Daily Times

Nothing evokes more controversy in third-world politico-economic discourse than the IMF – and for the right reasons. After all, by advocating for its infamous structural adjustment programs as a panacea for all the economic ills that afflict the global south, it has arguably deprived them of the much-needed finance for their basic expenditure including education, healthcare, and social security. The doctrine of fiscal conservatism espoused by the IMF, as its critics argue, is hopelessly detached from any attempt to critically analyse the political economy of developing countries. Worse, too much emphasis on stabilisation leads to inevitable trade-offs with weak economic growth.

The tenor of the criticism is alluring. In many instances, indeed, the efforts of the IMF are hampered by a lack of deep understanding of the political economy of a partner country, the drivers of armed conflict and fragility within it, and the likely impacts of economic policy on the social and political fabric of a country at risk. Moreover, in negotiations leading up to long-term engagements, macroeconomic stabilization is always on the agenda; job creation is hardly featured; taxation, and its adverse effects, are on the agenda; land reform is off. Furthermore, as critics justifiably argue, it has clearly erred from its foundational objective; as Joseph Stiglitz in his book ‘Globalization and its Discontents’ argues, the founding fathers of the IMF always envisioned it to be an international body that would help countries sustain an aggregate demand by pushing them to follow expansionary policies. Instead of doing that, it has diametrically reversed its course by persistently following contractionist policies under the tutelage of neo-orthodox liberals.

Yet one-sided flak of the IMF might not be completely fair. IMF’s ideology is based on the Washington Consensus, a famous set of agreed principles of economic management that were thrashed out by world powers – mostly Western – in 1995. The core ethos of this “consensus” included a strong emphasis on fiscal austerity, the importance of low fiscal deficits, the liberalisation of the economy, the withdrawal of subsidies and the privatisation of the public sector. In short, it essentially meant that a country should generate more, spend less, save more, and cede out a substantial part of economic governance to the private sector. As a matter of fact, therefore, there is nothing obnoxious in these principles of economic management.

Consider, for instance, the relentless emphasis of the IMF on privatisation. There is hardly any evidence to support the contention that privatisation is not in the interests of developing countries. Pakistan is a case in point. According to the World Bank’s Public Expenditure Review 2023, Pakistani SOEs cost approximately Rs. 458 billion to stay afloat and the combined value of liabilities associated with them is a whopping 10% of GDP. Evidently, state-owned companies are borrowing more, generating less, and are leading to grossly inefficient allocation of resources. The successive governments, therefore, find itself in a predicament: either to privatise the SOEs and run the risk of losing political

leverage due to inevitable mass lay-offs, or to let the status quo continue and let the debts accumulate. Unfortunately, most of the governments have preferred the latter which has exponentially increased Pakistan’s national debt. Naturally, this debt must be somehow financed – and who else could finance it better other than the impoverished people of Pakistan paying massive tariffs on fuel and diesel? The irony is that it is the IMF, and not the government, which gets the predominant share of the blame.

IMF is also readily blamed for causing many countries to adopt a path of rigorous fiscal conservatism, and for dogmatically preferring macroeconomic stabilisation over economic growth. This is simply not accurate. Although it is true that the IMF does emphatically prescribe stability as a part of its structural adjustment programs, it never inveighs against growth. It only says that before putting the economy on the path to sustainable growth, it must be stabilised first. In other words, when your revenues are enhanced, and expenditures are curtailed, then the economic superstructure is stabilised enough to follow a trajectory of robust economic growth. It is not rocket science: if your expenditures exceed your personal income, you will never have enough savings/surplus to invest in more productive ventures. Without a stabilised economic framework, growth is logically inconceivable.

Then if IMF’s prescriptions are so flawless, what is the root of the problem? Why, despite so many years of engagement with the IMF, so many developing countries have not been able to transform their economies? The reasons are simply the blend of ideological asininity of market fundamentalism, the sporadic strings of economic populism in the developing countries, and to some extent, IMF’s own flawed methodologies.

The most convincing reason for the IMF’s failure can be comprehended after situating its modus operandi within a broader context of its ideology. After its inception, it was mostly staffed by Keynesian economists who believed in state welfarism and had a generally sceptical attitude towards market fundamentalism. In the early 1980s, the conservative revolution led by Margaret Thatcher and Ronal Reagan led to the induction of new officials who were more pro-market and anti-statist in orientation. This led to the new era of neo-orthodox liberalism which espoused the doctrine of market fundamentalism dogmatically. It was believed that trickle-down economics would solve all the problems. It obviously did not, and IMF was justifiably raked over the coals for this failure.

More importantly, streaks of economic populism in the partner countries also explain why reforms did not materialise. To capture power, many political parties try to concoct populist narratives that the IMF is somehow plundering their resources. This can strategically be too good a catchphrase. Once in power, they sabotage the IMF programs or scuttle them altogether. For instance, in Kenya, successive governments kept on hampering the implementation of an IMF program in its entirety to strengthen their political turf. Paul Collier, a preeminent economist summarized IMF’s engagement with Kenya very aptly as follows,

“During a 15-year period, the Government of Kenya sold the same agricultural reform to the IMF four times, each time reversing it after receipt of the aid”

In terms of IMF’s own problems, the one which dwarfs all others is the limited political legitimacy of its conditionalities in the partner countries. Most of the Structural Adjustment Programs are negotiated behind closed doors. Moreover, they are egregiously untransparent and do not enjoy widespread democratic endorsement. Worse, if the country in question has a fragile democratic structure, then the chances of reforms to go through become even less likely. For instance, Pakistan has never been able to successfully complete any of its IMF programs in its entirety. Hence its pejorative title of being a “one-tranche” country.

Second, there is the issue of fungibility. Once the IMF releases its funds, it has little control over how they are being spent. This is very problematic because once the funds are released, it gives the license to governments to put off reform indefinitely; for instance, ever since the time Ghana engaged with IMF, 1/3rd of the flagship infrastructure projects that were supposed to be completed under various bailout packages never saw the light of the day.

Third, the IMF’s own double standards undermine its efforts. For example, on various instances, it has halted the release of funds to Kenya on pretexts of rampant corruption but has never hesitated in Indonesia or Russia where corruption was equally pervasive.

Finally, it has been sophomorically insistent on specific reforms, without realising their long-term implications. Its insistence in most cases on rapid privatisation without estimating its implications in terms of regulatory capture and wealth concentration is a case in point. Privatisation by itself is not bad if it is planned, sequential and phased. However, if it’s haphazard and rapid, it leads to regulatory capture.

From the standpoint of logic, therefore, IMF programs appear to be structurally coherent and sensible. Unfortunately, the lack of determination on the part of partner governments to steer the reforms to their logical conclusions, coupled with some of the IMF’s own flawed methodologies, has made them controversial. If governments roll up their sleeves to finally implement them in their entirety, the IMF programs can be potentially promising in terms of transforming the economies of the partner countries.

The writer is a lawyer and is currently doing a Master of Law (LLM) from the London School of Economics