IMF’s role in crisis is insufficient and the RST structurally fails

Last week's Annual Meetings of the World Bank and the International Monetary Fund - the Bretton Woods Institutions - was the first face-to-face gathering since the outbreak of the Covid-19 pandemic. The need for ambitious action could not be greater. The two institutions stressed that the world is facing multiple and interconnected crises - defined as a “polycrisis” by historian Adam Tooze - and outlined by the World Bank as: ‘Increased poverty. Food shortages. Energy shocks. Debt crises. Climate change. Inflation. War.’ The Bank’s forecast also predicted “the world may be edging toward a global recession in 2023”, while the IMF warned ‘the worst is yet to come’ for the global economy. This will have dramatic consequences for already rising poverty levels and inequalities. However, there was a disconnect between the alarming messages delivered by the World Bank and IMF - and by activists on the streets of Washington DC and around the world who were calling for action - and the underwhelming practical responses of the institutions. ¶ The main takeaway of the week is that the Bretton Woods Institutions have failed to deliver what is needed, proving yet again that they are unfit for purpose. The problem starts with their governance system, which simply must now be reformed. ¶ Designed in 1944, when power relations were driven by colonialism, the current governance structure and quota distribution, which gives the greatest power to a few countries, follows that same (neo)colonial logic. Mia Mottley, the Prime Minister of Barbados, argued in her address to the 2022 United Nations General Assembly, that the time had come “for a review of the settlement of the Bretton Woods institutions.” She said that the agreement that gave rise to the WB and the IMF “no longer serv[ing] the purpose in the 21st century that they served in the 20th century”. This was also raised by speakers at a civil society session dedicated to IMF governance, where the need to address the unbalanced governance structure and to end the ‘gentlemen's agreement’ that guarantees the US-European leadership at the BWIs, was clear.¶ A first step to deliver the systemic governance reform so desperately needed in both institutions would be a major change to the quota distribution. A major opportunity to advance with this reform is the upcoming 16th review of IMF quotas (the previous review failed to introduce any meaningful reforms). During the meetings IMF Managing Director, Kristalena Georgieva, acknowledged the high cost of failing to review the IMF quota, admitting to civil society organisations (CSOs) that “it undermines the credibility of the IMF, it undermines our ability to serve our members”. ¶ The polycrisis reveals the true colour of IMF policies¶ Civil society has for years denounced the gap between IMF rhetoric in favour of government spending on public services and social protection, and its practice that continues to recommend austerity measures. This year, the gap narrowed, as the rhetoric moved closer to the practice. Georgieva made clear that tackling inflation and reducing fiscal deficits are the priority, even if we are still deep in crisis with no end in sight, and even if countries have already contracted their public spending. As the 2022 edition of Oxfam and Development Finance International’s Commitment to Reducing Inequality Index shows, during the pandemic, half of low- and lower-middle-income countries saw health spending fall; half of the countries tracked by the Index cut social protection spending; 70 per cent cut education spending; two-thirds of countries failed to increase their minimum wage in line with gross domestic product. ¶ The standard IMF answer to CSOs’ concerns about the new wave of austerity cuts is that countries have to intensify social protection and other support measures targeted to the poorest and most vulnerable people. As Eurodad argued previously, targeted systems have proven to be inefficient at reaching those in need, commonly excluding over half of the intended beneficiaries and reinforcing gender stereotypes, rather than challenging them. In fact, civil society attending the Annual Meetings were astonished by the limited interest of IMF staff to seriously engage with CSO concerns, despite new evidence that by next year 85 per cent of the world will be affected by austerity. ¶ The only two measures announced to help countries face the crises and increase their fiscal space were the creation of a temporary Food Shock Window (FSW) for emergency lending, and the operationalisation of the Resilience and Sustainability Trust, both debt-creating tools.¶ The FSW might provide some short-term relief to countries struggling to pay for their food imports, but it does nothing to correct the IMF’s long held support for trade liberalisation measures, market-led land reforms and financial deregulation of agriculture, which have contributed to creating a dysfunctional and unbalanced global food system.¶ The operationalisation of the RST is the latest move of the so far-failed attempt to rechannel the 2021 Special Drawing Rights (SDRs) allocation to countries that need it the most. While the IMF announced that Rwanda, Barbados and Costa Rica have officially applied for the RST, no SDR has been rechanneled yet. ¶ At the Meetings, civil society reiterated concerns previously expressed about the RST, such as the fact that eligible countries must have a concurrent programme with the IMF, meaning they will have to withstand the Fund’s macroeconomic recommendations and definition of a stable macroeconomic environment, whether they agree with it or not. An additional concern is the emphasis placed on the hope that the RST will play a catalytic role for private capital to support climate needs, introducing reforms that will make it easier for governments to play a ‘de-risking role’ and create incentives to attract private investment in the energy transition. This sounds too much like WBG’s ‘maximising finance for development’ approach, termed by Professor Daniela Gabor the ‘Wall Street Consensus’, which has been questioned due to its focus on driving private capital into areas that should remain under the State. This is also something that may end up increasing the financial vulnerability of the Global South, serving the interest of private capital instead of those of people and the planet. None of these issues were addressed.¶ The RST, with its combination of macroeconomic programmes in the area of climate adaptation, energy transition and pandemic preparedness, will turn the IMF into a major actor in climate action. However, its limited expertise in the area, its unwillingness to move away from conditionality and austerity, and its unequal governance system make it ill-placed to play such a role. Climate action and climate finance should follow the principles of ‘polluters pay’ and ‘common but differentiated responsibilities’. They should include a strong element of justice and retribution, acknowledging that the most important policy issue in economics today is how to tackle climate change in an equitable, just, gender-responsive and human rights-based manner. All of these are yet to be seen in the IMF’s engagement with climate. ¶ The IMF should use a greater variety of instruments to help countries expand their fiscal space, such as the elimination of surcharges - a system of fees on loans from the institutions; a new allocation of Special Drawing Rights - especially if targeted to developing countries; and more focus on the need for debt restructuring. Yet none of these measures were addressed during the Meetings.