Info on Finance and Development (Oct17/03)
Geneva, 19 Oct (Kanaga Raja) - The International Monetary Fund (IMF) should change its priorities and finally let go of the outdated conditionalities of privatization, deregulation of markets, and "austerity" in social services, which in the past have engendered human rights violations, and instead make loans subject to a new set of conditions.
This is the view of the Independent Expert on the promotion of a democratic and equitable international order, Mr Alfred de Zayas (of the United States), in a report presented to the seventy-second session of the UN General Assembly in New York.
Bearing in mind that power dynamics are changing the international order, it is time for the World Bank and IMF to revisit their Articles of Agreement and discover their new vocation to promote development and human rights through "smart" lending practices that benefit not only banks and speculators, but billions of human beings, he said.
Unlike the World Bank, which is increasingly aware of the risks and the consequences of its activities and which undertakes to investigate and take action, IMF still appears more committed to the obsolete neoliberal economic model, he noted.
According to a UN news release, in presenting his report on 17 October, Mr De Zayas said: "I deplore the fact that the lending practices of the international financial institutions sometimes go against the aims of the United Nations, not just in the field of human rights, but also in achieving the Sustainable Development Goals."
"The IMF currently imposes conditions which discourage social spending and therefore hinder States' fulfilment of their human rights obligations. Often these conditions increase unemployment, lower standards governing labour, health and the environment, and reduce access to free quality education," he said.
"From this point forward, the World Bank and the IMF must work in tandem with the UN system, including with the specialised agencies, funds and programmes, such as the UN Conference on Trade and Development and the ILO," he added.
"International law will continue evolving for the good of mankind. At the same time, no international financial institution or commercial agreement is above international law. All must respect the overarching international human rights treaty regime," the rights expert said in his report.
"The human rights dimension in lending can no longer be ignored," he underlined.
Earlier last month, the Independent Expert had presented a separate report to the thirty-sixth session of the UN Human Rights Council in which he called on the World Bank to embark on an inclusive process for drafting a new and separate human rights policy, which should embody a commitment to integrate human rights into its work (see SUNS #8532 dated 15 September 2017).
The present report draws attention to International Monetary Fund (IMF) and, in particular, the "conditionality" of its loans.
According to the report presented to the UN General Assembly, the Independent Expert is of the view that, in the discharge of its functions, the IMF should ensure that its lending practices, and in particular the "conditionality" thereof, do no harm to developed or developing economies and do not conflict with established human rights norms, such as by imposing privatization of government services, deregulation of markets or "austerity" measures that, as empirical evidence has shown in many cases, have led to widespread unemployment and misery.
The Independent Expert does not suggest that IMF staff is indifferent to human rights, rather he sees a need for IMF to anticipate the consequences of the "conditionality" of its lending practices and to integrate ex ante human rights assessments so that its activities do not lead to violations of human rights.
Mr De Zayas noted that in its Spotlight on Sustainable Development 2017 report submitted to the 2017 session of the high-level political forum on sustainable development, the Civil Society Reflection Group on the 2030 Agenda for Sustainable Development assessed how privatization and corporate capture were hijacking the 2030 Agenda for Sustainable Development.
It observed that, while Governments committed in 2015 to a revitalized global partnership and declared that public finance had to play a vital role in achieving the Sustainable Development Goals, "the combination of neoliberal ideology, corporate lobbying, business-friendly fiscal policies, tax avoidance and tax evasion ha[d] led to the massive weakening of the public sector and its ability to provide essential goods and services".
"There is no shortage of opinions about the impact of the World Bank and IMF on the international order. Some observers think that the Bretton Woods institutions have greater impact on world affairs than all the resolutions of the General Assembly, the Economic and Social Council and the United Nations Conference on Trade and Development (UNCTAD) combined," said the Independent Expert.
IMF MANAGEMENT AND LOAN CONDITIONALITY
According to the report, notwithstanding the existence of excellent empirical studies, accurate diagnoses and innovative reform proposals, a regrettable level of inertia prevails in IMF management.
