A year ago the International Monetary Fund was on the nose, its credibility in tatters. Today it is the darling of the rich countries. They have agreed in principle to increase its funding massively, nominally by a trillion dollars. On Anzac Day, the first $US250 billion ($344 billion) was approved. Australia’s contribution to this will probably be about $US6.25 billion.
This is a remarkable turnaround. A year ago, one of the few subjects both sides of American politics agreed upon was that the fund had passed its use-by date. The left opposed it because of the harsh impact of its policies on the poor in developing countries. The right opposed it because of its demonstrated incompetence.
The IMF had misdiagnosed the Asian economic crisis in 1997 and prescribed contractionary policies for a crisis of confidence. Argentina faithfully followed the IMF’s advice for over a decade and then, in 2001, its economy imploded in the worst peace-time economic collapse in history.
Africa likewise followed the IMF’s advice for the decade to 2005, only to find its health-care systems were privatised, and foreign aid flows had been redirected towards the repayment of foreign debt and into foreign exchange reserves, two policies which had disastrous results.
For 27 years, IMF policies have put the need for poor countries to service foreign debt ahead of their need to develop. Development has been subordinated to debt repayment.
So what happened? Has the IMF suddenly changed? Has it been reborn with new policies and perspectives? Have the needs of developing countries shifted?
No, no and no
What has happened is the global financial crisis. The needs of rich countries have changed, specifically those of their financial sectors, not the needs of poor countries.
Poor countries need more help than ever because the crisis will hurt them the most, and the damage will last much longer than in the West. But more IMF loans are not the help poor countries need. It is the help the international banks need. For these funds will flow directly through the poor countries to the international banks.
This is a global stimulus package, just like Australia’s or China’s domestic packages, with the critical difference being that whereas most of Australia’s stimulus has been made available as grants to individuals or governments to spend, this package will be made available only as debt.
The rich countries, including Australia, are pumping resources into the IMF so it can lend the money to poor countries, which will add to the crippling debt burden they already bear.
Make no mistake, the worst of the global crisis is still before us. The Organisation for Economic Co-operation and Development predicts world trade will fall this year for the first time since 1945, and fall by more than 13 per cent. The World Bank estimates that private capital flows to developing countries in the past two years have reversed by a staggering $700 billion a year.
This collapse in trade and capital flows will seriously damage the fragile economies of poorer countries.
These countries need aid to replace their collapsing export revenues. They need some of their unsustainable debt to be cancelled. And they need a fair deal in the current Doha trade round, which needs to be completed urgently so the severe contractions in global trade caused by the global financial crisis can, to some extent, be countered.
What they don’t need is more debt. More debt will only reduce their prospects for long-term growth.
Many emerging market nations have had huge difficulties servicing their foreign debt. Ukraine, Iceland, Latvia, Hungary, Armenia, Romania, Serbia and Pakistan have all recently been helped by the IMF to service their debts.
Now it has the funds to "assist" even more countries. And it proposes to "assist" these countries by lending them money on the condition they use it to repay the foreign debt that is due. These funds will flow directly through the debtor countries to the international banks - the assistance will be rendered to the lenders, not the debtor countries.
Nothing has changed. The IMF is doing what the rich countries that control its board want it to do: put the interests of international banks before the interests of poor countries.
In short, development is a crock. There are about 195 countries in the world. Fifty years ago, 27 of those countries were developed. Today 32 are. In 50 years, five countries out of about 170 have achieved the goal of development. That is an abysmal track record.
Development hasn’t worked, and there are many theories about why that is so. But when you understand why the rich countries are pumping resources into the IMF today, you begin to see why development has largely failed. The system is being operated to benefit the rich and powerful nations at the expense of the poor and powerless.
Published by Sydney Morning Herald
Ross Buckley is professor of international finance law at University of NSW and policy advisor to Jubilee Australia