Today’s IMF (and, to a lesser degree, the World Bank) recall Talleyrand’s description of France’s Bourbon kings: It has learned nothing and forgotten nothing. At a time when rich countries like the US are running deficits of 12 percent of GDP because of the global financial meltdown, the IMF has been telling countries like Latvia and Ukraine, which did not start the crisis but have turned to the Fund to help combat it, that they must balance their budgets if they want aid.
Such hypocrisy would be laughable if global economic conditions weren’t so dire that even countries that once swore never again to deal with the IMF have returned to its door, cap in hand. Some leading economists in Argentina justify this reversal by arguing that the world now has an “Obama IMF,” one presumably friendlier and more attuned to local problems than the “Bush Fund.” But, as the IMF programs for Latvia and Ukraine suggest, the main difference may only be a smile.
To be sure, IMF managing director Dominique Strauss-Kahn recently called for a global fiscal response to the worsening recession. But will the Fund now abandon its long-held emphasis on government cutbacks, monetary contraction and overall austerity, policies that — in the opinion of many development economists — do considerably more harm than good? Are the IMF and the World Bank actually willing to reconsider their failed policies?
In recent years, lending by both institutions contracted dramatically, even though they have increasingly become the exclusive lenders to the world’s poorest countries. In 2005, Argentina and Brazil were the first of the countries that previously denounced the IMF’s neo-liberal agenda to begin repaying their loans. Repayments followed from other large debtors, including Indonesia, the Philippines, Serbia and Turkey.
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Indeed, the IMF’s outstanding general resource account (GRA) credits to middle-income developing countries fell by an unprecedented 91 percent from 2002 to 2007 as richer developing countries gained access to sources of financing that were free of the Fund’s conditionality. But poorer countries, for which international capital markets remain off limits, have no alternative but to rely on the World Bank and the IMF.
In September 2007, a year before warning signs gave way to a full-blown financial meltdown, Strauss-Kahn himself suggested that the IMF was in a “crisis of identity.” Indeed, the unprecedented decline in GRA lending, the IMF’s main source of income, forced the Fund to announce a US$100 million cost-cutting plan in April last year. Similar financial pressures affected the World Bank, with its main source of income, IBRD lending, down 40 percent in 2007 from late-1990s levels.
But the world’s pain has been these institutions’ gain. Since the crisis went global last autumn, the IMF has had countries parading to its door. Between Nov. 5 last year and Jan. 12 this year, the Fund committed nearly US$50 billion to seven countries (Hungary, Ukraine, Iceland, Pakistan, Latvia, Serbia and Belarus).
The World Bank, too, has recently been resurrected in places like Ecuador, Bolivia and Peru, with loans to that region of Latin America up four-fold year on year since last September, reaching nearly US$3 billion.
Unfortunately, for both institutions, the growing demand in such countries for financing merely means business as usual. Consider the recent standby arrangement with Latvia, whose conditions include a massive 25 percent cut in public-sector wages, a similar reduction in government expenditures and a huge tax increase.
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