The Independent Expert noted that in "The Shock Doctrine", Naomi Klein focuses on the fundamental problem: economic shock therapy and crisis opportunism. She describes how the doctrine "privatize or die" has been imposed on crisis-racked countries, noting that in the 1990s "the [United States] Treasury and the IMF became much tougher in their demands for instant privatizations".
She describes the "Tequila Crisis" in Mexico and the "Wild West" privatizations in the Argentina of Menem and the Bolivia of Goni and the Russian Federation of Yeltsin, which had devastating human rights consequences.
According to the Independent Expert, some IMF insiders resisted this trend. For example, senior IMF economist Davison Budhoo memorably resigned, after accusing the Fund of using "statistical malpractice" in order to exaggerate the level of economic crisis in countries, following which IMF would propose its own solutions.
In Trinidad and Tobago, for example, the oil-rich country was made to look far less stable than it actually was.
In another instance, Davison Budhoo contended that the Fund "invented, literally out of the blue", huge unpaid government debts.
These "gross irregularities", which he claimed were deliberate and not mere "sloppy calculations", were taken as fact by the financial markets, which promptly classified Trinidad and Tobago as a bad risk and cut off financing.
Mr De Zayas said that this mismanagement in the Caribbean had its counterpart in Asia during the 1990s Asian financial crisis.
He cited Naomi Klein as commenting: "As far as the IMF was concerned, the crisis was going extremely well. In less than a year, it had negotiated the economic equivalent of extreme makeovers for Thailand, Indonesia, South Korea and the Philippines ... The IMF "help" had turned crisis into catastrophe."
Even the IMF Independent Evaluation Office concluded that the structural adjustment demands imposed on Asian countries were "ill-advised", warning that "crisis should not be used as an opportunity to seek a long agenda of reforms just because leverage is high".
Improving people's lives would require IMF to abandon obsolete economic models and take a human rights- based approach, said the Independent Expert.
Indeed, he is of the view that a change, away from the Washington consensus of privatization, deregulation and "austerity measures" to a more "progressive" philosophy of inclusive development, is essential.
Recently, he noted, the IMF has made a considerable effort at improving its image through the issuance of fact-sheets, discussion notes and public statements in order to demonstrate that it has taken on board the many criticisms of its practices.
Yet one must still question whether the organization has really reformed itself and whether it is now protecting social spending and prioritizing health and education, the rights expert said.
According to Mr De Zayas, to the extent that the IMF maintains its focus on imposing strict limits on government spending, it must be clearly defined what kind of government spending is toxic and what is not.
"Under no conditions should government spending for health and education be reduced."
However, military procurement and research and development spending should be paused for the duration of IMF loans.
Where security concerns exist, the United Nations and regional arrangements should provide what is known as "collective security".
COUNTRIES IN CRISIS - GREECE, ARGENTINA AND TUNISIA
The report by the Independent Expert highlighted three countries in crisis - namely, Greece, Argentina and Tunisia - and the IMF's surveillance capacities in these three countries.
It noted that as the financial crisis in Greece demonstrates, IMF surveillance capacities are unequally applied, depending on the status of a member State's economy.
Once an economic crisis hits, the IMF may doggedly impose austerity measures as conditions, with variable consequences for rights realization in member States.
Triggered by the Wall Street meltdown in 2008, the crisis in Greece dragged many weaker economies under, with disastrous consequences for economic, social and cultural rights. The IMF watchdog, its Independent Evaluation Office, determined that the IMF operated in a "culture of complacency" prone to "superficial and mechanistic" analysis.
A series of calamitous misjudgements were made, and the warning signs of impending crisis were ignored. In the report of the Office, it was noted that its own investigators were unable to obtain key records or penetrate the activities of secretive ad hoc task forces.
The results of an evaluation by the Independent Evaluation Office of the performance of the IMF in the run-up to the financial crisis pointed to inadequate surveillance in the euro area, which echoed a larger problem of IMF surveillance in advanced economies.
Several factors were at play, including "a high degree of groupthink, intellectual capture, a general mindset that a major financial crisis in large advanced economies was unlikely, and incomplete analytical approaches".
