The IMF Formula:
Prescription for Poverty

by John Cavanagh, Carol Welch and Simon Retallack

IFG Bulletin, 2001, Volume 1, Issue 3, International Forum on Globalization


When the International Monetary Fund (IMF) and the World Bank announced at their 1999 annual meeting that poverty reduction would henceforth be their overarching goal, this sudden "conversion" provoked justifiable skepticism. The history of the IMF shows that it has consistently elevated the need for financial and monetary "stability" above any other concern. Through its notorious structural adjustment programs (SAPs), it has imposed harsh economic reforms in over 100 countries in the developing and former communist worlds, throwing hundreds of millions of people deeper into poverty.

The IMF came to hold virtual neo-colonial control over developing countries as a result of the Third World "debt crisis" of the 1980s. In the 1970s, commercial banks were eager to make large loans to developing countries and newly independent countries. The interest rates on these loans were initially very low, but variable. But when interest rates were raised sharply in the early 1980s, heavily indebted countries suddenly found themselves unable to make soaring interest payments on these bank loans, and many were simultaneously indebted to the World Bank. That's when the IMF stepped in.

Unless the IMF certified that an economy was being "restructured" and "maintained soundly," the world's public and private lenders would refuse to extend loans. The IMF decided that countries must now adhere to the policy package of structural adjustment, which essentially integrates national economies into the global market, enabling multinational corporations to access cheaper labor markets and natural resources, and increase exports. Sold as means to increase domestic growth and living standards, countries must remove restrictions on trade and investment, promote exports, devalue national currencies, raise interest rates, privatize state companies and services, balance national budgets by slashing public expenditures, and deregulate labor markets.

Caught in the trap of having to repay massive debts, most developing country governments-representing 80 percent of the world's population-have felt they have had little choice but to agree to implement these reforms in exchange for IMF assistance. The results, however, have brought ruin to national economies, cutbacks in schools and hospitals, increased poverty and hunger, and environmental harm.


The IMF has ardently promoted changes in labor laws and wage policies; changes designed to make countries more competitive and attractive to foreign investment. However, according to the 1995 United Nations (UN) Trade and Development Report, employers are changing labor laws to make it easier to fire workers and undermine the ability of unions to defend themselves, rather than add to productive capacity and create work. In spring 2000, for example, Argentinian legislators passed the harsher of two labor law reforms after IMF officials spoke out strongly in support of it, even though tens of thousands of Argentinians carried out general strikes against the reform.

Also contributing to unemployment is the IMF requirement that countries privatize public companies and services and fire public sector workers. As compliant government agencies downsize, the ranks of the unemployed grow faster than the private sector can absorb them. Removing barriers to foreign investment and trade, meanwhile, makes it much harder for private local producers to compete against better-equipped and richer foreign suppliers, often leading to the closure of businesses and further layoffs.

Under structural adjustment, many developing countries export similar, often identical, agricultural products and mineral resources to the industrialized nations. The result is a glut, the collapse of staple export prices and the further loss of livelihoods. Similarly, the IMF policy of devaluing national currencies makes imports (which usually include energy resources and machinery) more expensive, squeezing import-reliant domestic industries which are then forced to lay off more workers. The IMF policy of raising interest rates prevents small businesses from getting the capital needed to expand or stay afloat, often leading them to shut down, leaving even more workers unemployed.

The IMF's purely market-based approach has contributed to the fact that at least one billion adults-more than 30 percent of the global workforce-are unemployed or seriously underemployed today. In Senegal, touted by the IMF as a success story because of increased growth rates, unemployment increased from 25 percent in 1991 to 44 percent in 1996. In South Korea, a US$58 billion structural adjustment loan in 1998 contributed to an average of 8,000 people a day losing their jobs. Compounding this harsh reality is the lack of existing social safety nets that can support people out of work.

Even those who are working suffer, as the IMF frequently encourages countries to keep wages low in order to attract foreign investment. This often translates into the lowering of minimum wages and the weakening of collective bargaining laws. By the end of 1997, Haiti's minimum wage was only $2.40 a day, worth just 19.5 percent of the minimum wage in 1971. Costa Rica, the first Central American country to implement a SAP, saw real wages decline by 16.9 percent between 1980 and 1991, while during the first four years of Hungary's SAP, the value of wages fell by 24 percent.


