IMF SETTLEMENT IN THE 21ST CENTURY: HOW THE INTERNATIONAL MONETARY FUND HAS REPLACED COLONIAL POWER IN AFRICA
Every school of thought is like a man who has talked to himself for a hundred years and is delighted with his own mind, however stupid it might be.
~ J.W Goethe, 1817, Principals of Natural Science
Export or Die. This is the prevailing recommendation by the world’s predominant school of neoclassical economic leaders. I ask: what is economics for if not to eliminate poverty and suffering?
A leading group of economists informally known as the “Chicago Boys” has adopted a style of macro-economics known as free-market libertarianism, which is employed by the world’s dominant financial institutions like the International Monetary Fund and the World Bank. Here, classic economic theories such as market liberalization, free trade, and minimal government interference in market forces theoretically equalize the balance of payments and deficit. However, this school of thought is far from perfect. It favors not rigorous, quantitative mathematical analysis, but results-based textbook theory. It adheres to the belief that private morality is not the state’s affair, so activities like the arms trade, the sex trade or the drug trade, which arguably harm only those involved, should not be illegal. Therefore, libertarianism lacks concern for social justice and is only concerned with ‘capitalization’. Adherents to libertarianism should not be confused with the more traditional liberalists, who are generally seen further left on the political spectrum.
Through its Structural Adjustment Program, the International Monetary Fund (the Fund) has legitimized neocolonialism in Africa in the ghostly form of “free market” libertarianism, fueling poverty and reaping profits. This cookie cutter model for development poses a problem for Africa because no two situations are alike. Each country requires its own formula and model for development, which also embrace more egalitarian principals.
However, for the purpose of this paper, I will focus on Africa as a whole. First I will argue that through its Structural Adjustment Program, International Monetary Fund (the Fund) has become the new legitimate colonizer in Africa. Secondly, I will show how the North profits from the South, and then argue that this balance of power is perpetuating poverty. Finally, I will offer alternative suggestions for development.
The effort to transform African colonial states from colonies to independent nation states proved to be a desperate struggle in the post-colonial era. Independent political, social and ethnic claims to state power challenged independence during the transition, and after independence, to a free democratic nation state. As a result, Africa faced major challenges in its economy including rampant inflation and stagnating growth. During the 1980’s, poverty and hunger were at all time highs with more than half the population malnourished. The world’s poorest region realized a GDP per capita income decline of -1 percent annually during these years due to inter alia, “poor economic management and corruption.”[1] Africa desperately lacked the fundamental structure and organization needed for development in a fast global economy.
Turning to the North, Africa’s political elites sought relief from this massive suffering. IMF macroeconomic theorists from the “Chicago School” offered to deliver immediate relief in the form of hard currency “policy-based”[2] loans if governments agreed to “conditionalities” designed to reform the African economy. The “conditionalities” stipulated that money would be lent only to governments who complied with Structural Adjustment Policies while simultaneously accepting strict rules for their implementation.[3] When compared to colonialism, Structural Adjustments’ impact on society has been devastating.
Structural Adjustment Policies gave legitimacy for Africa’s new dependency on the North. Michel Chossudovsky points out in his book The Globalization of Poverty and the New World Order, two phases of reform would provide the context for this dependency to occur. Phase one deals with “short-term” macro-economic stabilization whereby governments are forced to devalue the national currency, liberalize prices, and practice strict budget austerity.[4] In Africa, these conditional ties were all enforced through the IMF, as prerequisites for lending.
In theory, manipulating a country’s exchange rate by devaluing its currency reduces excess demand within the national economy. Here we see lowering of the prices paid to the direct producers of goods as well as the real wages paid to laborers. The devaluation results in immediate and sharp price hikes, triggering inflation, while simultaneously reducing purchasing power through hard currency devaluation manifested in wages and earnings. This also intends to free up government revenue so it can immediately be put towards debt servicing. Part in parcel with devaluation comes the direct takeover of the countries Central Bank, meaning that the IMF controls the fiscal and monetary praxis.[5]
Price liberalization created major dependency on the West, particularly amongst African farmers. As part of this program, domestic grain prices were exposed to “free-market” competition through deregulation. Imports of staple food items were liberalized, flooding local markets with foreign grain and forcing down prices of locally produced foods, effectively pushing local farmers out of their own market. Moreover, transnational corporations move in to take advantage of the privatization of national industries (as prescribed by the IMF) and cheap labor. Planting cash crops for the export industry, transnational corporations have replaced old colonial powers in Africa. The IMF and transnational corporations are not mutually exclusive of one another. Powerful corporations frequently meddle with governments to gain favor. The United States, as the biggest depositor to the IMF and holding the most votes, supports the requests of its powerful corporations.
