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Latest IMF controversy unveils biased policies and a Harvard economist’s skewed views


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Protesters during the International Monetary Fund’s annual meeting demand to know why rich countries have not followed through on funding climate financing.

Photo by Phil Pasquini/Shutterstock

 

It is more fun to be Santa than Scrooge.”

The catchy phrase was deployed by Harvard University economist Ken Rogoff in early January, while cheekily asking, “Why is the International Monetary Fund trying to morph into an aid agency?”

The IMF’s leftward turn, he supposes, reflects an overly-generous mentality and practice under the very shaky leadership of neoliberal Bulgarian economist Kristalina Georgieva. Last year, Georgieva became notorious for data manipulation on behalf of multinational corporations and nearly lost her managing directorship because her statistical fraud was to China’s benefit, angering the IMF’s geopolitical bully-boy directors from the United States and Japan.

Absurd as the Santa metaphor is when applied to the IMF, given the institution’s ongoing destruction of societies, states and environments, the implications are ominous. They suggest that, in a milieu of emerging (generally mild) inflation threats, Rogoff’s neoliberal hubris could spread as fast as Omicron.

The former IMF chief economist argues that his former employer is now far too lackadaisical about lending standards in the poorest countries, “extraordinarily generous in its normally cautious surveillance assessments, giving its gold seal of approval to countries with exploding debt-to-GDP ratios.” In reality, while dishing out dribbles to some poor countries, the IMF has maintained the same brutal debt-collector philosophy.

 

Brazil and South Africa, where the IMF again opposes popular interests

According to Rogoff, the IMF is “even more sanguine about large emerging markets such as Brazil and South Africa, again arguing that dealing with the pandemic is the absolute top priority, despite soaring debt levels, rising inflation, and simmering banking problems. This lack of conditionality has been by design.”

Contrary to Rogoff’s interpretation, a U-turn out of the pandemic should be the top priority in both. Desperately-needed expansion of state spending, health-system support, redistributive social welfare and ecologically-sound infrastructure investments would allow a genuine “build back better” opportunity, so the world’s two most unequal large societies can recover from Covid-19 shocks. These shocks have generated mass protests and in South Africa’s case, debilitating riots and looting that left 360 people dead in mid-2021.

Both countries’ populations crave expansion of the progressive aspects of their public sectors (especially social grants), given the extreme social suffering in each, and given capitalism’s inability to offer any hope whatsoever to their majorities. And due to the exceptionally high social costs associated with Covid-19, neither can afford the state budgetary austerity Rogoff implies is necessary.

Rogoff’s opposition to fighting Covid-19 is surreal, with Brazil having suffered 672,000 ‘excess deaths’ (behind only India, Russia and the United States), and in South Africa, an even higher share of the population died: 240,000 excess deaths, putting the country in the top 10% of the world’s per capita Covid-mortality rates. As The Economist remarked, “Among developing countries that do produce regular mortality statistics, South Africa shows the grimmest picture.”

The IMF can perhaps be disparaged as “sanguine” in both, but in an entirely different way than Rogoff means: for promoting austerity and ignoring extreme Covid-19 policy mishaps and corruption.

To illustrate, the September 2021 Brazil mission statement opened by noting how IMF “Executive Directors commended the Brazilian authorities for their decisive policy response to the COVID-19 shock,” instead of remarking upon misleadership by a man New York Magazine describes as “arguably the most anti-vaxx leader in the world,” President Jair Bolsonaro. At the time of the IMF statement, Bolsonaro was under investigation by the Brazilian Senate, which as Jacobin Brasil’s Hugo Albuquerque explained, then ruled a month later that he should face criminal charges for his disastrous mismanagement of the COVID-19 pandemic…  his ministers, government authorities, and even some businesses were responsible for policies that caused hundreds of thousands of extra deaths. This toll was unsurprising given Bolsonaro’s failure to take preventive measures, and insistence on defending (and investing public funds in) ineffective quack remedies. Yet it was aggravated by unnecessary delays in buying vaccines – the product of both the president’s denialism and government officials’ corruption in dealings with laboratories.

