This article is part of ourEconomy’s ‘Preparing for the next crisis’ series.
In 2017 the former International Monetary Fund (IMF) Managing Director Christine Lagarde urged governments to “repair the roof while the sun is shining” by finishing an incomplete recovery and pursuing inclusive growth.
Left unsaid was the role of the IMF in creating a fragile and uneven recovery that left many people behind. After the global financial crisis, the Fund pushed policies that frayed the social contract and prevented a full recovery for jobs and the real economy. As the world sleepwalks into another crisis, working people are still feeling the effects of an incomplete recovery. With inequality rising, the breakdown of the social contract threatens democracy.
The IMF was founded on a progressive vision of international cooperation for crisis avoidance and response and economic policy that boosts employment and incomes. Beginning in the 1970s it was hijacked by the interests of transnational capital and supply-side economics. Now, the transition to a new leader amid another spectacular collapse of a loan programme in Argentina presents an opportunity for citizens and governments to demand reform.
Before the last crisis strengthened the IMF and helped it regain influence, the Fund had a difficult decade of high-profile failures. In the 1990s, the IMF promoted financial liberalization and structural adjustment programmes with an evangelical zeal in Asia, leading to the massive flows of speculative capital that precipitated the regional financial crisis of 1997. The Fund then imposed harsh budget cuts, despite spending not being the problem (many governments had a budget surplus). This intervention worsened the economic situation.
Next, the IMF’s programme in Argentina resulted in a massive economic, social and political collapse, and ultimately default. In 2002 Joseph Stiglitz commented that the IMF “made the same mistake as they did in east Asia, which is pushing extremely contractionary fiscal policies on a country in recession. And then they said that if Argentina only stick[s] to it long enough, it’ll eventually recover.”
The Fund was a ship adrift before 2008, with a limping reputation and concerns about its own financial future. New lending commitments declined from around $7 billion in 2005 to just $38 million in 2006. This decline prompted talk of staff cuts, a search for new sources of revenue outside loan repayments, and a pledge to cut costs through 2010.
Once the global financial crisis struck, the IMF’s lending rebounded, reaching $32 billion in new lending commitments in 2008 and restoring the Fund as a central player in global politics. The Fund became a trusted advisor to the new Group of 20 (G-20), formed to coordinate crisis response between governments.
For a time, it seemed that the Fund had learned from past mistakes and changed course. The IMF urged that 2 per cent of global gross domestic product go toward fiscal stimulus, significantly influencing the first G-20 summit in Washington. A strong plan was put in place at the London summit in April 2009, where leaders pledged “the scale of sustained fiscal effort necessary to restore growth”. In September, G-20 leaders endorsed the Global Jobs Pact adopted at the International Labour Organization, a comprehensive roadmap to putting employment at the centre of the recovery.
These commitments would not last long. By late 2009, the IMF was providing G-20 Finance Ministers with possible exit strategies from stimulus. The Fund sponsored high-level conferences in December and January on ‘exit strategies’ and ‘high public debt.’
Another influential voice was academic Kenneth Rogoff, the IMF’s chief economist from 2001 to 2003. His paper ‘Growth in a Time of Debt; warned that economies with high public debt revert to negative growth. It helped figures including incoming UK Chancellor of the Exchequer George Osborne extoll spending cuts in order to avoid a return to crisis. Three years after the publication of Rogoff’s influential paper, its central finding was debunked as being based on a spreadsheet error.
In February 2010, the IMF published ‘Exiting from Crisis Intervention Policies’ that cemented their recommendation to end stimulus. At the Toronto G-20 leaders’ summit in June, the IMF recommendations carried the day and fiscal consolidation became the focus. Trade unions respondedwith a dire warning:
“Global Unions are deeply concerned that the recent shift by the international financial institutions (IFIs) away from support for stimulus policies toward advocacy of fiscal consolidation will endanger the fragile recovery and prolong current high jobless rates for years to come. Signs that economic growth is slowing in some regions of the world barely months after the recovery began raise the probability of a double-dip recession to which the policy shift will have contributed. Austerity conditions have been applied in recent IMF loans and their negative impact on working people has already been felt.”
The IMF’s post-crisis loan programmes were concentrated in Europe, where warnings of a double-dip recession soon became reality. The mistakes made prior to 2007 were repeated, based on the fervent belief that growth could be achieved through austerity.
Two years after the shift to austerity, the IMF chief economist Olivier Blanchard admitted that the Fund had underestimated the negative effect of fiscal consolidation on economic performance. In a report on the response to the crisis, the Fund’s Internal Evaluation Office concluded: “[IMF] calls for global fiscal stimulus in 2008–09 were timely and influential, but its endorsement in 2010–11 of a shift to consolidation in some of the largest advanced economies was premature.”
One of the first post-crisis loan programmes was Iceland, where the IMF recognized the role of centralized collective bargaining and a strong trade union movement as part of the country’s past success in responding to shocks. The programme could have been a template for other loans, including its focus on social dialogue and recovering the real economy rather than bailing out banks.
Instead, Greece became emblematic of austerity alongside an IMF assault on collective bargaining, worker protections and public services. Minimum wages were reduced, particularly for people under the age of 25, and the process for fixing minimum wages through social dialogue was ended.
