The IMF and the “Washington Consensus”
Prior to the rise of the recent wave of progressive governments, Latin American countries for years followed “neoliberal” or “Washington Consensus” policies. Designed by orthodox economists in the U.S. and promoted by international financial institutions including the International Monetary Fund (IMF) and the World Bank, neoliberal doctrine eschews government intervention in the economy in many areas (such as health care and education). While often referred to as “free market” policies, neoliberal measures actually promote selective “free market” practices (such as elimination of tariffs and quotas) while often enforcing other market protections (such as patents and copyrights). Economists and policy-makers often push neoliberal policies as the definitive route to development and economic prosperity, but in the decades of the “Washington Consensus” in Latin America (and in most developing countries), the 1980’s and ‘90’s, there was a sharp drop off in economic growth and various key health indicators.
The principle father of this ideology was the University of Chicago economist, Milton Friedman. Friedman and his disciples emerged as a backlash to the statist, pro-government economic policies that prevailed in much of the world during the post-war period. These thinkers from the “Chicago school” argued that the government, by getting in the way of market forces, was an obstacle to economic prosperity.
Structural Adjustment
As the ideology of neoliberalism migrated from the academic to the policy sphere, the IMF and World Bank took the lead as its principal champions. Countries that found themselves in economic trouble and in need of external funding were required–and often coerced–into adopting sweeping packages of neoliberal reforms, known as Structural Adjustment Programs (SAPs). The IMF, in particular, became the gatekeeper of international finance. The IMF acted as the de facto head of a creditors’ cartel, as its seal of approval was routinely required for countries to access international credit or loans from the World Bank and other institutions. The U.S. Treasury Department in turn maintained – and continues to maintain – an effective veto over IMF decisions through its voting power on the governing Executive Board.
SAPs were often signed behind the backs of domestic legislatures and with little transparency or public accountability. An early example of a neoliberal reform package, for instance, was in Chile during the 1970s under the brutal dictatorship of General Augusto Pinochet. General Pinochet sought advice from Milton Friedman and several Chilean economists who had studied under Friedman–known in Chile as the Chicago boys. They in turn handed Pinochet a radical blueprint on how to restructure Chile’s economy.
The main argument behind the SAPs was that the short-term pain of economic adjustment policies would unleash the productive energy of the free-market, setting the country on the course to long-term economic growth and development. Unfortunately, these economic shock policies led to more than just a little short-term pain, causing severe negative social consequences and failing to deliver robust economic growth. In fact, Latin America’s two decades of neoliberal reform coincided with a growth failure of historic proportions when compared to the previous two decades. Between 1960-1980 real per capita income grew 82% while between 1980-2000 it only grew 9%.
“Free Trade”
The standard neoliberal recipe called for (1) “free trade”, (2) privatization, (3) cutting government spending, (4) deregulation and (5) opening up financial markets. “Free trade” made a major stride forward in 1994 with the establishment of the North American Free Trade Agreement (NAFTA), the most ambitious and far-reaching trade agreement to date stretching from Canada to Mexico. In the following years numerous more “free trade agreements” (FTAs) were signed, including one between the U.S. and Chile. In 2005, Central America and the Dominican Republic followed in Mexico’s footsteps, signing the U.S.-Dominican Republic and Central American Free Trade Agreement (DR-CAFTA).
Under an FTA countries agree to lower tariffs and other “barriers to trade”. This is supposed to reduce the price of imports and make consumers better off, but it also exposes local producers to unfair competition from the north. Thousands of Mexican farmers, for example, found that they could not compete with the price of U.S. corn suddenly imported under NAFTA, and were forced to seek other ways to make a living – in garment factories, for example, or across the border in the U.S. The U.S. had planned to extend these trade agreements throughout the entire hemisphere with a “Free Trade Area of the Americas.” This idea was finally defeated, after earlier failed summits, in Argentina in 2005 – a low point for the Bush administration’s Latin America policy.