According to the Independent Evaluation Office, IMF violated its own cardinal rule by signing off on a bailout in 2010, even though it could offer no assurance that the package would bring the country's debts under control or clear the way for recovery. An exception was made because of the risk of "systemic contagion".
Indeed, the concern being addressed was saving the monetary union, not helping Greece out of its predicament, said the Independent Expert.
The Independent Evaluation Office, however, only acknowledged the failure of the bailout, without addressing the adverse human rights impacts of the conditions imposed, he noted.
At the end of his country visit to Greece in December 2015, the Independent Expert on foreign debt and other related international financial obligations of States on the full enjoyment of all human rights, particularly economic, social and cultural rights, Juan Pablo Bohoslavsky, had issued a statement voicing concern about those very impacts, including the fact that an estimated 2.5 million people were without health insurance as a result of the crisis.
He had gone on to detail that the rights to work and social security were in a state of disarray, that youth unemployment remained at 47.9 per cent and only 1 out of 10 registered unemployed persons received unemployment benefits, while millions were left without basic social security.
Part of the problem had been the loan "conditionality imposed by the troika consisting of IMF, the European Commission and the European Central Bank."
The Independent Expert said that he agrees with many who consider that the troika is continuing to fail in the ongoing crisis in Greece, which can only be resolved by debt relief and international solidarity. Additional "austerity measures" will only lead to continuing human rights violations.
In a leaked IMF memo to the European Commission, it was estimated that Greece's debt would reach 200 per cent of GDP in two years without relief. In 1980, it was 22.6 per cent. In 2008, 127 per cent. In 2014, 177.1 per cent. Since the beginning of the financial crisis, the economy of Greece plunged by over 25 per cent.
The IMF memo continues as follows: "Greece's debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far."
However, even these dire predictions have not stopped the imposition of system-shaking loan conditions, nor the devastating human rights consequences which result from them.
In February 2017, the European Union and the IMF decided to impose further "austerity measures" on Greece, namely, to make a further 7 billion euro payment to its creditors by July or risk defaulting on its entire debt, which remains at a staggering 330 billion euro.
Sadly, said the rights expert, the most succinct common-sense summation of the crisis in Greece was given by former Minister of Finance of Greece Yanis Varoufakis in an interview with Al-Jazeera, in which he stated that Greece was and is being subjected to "fiscal water-boarding".
As a safeguard to prevent the further erosion of human rights in the country, the Independent Expert encouraged all creditor States and financial institutions to revisit the "conditionality" of their past and future loans to Greece.
Instead of demanding privatization, deregulation and reduction of social services, IMF should consider applying a different set of conditions; no loan should be awarded to any country that continues spending for military procurement.
"This means that Greece, a bankrupt country, must not be required by NATO to devote scarce resources to military expenditure."
Mr De Zayas noted that the mismanagement of Argentine debt is not new. And, even if the blame is shared, IMF has earned no laurels. As early as 2004, the wrong options were chosen.
The then Minister of Finance of Argentina, Roberto Lavagna, characterized the Fund surveillance efforts as "ideological assessments", which blurred the capacity of the Fund to conduct objective assessments of policy reform.
Even the Independent Evaluation Office acknowledged that "IMF surveillance failed to highlight the growing vulnerabilities in the authorities' choice of policies and the IMF erred by supporting inadequate policies too long".
Its correct diagnoses aside, interestingly enough, the words "human rights" do not appear in the report of the Office, which is only concerned with economic and financial matters.
According to the Independent Expert, observers have similarly warned that the extreme conditions imposed on Tunisia by the IMF would reverse progress made in the country following the Jasmine Revolution.
In March 2017, the International Trade Union Confederation warned that "IMF is pushing Tunisia to the brink of economic and political disaster with its refusal to release urgently needed funds at a time when the country most needs international support."
According to Government of Tunisia, IMF suspended payments on its four-year, $2.8 billion loan "to pressure the Government into mass dismissals in the public sector, along with sales of government assets and possible cuts to pensions."
Among other conditions, the IMF demanded that Tunisia sell stakes in three State-owned banks, in addition to abolishing 10,000 public sector jobs.