The collective bargaining system was decentralized and decimated. The economy shrunk and unemployment soared, contrary to IMF claims that deregulation would increase employment. The Fund pursued a similar recipe of eliminating worker protections, decentralizing collective bargaining and suppressing wages across Europe, including Portugal, Ireland and Romania. These measures make work more precarious and undermine living standards. Cuts to the public sector often disproportionately affect women workers and users.
These actions were based on an ideological commitment to deregulation as the key to competitiveness in the global economy, rather than evidence about creating inclusive growth and quality jobs. Together, the wave of austerity and the attack on working people prevented a full recovery from the global financial crisis. Working people unfairly suffered the most with the recovery in employment lagging behind the recovery for the financial sector and corporations, and then with the cementation of more insecure, low-wage work. The result has been the fraying of social cohesion and trust, precipitating the end of the social contract and the rise of xenophobic right-wing populism.
Separately, IMF research began to question some of the ideologically-driven policies promoted by the Fund, and particularly the role of these policies in fuelling inequality. This included the financial liberalization and the erosion of trade unions and collective bargaining. Under Christine Lagarde, there were preliminary steps to focus more on inequality in the policy advice of the Fund. Non-binding guidance for IMF staff calls for the consideration of alternative policies or mitigation measures if a possible course of action would increase gender or economic inequality.
But the greater concern for inequality has not yet altered IMF loan conditions that plunge countries into deeper economic trouble, as illustrated by recent agreements with Argentina, Ecuador, Pakistan, and Tunisia. The only change thus far has been a focus on limited mitigation measures to blunt the effect of austerity and deregulation, rather than alternative policies, and the safeguarding of some basic social assistance programmes.
Many in the Global South never have enjoyed the basic level of worker protection or effective centralized collective bargaining that was severely eroded in Europe after the financial crisis. Undeterred by the negative effects of its European loan programmes on jobs and recovery, the IMF has shifted to a new wave of lending in emerging markets. While developed countries grapple with tepid recovery, the IMF has further globalized austerity. Once the European loans ended, the Middle East and North Africa became the biggest destination of IMF lending.
In emerging countries, public sector workers and social protection benefits have often borne the brunt of adjustment. Tunisia has been a flashpoint of confrontation as the UGTT trade union federation, a key player in the most successful revolution of the Arab Spring, stood strongagainst attempts under the IMF loan to gut the public sector. More can and should be done to create quality jobs in the private sector in emerging and developing countries, but this will come about through strong public systems including health and education – not through counterproductive attempts to reach spending targets on the backs of public workers.
In Tunisia and elsewhere, the IMF has promoted eliminatinguniversal and accessible social protection benefits with narrowly-targeted schemes that are administratively costly and erroneously exclude large numbers of needy people. The recent IMF strategy on social spending missed an opportunity to support universal social protection including floors, which would promote resilience and speed recovery.
In Argentina, history is repeating itself. In 2018 the IMF made its largest-ever loan, proclaiming that it had changed: the loan programme would reduce poverty, protect the most vulnerable and safeguard social spending. After only 15 months the programme is rapidly falling apart, and a social crisis is gripping the country due to rising poverty and unemployment, and reduced consumer purchasing power.
Despite the damage of the structural adjustment programmes promoted by the IMF under the Washington Consensus and twenty years of damage from austerity and deregulation, it is important to recall that the Fund has a crucial role in our multilateral system.
According to US Treasury Secretary Henry Morgenthau, the goal of the Bretton Woods conference that created the IMF in 1944 was a “New Deal in international economics”. The IMF’s mandate to promote global economic stability through cooperation and to provide assistance when countries face crises is a necessary part of a fair international system. Sometimes overlooked is the mandate of the Fund to “facilitate the expansion and balanced growth of international trade and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy.”
In a powerful proposal for reforming multilateralism, the United Nations Conference on Trade and Development and the Global Development Policy Center reconstruct how the progressive aim of the international financial institutions “began to break down in the late 1970s, when giant global banks, corporations, and their allies in government regained the reins of power that they had temporarily lost in the Great Depression and the War.”
Thanks to new research, we can better understand how the United States drove the IMF’s shift toward supply-side economics and structural adjustment in the 1980s. Today, we can fight to finally end this hijacking and build a new social contract. The recent paper, ‘A New Multilateralism for Shared Prosperity: Geneva Principles for a Green New Deal’ is an invaluable contribution to that task.
We are still living in an incomplete recovery and a fragile situation that could easily dip into economic, social and political crisis. This is made worse by the growing right-wing backlash fuelled by decades of structural adjustment and austerity. This backlash threatens to throw away the good with the bad, destroying the entire apparatus of international cooperation.
We should act to rescue the multilateral system from the policy capture that has prevailed since the 1980s. The progress on tackling rising inequality at the IMF must be accelerated as part of a broader set of reforms that reclaim its purpose in the name of a new social contract. Instead of the destructive role played in the last decades, the IMF can help build a global economy based on shared prosperity and a just transition to a zero-poverty, zero-carbon future.
Doing so will require challenging both the right-wing opponents of internationalism and those who have mismanaged the multilateral financial system into its current state of disrepair.