Budget discipline proved to be another way for the IMF to formalize control over Africa’s capital and resources. Government jobs, education, hospitals and social programs were all abandoned for IMF assistance. Africa’s entire system crumbled under IMF loan “conditionalities” paving the way for a net transfer of wealth in the form of debt servicing, furthering the cycle poverty.
The second phase of reform described by Chossudovsky came in the form of “Structural Reform”. Here, we see further power stripped from African governments in the name of “stabilization”. Measures pertaining to trade liberalization, the deregulating of the banking sector, privatization of state enterprises and agricultural land, tax reform, along with “poverty alleviation” and “good governance”[6] all take precedence, deepening national dependency on foreign powers. Thus, The Fund legitimately becomes the new colonizer of Africa.
Financial institutions such as the IMF simply serve as de facto state interventionalists, bypassing democratic processes. It is all however legitimized by the “intellectual sustenance”[7] provided by western think tanks, like the “Chicago School” of economic thought. The lending policies of Western institutions like the IMF create a positive feedback cycle of payback to the North, perpetuating poverty in the South by disenfranchising the government’s abilities to take control of their own affairs.
The North profits from the continuous debt servicing of the South. Every year billions of dollars are transferred to wealthy bankers in the West who profit from poverty. The IMF pays no heed to this injustice. According to Chossudovsky, between 1982 and 1992, the share of exports allocated to debt servicing by Sub-Saharan Africa, in the years of 1982-92, was 24.8%.8 However, during this time developing nations’ debt crisis only grew, exponentially (Illustrated in the appendicle graph 3.1).[9] Many countries having received IMF loans are no better off today than before receiving them. For example, the country of Zaire received $1.8 billion in IMF loans between 1972-95. In 1972, the per capita GDP was $683 US dollars; in 1993 it was 54 % less than pre IMF intervention, at $317 US dollars.[10] Over the long term, debt restructuring becomes highly profitable. To this effect, poverty becomes an output on the supply side of neoliberal-macro-economic theory.
Africa’s economic subordination under the Fund’s structural adjustment policies is a clear example of domination and control, as observed by old colonial powers. Therefore, Structural Adjustment Policies subsequently lead to the erosion of African states’ economic and political sovereignty, creating a balance of power that perpetuates poverty. Twenty years ago, in the midst of the Cold War, America gave financial backing through institutions like the IMF for various state’s Cold War alliance, particularly the Congo. As Frederic Cooper acknowledges, “ Some of Africa’s most conflict-ridden states in the 1980’s and 1990’s had been among the largest recipients of economic and military aid entered to foster Cold War alliances.”[11] Perhaps this was the tipping point for Africa’s dependency on foreign aid, which created such a balance of power. Entering into the fast growing European and American world economies with out the structure and organization to facilitate development made dependence all that more agreeable. Here we can see how the International Monetary Fund has stepped into Africa with billions of dollars of aid under tight rules and “conditionalities” only to duplicate the effect of former colonial powers. Consequences of structural adjustment have created a convenient dependency for both corrupt African elites and Western elites, while millions and millions of people suffer from HIV/AIDS, curable diseases, malnutrition and starvation and abject poverty. Yet amazingly they have hope.
What has to be done? The International Monetary Fund has received a failing grade from experts, “{The IMF} encouraged country after country to continue with unwise and unsustainable policies…the end result has been more rather than less financial instability”, Milton Friedman in the Wall Street Journal on October 13, 1998; “The Fund’s record is mediocre at best.” Jeffery D. Sachs in the Wall Street Journal on July 21, 1994. [12] Global inequality between the rich and poor is widening, the planet and atmosphere are decaying and archaic institutions uphold power and beliefs out of touch with reality. There are arguably numerous solutions to Africa’s plight. However, without disservice, “We can’t solve problems by using the same kind of thinking we used when we created them.”[13] Indeed what is needed is equilibrium between the goals of the progressives and those of the conservatives. The argument of the former criticizes market-oriented economists who believe increased equality will be achieved, eventually, though a trickling down of monies where capital is centralized in the hands of a corrupt few. Alternatively, what would alleviate pain and suffering sooner is greater distribution of capital.
While development capital is needed for industry to flourish, so too does the base population need capital to invest. Two important factors can lead to this take off point. One is land distribution. The poorest people living in rural areas must be empowered to sustain themselves, in order to eliminate the urban-rural gap. The fruits of rural labor will trickle up to the market where the national economy will find its balance of payments. The second is micro-credit loans. Small lending schemes have risen up throughout some countries in Africa. Women micro-entrepreneurs are finding ways to care for orphans and elderly by starting very small-scale trade with very small loans provided by independent NGO agencies such as the Live Above Poverty Organization (LAPO).
