Long before COVID-19, the multilateral system was in crisis. Established in the aftermath of World War II on a vision of increased cooperation and shared prosperity, the IMF and the World Bank built instead a legacy of policies that favour the interests of international capital, at the cost of working people throughout the world. As the world faces a pandemic along with the biggest economic crisis since the Great Depression, a coordinated global response that returns to an initial vision of shared prosperity is essential.
Since the 1980s, with a push from the Reagan administration, the IMF and World Bank adopted the ideology of market fundamentalism, which continues to be the dominant view in both institutions. These views, which are now referred to as the Washington Consensus, were implemented through conditions attached to loans. Borrowing countries were forced to undergo massive liberalization and deregulation of their economies, give up measures for capital account management, weaken protections for workers, and massively cut their spending. The promise was that if only the government got out of the way, markets would work their magic and bring development and growth. These promises did not materialize.
As the failure of the policies imposed by these institutions through structural adjustment programmes became undeniable, some steps towards reform were taken. However, the changes were mostly in the rhetoric of the institutions rather than a fundamental shift in operations. The World Bank has maintained its bias for privatization and private provision of services, while the IMF continued imposing the same type of structural reforms it now acknowledges to be linked with increased inequality.
Beyond hampering growth and development outcomes, these policies directly impacted the health and social safety net needed during crises. The World Bank has promoted private involvement in healthcare, while its private-sector arm IFC supported Public-Private Partnerships in health that threaten equity – including one involving tax evader and labour rights violator Fresenius. Although the World Bank endorsed universal social protection, it has continued to promote policies that put the burden and risk on individual workers. It has been thoroughly documented that the legacy of structural adjustments programmes in Africa hampered the ability to respond to the Ebola crisis. Furthermore, IMF conditionality often demands cuts in the public employment, which results in cutbacks to the already meager number of healthcare workers. Ecuador’s inability to properly respond to COVID-19 is in part a consequence of the massive cuts to its health budget as part of an IMF programme.
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As we wrote in the openDemocracy series on preparing for the next crisis, the global financial crisis of 2008 made a beleaguered IMF relevant again. The IMF’s immediate response to the crisis was laudable: it called for coordinated stimulus and took measures to support the liquidity of its members. The Fund issued additional Special Drawing Rights, an international reserve asset, to all members to provide much needed liquidity support. However, the IMF soon reverted to its old playbook, and by 2010 was again imposing harsh austerity on its borrowers, along with pushing reforms that weakened protections for workers, suppressed minimum wages and attacked collective bargaining.
The recovery from the global financial crisis of 2008 was incomplete and uneven, leaving behind a weakened social contract and growing inequality. Private and public debt burdens continued to grow to clearly unsustainable levels. Austerity policies did little towards their stated goal of reducing debt burdens,instead hampering growth and making working people bear the brunt of the adjustments. As economic anxieties grew, millions all over the globe took to the streets to demand a renewed social contract.
Adding to their problems, emerging and developing countries are experiencing record capital flight. Low interest rates in advanced economies pushed those seeking higher returns, often through speculative investments, to emerging and developing markets. Now, as these investors pull out, the outflows put countries at risk of balance of payment crises and currency devaluations that would make debts unpayable and could collapse their economies. This is a problem which illustrates the limitations of a development model designed around attracting foreign investors at all costs, not distinguishing speculative investments from productive ones.
Countries in the G20 have announced record stimulus measures, to support their health systems, and keep their economies afloat during the lockdowns mandated due to the virus. However, this is a global crisis, and not all countries have the ability to respond. This is where the World Bank and IMF, along with donor governments, need to step up and provide immediate assistance to support the public healthcare systems they played a role in crippling. This includes offering support for lost income to workers and businesses, and backing stimulus measures for recovery once the virus is contained.
In a global economy where most liabilities and debts are denominated in dollars, currently the Federal Reserve is extending swap lines that provide dollar liquidity to other advanced economies and select emerging market economies. As an institution tasked with maintaining global financial stability, the IMF needs to do more. A new issuance of Special Drawing Rights would go a long way in providing immediate liquidity support to all the member countries of the Fund. This new allocation should be accompanied by a trust in which advanced economies that do not need the additional support can donate part of their allocations to support lower income members as they seek to preserve stability and employment.
For many low-income countries, the debt repayments have been higher than healthcare spending. The IMF, the World Bank, as well as bilateral creditors need to suspend debt repayments during the crisis and create a comprehensive process to restructure and cancel debt. This is imperative for the developing world to recover from this shock and achieve the Sustainable Development Goals.
The other immediate step to protect people is a global fund for universal social protection to create the basic floor of economic security that is lacking for vulnerable people in low-income countries. The response and recovery is an opportunity for the World Bank to support true universal social protection and health coverage, not individualized, private-led or narrowly targeted approaches. Both of the international financial institutions can use the recovery to turn the page on policies that starve social spending and the workforces for public health and education. Investments in the care economy and education, alongside fiscal stimulus, can create an equitable and speedy recovery.
However, World Bank President Malpass has already argued that structural reforms to reduce “excessive regulations” will speed recovery, echoing the infamous 'Doing Business' report that has been the Bank’s battering ram. The IMF has pledged $100 billion in emergency loans for its members that can be disbursed rapidly and carry no conditionality. However, these loans are unlikely to be large enough to address the scope of the problem, and can be seen as an intermediate step for countries later entering full fledged IMF programmes. Despite a well documented failure of IMF programmes that impose austerity and structural reforms to achieve their stated goals, recent publications from the IMF continued to praise structural reforms as a way to relaunch growth. It is extremely worrisome that the IMF could turn to these measures once again.
It is possible, nonetheless, to push back. A raft of positive changes are coming at the Bank thanks to negotiations with the US House Financial Services Committee led by Representative Maxine Waters. The Doing Business report will now completely abandon a labour indicator that was suspended in 2010 under criticism that it was simplistic and destructive, reversing course from a Bank plan to revive the indicator. The Bank will also open a review of the equally misguided tax indicator of the report. Elsewhere, IFC will freeze support to private, for-profit education and sweeping measures will be taken on accountability and transparency.
The ongoing Spring Meetings will play a key role in setting the longer term agenda of how the IMF and World Bank will respond to this crisis. An uncoordinated response will leave the most vulnerable people and countries behind, and could permanently end trust in multilateralism. Governments and the international financial institutions, if they feel enough popular pressure, can choose the path of reform and building a better world.