Atelier 18, article 2
© Gabriel Kolko.
(taken from the "Multinational Monitor Magazine," June 1998)
"Ravaging the Poor: IMF Indicted by Its Own Data
For the first time since it's creation a half-century ago, the International
Monetary Fund (IMF) is being subjected to severe criticisms from
establishment sources that may profoundly alter its future role in guiding
the world economy.
The IMF's failure to reverse the economic crisis in
Thailand, Indonesia and South Korea, which is now spreading throughout Asia,
is producing unprecedented condemnations from powerful voices within
business and policy circles who believe that the Fund's its conservative
strategy, with its insistence on slashing government spending to balance
budgets, is endangering the stability of the entire world economy. Since the
beginning of the year, Harvard Professor Martin Feldstein, former chair of
Reagan's Council of Economic Advisers and arguably the single most
influential U.S. economist, the prestigious Financial Times, billionaire
speculator George Soros and many others
have raised fundamental questions about the IMF's direction of the world
economy. In March, the World Bank formally withdrew from joint sponsorship
of the quarterly Finance & Development, which for 34 years had reflected
the profound consensus between the two institutions, and Bank officials have
publicly attacked the IMF's core policies in Asia.
Far less powerful critics have long condemned the IMF on a
different score. They have contended that IMF "structural adjustment"
programs, imposed on dozens of poor Third World nations, perpetrate and even
intensify poverty. The IMF always admitted that adjustment may involve
short-term social costs for vulnerable groups, but asserted that this
short-term pain would ultimately benefit the poor themselves, since
Fund-spurred economic growth would solve the basic problem of
underdevelopment. Well before the economic storm in East Asia began to rage,
the IMF was under mounting attack.
The IMF imposes rules
In December 1987, the IMF expanded its existing structural
adjustment program to create an "Enhanced Structural Adjustment Facility"
(ESAF). It invited "low-income developing nations" to borrow from it. By
August 1997, 79 countries were eligible to join ESAF but only 36, with a
combined population of around 670 million, had done so. In order to receive
ESAF loans, countries must agree to the IMF's "conditionality" and make
to cooperate with the IMF in setting policies to the formulation of
specific, quantifiable plans for financial policies."
These conditions include fundamental domestic and external
policies that, depending on the IMF's intentions, can effectively control a
state's crucial social and economic priorities. Among the standard IMF
descriptions for developing countries: reducing government spending and
involvement in the economy; promoting exports and removing trade
restrictions; deregulating the economy; privatizing government-run
enterprises; eliminating price subsidies, including on essentials like food
and housing; and imposing consumption taxes. The IMF reviews country
compliance with "performance criteria" designed to measure adoption of these
policies on a semi-annual or even monthly basis. Countries that fail to pass
the test are denied additional drawings on previously agreed-to loans.
Most World Bank aid, and much of the development aid that
ations give, is dependent on a country satisfying IMF criteria. The Fund
therefore serves as a gatekeeper to official loans and aid and has far more
power than the funds it provides directly would suggest.
The IMF has always defended its draconian demands as the
essential preconditions to economic growth, without which poverty and
stagnation will continue. But growth in the developing nations under IMF
tutelage has either not occurred or only occurred very unevenly. Indeed, a
number of national economies following IMF prescriptions have even shrunk.
In the face of mounting criticism of its performance, in 1996 the IMF
initiated a review of its impact
"in strengthening economic performance in ESAF countries." On July 28, 1997
the IMF issued a laudatory summary, but postponed releasing a carefully
edited complete text until late February.
The policy implications of this review are very profound;
the IMF cannot allow the data it gathers to be used to prove that a major
aspect of its work is useless, much less harmful, to the nations accepting
its guidance. Not surprisingly, the IMF interpreted the data it released as
vindication of its success. But no amount of statistical manipulation can
reverse the fact that the majority of those nations that have followed the
IMF's advice have experienced profound economic crises: low or even
declining growth, much larger foreign debts and the stagnation that
perpetuates systemic poverty. Carefully analyzed, the IMF's own studies
provide a devastating assessment of the social and economic consequences of
its guidance of dozens of poor nations.
Assessing poor nations
The July 28, 1997 IMF release of the preliminary results of
its internal review of all 79 low-income developing nations gave the best
possible interpretation of the ESAF nations' performance, but it was
unconvincing. Even on the basis of the data as the IMF presented it,
countries that stayed out of ESAF began and remained better off by not
accepting its advice. The value of all such comparisons is limited by the
fact that most of the poor countries not
participating in ESAF chose nonetheless to adopt IMF-preferred policies,
though often not as fully as the Fund would like.
The IMF claimed per capita annual gross domestic product
(GDP) growth for ESAF countries declined 1.1 percent in 1981-85, before the
ESAF program began, and rose to zero growth during 1990-95. Non-ESAF
developing nations went from 0.3 percent in 1981-85 to 1.0 percent in 1991 -95.
ESAF failed at one of its key ostensible purposes: reducing
poor countries' foreign debt. External debt as a percentage of gross
national product (GNP) for the ESAF nations grew from 82 percent in 1980-85
to 154 percent in
199195. Non-ESAF nations were far less encumbered: their external debt grew
from 56 to 76 percent of their GNP.