The IMF acknowledged that some emergency fiscal relief prevented Brazil’s 2020 contraction from being worse, but then predictably called for fiscal austerity: “Medium-term consolidation is appropriately guided by the constitutional expenditure ceiling. Reducing budget rigidities and mandatory outlays will be key to create the fiscal space needed for high priority programs and to increase the flexibility in responding to shocks.” In reality, Albuquerque argues, “the outright economic disaster today producing growing hunger and social inequality” needs more not less state spending.

The IMF’s flattery of Bolsonaro’s economic and Covid-19 policies didn’t actually win much favour in Brasilia, as the mission was expelled last month, Barron’s reported, “in reaction to critical IMF remarks about Brazil’s environmental policy.”

Meanwhile in South Africa, the “sanguine” IMF also didn’t care about Pretoria’s policy disasters, including Finance Minister Tito Mboweni’s $244 million health budget cut in late February 2020, a few days before Covid-19 arrived. A few months later, the IMF made a $4.3 billion loanto Mboweni, even though a hard-currency credit wasn’t needed. And brutal budget cuts were indeed part of the package, for Rogoff’s supposed Santa was Scrooge.

To be sure, as Rogoff frets, South Africa’s public debt to GDP did rise steadily from the 2007 trough of 28% to the current peak of 72% (which is still far lower than the world average). Brazil’s public debt/GDP also increased, from a 2013 low of 60% to nearly 90% in late 2020, though since then it has fallen. But rich-country state debt also rose from 70% to 124% of GDP from 2007-21 and globally, all countries’ public debt collectively rose from 60% to 106%.

Although both Brazil and South Africa pay absurdly high interest rates on foreign borrowing (in the 9-11% range), the public debts are manageable, especially to the extent they are in local currency. And this is even more true when considered in relation to public assets, a factor Rogoff entirely neglects, but that even the IMF at least has begun to factor into its research.

By that measurenet worth (in which liabilities are offset by assets as any other institution subject to basic accounting principles would do) – South Africa is far healthier, and Brazil a bit healthier, than the U.S., Germany, UK and France. (The reason is both countries’ vast state-owned natural resource base, although lack of effective popular control over those resources – compared to extractive-industry firms – explains why both countries suffer intense inequality.)

Moreover, Rogoff nags the IMF unnecessarily about bank instability and inflation. Consumer price increases in South Africa stayed in the 3-6% range over the last dozen years; while Brazil’s inflation rate is up just above 10%. In both cases, the price hikes have been much lower, recently, than during their late-20th century peaks.

Nor do Brazil or South Africa have banking stability problems. (Yes, South Africa lost one small bank to bankruptcy in 2018, but that was due to blatant corruption facilitated by KPMG accounting sloth and non-existent SA Reserve Bank oversight.) Bankster oligopolies were able to keep their interest rate spreads high in both countries and, like financial institutions nearly everywhere, they are surviving Covid-19 with hedonistic profits and capital reserves intact.

It is especially ironic that Rogoff – a financial crisis expert – is sounding like a Chicken Little regarding South African and Brazilian banks, when he and indeed all other U.S. bourgeois economists (with the exception of Nouriel Roubini, whose forecasting Rogoff belittled in mid-2008) neglected the world-scale risk of sub-prime lending emanating from his own country’s financiers during the prior financial melt.

 

Austerity conditions bite South Africans hard

The IMF’s influence combines here in South Africa with a neocolonial mentality at Treasury, making fiscal austerity so extreme that the main parliament building in Cape Town burned down on January 2. For the first time ever, due to what officials termed ‘budgetary constraints,’ overtime pay was unavailable for parliamentary staff who are typically there on holidays, so they were told not to come to work. (The inferno’s cost was at least $60 million and it was uninsured, leaving national politicians homeless for the next five years.)

The IMF loan was the first since an $850 million credit in December 1993 – a loan which cemented neoliberalism, leaving Nelson Mandela’s first democratic government hamstrung and, six months after the loan was granted when Mandela took power in the first-ever democratic government here, unable to carry out its Reconstruction and Development Programme (RDP).

Those IMF conditions included reduction of import tariffs for labor-intensive industries (clothing, textiles, appliances, electronics, etc) which led to their local demise, much lower state budget deficit ratios (notwithstanding the vast inherited apartheid backlogs), and cuts to civil service real wages. Business Day reporter Greta Steyn described the choice: “The ANC wants to create an almost utopian society, described in the RDP. But it has to build that society while keeping its promises to the IMF,” and in respecting the latter, Mandela sacrificed the fight for greater equality, for poverty elimination and for lower unemployment.

