By Hassan Raza
When a country’s economy collapses, there’s a certain quietness that mantles it. It is not a silent war. Its quieter than ATMs that go silent and can’t dispense cash anymore, than empty shelves, than families no longer planning for the future now find it truly unreadable. Argentina experienced that day of silence in 2001. The answer was a decade later in Greece. Thailand did, in 1997, and Mexico did previously in 1994.
In all three these instances, a call was telephoned to a grey-walled establishing on 19th Street NW that accommodates the International Monetary Fund in Washington, D.C.
One such institution with which almost everyone is familiar, but with few enough who fully understands the IMF. It is pointed out as the root cause of austerity, credited with saving currencies, reprimanded for imperialism and blamed for averting financial contagion that engulfed whole regions. But, as with most things when it’s really complicated, the truth is between all of these.
Born of the rubble of the 1940s, a world just emerging from a Great Depression brought on by attempts to build economic walls between countries and a war that left such walls comatose, the IMF emerged. It was at a conference in Bretton Woods, New Hampshire in 1944, when the creators of a new international system agreed that the world economy required some sort of emergency backstop. A lender willing to lend at, or more, than their face value. Activity that might intervene should a nation’s finances have become bankrupt.That institution was turned into the IMF. It has 190 member countries today and each country has resources in the pool of $1 trillion and when they face serious trouble, they can be deployed to. It’s like a big credit union for governments–but the membership fees are determined by economy size, and the requirements for borrowing are quite stringent.
Economic crises come with no signs. They come with borrowing, borrowing, borrowing by a Government an unfree currency at an artificially high exchange rate and by a machine of banking that has been making loans which it would not morally have been justified in making. Then, quite often on its back as it were, a seemingly random change in investor mood and a freak commodity price drop and everything collapses.
The outline of what is to come is predictable. Capital flees. The currency craters. Imports become unaffordable. Inflation surges. An increase in debt is sufficient that governments are unable to pay back their debts. There’s a phone call at the IMF.The Fund will generally do two things when responding. Firstly, it offers bridging loans that allow for the country to stabilize its economic currency and maintain its basic functions. Secondly and much more controversially it places strings on that financing. The former name for the structural adjustment programs was: We’re more polite about the language in years, but the underlying argument is pretty consistent: change policies that have led us here, and we’ll support you with money.Typical measures include austerity, such as cutting government expenditures, measures aiming at the increase of the interest rate, and trade liberalisation, and in some instances the state-owned enterprises are to be as well liberalised by being privatised. The IMF’s case for an orderly recovery makes sense: “Fixing the structural problems that caused the crisis is the way to achieve a sustainable recovery. Those changes guaranteed or at least make the situation worse, for otherwise the money would simply buy time.
But here is where the record truly becomes hard to evaluate the above argument, as of reason, collides on a practical level with the hard truth on the consequences of austerity on “human persons”.Following the program of the IMF in Greece in 2010, joblessness rose above 27 percent. At the height of the crisis, youth unemployment spiked over 60%. A succession of reductions in pensions was made. Basic medicines were in short supply in hospitals. Whether or not the IMF was necessary for Greece to survive her quarrel with its creditors, whether that same intervention would have been worse than it was, is a debate that economists might go to bat for one another over and argue before the teams; but these people, standing in line at the food banks, weren’t particularly interested.
This is the main issue the IMF regulates can’t seem to figure out: the pills it is giving and administration are frequently harsh with short-term averse impacts, especially for individuals with the least accountability for the crisis. Those who accumulated the debt are doing just fine during austerity compared with those who didn’t.Those who banked profits during austerity are doing just fine, while the schoolteachers and pensioners aren’t.
The IMF has accepted that this is so, and has been more willing to admit so in recent years than earlier. In a briefing paper cited by the Fund, its own economists, in a candid report on the state of the economy for 2016, found its ‘neoliberal policy agenda’ had been ‘oversold’ and austerity measures have in some cases led to a ‘broad deterioration in inequality, posing threats to growth. This sort of institutional stock taking is not as common as it should be in international finance, and deserves praise.But it would be a disservice to just harp on about what’s wrong. The year 1997 is important for South Korea. He arrived with the Asian financial crisis having hit the currency and financial system of Korea hard with the Korean currency, the won, conspicuously red.On his arrival, Korea’s currency was red-flagged and the financial system was hanging on to a thread. To rescue the economy, the IMF provided a $57 billion ‘bag of money’ that was then the largest in history. It was a challenging predicament. High structural unemployment and bank failures and re-organizations were painful.
South Korea had paid back their loans before the due date in two years and was growing again. The changes were harsh but are still both lasting and enduring. It was the same scenario in Mexico following the peso crisis in 1994.
The IMF is better suited for the case in which a country’s problem is mostly liquidity, in other words, where its fundamental economic conditions are good, but confidence has been lost and capital has rushed to the exits. When that’s the case, the backstop role of the Fund is just as it’s supposed to be: providing window-shading time, smoothing expectations, giving breathing room to a functioning economy.
It doesn’t seem to work so well when the crisis is structural to the system, when decades of mismanagement, corruption and bad luck have built up an economy that lacks the due process of law it needs to carry out inevitable changes, or a populace that has just exhausted its pain receptors.There is a legitimate debate to be looked at and a debate that’s slowly being looked at, and whether the international financial architecture created at Bretton Woods is still appropriate in a world that looks nothing like 1944 is a debate to be had. IMF was created in a world of fixed exchange-rates, and somewhat more limited capital flows. Today it’s situated in an era in which capital can flow in and out of digital assets in real time, cryptocurrencies provide a new layer of financial instability, climatic disruptions can severely impact financial security, and geopolitical instability has fragmented the markets. Purely economic solutions to crises are now gradually becoming insufficient.
The Fund has adjusted its approach and facilities to make them more climate-resilient, tried new “conditionality” approaches, and has introduced greater flexibility. The question remains if those adaptations are adequate.
There is nothing that is up for debate regarding this.It is a fact Canadians suffer when economies fail. The IMF is necessary because the other model – each country in financial meltdown by itself has proven to be inferior. Having done something or doing it optimally are two separate considerations. There remains much work to be done at the institution that answers when money runs out on assurance that once it answers, it’s terms of rescue don’t crush the very people it’s supposed to be helping.It’s not something to mess up in any way. So one never tires of trying.
Also Read: Intellectual Bankruptcy and Geostrategic Avarice
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