The biggest difference between ESAF and non-ESAF country
performance was in exports, not surprising since maximizing exports and
integrating developing countries into the world economy is the ultimate
objective of all IMF programs. The annual export growth of the ESAF nations
increased more than four times, according to the August 5, 1997 IMF Survey
(the IMF's biweekly publication reporting on Fund activities, policies and
research), from 1.7 percent in 1981-85 to 7.9 percent in 1991-94, while the
non-ESAF nations' exports grew modestly from 4.4 percent to 5.7 percent.
To assess the impact of the IMF's structural adjustment
program accurately, however, a different methodology than the IMF's should
be used: only nations that are economically similar should be compared. Some
of the non-ESAF nations had 1995 per capita incomes of $3,000 or more, and
should not be compared to countries with per capita incomes roughly a tenth
as large. There are 23 nations under ESAF for which data exists (with
approximately 436 million population) with a per capita income below $400
and 13 non-ESAF nations (with 1.2 billion population)with similarly low
incomes. These are the countries that should be studied to evaluate the
IMF's ESAF program.
There are also limits in comparing the two groups of states
under $400 annual per capita income, however. Significantly, averagilng the
22 poorest ESAF nations for which there is sufficient data agailnst the 13
independent fails to welight them by population size, which varies
enormously; but to weight them introduces other distortions. The vast bulk
of the non-ESAF population lived in India, while Pakistan and Bangladesh
accounted for about half those under the ESAF.
Ignoring population, during 1985-95 the poorest ESAF nations
had a negative growth of 0.1 percent annually, while the 11 poorest non-ESAF
nations declined 0.4 percent annually. The external debt of ESAF countries
as a percent
of the GNP grew from 52 percent in 1980 (in the 16 countries for which there
is data) to 154 percent in 1995 (23 nations). For 11 non-ESAF nations it
increased three times, to 117 percent-about the same for both groups. Debt
service (interest payments on foreign debt) as a percentage of exports of
goods and services over the same time grew from 16 percent to 21 percent for
ESAF countries, 11 to 23 percent for the others.
On the basis of this data, there was no great difference
between these two groups- all were in severe economic difficulty. But if
India is Field workers in Indonesia. assigned its importance by population,
the non-ESAF poor
nations as an aggregate performed far better. India had an annual growth
rate from 1985 through 1995 of 3.2 percent, nearly three times that of
Pakistan and one-half more than Bangladesh. Although it has begun to move to
implement IMF-style liberalization in the 1990s, India remains far less
dependent on exports than other low-income nations, and this has insulated
it from external pressures and made stable, steady growth possible. More
important, unlike its two large neighbors, its terms-of-trade (the relative
value of the goods and services a nation imports compared to its exports)
since 1985 have not varied greatly, further protecting it from the
fluctuations of the world economy. Given the experience of these three
nations only, there is a powerful argument against integrating a nation into
the world economy and linking its development more than is absolutely
essential into an inherently unstable export system.
Increasing exports is an absolute condition for IMF loans
and ESAF nations embarked on an export-led development strategy. This
decision was a recipe for stagnation and pificantly, averaging the 22
poorest ESAF nations for which explains one crucial reason for the decline
in growth for most there is aufficient data against the 13 who were
independent ofthose who pursued it. Between 1985 and 1995 the terms-of-trade
for the 18 very poor ESAF nations for twhich dataa exists fell 27 percent,
according to the World Bank's World development Report 1997, the basic
source for the IMF's reviews and this article. This emphasis on exports in
the face of declining prices was a disastrous strategic choice for
development, because it is highly unlikely for a nation to export its way
out of poverty in the face of falling prices for its goods. The result was
that the states that the IMF directed, containing 670 million people,
continue on a cycle that produces growing debts and sustains human
deprivation. India chose another course, and notvvithstanding its other
difficulties, it averted many of the grave problems existing elsewhere.
Despite some modest differences, all very poor nations have
fared badly, and debts have aggravated rather than cured their basic
problems. Indeed, it is the very fact they become indebted that compels many
of them to submit to the IMF's control, creating a vicious cycle of yet
greater obligations- and poverty.
Nothing proves the danger of excessive reliance on exports
more than the World Bank's list, published in the World Development Report
1996, of 25 countries that are "severely indebted exporters of nonfuel
These are among the world's poorest nations, and 16 ofthem (with a 1995
population of 217 million) were under the IMF's ESAF guidance; nine (with
143 million persons) were not. Of the 23 nations under IMF control with per
capita income below $400, 13 were in the especially troubled economy category.