The same was true in July 2020, in the midst of the Covid-19 crisis. Neoliberal conditionalitywas initially self-imposed by Mboweni in a “letter of intent” and codified by the IMF loan, destroying any hope for building back better, or even in many cases assuring survival. To follow the IMF letter of intent conditions, especially “fiscal consolidation measures,” Mboweni decisively adopted an austerity budget three months later, in October 2020. The promised $31 billion fiscal stimulus meant to mitigate Covid-19 damage to society, state (including the healthcare system) and economy adopted in mid-2020 was promptly curtailed, with only about a fifth actually hitting the ground.

As Keynesian economist Duma Gqubule explains, “National Treasury effectively cancelled the stimulus. If one looks through the smoke and mirrors of the package, the real stimulus – new money that was injected into the economy – was only $6.4 billion, which was equivalent to 1.8% of GDP in 2019.” The single largest chunk, he notes, was $3.6 billion “that the Unemployment Insurance Fund paid to people who were unemployed because of the lockdown,” which shouldn’t have been a fresh form of fiscal stimulus, since such funds in an overcapitalized fund should in any case have been available to the more than 1.4 million new jobless during 2020-21.

Moreover, in the 2020 loan documentation, both the IMF and SA Treasury agreed to electricity-generation privatization and other state-owned enterprise commercializations, dramatic civil service wage cuts, and budget tightening:

not only will the temporary relief measures be phased out as the pandemic wanes, but some of the expenditure cuts implemented to make room for the relief measures will either become permanent or be replaced by other cuts… The implementation of zero-based budgeting for national and provincial departments will reduce dependency on previous budgets and pursue a better alignment between revenue and expenditure. We intend to take measures that include further reductions in the wage-to GDP ratio, rationalization of transfers to SOEs, and streamlining of subsidies.

The result for Mboweni’s successor in mid-2021, Enoch Godongwana, was pressure to impose further (inflation-adjusted) cuts to the 2022-24 medium term budget: 23.8% in social welfare spending, 15.1% in the health budget, and 12.6% in primary and secondary education. Complained labor leader Zwelinzima Vavi last November.

The negative consequences of austerity are manifest in systemic paralysis across the public sector. Examples include the reduction in headcount of public servants, worsening infrastructure in schools, poorly maintained fleets, lack of equipment and resources, etc. For instance:

  • The KwaZulu-Natal Department of Basic Education has already reduced its headcount by 6,000.
  • In the Eastern Cape, 1,142 schools have been gazetted for closure. This means teaching posts will also be reduced. In March this year, the unfilled vacant posts in the Education Department stood at 24,000.
  • Home Affairs staff will be reduced by 834 jobs.
  • The South African Police Service headcount will be reduced by 10% between 2020/21 and 2023/24. This means by the end of the financial year 2023/24, there will be 18,399 fewer police officers.
  • Statistics South Africa’s headcount will be reduced by 146. The judiciary will shed 815 posts. Correctional Services will shed 1,027 posts.
  • The health sector is said to be sitting with 40,000 unfilled posts. Given the huge knock it took in the Budget, it is more likely to reduce its headcount in great numbers in the next three years.

So the IMF is generally pleased about South Africa’s fiscal consolidation, even in 2020 when Gross Domestic Product fell by 6.2% and genuine stimulus was sorely needed. Claiming there is now “no fiscal space to facilitate significant human capital and infrastructure investment,” the IMF’s December 2021 mission further argued, “An ambitious fiscal consolidation is necessary” while celebrating how Godongwana’s 2022-24 budget a month earlier “rightly outlines a consolidation path to unwind much of the pandemic-related support over time.”

Yet without serious state intervention, the official unemployment rate (counting those who have given up looking for jobs) skyrocketed by 9% from when Covid lockdowns began in March 2020 to 46.6% by September 2021. What was already an appallingly-exploitative economy, worsened dramatically.

