JUNE 1998 · VOLUME 19· NUMBER 6

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 financial policies."

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 loans.

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 would suggest.

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 would like. 

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 1991-95. 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, averaging the 22 poorest ESAF nations for which there is sufficient data against the 13 who were independent fails to weight 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 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 explains one crucial reason for the decline in growth for most of those who pursued it. Between 1985 and 1995 the terms-of-trade for the 18 very poor ESAF nations for which data 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 notwithstanding 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.

Severely Indebted
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 of them (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 economy category.

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 of people.

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 programs.

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 three-fifths 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.