Critique: The IMF’s Detrimental Help during COVID-19
The International Monetary Fund (IMF) was established in 1944 as a United Nations specialized agency to secure international monetary cooperation, Throughout the COVID-19 recession, the International Monetary Fund (IMF) has been working to alleviate economic downturns across the world. Unfortunately, it heavily promotes austerity measures to the countries it lends to. A study published by Oxfam in 2020 demonstrates that over 80% of the IMF’s COVID-19 loans recommend poor countries adopt austerity measures. This is incredibly harmful for developing economies in two ways.
First, austerity causes agricultural displacement. Sonkin writes that the fund’s macroeconomic agenda often leads to the loss of livelihood for local communities while benefiting agribusiness investors and financial speculators. The World Bank and IMF have played a pivotal role in facilitating the financialization trend through their support for market-led land reforms and financial sector deregulations, which enabled private investors’ access to large-scale land deals in developing countries and further speculation over commodity futures. Huddell furthers that the liberalizing measures forced by the IMF reduce the role of government in agriculture, pushing poor rural farmers out of the market due to an inability to compete.
Thus, Rao quantifies that a country’s agricultural output is predicted to decline by 4% within two years of starting an IMF program and 2% every year afterward. This is critical, as the Economic Development Institution explains that the agriculture sector is a major source of both income for citizens and capital for industrial growth in low-income economies. As the World Bank explains, agricultural development is one of the most powerful tools for ending extreme poverty. It is four times more effective than other sectors at raising incomes among the poor and is critical to feeding 9.7 billion people by 2050. Unfortunately, Feffer writes that IMF policies have destroyed African agriculture, and under the IMF the number of Africans living on less than $1 a day more than doubled, reaching 313 million.
Look at the events in Malawi, where an effective program providing fertilizer and seeds to the poorest families was ended by the IMF, which Bello explains led to food crises in 2001, 2002, and 2005. The crises were only solved after a new government abandoned the IMF’s suggestions and reimplemented the program.
Second, the IMF exacerbates inequalities. Reinsberg writes that it sets expenditure reduction targets for borrowing countries, but these cuts in government spending can widen income inequalities because low-income households often depend on government transfers. Statistical analysis proves the IMF exacerbates income inequality, showing that once a country participates in an IMF program, income inequality increases on average by 6.5% per year.
By looking at the past, this trend is clear. In Greece for example, Coppola notes that with the advent of the country’s debt crisis, there were repeated bailouts from the IMF accompanied by harsh austerity measures that were meant to reduce the country’s debt-to-GDP ratio. However, this resulted in their economy shrinking by over a quarter and unemployment rate topping 20%. Moreover, Portes reports that the U.K. began to pass austerity measures in 2010 and continued to do so to reduce its debt relative to its GDP. By 2022, these changes will cause the net incomes of the poorest fifth of households to reduce by about one-tenth on average while making little or no difference to the incomes of the richest fifth, in addition to increasing the child poverty rate by more than 10%.
The impacts have been catastrophic. First, widespread poverty. As the World Bank explains, proper management and expansion of agriculture are key to the development of low-income economies, and the IMF has proven itself incapable of managing agricultural resources. If the IMF continues to interfere with developing nations, it could lead to increased poverty across Africa and regional food crises from the decline of the agricultural sector. According to the FAO, Africa alone had 124 million malnourished people last year. This number will only increase as the IMF continues to implement its policies. Second, the IMF is impeding on recovery of the pandemic. IMF economists themselves find austerity policies harmful, as income inequality hurts the level and sustainability of growth. Indeed, on average, a consolidation of just 1% of GDP increases the long-term unemployment rate by 0.6%. This is crucial as the World Bank quantifies that; as advanced economies are projected to shrink by 7% due to the COVID-19 pandemic, developing economies will subsequently contract by 2.5%, reversing years of progress toward development goals and tip tens of millions of people back into extreme poverty. Austerity policies from IMF programs in said developing economies, which 80 are currently participating in, could worsen these numbers and slow down their recovery.