The damage of International Monetary Fund ‘conditionality’: call for urgent rethink

Countries often take loans from the International Monetary Fund (IMF) when they have little or no alternative sources of funding, as is the case for many countries in the Global South who are on the sharp end of capitalism and its unquenchable thirst. After decades of the plundering of resources and of post-colonial exploitation there’s additional destitution created by international bodies like the IMF that offer a conditional ‘helping hand’ and quick fixes, which turn out to be laying the foundations of many serious problems further down the line. Many countries, some of whom, like Tunisia or Egypt, have seen massive illicit financial flows leaving their shores and pouring into Switzerland and other jurisdictions and into the pockets of dictators and their entourages, turn to the IMF and World Bank.

They say there’s no such thing as a free lunch. Well, to extend the metaphor, the IMF demands a high price in exchange for its loans – it means politicians are squeezed into the position of being the ones to implement deeply unfair and unpopular policies which exacerbate inequality and poverty and hurt ordinary people so much that it could bring down their government. The opportunities for politicians to negotiate, or re-negotiate these deals when they prove unworkable, or certainly, immoral, can be very limited indeed. There are alternative options such as wealth taxes, or raising corporate taxes, but all too often the pressure from the IMF is to hike regressive taxes, cut back essential services, slash civil servant salaries and remove subsidies on staple foods, just for a few examples.

We’ve covered the demonstrations in Jordan against austerity measures connected to IMF loan conditionality (which forced the Prime Minister to resign) in our monthly podcast/radio show in Arabic here. You can also read this article from Jihen Chandoul of the Tunisian Economic Observatory on the IMF and the imposition of austerity on Tunisia since the popular uprising in January 2011. Massive loans have been offered to so-called “Arab countries in transition” in exchange for pushing through neo-liberal reforms. The Tunisian Economic Observatory has written various reports on the damage wreaked by IMF conditionality in the country, accessible here.

Now campaigners, academics, economists and networks are urging the International Monetary Fund to reflect on, and review the continued negative impacts of ‘conditionality’ in its programmes.  They’re calling on the IMF to rethink its damaging lending practices and to remove those ‘bindings’ which force governments to implement fiscal austerity policies that are thwarting the ability of states to fulfill their social, economic and cultural rights obligations to their citizens.

In an open letter  to the International Monetary Fund (IMF) the Tax Justice Network is joining others (see list below) in calling for an urgent re-evaluation of their current lending approach.

The open letter underlines the findings of a recent report on the IMF prepared by Professor Philip Alston, UN Special Rapporteur on Extreme Poverty and Human Rights.  Professor Alston concludes that the IMF is arguably the “single most influential international actor, not only in relation to fiscal policy but also to social protection”. His report makes a strong case that IMF must change its mindset. He argues that the basic policy paradigm of structural conditionality (the range of economic policies including the minimising of state-owned industries, shrinking the provision of state services, and being ‘open’ to – and ‘competitive’ in order to encourage overseas ownership through foreign investment) offers only a short-term fix. That’s especially the case in low income countries, usually the recipients of IMF loans, where the social safety net is limited and of critical importance – the result of these policies is to further entrench inequalities.

Like Philip Alston’s report, intervention by way of this open letter is timely as we continue to digest the World Inequality Report 2018 which highlights increased inequalities in almost every country in the world.

In his strongly worded report, echoed by the open letter, the Special Rapporteur calls on the IMF to take the urgent action needed for “more systematic consultations with a broad range of civil society groups”  and to recognise that in exercising its “past lopsided approach…to globalization and its single-minded pursuit of a model of fiscal consolidation that relegated social impact to an afterthought” it “bears responsibility for the past but will also determine whether the future will be different.”

The full text of the open letter and signatories is here:

Dear Executive Board,
Dear Strategy, Policy, and Review Department,

We write to you as civil society organisations, academics, economists, and networks to express our concern over the continued negative impacts of conditionality in IMF programmes. We call on you to use the Consultation on the 2018 Review of Conditionality and Design of IMF Supported Programs to re-evaluate the current approach. At the heart of our calls rests a need for the systematic integration of global civil society in the consultation process and to ensure that the voices of those impacted by IMF policy are listened to and involved in its design and implementation.

Restrictive fiscal and monetary policies prescribed in IMF loan conditionality squeeze the fiscal space needed for public investment and too often result in devastating consequences – particularly for marginalised groups – at high political costs. Last year, a UN expert warned that lending policies of the IMF actively undermine some human rights and development priorities, as well as promoting failed policies of privatisation and austerity. Moreover, in June 2018 the UN special Rapporteur on Extreme Poverty and Human Rights claimed that the world is now “suffering the consequences of the past lopsided approach of IMF to globalization and its single-minded pursuit of a model of fiscal consolidation that relegated social impact to an afterthought.”