The 10 highly indebted ESAF nations under $400 per capita
for which data exists during 1985-95 had an average per capita GNP decline
of 0.6 percent (compared to minus 0.2 percent for all ESAF nations
together). For the seven non-ESAF states for which there is data, the
average annual decline was 1.4 percent. What united all of these nations was
that their external debt as a percentage of the GNP increased about three
times between 1980 and 1995, their debt service consumed about a quarter of
their exports of goods and services, and they became more deeply mired in
debt. The terms-of-trade for their exports fell 23 percent between 1985 and
1995. Although nine were not under direct IMF supervision, they all
nonetheless pursued its program for export-oriented development and staked
their economic future on exports. The gamble failed: they stagnated and
The IMF's social costs
It is, above all else, the human and social consequences of
the IMF's structural reform programs that has evoked the most condemnation,
compelling the IMF to embark on an aggressive defense of its crucial role in
the Third World. But the emerging IMF data only confirms that IMF policies
have eroded existing social services and aggravated the poverty and
suffering of hundreds of millions of people.
One IMF structural reform program demand that directly
affects the poor is the forced reduction of government deficits. This
comprises everything from slashing price subsidies for rice and fuel-which,
as in Indonesia last May, often produces social disorder where
implemented-to health clinics and public works. "Due regard needs to be paid
to the cost-effectiveness and financial viability of these safety nets,"
stated the Fund in the December 15, 1997 IMF Survey - which means reducing
them for the sake of a prosperous future which, so far, has never arrived.
As a companion to its defense of the ESAF, the IMF's Fiscal
Affairs Department last November produced a study, "The IMF and the Poor,"
which reported health and education spending in 23 ESAF-supported nations
for which it
had data, comparing the three years before each nation accepted the ESAF to
1994 or 1995. On balance, the IMF concluded, ESAF countries increased health
and education spending after adopting structural adjustment programs.
However, six of the 23 countries examined, containing 122
million people-one-fifth of the ESAF-nations' population-reduced the
proportion of their GDP allocated to health and education. And the report
does not include
the 13 countries under ESAF for which it did not have data. Those excluded
have a combined population of one-third of the 620 million persons in the
ESAF countries in 1994. The report's optimistic conclusions therefore
most, to slightly under half of the people under ESAF programs- but even
here the IMF distorted the data.
The IMF report averaged real per capita spending for health
and education in its 23 nations. But averages are wholly misleading; the
real issue is which class within each nation's population gains most from
socially sponsored health and education programs-that is, whether the
benefits are spread evenly. In a sample of eight ESAF nations, the IMF study
found that the wealthiest fifth of the population received 32 percent of the
education benefits, and the poorest 13 percent. For five nations where
health data existed, the wealthiest quintile received 30 percent of the
allocations, the poorest 12 percent. In Vietnam, an ESAF nation whose
relative spending on health and education has dropped, the wealthiest fifth
receives 45 percent of the public subsidies for health and education,
according to the World Bank's January 1995 "Viet Nam: Poverty Assessment and
The IMF's own evidence shows that the poorest threefifths of
these nations are being largely excluded from whatever social "safety net"
exists for education, health, housing and social security and welfare; their
position has either not changed or, for many, became worse.
In some ways, focusing on health and education spending is
misleading. IMF conditionalities affect the population's economic security
considerably more than does spending on health and education. ESAF programs
routinely cut government wages and salaries and facilitate private sector
wage cuts and layoffs so that each nation becomes "cost-effective" in the
world export market. Price subsidies on basic commodities like bread and
cooking oil-most critical for the poor-are cut. The higher value-added taxes
it advocates are regressive on income distribution.
Ignoring the fact it did not benefit the poorest, the
nominal increase for health and education as a percentage of GDP in its 23
nations was only one-seventh of the reduction in wages, salaries, subsidies,
and transfers that the ESAF program imposed on the total population, with
the worst impact felt by the poorest. (The net decline for these functions
combined was 1.8 percent of GDP.) The IMF's own data confirms that
structural adjustment programs
made the poor even poorer.
Unfortunately for the IMF, just as it was preparing its
rebuttals of the widespread belief that its strategy hurts the poor, the
World Bank, its sister institution, published a comprehensive analysis of
poverty in the developing nations since 1980 which provides further evidence
on how the IMF's programs have helped to sustain and create it. The Bank's
study, published in the May 1997 World Bank Economic Review, traces poverty
rates in 42 nations, divided by regions. It found that trends in living
standards and absolute poverty are linked, above all else, to economic
growth. No region displayed a consistent pattern, but Eastern and Central
Europe, Latin America and Sub-Sahara
Africa-regions where the IMF was most active-generally had a higher
incidence of poverty since 1980, while poverty declined in East and South
Asia, the Middle East and North Africa.
The IMF burden
Most of the nations whose economic destinies the IMF has
guided have not grown; they have either stagnated or declined economically,
and the poor have suffered both in the short- and long-run in the name of
the Fund's socially dangerous ideological mystifications. Save for India,
which alone confirms the value of independent strategies, most of the poor
nations which remained outside of the ESAF program did not do much better,
but they certainly did not do worse than the IMF-led countries.
The causes of the sustained crisis of development in the
Third World are extremely complex, but it is certain that excessive reliance
on export-led growth in an unstable world economy creates major structural
problems that all growth strategies must avoid. But exports are at the core
of the IMF philosophy, and its guidance has gravely hindered the struggle of
innumerable poor nations to escape their suffering.
(*)Gabriel Kolko's 11 books include studies of the Third World, economics
and economic history. He is Distinguished Research Professor of History
Emeritus at York University in Toronto, Canada.