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Tuesday, October 19, 2021
Christi van der Westhuizen
CAPE TOWN, May 15 2009 (IPS) - 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.
James also urged developing countries, including those in Africa, to find ways to stimulate economic activity. She argued 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.
IPS interviewed James after she spoke at a public meeting hosted by Our World Is Not For Sale (OWINFS), of which CEPR is a member, and Amandla Publishers in Cape Town, South Africa.
While some say that neoliberalism is in crisis, others are saying "we need more of the same", James told the audience. Apart from the IMF, the World Trade Organisation is the other institution which, despite promoting neoliberal policies such as deregulation and liberalisation, is projecting itself as "part of the solution".
Before the economic crisis struck, the IMF was teetering on the brink of becoming redundant as lending dropped to its lowest level in 25 years.
Its financial reserves were falling because of countries such as Argentina and Brazil deciding not to take out further IMF loans and regions such as South America and Asia deciding to form their own monetary funds that will lend money without policy strings attached.
The Group of 20 meeting at the beginning of April this year gave the faltering organisation a new lease on life. The G20 leaders decided to make 750 billion dollars 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 with bailing out countries that are suffering from balance of payment problems and are running out of 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 and therefore inhibit the 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," explained James. Interest rates are a key determining factor in growth.
The IMF has also made other counterintuitive measures the criteria for bail-out assistance, such as raising the rates of services such as water and electricity (at a time when people cannot afford such hikes), 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 percent 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.
Countries like Latvia in Eastern Europe have been particularly hard hit because Eastern Europe is more globalised than other regions, 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 percent 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 nine percent.
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 eight and nine percent per annum over the last five years, one of the best in the region, James said in an interview with IPS.
This is not only due to commodity exports, argued James, 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.
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 billion dollar operating budget. It 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 decided to fund itself in perpetuity by selling an eighth of its gold reserves. The G20 in April gave its stamp of approval to this action.
The IMF’s troubles have intensified since Asian and South American countries have decided to create regional monetary funds. The United Nations’ commission led by Nobel economics laureate Joseph Stiglitz also recommended that regions rather look at developing their own monetary funds, given the U.S.’s domination of the IMF.
The U.S. has an effective veto in the IMF as a decision needs 85 percent of the stakeholders to vote and the U.S. – as the largest funder – holds 60 percent 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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