However, infant industries also need protection from “free market” forces. To this effect, Africa would benefit from import substitution industries where domestic needs are produced and protected for the national economy, rather than importing expensive necessities. Here, African crop farmers should also receive subsidies, while tagging tariffs on imports. This will allow for capital account accumulation and help equipoise the balance of payments deficit. Currently under IMF rule, farmer subsidies are prohibited.
Poverty in Africa cannot all together be eliminated without the effort too, of nearly every American, Canadian and European citizen. It is time we realized the way in which we think and act. Part of that involves stepping out of our nests to find out what’s happening in the world and why. At the root of our prosperity is suffering, ironically, not just the pain and suffering of millions of have-nots, but also our own. The “free market” ideology promotes material wealth above all else. Kevin Danaher says this has created an “ethical bankruptcy”, pointing out that “free market” ideology goes against the great spiritual teachings of all the world’s relitions.[14]
In concluding, libertarian macro-economic thinking is fueling a “free market” system that perpetuates poverty and is out of touch with reality. I have argued that the International Monetary Fund, having adopted this style, has failed in Africa’s post-colonial development. Furthermore, the Fund has indeed recolonized many African states, though its Structural Adjustment Program. Two phases of reform have created various national dependencies on foreign power: short-term, macro-economic “stabilization” reforms and “structural reform”. I argue that these reforms have eroded political and economic state sovereignty, such that the Fund has legitimized neocolonialism in Africa. In developing the argument that the Fund has profited from this dependency, I developed the notion of a positive feedback cycle, where net transfers of capital are gained through lending policies of the IMF. To highlight this point, I showed how long-term debt restructuring is perpetuating poverty. All this makes the IMF the new colonial empire of Africa. Through its “intellectual sustenance” we are able to see how the IMF is able to defend, logically, its policies for the South. Finally, Africa can transform itself from poverty to a beautiful, culturally rich and revolutionary example, by going inward.
Bibliography:
Chossudovsky, Michel. The Globalization of Poverty and the New World Order. Quebec, Canada. Center for Research on Globalization. 2003.
This book discusses a New World Order which feeds on human poverty and the destruction of the environment, the role of the IMF and World Bank play in this world order, as well as the free market economy and trade liberalization.
Cooper, Frederick. Africa Since 1940: The past of the present. Cambridge, Cambridge University Press. 2002.
This book discusses the history of decolonization and the independence of Africa. Covering historical processes which have shaped Africa’s current position.
Danaher, Kevin 10 Reasons to Abolish the IMF & World Bank. 2nd ed. New York. Seven Stories Press. 2004.
This book is an in depth critique of the IMF and World Bank policies as well as the problems with the current global market economy and offers suggestions for a more Democratic global economy.
Goode, Richard. Economic Assistance to Developing Countries Through the IMF. Washington, D.C. USA. The Brookings Institution. 1985.
This book, published by the Brookings Institution, discusses IMF policies and operations. It explores the extent to which the IMF provides assistance to developing countries and looks in to different models and proposals of assistance.
McQuillan, Lawrence J. and Peter C. Montgomery. Ed. The International Monetary Fund: Financial Medic to the World? Stanford, California, USA. Hoover Institution Press. 1999.
This book is a compendium of information written on the IMF. It presents opposing viewpoints on the IMF.
Endnotes
1. Handelman, Howard. The Challenge of Third World Development. 3rd ed. Upper Saddle River, New Jersey. Prentice Hall. 2003. P.5.
2. Michel Chossudovsky. The Globalization of Poverty and the New World Order. Quebec, Canada. Center for Research on Globalization. 2003. P. 42.
3. Ibid. P.43.
4. Ibid. P.48.
5. Ibid. P.50.
6. Ibid. P.54.
7. Frederick Cooper. Africa Since 1940: The past of the present. Cambridge, Cambridge University Press. 2002. P. 92.
8. Michel Chossudovsky. The Globalization of Poverty and the New World Order. Quebec, Canada. Center for Research on Globalization. 2003. P. 37.
9. Ibid.
10. Brett D. Schaefer. Why the IMF is Ineffective. In The International Monetary Fund: Financial
Medic to the World? Ed. Lawrence J. McQuillan and Peter C. Montgomery. Ed. Stanford, California, USA. Hoover Institution Press. 1999. P.56.
11. Frederick Cooper. Africa Since 1940: The past of the present. Cambridge, Cambridge University Press. 2002. P. 160.
12. Lawrence J. McQuillan and Peter C. Montgomery. Ed. The International Monetary Fund: Financial Medic to the World? Stanford, California, USA. Hoover Institution Press. 1999.
P. 127 & 57.
13. Albert Einstein.
14. Kevin Danaher. 10 Reasons to Abolish the IMF & World Bank. 2nd ed. New York. Seven Stories Press. 2004. P. 96.
