results were disastrous underdevelopment in many regions of the world and the weakening of democratic rule as leaders used force to silence local protests against the impact of austerity on peoples’ lives. The neo-liberal project dovetailed well with the continued neo-colonial extraction of commodities and labour value, as the Cold War West congratulated themselves on saving the world from the “horrors of Communism”.

Fast-forward to the post-Covid world, and we see this happening again – 81 countries together borrowed $101 billion from the IMF through Covid-19 financing channels.

In a time of great vulnerability, countries had little wriggle room to negotiate the terms of their loans. According to a comprehensive open-source OXFAM database published in October 2020, 84 percent of these loans required the debtor countries to introduce a combination of fiscal austerity or debt consolidation measures as part of the repayment conditions. These countries included South Africa, Mozambique and Tunisia. But, just as the OPEC oil crisis hit the repayment obligations of developing countries in the 1970s, so many debtor countries have been badly affected by the global impact of the food and fuel crises catalysed by the Russian invasion of Ukraine. And governments are now having to cut and cut and cut, as people’s miseries mount.

But even before Covid-19 hit, IMF researchers were raising concerns about the efficacy of these fiscal consolidation steps. When the ideological noise of neo-liberalism was rolled away the existing data did not demonstrate the gains promised by the IMF. In fact, evidence was mounting that the impact of cutting state spending to free up money to pay back international loans was creating negative growth and development cycles.

What makes for stable societies, healthy people and growing economies are policies that provide a predictable sufficiency of people’s basic needs being met. People can take risks, invest in future ventures and will be more likely to be good and active citizens, strengthening social institutions and supporting good government. Active social protection systems are important to provide this stable sufficiency, using feedback loops to fix where socio-economic shortages are anticipated, and averting crises.

And this is where the IMF’s actions of demanding slashing of state spend are so treacherous. Despite their claims to be keen to see prosperous and stable developing countries, the IMF country visit teams are demanding that the post-Covid social protection interventions be targeted, temporary and with a clear exit strategy.

At a time when the majority of people have yet to recover from the economic devastation of post-Covid-19 life, countries that committed to fiscal consolidation as part of their IMF loan conditions are being directly affected.

Fiscal consolidation, or austerity budgeting, simply put means that a state has to cut its spending. There is a complex interplay between austerity budgeting and neoliberal economics. If a country has to cut its spending on the public sector, more of the state activities are privatised. The end user ends up paying more. The costs of these services don’t disappear, they just move off budget and are paid for by those citizens who can afford them, perpetuating inequality. The citizen becomes a customer, this has the effect of reducing the social contract between citizen and state as the private sector creeps in preaching cost cutting efficiency.

Now as far back as June 2016, three members of the IMF’s research department published an article called Neoliberalism: Oversold? The authors used data to track the consequences of the introduction of neoliberal policies over time.

Where countries had opened up their financial markets to attract foreign investment as they were told, this often attracted destructive, short term and speculative investors who could manipulate countries’ currencies to maximise their profiteering. Slashing state spending in fact did not bring about the predicted economic growth and prosperity, but instead increased the vulnerability of economies to frequent financial crisis and led to increased inequalities.

Crisis and inequality fed upon themselves. The impact on poor people was that people had to sell off productive assets to pay for health costs, or drop out of school. People consumed less. This created a negative multiplier on local economies. Austerity not only negatively affects the welfare of the population, but it also leads to lower demand, which ultimately leads to higher unemployment.

The authors conclude that where debt consolidation must take place, spending cuts should be done over time, rather than using a slash and burn approach.

And yet fast forward to just over four years later. In the very eye of the global Covid-19 storm over 500 global charities, academics and social groups felt sufficiently outraged by the actions of the IMF to publish a Memorandum begging the IMF to cease and desist from doing it’s austerity damage all over again. The Memorandum uses the IMF’s own research to call for an end to inequalities, a prioritisation of people and the planet through adequate provision of needs and investment in just transitions, and it draws attention to the proven causality between austerity budgets and deepening cycles of inequalities.

It sees that there are some fundamental glitches in the global systems that are deeply evident but, those with the money seem strangely untroubled. The continued demands by the IMF on countries to adjust their sovereign policies in ways that destroy peoples’ welfare and wellbeing is pretty far out. But as long as we build those walls high enough, y’all don’t need to be worrying about that there inequality. Or do you?

Frye is director of the Social Policy Initiative

This article is original to the The African. To republish, see terms and conditions.