The conditionality review must thus revisit and investigate the impacts of IMF policy lending practice on human rights and inequality in the past two decades. We believe that fighting inequality must be integrated into loan programmes and conditions, which should include regular monitoring of the impacts on inequality of such programmes. Additionally, this review offers an opportunity for the IMF to set out how conditionality can support or undermine the achievement of the Sustainable Development Goals, and human rights. Critically, this means designing conditions which do not compromise countries’ ability to achieve adequate levels of public spending, especially in health, education and social protection, but which in fact help them support these spending levels, including through the design of fair tax systems.

Further, as demonstrated by an academic study entitled IMF conditionality and development policy space, 1985-2014, since 2008 “structural conditions have been a growing component of IMF programs.” We therefore remain concerned that IMF programmes continue to erode democratic governance and sovereignty of borrowers.

With regards to labour, coordinated collective bargaining and fair regulations are beneficial for productivity and job-rich growth. Reaching beyond institutional expertise, IMF loan programmes have often undermined collective bargaining structures, held down wages, encouraged excessive labour market flexibilization, and led to drastic job cuts in the public sector. In programmes since 2011 – including Portugal, Greece and Romania – the Fund focused on the dismantling of national or sector-level collective bargaining and the weakening of employment protection legislation.  This has long-term repercussions for precarious and non-standard work, productivity, wage stagnation, inequality and falling labour share of income. IMF research has recognized that inequality undermines sustainable economic growth.

Outside Europe, IMF conditionality has targeted the size and compensation of the public sector. Conditions and prescriptions on labour markets have shown few signs of aiding recovery or addressing unemployment and have instead contributed to increased  income inequality and the erosion of basic public services. We call on the IMF to address this through the conditionality review.

On gender, the IMF’s recent efforts to explore the gendered dimensions of macroeconomic policy are broadly welcomed, but its approach to gender in policy conditionality continues to lack a systematic framework and disregard gendered impacts of conventional IMF macroeconomic policy advice. We therefore call on the IMF to use the review to set out a board-approved ‘institutional view’ on its position and role towards gender equality, enhance collaboration on its gender work with international organisations, in particular UN Women, and civil society organisations, in particular women’s rights organisations. Further, we call for the implementation of gender budgeting in the design of IMF loan conditionality, and to use ex-ante gender impact assessments to analyse core policy conditionality, track the impact of subsequent reforms and propose an alternative policy mix if adverse gendered impacts of proposed conditionality are identified.

Moreover, we believe that the review should revisit the efficacy of the IMF’s standard prescriptions of driving interest rates very high to get inflation very low. The unquestioned acceptance of highly restrictive fiscal and monetary policies has consistently undermined efforts to realise meaningful increases in public investment as a percent of GDP, and the harmful consequences of the high interest rates makes government deficit financing so unaffordable as to block needed increases in public investment. Efforts by advocates for increased public investment have been consistently frustrated because the root problem – the need for more expansionary policies – has not yet been adequately addressed.

The aftermath of the 2008 financial crisis had far-reaching and harmful consequences. Ten years on from the crash and amid rising global debt and inequality, we hope that this conditionality review will be used by the Fund as an opportunity to reconsider the current approach in favour of one that protects universal human rights and supports the achievement of the Sustainable Development Goals.

Kind regards,

ActionAid International

Afrodad

Alexander Kentikelenis, University of Oxford

Alice Evans, Lecturer Kings College London

APIT Portugal – Portuguese Tax and Customs Inspectors Trade Organization

Asia Transnational Corporations (ATNC) Monitoring Network, Hong Kong

Bank Information Center Europe

Bank Information Centre

Bretton Woods Project

British Black Anti-Poverty Network

Center for Economic and Policy Research

Centre national de coperation au développement, CNCD-11.11.11

Child Poverty Action Group

Church of Sweden

Common Weal, Scotland

Daniel Horn, independent researcher

Debt Justice Norway

Development Pathways

Development Research and Training (DRT)

Diane Elston, Professor, University of Essex

Dr Carolina Alves, University of Cambridge

EnaBanda

Equality in Tourism

Eurodad

Focus Association for Sustainable Development

Free Trade Union Development Center, Sri Lanka

Gender and Development Network

Global Alliance for Tax Justice

Global Justice Now

Global Responsibility from Poland

Heinrich Boell Stiftung Washington, D.C.

International Trade Union Confederation

Jayati Ghosh, Professor of Economics, Jawaharlal Nehru University, New Delhi

John Weeks, Professor SOAS

Jubilee Scotland

Jubilee UK

Jubilee USA

Labour Resource and Research Institute (LaRRI)

Latindadd

Movement for decent work and welfare society

New Economics Foundation

Norwegian Church Aid

Olof Palme International Center

Oxfam International

Phenix Center for Economic and Informatics Studies, Jordan

Social Watch

Stamp Out Poverty

Tax Justice Network

The Egyptian Initiative for Personal Rights

The Network for Transformative Social Protection (NTSP) in Asia

The Rethinking Bretton Woods Project at Center of Concern (USA)

Thomas Stubbs, University of Cambridge

UK Women’s Budget Group