“Does the Fund Impose Austerity?”

J. de Larosière, Managing Director, IMF

This pamphlet, written by the Managing Director of the IMF, was distributed to address the “misconception” that the IMF through their development policies and aid packages imposes austerity on its member nations, particularly the third world/developing countries. The basic justification given by de Larosière and the IMF is that developing countries can have no hope of achieving long-term growth if they “postpone needed adjustment.” The pamphlet is written in the largely misleading language of the IMF and conveniently enough the “supporting data” is also drawn from the depths of the organizations own ambiguities. Keep in mind that the IMF is not a sort of independent, supranational economic mediator. They are a corporation as much as any other and as such their primary goal is profit. The director gives five reasons (arguments) for why the accusations of austerity (accusations that are often uttered by the member countries themselves) are mere misconceptions.

1. “Economic adjustment is inescapable.” Since the first oil shock and the world recession that followed many countries had exacerbated the already devastating economic impacts by delaying internal adjustment in favor of external borrowing. Inasmuch as adjustment is inescapable the governments will eventually reach a point where they can borrow no more. In such a situation the failure to adjust via changes in economic policy cannot create employment and promote long-term growth because experience has shown that this lack or fiscal discipline can only deteriorate that which has already been hurt.

2. “Adjustment as perceived by the International Monetary Fund is not synonymous with lower growth or economic retrogression.” Public opinion of the Fund has reflected a belief that the effects of IMF programs are in fact consistent with economic decline for the people in countries receiving aid rather than development. In response the IMF states that the economic decline in Latin America for example began prior to any fund intervention as a result of their prolonged maladjustment to the world recession and their external debt. Accordingly IMF programs are designed for a more “rational combination” of economic measures to achieve a better balance of payments equilibrium and thus create opportunity for sustained growth. As a side note, though the IMF does not suggest that their adjustment policies are synonymous with economic decline, such is the consequence in an overwhelming number of cases.

3. “While these programs do entail sacrifices, the austerity born of adjustment must be compared to the alternatives.” Comparative analyses conducted by the IMF themselves has not surprisingly shown that the countries that were in economic “difficulties” (some consistently near collapse) would have been much better off if the policies advocated by the IMF had been instituted. With this in-depth analysis in hand we should therefore compare the austerity associated the programs (the Managing Director now using the very language he had previously advocated has been incorrectly associated with the IMF) to the alternatives that would result from nonadjustment, which by definition would not be connected with the Fund’s financing that, according to the IMF, obviously eases the burden of adjustment.

4. “With regard to the social costs of adjustment programs, by definition any action to restore balance of payments equilibrium entails costs, since it tends to reduce the absorption of external resources.” Though social costs will be incurred it is not the Fund’s place to decide how they are divided up within the society, this is left to the government. But this fails to recognize that IMF assistance is often contingent upon the local government creating policy conducive to the IMF’s ability to extract resources while simultaneously keeping countries in debt.

5. “As to the impact of exchange rate adjustments on the least-favored sectors of the population, the effects vary.” IMF states that social groups can benefit from a depreciated domestic currency especially in cases with large agricultural economies because small farmers would benefit from an attractive currency. But de Larosière stresses that social analysis of the effect on poorer populations can be oversimplified. To close he adds that Fund programs need to be supported by long-term structural efforts that can come from improved interconnections with other development agencies, particularly the World Bank, who already works very closely with the IMF. And this is the only way we can save the sinking ship of the developing world.

Summary by Cristopher B. Sapstead