 

No conditions against corruption

But when it came to anti-corruption conditionality, the IMF was absent. (To his credit, Rogoff does make this point in passing, at the end of his article.) South Africa should have been a lab for Covid-emergency lending with anti-graft conditions. After all, the Sandton-Stellenbosch corporate leaders are among the world’s three capitalist classes most prone to engaging in “economic crime,” PwC reports

Though Transparency International ranks the politicians and bureaucrats only 111h most corrupt in its 180-country annual survey, unfortunately the ruling African National Congress adopted an outsourcing ideology early on under neoliberal pressure, and that meant the 2020-21 international lenders would merely nudge-nudge wink-wink at Treasury’s services privatizers. Along with two $1 billion loans from the BRICS New Development Bank in 2020-21 and a $288 million African Development Bank loan, the IMF credit facilitated blatant corruption in Covid-related procurement.

The situation degenerated so far that President Cyril Ramaphosa’s health minister – his close ally Dr Zweli Mkhize, who once led the ultra-crucial KwaZulu-Natal province and retains enormous influence (vital to Ramaphosa’s ruling-party leadership election this year) – had to be fired by the reluctant president last August. Naturally, the IMF has said not a word about this, even in last month’s annual IMF mission statement.

In recent months, the IMF has only addressed South Africa’s corruption by reference to the 2009-18 Zuma-era period of “state capture,” in its in-house journal’s interview with former IMF/Bank chairperson Trevor Manuel. As South Africa’s finance minister from 1996-2009, Manuel was responsible for putting in place the very procurement system and outsourcing philosophy that allowed so much Covid-19 fraud to occur in 2020-21. An estimated 35-40% of state tendering entails overcharging by corporates, according to a leading Treasury official who quit after assassination threats in 2017.

South African society would be correct to demand that the state – hopefully run in future by a genuinely democratic government – refuse to repay the 2020 IMF loan on grounds it was Odious Debt, as with the other huge outstanding loan by the IMF’s partner institution, the World Bank: $3.75 billion in 2010, for a corrupt coal-fired power plant.

 

When IMF reform deforms, closure is overdue

There are so many ways the IMF needs fixing, and such adverse conditions in multilateral governance, that the two main suggestion Rogoff makes – 1) the “vast bulk of the funding they provide takes the form of outright grants, rather than loans” and 2) that “IMF funds are not used simply to repay private creditors” – are both too limited and too ambitious, given realpolitik of financial imperialism.

Take one example of the IMF’s failure to use its massive power constructively: fossil fuel subsidies that its researchers finally recognize are hastening the destruction of organized life on the planet. In September 2021, the IMF’s most recent call to reduce both explicit and implicit fossil subsidies was based on the obvious fact that

mispricing of energy is pervasive, and the potential benefits from reform are substantial… Globally, fossil fuel subsidies are were $5.9 trillion or 6.8% of GDP in 2020 and are expected to increase to 7.4% of GDP in 2025 as the share of fuel consumption in emerging markets (where price gaps are generally larger) continues to climb.

But the $5.9 trillion was based upon the assumption that damage done by CO2 amounts to “$60 per ton in 2020, a lower bound value given the goal to limit warming to well below 2 degrees C (prices for intervening or earlier years are inferred assuming prices rise annually at $1.5 per ton).” Actually, the Social Cost of Carbon baseline that the IMF should be using, according to research by respected European scientists published the same month, is $3000/ton, 50 times higher.

The same limitations are evident regarding what Rogoff considers the IMF’s “generous” approach to poor countries’ debt. A so-called Debt Service Suspension Initiative (DSSI) was introduced by the G20 in April 2020 to stave off sovereign defaults, and attracted requests for debt relief (mainly repayment delays) from 46 countries. But due to lender stinginess, as the Financial Times reported, “The $12.7 billion deferred fell far short of initial estimates which suggested the DSSI would provide about $20 billion of relief in 2020 alone.”

The IMF took in $1.9 billion from the poorest countries in 2020-21, suspending just 24% of repayments, playing Scrooge in comparison to China (45%), Japan (56%), India (60%), France (64%) and Saudi Arabia (71%). By last October, the world’s poorest countries paid $36.4 billion to service debt, according to the Jubilee Debt Campaign, “compared to $10.3 billion of debt payments that were suspended and $0.6 billion cancelled.”

And while the IMF may well rebut that a $650 billion Special Drawing Rights issuance in August 2021 represented a gift to all countries including the poorest, Rogoff is correct to observe that, “owing to the instrument’s arcane structure, developing economies stand to receive only a small fraction of the pot.” Africa received only $23 billion of the $650 billion – 3.5% – in spite of having 17.5% of the world’s population, and of that, $7.6 billion went to just two countries: South Africa and Nigeria.

