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Is the International Monetary Fund (IMF) Changing?

Is the International Monetary Fund (IMF) Changing?

 

In the 1980s, many developing countries experienced financial crises. They badly needed to borrow money from the IMF. This was also happening at time of heightened Cold War ideological rivalry. So, Western powers controlling the IMF came up with the idea of attaching conditions with IMF loans to developing countries. These conditions included reduction in public expenditure, removal of subsidies, import liberalization, labour market deregulation and privatization. In addition, the state or borrowing government must not intervene in the economy other than facilitating the working of market capitalism. The IMF quickly developed a reputation for its notoriety in enforcing these conditions on all borrowing countries. The combined effects of IMF-prescribed policy measures further widened income gaps and deepened existing socio-economic crises in many countries. Meanwhile, the IMF continued to argue that inequalities in the process of economic growth were necessary evils that countries must accept, as they enable capitalist firms to accumulate capital and expand by investing in industries, science and technology to stimulate long-term economic growth.

 

Last month (June 2015) the IMF published a paper arguing that structural inequalities are bad for economic growth. The paper, dubbed staff discussion notes (https://www.imf.org/external/pubs/cat/longres.aspx?sk=42986.0), was produced by a group of IMF staff and published with a disclaimer that the views do not represent the official views of the institution. The fact that the IMF allowed its publication can be significant, because the entire argument in the paper appears to negate its own thinking. For instance, the authors write,   “building on earlier IMF work which has shown that income inequality matters for growth, we show that income distribution itself matters for growth as well”.  They argue that lack of access to education, health, finance, assets and other inequalities arrest economic growth. “Inequality dampens investment, and hence growth, by fueling economic, financial, and political instability”, the authors wrote. Policies that reduce inequalities do not disrupt economic growth; rather, they create opportunities for low-income people to participate in the economy. The most crucial aspect of government policy is support for people to acquire skills, knowledge and technology that increase labour productivity and drive economic growth. The authors suggest a list of policies including equitable access to education and health services, financial inclusion, wage increases, and above all, income redistribution

 

In the 1980s and 1990s, governments that embraced progressive social policies would have found it difficult to deal with IMF. We don’t know how IMF officials were reacting when the Ethiopian government repeatedly rejected their advice to abandon its state-led economic growth strategy. The late Meles Zenawi was famous for ostracizing the whole IMF economic development philosophy including the idea of state non-intervention in the economy. Today we know that the same institution has no problem of praising the performance of Ethiopia’s economy. In its June 2015 mission report, the IMF wrote that “the state-led development model has delivered rapid and broad-based growth over many years”.  

 

All this then shows that the IMF may indeed be changing. Why?  Let us consider three factors here. First, confidence in neo-classical economics declined following the 2008 financial crisis and has not yet fully recovered. As it stands, the IMF no longer commands moral or intellectual authority to propagate its outdated economic growth approach. Second, the BRICS countries (Brazil, Russia, India, China and South Africa) and other emerging economies like Saud Arabia are getting richer (due to continuing growth) and expanding their global reach and influence. Indeed, the BRICS have agreed to create a new development finance bank, whereas there is also a Chinese-led proposal to create Asian infrastructure development finance bank. Success for these two initiatives alone will certainly result in reduced monopoly of infrastructure development financing hitherto enjoyed by the IMF and World Bank. It may therefore be imperative for the IMF to try to be more relevant for developing countries (like the BRICS) by recognizing their needs for balancing economic growth with equity. Finally, there is the upcoming UN summit on the post-2015 global development agenda with a motto, “leave no one behind” (equity as a central issue). The IMF ought to share common vision and goals with the global community by embracing poverty reduction as institutional strategy. Nonetheless, the IMF will remain one of the most powerful and influential institutions in the world, so that changes in its policies and practices will be beneficial to developing countries.  

 

The IMF economists who wrote the paper presented here are calling for formulation of pragmatic development policies. This task would require politically committed and competent national leadership. The Ethiopian people have re-elected EPRDF, because the country needs a strong governing party that will build on the current development momentum to move forward with transforming the economy and society, and contribute to the maintenance of regional peace and security. This is also the view from the international community, despite a concern with the failure of Ethiopian opposition groups to secure parliamentary seats.

 

Getachew Mequanent

Ottawa, Canada

July 1, 2015

 


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