Even though rich country governments commonly engage in deficit spending, the IMF and World Bank have made this a taboo for poor countries. Faced with tough choices, governments must often cut social spending because this doesn't generate income for the federal budget, while simultaneously increasing fees for medical services leading to less treatment, more suffering, and needless deaths. Throughout much of Africa, cuts in government health spending arising from SAPs have caused a shortage of funds to be allocated to medical supplies (including disposable syringes). This, in combination with IMF-ordered price hikes in electricity, water and fuel (required to sterilize needles), has increased the incidence of infection (including HIV transmission). Yet the proposed "solutions" still consist of, in effect, privatization of public health and the massive lay-off of doctors and health workers.

In Kenya alone, the introduction of fees for patients of Nairobi's Special Treatment Clinic for Sexually Transmitted Diseases (vital for decreasing the likelihood of transmission of HIV/AIDS) resulted in a decrease in attendance of 40 percent for men and 65 percent for women over a nine month period.

In Zimbabwe, spending per head on healthcare has fallen by a third since 1990 when a SAP was introduced. UNICEF reported in 1993 that the quality of health services had declined by 30 percent since then; twice as many women were dying in childbirth in Harare hospitals compared to 1990; and fewer people were visiting clinics and hospitals because they could not afford user fees.


Under the mandate of reducing the size of the state, the IMF has encouraged the privatization of schools. Such a measure was undertaken in Haiti, and an IMF report predicts that the extreme deterioration in school quality and attendance will hamper the country's human capacity for many years to come. For example, only 8 percent of teachers in private schools (now 89 percent of all schools) have professional qualifications, compared to 47 percent in public schools. Secondary school enrollment dropped from 28 to 15 percent between 1985 and 1997. Nevertheless, the report ends with recommendations for Haiti to pursue further privatization initiatives.

Meanwhile, to make up shortfalls, school fees are often introduced, forcing parents to pull children-usually girls-from school, resulting in declining literacy rates and skills. In Ghana, the Living Standards Survey for 1992-93 found that 77 percent of street children in the capital city Accra dropped out of school because of an inability to pay fees. In sub-Saharan Africa, under explicit conditions of adjustment, education budgets were curtailed, and a "double shift system" was installed so that one teacher now does the work of two. The remaining teachers were laid off and the resulting savings to the Treasury are funneled toward interest payments on debt.


The increased dependence on food imports that SAPs create places countries in an extremely vulnerable position because they lack the foreign exchange to import enough food, given falls in export prices and the need to repay debt. It should come as no surprise therefore that 80 percent of all malnourished children in the developing world live in countries where farmers have been forced to shift from food production for local consumption to the production of crops for export to the industrialized world. Furthermore, as Davison Budhoo, a former IMF economist, notes, export orientation "has led to the devastation of traditional agriculture and the emergence of hordes of landless farmers in nearly every country in which the Fund operates."

Hunger and farmer bankruptcy is also a product of budget cutting under IMF programs, often leading to the removal of price supports for essential items, including food and farm inputs such as fertilizer, whose prices then rise dramatically. This problem is compounded by IMF-inspired currency devaluation, making these imports more expensive. In Caracas in 1989, for example, following a 200 percent increase in the price of bread, riots ensued in which the army responded by firing upon and killing l,000 people. In addition, higher interest rates often prevent small farmers from obtaining the capital needed to stay afloat, forcing them to sell their land, work as tenants, or move to the slums of large cities.


Although the Fund and the Bank have promoted SAPs as a virtual religion for nearly 20 years, they cannot claim that they have achieved even their own narrow objectives. IMF internal studies reveal that many SAPs have failed to enhance economic growth, reduce fiscal and balance of payment deficits, lower inflation and reduce external debt. In fact, between 1980 and 1997, the debt of low-income countries grew by 544 percent and that of middle income countries by 481 percent. Poor countries have thus gone through all the pain of structural adjustment only to continue to engage in a net transfer of wealth to the industrialized world.

A decade and a half ago, we likened the Bretton Woods institutions to medieval doctors. No matter what the ailment, they applied leeches to the patients and bled them. At the onset of the new millennium, the doctors' cruel ministrations have been exposed in dozens of studies and increasingly vocal street protests. Yet thus far, the Fund and the Bank's response has been largely cosmetic. New leeches are applied, dressed up by public relations experts. However, the "new" treatment is still ineffective. The growing public outcry in North and South alike will hopefully result in real reform and effective cures.

John Cavanagh is the director of the Institute for Policy Studies in Washington DC. He is co-author (with Sarah Anderson and Thea Lee) of Field Guide to the Global Economy (New Press, 2000), and he serves on the board of directors of the International Forum on Globalization. Carol Welch is an international policy analyst at Friends of the Earth, USA, and Simon Retallack is the managing editor of The Ecologist's special issues, and is an associate of the International Forum on Globalization.

International Monetary Fund (IMF), World Bank, and Structural Adjustment

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