IMF using crisis for own ends
By Christi van der Westhuizen
CAPE TOWN - The International Monetary Fund (IMF) is attempting to reinvent
itself with the global financial crisis, in the process using the opportunity
to promote policies that exacerbate the recession by shrinking rather than
growing economies, according to Deborah James, director of international
programmes at the Center for Economic and Policy Research (CEPR) based in
Washington, US.
James urged developing countries to find ways to stimulate economic activity,
arguing against those who promote the idea that only the North can afford
stimulus packages.
Several countries in the South, including a poor country such as
Bolivia, are using stimulus packages to buffer their populations against the
ravages of the crisis.
She distinguished between policies that stimulate economic activity and those
that don't. Tax breaks and assistance to buy imports do not stimulate
economies, but food stamps, transport vouchers, rent reduction or housing
vouchers are all reactivating because such assistance is spent immediately and
therefore circulates in the economy.
James was speaking to Inter Press Service after addressing a public event
hosted in Cape Town, South Africa, last week by Our World Is Not For Sale
(OWINFS), of which CEPR is a member, and Amandla Publishers.
OWINFS, which concluded its biannual strategy meeting in Cape Town on May 15,
is a global network of organizations, individuals and social movements that
oppose corporate globalization. CEPR is a non-governmental organization that
promotes democratic debate about economic and social issues through research
and public education.
While some say that neo-liberalism is in crisis, others are saying "we need
more of the same", James told the audience. Apart from the IMF, the World Trade
Organization, despite promoting neo-liberal policies such as deregulation and
liberalization, is projecting itself as "part of the solution".
Before the economic crisis struck, the IMF was on the brink of becoming
redundant as lending dropped to its lowest level in 25 years.
Its financial reserves were falling because countries such as Argentina and
Brazil were deciding against taking out further IMF loans, and regions such as
South America and Asia were forming their own monetary funds to lend money
without policy strings attached.
The Group of 20 meeting in London at the beginning of April this year gave the
faltering IMF a new lease on life. The G-20 leaders decided to make $750
billion available to the IMF, ostensibly to help countries battling with
recession.
According to James, the IMF is presenting itself as the institution that can
help in bailing out countries that are suffering from balance of payment
problems and are running out of foreign reserves. But the loan policies that
the IMF is enforcing are still the same as before: contracting rather than
stimulating economies.
Contractionary policies are about keeping interest rates high, which makes it
expensive to borrow money. They therefore inhibit growth of economies. Stimulus
policies, on the other hand, are what governments in the North are doing by
spending more money to counteract the recession.
"The whole point of the IMF coming into those countries is to help them not
collapse, but they are forcing them to adopt policies that make the recession
worse. High interest rates [one of the IMF's conditions for a loan] choke off
growth," said James.
The IMF has also made other counterintuitive measures the criteria for bail-out
assistance, such as raising the rates for services such as water and
electricity (at a time when people cannot afford such increases), and freezing
pensions and unemployment benefits (at a time when people desperately need
assistance).
As an example, Latvia's economy is due to contract by 12% because the IMF has
forced it to adopt contractionary policies. Such negative growth will translate
in hundreds of thousands of job losses. When Latvia deviated from the imposed
policies, the IMF denied it the second tranche of bail-out money, according to
James.
Latvia has been particularly hard hit because Eastern Europe has deregulated
extensively and is dependent on speculative investments from the West.
The policies that the IMF is still forcing on countries are the same that led
South American countries such as Argentina to decide to break ties with the
institution. Cumulative growth in South America was 82%in the period 1960 to
1980. Between 1980 to 2000, in the grip of the IMF policies that come with
loans, cumulative growth in the region fell dramatically to 9%.
In the wake of the Argentine economic crisis in 2001, the IMF tried to impose
more contractionary policies on Argentina.
The latter broke with the IMF and adopted expansionary policies that saw its
economy rebound faster than had been expected to economic growth of between 8
and 9% per annum over the past five years, one of the best in the region, James
said in an interview with IPS.
This was not only due to commodity exports, because Argentina has outshone
other commodity-exporting South American countries. As a result of this growth,
10 million people have managed to cross the poverty line to better livelihoods,
she said.
The IMF would want to use the global economic crisis to reclaim some of its
former power because, by last year, it was "a shell of its former self", James
said. Its crisis was exacerbated when South American countries decided not to
borrow more money.
The IMF has a $1 billion operating budget and keeps itself operating from the
interest that it gets from developing country loans. Therefore it has a
perverse incentive to keep countries indebted to keep itself functioning,
argued James.
Rather than shrinking and "going away" as more countries rejected its services,
it has decided to fund itself in perpetuity by selling an eighth of its gold
reserves. The G-20 in April gave its stamp of approval to this action.
The IMF's troubles have intensified since Asian and South American countries
decided to create regional monetary funds. A United Nations' commission led by
Nobel economics laureate Joseph Stiglitz also recommended that regions look at
developing their own monetary funds, given US domination of the IMF.
The US has an effective veto in the IMF as a decision needs 85% of the
stakeholders to vote and the US - as the largest funder - holds 60% of the
vote.
After years of attempted reforms of the vote in the IMF, amid serious economic
crises exacerbated by IMF policies in both Asia and South America, the two
regions decided to pool their our own reserves and lend money without forcing
countries to adopt contractionary economic policies.
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