The International Monetary Fund (IMF) was originally created to work with member nations to implement measures to ensure the stability of the international financial system and correct balance-of-payment maladjustments. By the early 1980s, however, it took a different course. Rather than helping governments avoid currency crises, it has persistently pressured them to abandon the regulation of cross-border trade and financial flows, resulting in massive trade imbalances and reckless financial speculation. IMF-sanctioned policies helped attract huge inflows of foreign money to what were called the “emerging market economies” of Asia and Latin America in the form of loans and speculative investment. As Walden Bello and Martin Khor have documented, the rapid buildup of foreign financial claims set the stage for the subsequent financial meltdown in Mexico in 1994 and in Asia, Russia, and Brazil from 1997 to 1998.
This is why, when it became clear that the huge financial bubbles the inflows had created could not be sustained and that claims against foreign exchange could not be covered, speculators were spooked and suddenly pulled out billions of dollars. Currencies and stock markets went into freefall. Millions of people fell back into poverty. Then the IMF stepped in with new loans to bail out the foreign banks and financiers involved—leaving it to the taxpayers of the devastated economies to pick up the bill once the loan payments came due. In many instances, at IMF insistence, uncollectible private debts were converted into public debt.
Over the last two decades, the conditions attached to IMF’s loans, known as structural adjustment programmes (SAPs) were imposed by the IMF on close to 90 developing countries, from Guyana to Ghana. The objective of these SAPs went beyond debt repayment or attainment of short-term macroeconomic stability, seeking nothing less than the dismantling of protectionism and other policies of government assisted capitalism that their theorists judged to be the main obstacles to sustained growth and development. Structural adjustment requires governments to do the following: cut government spending on education, healthcare, the environment and price subsidies for basic necessities such as food grains and cooking oils; devalue the national currency and increase exports by accelerating the plunder of natural resources, reducing real wages and subsidising export-oriented foreign investments; liberalise (open) financial markets to attract speculative short-term portfolio investments that create enormous financial instability and foreign liabilities while serving little, if any, useful purpose; eliminate tariffs and other controls on imports, thereby increasing the import of consumer goods purchased with borrowed foreign exchange, undermining local industry and agricultural producers unable to compete with cheap imports, increasing the strain on foreign exchange accounts, and deepening external indebtedness.
In most cases, structural adjustment caused economies to fall into a hole wherein low investment, reduced social spending, reduced consumption, and low output interacted to create a vicious cycle of decline and stagnation rather than a virtuous circle of growth, rising employment, and rising investment, as originally envisaged by the World Bank-IMF theory. The more the borrowing, the greater the need for still larger loans, and borrowing became something of an economic addiction. Once countries accepted the conditions of structural adjustment, the IMF rewarded them with still more loans, thus deepening their indebtedness—rather like a fireman pouring gasoline on a burning house to stop the blaze.
The example of the aforementioned topic can be many countries like Mexico, Greece and the list goes on but the African continent is more prominent. The African debt crisis has its roots in the oil crisis of the 1970s when OPEC dramatically increased the price of oil, crashing Western economies and garnering a windfall in the process. That massive windfall was largely invested in Western banks who in turn looked to loan the money back out.
As their debt ballooned the IMF insisted that further loans would only be offered if African countries accepted SAPs. These involved the deregulation of trade protections, the ending of price controls and subsidies, export-led economic policies, privatisations and the ending of free healthcare and education. Basically, countries had to export their raw materials, end any welfare programmes and accept higher prices for food. The theory was economic growth would ultimately trickle down, leading to poverty reduction. The results were disastrous. The neoliberal economic policies proposed in the Washington Consensus (American economic model) have since become pillars of bailout conditions enforced not only by the IMF, but also by its Washington-based offspring, the World Bank.
The economy of Pakistan is heading down the same arduous path. The pressure multiplied through international institutions like the IMF due to a tilt towards the Chinese and Russian led bloc. Also, America’s own failure in Afghanistan caused economic trouble for Islamabad to the larger extent in the shape of continuity in the ‘Grey list’ of the Financial Action Task Force (FATF). The policymakers of Islamabad ought to play their cards to get rid of international pressure before it’s too late. A national unity among political parties, productive contribution of technocrats and well-known Pakistan-based economists and a well-planned strategy to execute can prevent Pakistan from suffering the same fate as Africa.
https://nation.com.pk/26-Nov-2021/an-economic-trap