On 12 June 2017, the IMF Executive Board completed its first review of the economic programme of Tunisia, thereby enabling Tunisian authorities to draw an additional $314.4 million of IMF funds.
While Tunisia sought a waiver of some conditions, the Government did agree to privatizations, an increased value added tax and a scale-back of its public sector.
The rights expert noted that participants at the meeting of the Group of 20 in Hamburg in July 2017 deplored the additional austerity measures forced on Tunisia by the IMF.
ROLE OF IMF IN INTERNATIONAL ORDER
The Independent Expert pointed out that in addition to their potential to weaken public sector infrastructure, IMF conditionality has been shown to threaten the right to health.
Researchers have noted that, with Governments required to demonstrate rapid economic growth and fiscal constraint, long-term investments, such as those required to improve health care, are discouraged, which leaves countries with under-resourced health sectors vulnerable to breakdowns and public health emergencies.
For example, in a study entitled "The impact of IMF conditionality on government health expenditure: a cross- national analysis of 16 West African nations", scholars in the fields of sociology and public health linked IMF conditionality with reduced expenditure on health by Governments and consequently with setbacks in efforts to achieve universal health coverage.
Commentators have further drawn a connection between IMF conditionality, reduced health sector spending and the Ebola outbreak in West Africa. Scholars have likewise drawn attention to the impact of IMF conditionality on efforts to combat AIDS in developing countries.
"Bearing in mind that the denial of adequate health care can lead to much suffering and death, the issue of accountability is inescapable. Admittedly, international organizations enjoy immunity from domestic legal action, but that immunity is already being challenged in the United States of America, for example, by civil society groups like Earth Rights International," said Mr De Zayas.
He also said that in principle, IMF loans should ensure that the risk of corruption and tax fraud is avoided and that appropriate monitoring and follow-up is available. Although IMF, in its publications, has recognized the importance of fiscal transparency and combating corruption, in practice, those standards are not uniformly raised.
The Independent Expert noted that in 2001, Anne Krueger, then Deputy Managing Director of IMF, proposed a new approach to sovereign debt restructuring. Whereas in domestic law individuals and corporations have recourse to bankruptcy codes that give them protection from their creditors, sovereign States do not.
"Alas, her proposal was not endorsed by the ideology-bound IMF and the idea was essentially killed by Wall Street. It is, however, still valid today," he said.
The Independent Expert encouraged IMF to mainstream the Basic Principles on Sovereign Debt Restructuring Processes, as contained in General Assembly resolution 69/319 of 10 September 2015.
Indeed, leaders in academia, the public sector and civil society - including Pope Francis and economists Joseph Stiglitz and Thomas Piketty - have raised awareness of the need for a global bankruptcy process, he noted.
He said that the IMF should join forces with other international financial institutions in facilitating debt relief programmes and removing aggressive vulture funds and hold-outs from the international financial landscape.
A NEW SET OF CONDITIONS FOR IMF LOANS
The Independent Expert recommended that the IMF make loans subject to a new set of conditions, including:
(a) A moratorium on military expenditure (except for salaries and pensions) for the duration of the loan;
(b) Adoption of national legislation that ensures that national and transnational corporations pay their taxes, prohibits profit-shifting, and outlaws tax havens;
(c) Adoption of General Anti-Avoidance Rule legislation to address specific base erosion and profit shifting concerns;
(d) Adoption of legislation imposing fines on persons and corporations which evade taxes and obliging citizens who have money hidden offshore to repatriate their wealth within a defined period of time, or otherwise face the risk of penal sanctions;
(e) Adoption of legislation to prevent corruption and bribes, accompanied by effective monitoring mechanisms;
(f) Enactment of financial transactions tax laws;
(g) Assurances by the borrower that no part of any loan is used to satisfy claims by vulture funds or hold-outs.
Furthermore, IMF should assist jurisdictions in developing capacities to tackle illicit financial flows; strengthen the global financial safety net with an adequately resourced, quota-based IMF at its centre; and contribute to public investments in education, the care economy, water and sanitation, as well as other quality public services.
"Only through the concerted efforts of IMF and the World Bank, together with the United Nations, will a more democratic and equitable international order emerge," the rights expert concluded.