Milan Rivié and Éric Toussaint of the Committee for the Abolition of Illegitimate Debt criticize the “paltry” character of the SDRs:

While this allocation may at first sight represent a breath of fresh air for the countries of the South, the reality is quite different… Compared with the thousands of billions of euros and US dollars, respectively, released since the beginning of the pandemic by the European Central Bank and the US Federal Reserve, and with the actual needs of the countries of the South, the allocation of $275 billion dollars is derisory.

Rivié and Toussaint remark on the politics behind the new SDR allocation:

Since the global crisis of 2007-08, the IMF has once again become inescapable and is present in a majority of countries in the South. To use this allocation is to reinforce the central position of an institution that has constantly failed since its creation, both because of its anti-democratic functioning and its deadly neoliberal ideology… private creditors, who are a large majority, have not yet granted any relief or cancellation of their debts. In such circumstances, the allocation is likely to be used first to directly or indirectly repay private creditors. The current dominating logic for countries of the South is to preserve their trustworthiness on financial markets and with investors. As they give in to the blackmail of creditors and rating agencies, States are clearly undermining international law, human rights and the United Nations Sustainable Development Goals.

Cooptation of semi-peripheral economic powers is another feature of the IMF’s evolution, similar to the imperial G7 accompanied by an imperial/subimperial G20 since 2008. The prior 2015 recapitalization of the IMF had not only doubled the Fund’s quotas to 500 billion SDRs, but dramatically increased several “emerging economy” shares, e.g. Brazil by 23%, Russia by 8%, India by 11% and China by 37%. But of the three largest African shareholders, two suffered dramatic declines in their voting power at the IMF that year: Nigeria by 41% and South Africa by 21%, alongside substantial declines in influence for Libya (39%), Morocco (27%), Gabon (26%), Algeria (26%), and Namibia (26%).

Finally, the main reform project now underway is a call to end the IMF’s regressive, unnecessary loan surcharges, which will squeeze $4 billion more from high-risk borrowers like Argentina this year. Begun at the Center for Economic and Policy Research in Washington, DC and given high profile support by former World Bank chief economist Joe Stiglitz and U.S. left politician Alexandria Ocasio-Cortez, the campaign nevertheless may fail due to U.S. opposition, even if the main European shareholders are more open-minded about dropping the charges.

In this context of profound inequality, it’s surreal to see Rogoff sounding off against the IMF’s alleged resemblance to an aid agency. Of course, it’s useful that he flags – at the end of the article, as if an afterthought – how the IMF facilitates capital flight, corruption and Ponzi-like repayment of old debts with new loans. Consistent with U.S. foreign policy dogma, Rogoff slams excessive Chinese loans to poor countries, not without justification. But Rogoff’s ultimate agenda, as ever, is fiscal contraction.

It reminds so much of 2013, when Rogoff’s intellectual dishonesty (writing alongside the World Bank’s current chief economist, Carmen Reinhart) about debt/GDP ratios – unveiled by a PhD student at U.Mass-Amherst – led the New Yorkerto remark:

The attack from Amherst has done enormous damage to Reinhart and Rogoff’s credibility, and to the intellectual underpinnings of the austerity policies with which they are associated. In addition, it has created another huge embarrassment for an economics profession that was still suffering from the fallout of the financial crisis and the laissez-faire policies that preceded it. After this new fiasco, how seriously should we take any economist’s policy prescriptions, especially ones that are seized upon by politicians with agendas of their own?

Or recall a moment in 2002, when Rogoff was so incensed by Stiglitz telling the truth about the IMF’s brutal neoliberal ideology and “third rate” staff, that on the IMF’s own website, still there today, Rogoff spread catty gossip (putting Stiglitz in a poor light) about how arrogant economists chatter at Princeton luncheons.

The IMF needs constant deep critique. The futile effort by Rogoff to poke little holes in its “generous,” “sanguine” Covid-era lending practices only reveals how ghoulish the institution has become, at a time that a light resurgence of global inflation will empower neoliberal economists and the IMF to tighten fiscal-austerity screws.

And it’s a time when we really need the Bretton Woods Institutions to start a rapid winding down, as part of a true global effort to build back better.

 

Patrick Bond teaches at the University of Johannesburg Department of Sociology.

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