The International Monetary Fund and the World Bank hold their annual fall meetings this week in the midst of a pandemic that has blazed a path of massive disaster through countries of the global South. COVID-19 has presented the Bretton Woods twins, on the seventy-sixth anniversary of their founding, with a grand opportunity, not to save the world, but to salvage their tattered reputations.
Before the onset of COVID-19, the IMF’s image was at its nadir. Under Christine Lagarde, the former managing director, the Fund had served as a member of the so-called Troika, alongside the European Commission and the European Central Bank, that had imposed what can only be described as savage austerity programs on Ireland and Greece in the aftermath of the 2008 global financial crisis. The IMF’s role in saving European banks by squeezing the Irish and Greek peoples of the resources to repay their loans had shown that it had not changed its approach from the one it applied to the Asian economies following the Asian financial crisis of 1997-98: cut government budgets, fire people, and channel savings from this draconian process to pay off private-sector creditors. These “pro-cyclical” measures were to be adopted even if they prevented an early return to growth and caused widespread pain to people.
Newly appointed Managing Director Kristalina Georgieva leaped at COVID-19, presenting the IMF with a public relations bonanza. She boasted of a $1 trillion war chest that the Fund was willing to disburse to meet the challenge of what she called a “once in a lifetime pandemic.”
There was only one problem: many Fund members who badly needed the cash were not biting. For instance, a “debt relief” program for about 25 African countries to the tune of $20 billion found few takers, with only four countries, Cameroon, Côte d’Ivoire, Ethiopia, and Senegal, making applications. The African countries were being very careful, and the reason was not only because they had witnessed the the IMF put Greece, Ireland, and other European countries through the wringer. They were also apprehensive after reading the fine print. They discovered that 1) that the Fund was offering loans, not grants; 2) that the “debt relief” initiative it was offering was not really relief but a restructuring of the loans owed to rich country governments by debtor countries so they could make their debt payments later; and 3) that accepting a loan would subject a country to the same dreaded Fund conditionalities and surveillance that accompany regular IMF loans.
Getting a loan or “debt relief” from the Fund and its partners, in other words, was likely to put the recipient into a similar situation as Ireland, Greece, South Korea, Thailand, and so many other countries: what Cheryl Payer so aptly called the “debt trap” in her classic book on the IMF.
When asked why the IMF and the World Bank didn’t just cancel the massive debt of developing countries in light of the catastrophic economic impact of COVID-19, the IMF’s Georgieva offered the lame excuse that its articles of association did not allow that while the new World Bank president, David Malpass, admitted frankly that the financial markets did not like debt write-offs, and Wall Street would indirectly punish the Bank’s clients in the future by charging higher interest on borrowings made by the Bank for its projects. Malpass knew what he was talking about since he had served as chief economist of the investment bank Bear Stearns, which imploded during the first weeks of the 2008 financial crisis.
A Crisis-Ridden Institution
The Bank enters the fall meetings with its own set of reputational problems. Global poverty, the ending of which it has proclaimed to be its raison d’etre, was on the increase, even before COVID-19. This was especially acute in Africa, owing partly to the conditions created by its neoliberal “structural adjustment loans” and those of the IMF.
Although a Bank-commissioned study sounded the alarm about an earth experiencing an average temperature rise of 4 degrees centigrade by the turn of the century, the agency laid itself open to charges of hypocrisy since it continued to promote investment in scores of carbon emission-intensive coal-fired plants throughout the globe.
It is deeply involved in the imbroglio around the UN’s “Reducing Emissions from Deforestation and Forest Degradation” initiative or REDD+, many of whose projects it funds, with indigenous peoples on all continents calling the program a recipe for the dispossession of forest-dependent communities.
These reputational problems are compounded by a major credibility problem, which is the collapse of its advocacy of neoliberalism, trade liberalization, and globalization owing to the fact that these policies and trends have centrally contributed to greater poverty, greater inequality, climate change, and global economic stagnation. The Bank continues to support trade liberalization and globalization, but its advocacy is now more muted since, as the Latin saying goes, Contra factum non esse disputandum—that is, one cannot argue against the facts.
Some of those prominently identified with the Bank’s neoliberal advocacy have indeed recanted, among them Oxford economics guru Paul Collier, who served as director of the Research Development Department of the Bank from 1998 to 2003. In a chapter in his latest book, The Future of Capitalism, that is laced with mea culpas, Collier admits that it was not only he who was wrong in his defense of globalization and free trade, but the whole economics profession was guilty:
The profession has been unprofessional, fearful that any criticism would strengthen populism, so that little work has been done on the downsides of these different processes [of globalization]. Yet the downsides were apparent to ordinary citizens, and the effect of economists appearing to dismiss them has resulted in widespread refusal of people to listen to “experts.” For my profession to re-establish credibility we must provide a more balanced analysis, in which the downsides are acknowledged and properly evaluated with a view to designing policy responses that address them. The profession may be better served by mea culpa than by further indignant defenses of globalization.
