IMF retrofit: Bretton Woods’ agenda has come a cropper

The IMF describes itself as “an organisation of 189 countries, working to foster global monetary cooperation...” But there is little time left as we head towards Sustainable Development Goals 2030

In recent years, the International Monetary Fund has become a leading voice among global governance institutions in drawing attention to the rising levels of inequality in developed countries and, more so, in developing countries. This shift of stance from promoting free market-oriented models of economic growth leading to trickledown benefits for all, to a broader notion of inclusive development comes on the back of widespread criticism of its policy prescriptions that promoted government austerity and fiscal discipline in the wake of the 2008 global financial crisis.

The IMF’s position on inequality was made clear by its Managing Director Christine Lagarde, who at the 2013 World Economic Forum stated, “I believe that the economics profession and the policy community have downplayed inequality for too long. Now all of us — including the IMF — have a better understanding that a more equal distribution of income allows for more economic stability, more sustained economic growth, and healthier societies with stronger bonds of cohesion and trust.”

More recently in April 2019, key IMF functionaries participated in the annual Spring Meetings focusing on ‘Income Inequality Matters: How to Ensure Economic Growth Benefits the Many and Not the Few’. However, while the IMF’s research department has commissioned various studies that underscore the need for inclusion in the pursuit of economic growth, the Fund’s loan extension and programme evaluation divisions have been impervious to these growing concerns.

The IMF was conceived in 1944 as part of the Bretton Woods Agreement signed by all the World War II Allied nations in New Hampshire, USA. The agreement aimed to establish a secure monetary and exchange rate management system and promote economic stability in the international system. This newly created global governance architecture advocated that economic liberalism would spur economic growth, benefits of which would then trickle down to poorer segments of society.

The IMF describes itself as “an organisation of 189 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.” The institution adopts various ways to achieve its mandate. Its basic functions include monitoring and reporting on economic developments across the globe and extending policy advice to member countries on future courses of action. While the IMF’s recommendations are not legally binding, they are highly influential in setting the agenda for economic policymakers and governments.

Providing loans to poor countries is another key function of the IMF. The institution extends financial aid to countries, which are on the verge of economic collapse or are recovering from economic challenges. The IMF has made significant loans to Portugal, Greece, Ukraine, Mexico, Poland, Columbia, and Morocco, among others.

During the 1980s and 1990s, with many countries in the Global South facing debt crises, the IMF extended loans to these countries as part of what it called structural adjustment programmes (SAPs). These programmes, under what is now dubbed as the ‘Washington consensus’, aggressively pushed its agenda of economic liberalisation, deregulation and privatisation, along with sharp cuts in government spending in the social sector especially health and education.

The financial support was provided under the ‘conditionality’ that the borrowing country would commit itself to far-reaching macroeconomic and structural policy reforms. These policy reforms included opening up of financial markets to promote foreign investment, reduction in government expenditure, cutbacks on subsidies for essential services including food subsidies, and deregulation of interest rates to promote private investment. However, outcomes of these measures have been largely detrimental to long-term development, worsening poverty levels, with the poor being the most affected by the implementation of these programmes.

Critics have pointed out to the responsibility of the IMF and the Bretton Woods institutions in furthering poverty and inequality. In comparison to the limited macroeconomic gains resulting from SAPs, the programmes have had profound socioeconomic and political effects, with the lopsided distribution of limited gains among a select elite class of society and extensive hardship for the poor, denying them social justice.

In political terms, there is wide evidence, especially from African countries, of how SAPs were pushed through in conjunction with authoritarian governments. While paying lip service to issues of good governance, the IMF negotiated SAPs with many such governments for years without any concrete actions to bolster institutions of democracy. The distributional effects of SAPs have also been criticised as being undemocratic as a result of large-scale accumulation by the powerful and elite classes at the expense of poor farmers, workers and the poor, the majority of whom are women.

Recent studies by academics as well as civil society organisations have identified the failure of policies widely supported by the IMF, such as the privatisation of essential services, overreliance on private sector investment and related regressive tax policies and austerity, which hurt the poor and women and girls in particular. This has led to governments shedding responsibility to provide public services to its citizens in key areas of social life. Necessities like education and health have become more expensive, further marginalising poorer sections of society.   

A 2019 paper by Timon Foster, et al, which analysed the impact of IMF structural adjustment programmes on inequality between 1980 and 2014 found that “overall, policy reforms mandated by the IMF increase income inequality in borrowing countries.” The study revealed that in these developing countries income inequality increased by an average 6.5 per cent a year once the SAP was implemented and that these detrimental effects continued for three years after the programme’s implementation.

In the run-up to the adoption of the 2030 Agenda and Sustainable Development Goals, the IMF has “fully committed” to delivering the new goals. While the IMF’s rhetoric about the impact of inequality and the emphasis on SDGs has been stepped up, a question that arises is whether the IMF’s actions would indeed lead to ‘Transforming Our World’, the official title of the SDG Agenda. In continuing with its business-as-usual policies, the IMF’s policy prescriptions of regressive tax systems including the Value Added Tax, labour market informalisation and targeted social spending will not be able to tackle inequality in any meaningful way. Instead of using the SDGs as a public relations exercise, the IMF must reconsider and realign its policies and actions towards promoting equitable sustainable development in a just and sincere manner.

(The author is an Assistant Professor, who teaches politics at the School of Liberal Arts and Human Sciences, AURO University, Surat, Gujarat)