Another important aspect of the SAPs was financial liberalization, to allow the free flow of capital between countries. While in principle this was supposed to lead to higher growth and economic stability, many countries that opened their economies to international financial markets became vulnerable and some suffered severe financial crises.
Resistance to the IMF
These SAPs frequently encountered mass popular resistance, sometimes taking the form of an “IMF riot.” Some of the most well-known “IMF riots” occurred in the late ‘90’s in Southeast Asia, as financial crises spread, leaving millions suddenly impoverished. In Indonesia, for example, rioting began in 1998 after adherence to IMF-mandated policies forced sharp increases in the price of fuel. These price hikes hit poor and working people particularly hard, who were already suffering falling real incomes and spiraling unemployment – also due in large part to IMF policies. http://www.cepr.net/index2.php?option=com_content&task=view&id=980&pop=1&page=730&Itemid=45
In Argentina, the IMF’s support for an overvalued exchange rate led to a severe recession and then finally economic collapse, at the end of 2001. Ensuing riots, which left some 27 people dead, forced president Fernando de la Rua to resign in December 2001. In the following ten days Argentina had a succession of four different presidents as mass protests and riots forced out one president after another. Venezuela’s 1989 IMF riot was known as the “Caracazo,” and, as in Indonesia’s case, was sparked by a fuel hike. In the ensuing riots, then-president Carlos Andrés Pérez called out the troops, and hundreds at the least, but probably thousands (the number is not known) were killed as the military fired on civilians. The “Caracazo” was a crucial turning point in Venezuelan history, polarizing society and galvanizing support for an end to the old political system, and laying the groundwork for popular support for Chávez and his political movement when it emerged three years later.
In the wake of the IMF’s disastrous policies, the 1990’s saw the worldwide emergence of the “global justice movement”, comprised of peasant groups, labor unions, activist networks, non-governmental organizations (such as, for example, Jubilee USA. the Bretton Woods Project, and Focus on the Global South, environmentalists, and other social movements around the world. At the same time, many developing nations began to distance themselves from the Fund, seeking alternative methods to insure themselves against economic problems without what they saw as Washington’s interference. In Latin America, the emergence of Venezuela as an alternative source of regional funding allowed some countries, notably Argentina, to pay off their debts to the IMF early.
A New IMF?
Faced with the prospect of becoming completely irrelevant in the world financial system, the IMF has undertaken an internal process of reform. With the appointment of new Managing Director, former French finance minister Dominique Strauss-Kahn in 2007, the IMF modified much of its lending framework and publicly changed some policy stances. Many commentators have interpreted this change of face as the beginning of a new IMF or an “IMF 2.0,” as Peter Gumbel commented in Time magazine.
But despite the IMF’s fresh public relations campaign and new policy positions, it appears that old habits die hard. For example, during the recent global downturn the IMF announced with much fanfare that it was reversing its long held opposition to counter-cyclical policies to combat a recession (increasing spending during a slump to raise aggregate demand and stimulate the economy). However, the reality of IMF programs in developing countries is quite different. A recent study of IMF policies during the current world recession shows that 31 of 41 countries with IMF programs implemented pro-cyclical policies (that is, policies expected to hurt growth and increase unemployment). This points to a glaring double standard: according to the IMF pro-growth stimulus policies are acceptable for rich countries but not for developing countries.
Resources:
Online:
Center for Economic and Policy Research’s Globalization and Trade pages
Books:
Flat Broke in the Free Market: How Globalization Fleeced Working People
By Jon Jeter. W.W. Norton: 2009
Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism
By Ha-Joon Chang. Bloomsbury Publishing PLC: 2007
Globalization and Its Discontents
By Joseph E Stiglitz. W. W. Norton & Company: 2003
The Shock Doctrine: The Rise of Disaster Capitalism
By Naomi Klein. Metropolitan Books: 2007.
Film:
The End of Poverty?
