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Springtime at the IMF

All his tactics are dictated
By problems he himself created.

— Auden.

A photograph from South Korea during the 1997 Asian financial crisis captured the prevailing mood about the International Monetary Fund: a white collar worker held up a sign that read, “I’M Fired.” The habits of “sound money” and “austerity” had become the Fund’s orthodoxy since the 1980s, and, as the Greeks now know, it is unchanged.

Since 2003, the Fund had become less relevant. Countries of the South had come to rely increasingly on the private sector, and to investments from the new giants, principally China (in 2005, the IMF lent just over $1 billion whereas private flows totaled $491 billion). The Fund operated as a kind of credit rating agency, giving its blessings to a country, which would then be able to borrow money from the private market. The Fund smuggled in its orthodoxy, but now no longer in the flamboyant way that it had done so in the high-days of Structural Adjustment. The appeal of China’s finance was that it came absent the IMF orthodoxy.

The apotheosis of Dominique Strauss-Kahn (DSK) was premised on his ostentatious attempt to bring the Fund back to center-stage. DSK had to deal with two major challenges to the Fund: (1) the lack of democracy in the management at the Fund, (2) the discredited ideology of the Fund. The Fund recovered its profile, but it has operated largely unchanged. That was the legacy of DSK: neoliberalism with a French accent, n?olib?ralisme.

Democracy at the IMF

One of the myths of the IMF is that the voting shares in the IMF’s executive board are indexed to the investment of individual countries in the Fund. Since 1968, the Fund has fully recompensed its creditors. Just after that date, the other countries began to clamor for a more democratic board. Currently, the United States has the largest bloc of votes in the board (16.80 per cent), with Japan in second (6.25 per cent). By “convention” the IMF has been headed by a European (hence the rapid consensus that the next head should be the French Finance Minister Christine Lagarde). But the Europeans do not control the IMF. In 1997, the New York Times let slip that the IMF “acts as the lapdog of the U. S. Treasury.” Because of the “consensus” system, the U. S. effectively has a veto (in 1987 and in 1991, the U. S. overruled the Fund’s attempt to strengthen conditions on loans to Mubarak’s Egypt).

After the credit crunch of 2007, the Group of 8 and the IMF pleaded with the locomotives of the Global South to put some of their surplus capital into the IMF. The BRICS states ? Brazil, Russia, India, China, South Africa ? complied. They put billions of dollars into the Fund, and the G8 countries shifted 6 per cent of the voting shares to them (the U. S. used to control 17.11 per cent, for instance). But even then the voting shares in the BRICS states are very limited (they total 14.18 per cent, less than the U. S. alone): Brazil (1.72 per cent), Russia (2.40 per cent), India (2.35 per cent), China (3.82 per cent) and South Africa (0.77 per cent). China now has the second largest economy in the world, and according to the IMF’s World Economic Outlook for 2011, it is poised to overtake the U. S. by 2016, if not sooner.

Since the 1980s, the funds disbursed by the Fund have largely come not from the North but from the South itself. Income from debt servicing payments provided the down payment for the Fund’s disbursements. The slogan from the Global South is familiar: no taxation without representation.

Ideology at the IMF

The economic disorders provoked by IMF policy are now legion. Little divides the ill-effects of IMF policy whether one looks at India or Zambia. In 1996, the World Bank reported that on average the debt service payments from Sub-Saharan Africa amounted to about 5 per cent of the Gross Domestic Product; spending on health was about 2 per cent. “The burden of debt service payments on the provision of social services becomes starkly obvious,” the Bank reported (Taking Action for Poverty Reduction in Sub-Saharan Africa). Health is less important than bond ratings.

The United Nations Development Program’s Human Development Report (2010) contains new data on poverty using the Multidimensional Poverty Index. What it shows is that eight Indian provincial states contain more poor people than twenty-six of the poorest African countries. Since 1991, when India opened the door to liberalization, social distress has increased dramatically. It is only old-school racism that retains “Africa” as the symbol of poverty; the global poor house is overrun by Indians.

These are the social consequences of the IMF’s orthodoxy as far as the Global South is concerned. The Fund’s “science” of economic growth never applied to the United States itself. Between 1997 and 2005, half a trillion dollars of hard-earned reserves went from South to North as debt servicing and reserve accumulation. The Atlantic banks leveraged this money into the financial sector, building up the huge ponzi scheme that masquerades as a stock market. Into this mix came Alan Greenspan’s “put,” the injection of liquidity into the system to protect (that is, inflate) asset prices, to create the bubbles that would explode first in 2000 (the dotcom bubble) and then in 2007 (the housing bubble).

The IMF’s self-study of the debacle found that it had “praised the United States for its light-touch regulation and supervision that permitted the rapid financial innovation that ultimately contributed to the problems in the financial system” (Independent Evaluation Office of the International Monetary Fund, IMF Performance in the Run-up to the Financial and Economic Crisis, 2004-07, January 10, 2011). Mirroring Greenspan, the IMF “recommended to other advanced countries to follow the U. S./U. K. approaches to the financial sector,” and remarkably, “did not sufficiently analyze what was driving the housing bubble or what roles monetary and financial policies might have played in the process.” Neither the IMF nor the Federal Reserve warned against the lack of leverage limits and the lack of risk management. Few complained about the dangerous inflation of the asset bubbles by Greenspan. High rates of inequality in the United States combined with high rates of financial manipulation by the banks created a toxic environment that had to collapse.

DSK appeared on the scene with a few bromides about inequality and de-regulation. But he did not try to shift the course of the Fund. It was all rhetoric. This was clear in southern Europe, where the Fund stood with the creditors, keeping money “sound” and asking the people to undertake “austerity.” The code-words are the same.

Creativity is the order of the day. Pedro P?ez, a former minister of the government of Ecuador, proposes to decouple the world’s economies “from the dollar’s crisis logic.” The “commercial dependency (and intra-firm trade) with the North is sky high,” P?ez noted. He proposed a series of Regional Monetary Arrangements and regional currencies. If these came into effect, the South could reduce “the artificial need for dollars in the regional trade, financial markets, and therefore, the technical need for reserves through the deployment of intra-continental system of settlements.” Such a project would bring countries within regions closer together and prevent distant climes from complete capitulation to the wiles of the U. S. Federal Reserve Bank and the gargantuan banks of Wall Street, the City of London and the Finanzplatz. P?ez’ ideas take us some way from the ancient rubbish heap of IMF thought. Better late than never.

Vijay Prashad is the George and Martha Kellner Chair of South Asian History and Director of International Studies at Trinity College, Hartford, CT His most recent book, The Darker Nations: A People’s History of the Third World, won the Muzaffar Ahmad Book Prize for 2009. He can be reached at: vijay.prashad@trincoll.edu

 

 

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Vijay Prashad’s most recent book is No Free Left: The Futures of Indian Communism (New Delhi: LeftWord Books, 2015).

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