When a cowboy rolls into town, you can feel the change coming. Maybe he’s a wandering vigilante or a desperado on the run, but before he leaves he’ll have killed the bandits, stopped the railroad baron, and saved the goddamn day.
Right now we’ve got just such a hero roaming the land, righting fiscal wrongs and rescuing buxom budgets in distress. It appears when things are at their worst, a grizzled stranger with a dark past who plays by its own rules. It’s the lender of last resort, it’s the end of the line, it’s your last best hope for financial salvation. It’s the IMF.
This is the first of a two-part series on the International Monetary Fund, because I don’t like you and I want you to suffer. Next week we’ll get into the steamy on-again, off-again romance that is the neverending Egypt loan negotiation. It’ll be titillating.
But first we’re going to talk about this legendary gunslinger and its fondness for large-scale rescues. In one holster the IMF’s got money, big bulging sacks of cash that it fires at struggling economies with a righteous thunder. In its other holster it’s got an economic reform program, the line it makes them toe for the privilege of receiving its beneficence.
And that program, boy howdy. We’re talking privatization, massive spending cuts, layoffs, subsidy reduction. Also, Christine Lagarde gets to punch you once in the face. Technically, the plan is written by the country requesting the loan, with heavy IMF “consultation.” They call it a Letter of Intent, which seems pointlessly mean, like your brother whacking you with your own hand and telling you to stop hitting yourself.
The Fund never asked to be a hero. It was actually designed to keep international trade going after WWII, setting the gold standard and keeping payments between countries flowing. Sometime in the ‘70s it got drafted into being a development agency, and so it gallivants across the globe, lassoing countries that are seriously fucked and pulling them to fiscal safety. The problem is, it still thinks like a trade agency, which means when it looks at a country it sees a buyer and seller of goods, not a nation full of real people.
The cowboy concept is appealing in its simplicity as well as its Western ego-stroking. Mysterious stranger wanders into a small town that’s beset with a terrible yet simple problem, a crisis that can always be resolved by shooting it a bunch. Then it’s a parade down the street, a roll in the hay with the barmaid, and you ride off into the sunset.
Real life doesn’t work that way. Brace yourself for a shock, but not all poor countries are the same. One country might be in debt because it’s spent way too much on government salaries, another because prices of a commodity like oil or produce collapsed, another because they blew it all on whores, booze and bouncy castles. IMF doesn’t give a shit. It’s a budget-cutter, by God, and anyone looking for its help best be getting their budget-cutting boots on. Is some of that budget going to things that people need, like education and healthcare? Aww, that’s a shame. Maybe next time you’ll think twice before being born in a developing country, slacker.
Another issue is that the IMF has to “respect national sovereignty”, which is hilarious in itself, since its basic goal is to redesign the economy. What that respect actually entails is that the Fund can’t deal with anyone who isn’t the formal head of the country. It can’t even talk to the opposition without the regime’s agreement. And all of the money has to go through the central government, which of course is completely trustworthy. Dictators now have even less reason to give a shred of a fuck about what their people want, especially if all they have to do to keep getting money is to stay poor. It’s the easiest job in the world.
Finally, the Fund’s obsession with free market economics borders on the maniacal. Free market basically means fewer regulations and trade barriers, as well as allowing more of economy to be run by private companies instead of the government. All of these are good things – read my earlier post to see my feelings on regulations – but push this horse too hard and she’ll spook, smashing small businesses and trampling the poor.
The IMF is a pretty shitty cowboy, really. It’s got one weapon, a big ol’ money gun, and it fires away at every deficit that shows its face, taking time only to lay down a set of reforms that have been shown by multiple studies to hurt as often as they help. Argentina famously flaked on a $3 billion loan in 2002, saying that the austerity forced by the economic adjustment program was screwing the economy and they’d be better off defaulting. It worked, too –in less than a year the economy was growing at 8% (for reference, Egypt will be struggling to hit 2.5% this year). Take a look at the programs in Africa: some worked great, some failed miserably. The only factor the successes had in common? It rained.
Some say the Fund is actually one of the bandits, playing the hero then selling the townsfolk into economic slavery. Countries like Nicaragua get caught in a cycle of loan after loan, as harsh austerity measures keep growth down and prevent them from ever paying off their debt. While under an IMF program, which usually lasts around 3-4 years, countries on average see a drop in development and GDP growth.
In all fairness, the IMF’s been working hard to answer their critics. Around the turn of the century it created a new type of reform program that focuses on poverty reduction. It includes the radical strategy of actually talking to people while reforming their economy. Interest rates have come down and conditions are a lot more flexible. The results so far have been mixed, but it’s a hell of a lot better than the old model. That’s good, because for a lot of desperate villages, this cowboy’s their last shot.