Feudalism in the Era of Late Capitalism
The Bretton Woods institutions come into the 2020 fall meeting suffering from not only numerous policy crises and a shattered intellectual paradigm. There is also the longrunning, debilitating dispute over governance reform. Despite some 50 years of trying, the countries of the global South have not been able to get the dominant powers in both institutions to accept even a modicum of reform.
At the IMF, the United States holds 16.5 percent of voting power, which continues to give it an effective veto over any change in the articles of association or in major policies of the Fund. Next to the United States, Europe is the Fund’s most powerful bloc, though key developing countries now have collectively a greater weight in the world economy. The four big BRICs (Brazil, Russia, India, China) have a combined share of world gross domestic product of 24.5 percent, compared with the 13.4 percent share of the four big European economies (Germany, France, Britain, Italy). But the four BRICs countries have a combined share of votes of only 10.3 percent, compared with the four European nations’ share of 17.6 percent. In fact, long-promised voting power shifts from developed to developing countries have been very marginal, coming to only 2.6 percent, according to analysts Robert Wade and Jakob Vestergaard.
As in the case of the Fund, the flaws, both in policy and theory, of the World Bank cannot be dissociated from the realities of power at the institution. The United States is the primordial power at the Bank, where it exercises 15.7 percent of voting power, which gives it effective veto power over major policy decisions owing to its being able to count on its influence on European countries. In a “realignment” of the voting shares at the Bank a few years ago, the progressive Bretton Woods Project has pointed out, Africa’s vote rose less than 0.2 percent, and domination by the rich North remained formidable, with high-income countries clinging to almost 61 percent of the vote, middle-income countries getting under 35 percent, and low-income countries just 4.46 percent.
The Bank and Fund have also been labeled anachronistic feudal institutions in the era of late capitalism, with Europe unwilling to give up its “right” to name the managing director of the IMF and the United States refusing to give up its privilege of naming an American as head of the Bank.
Time to Split?
Serious calls for reform at the World Bank and the IMF first emerged 50 years ago. Cheryl Payer’s classic The Debt Trap served as the eye-opener for a generation that saw the promise of economic independence following decolonization begin to crumble with the emergence of a new form of colonialism in which the Fund was a prominent agent. The World Bank also emerged as a global actor, but its potential for bringing about a better world was dissipated by its support of dictatorships like like those of Marcos in the Philippines and Suharto in Indonesia during Robert McNamara’s tenure and its deployment, along with the IMF, as a tool for the neoliberal transformation of developing countries during the Reagan administration and after.
After 50 years, the absence of change in either policy or intellectual paradigm has been paralleled by the glaring lack of reform in the governing structures of the Bretton Woods twins. The minuscule shift of voting power in the IMF–2.6 percent from developed to developing countries–is emblematic of how little change has taken place in the governing of both institutions. Given this, many are asking: does it make sense for developing countries to expect change at the IMF and World Bank during the seventy-sixth anniversary of the latter’s founding? Indeed, is it rational for them to remain within the two institutions, imprisoned in ever increasing and permanent debt to both institutions?
Perhaps this is the time for developing country governments to begin exploring an exit strategy, to begin to seriously talk to one another about leaving and creating alternative institutions of global economic governance based on genuine mutual respect, equality, and cooperation.
“South-South Cooperation” is an ideal that has been floating around for decades. It is perhaps time for the global South to make the resolution to push for the material realization of that ideal. There are new geopolitical and geoeconomic realities that make this enterprise no longer a pipe dream. The weight of the West in the global economy has declined significantly. The United States, the hegemonic power in the Bretton Woods institutions, is in its deepest political quandary in years. he so-called Western alliance is fraying owing to conflicts among its principals.
Then there is China.
China is admittedly as much motivated by national interest as other global powers, and many in the global South are of the opinion there are disturbing signs that it is following in the path trodden by the imperial West. But its competition with the United States is one the countries of the global South can use to their advantage. While presenting dangers, the U.S.-China conflict also offers opportunities for countries in the global South to carve out significant political and economic space for the pursuit of progressive policies and the creation of progressive institutions: a zone of increasing independence of both superpowers.
The ability of the developing country bloc at the World Trade Organization to successfully resist significant new initiatives in trade liberalization and weaken the collective strength of the rich country bloc offers an example of what a relatively united global South can achieve amid Western disarray. The era unfolding has similarities to the 1960s and 1970s, when the Cold War between the Soviet Union and the United States was a key factor in the emergence of the Non-Aligned Movement, the acceleration of decolonization, and the coming to power of national liberation movements throughout what was then called the Third World.
The IMF and the Bank would like the global South to believe that they are indispensable. They are not, and the first step toward liberation from their clutches is to embrace that truth.