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.
IMPACT ON EMPLOYMENT
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.
IMPACT ON HEALTHCARE
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.
IMPACT ON EDUCATION
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
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.
IMPACT ON FOOD SECURITY
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.
FAILURE ON THEIR OWN TERMS
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.
Monetary Fund (IMF), World Bank, and Structural Adjustment