Ravaging the Poor
IMF Indicted by Its Own Data
by Gabriel Kolko
Multinational Monitor magazine, June 1998
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 "general commitments to cooperate with the IMF in setting
policies to the formulation of specific, quantifiable plans for
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 prescriptions 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
Most World Bank aid, and much of the development aid that
nations 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
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
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 who were 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 primary products." 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
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 became poorer.
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
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
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 applied,
at 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 Strategy."
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. His Vietnam: Anatomy of a Peace,
was published last year. He is Distinguished Research Professor
of History Emeritus at York University in Toronto, Canada.
World Bank, Structural Adjustment