Finance: IMF needs different mindset than its modified neoliberalism

If the International Monetary Fund (IMF) is to respond effectively in the years ahead to the challenges in a world in which both globalization and liberal democracy are increasingly under attack, it will need a different mindset from the modified neoliberalism that currently sets the parameters of its thinking.

This is the assessment of Philip Alston, the Special Rapporteur on extreme poverty and human rights, in his latest report to the UN Human Rights Council, which begins its thirty-eighth regular session on Monday (18 June).

In his report that focuses on the IMF and its impact on social protection, Mr Alston said that the IMF is the single most influential international actor not only in relation to fiscal policy but also to social protection, even if both it and its critics might prefer that this were not the case.

He noted that the majority of low-income developing countries are already included in IMF programmes or are likely to be so in the near future, yet fewer than one in five of the poorest 20 per cent of people in those countries is covered by any form of social protection.

And any assistance they receive will only cover a mere 13 per cent of their consumption needs. Even in lower- middle-income countries, fewer than half of those living in poverty receive such assistance.

IMF influence

No international institution exerts greater influence than the IMF over issues such as distribution, including social protection. But for many years, it took the position that these issues were not its concern; it could take account only of macroeconomic issues narrowly defined, said the rights expert.

Other institutions were left to pick up the pieces in the social area, but could only do so within the confines of the fiscal space, if any, left open after IMF prescriptions had been adopted.

The IMF has long been criticized for its disregard of "social issues" and its impact thereon, Mr Alston pointed out.

In 1987, when a ground-breaking and devastatingly critical report entitled "Adjustment with a Human Face" was published by the United Nations Children's Fund (UNICEF), the IMF subscribed to the original Washington Consensus, which prioritized "prudent macroeconomic policies, outward orientation and free-market capitalism".

The "imposition" of structural adjustment policies on many countries in Africa, Asia and Latin America were said by human rights groups and others to have further immiserated the living conditions of the poor.

Such criticism, combined with political pushback, led to an "augmented Washington consensus" with a new emphasis on social safety nets and "pro-poor growth".

The advice subsequently proffered by the IMF during the 1997 Asian financial crisis was widely faulted by Governments and commentators and, as the Asian recession abated and the developing country debt crisis was resolved, the IMF receded into the background and underwent significant staff cutbacks.

But the global financial crisis of 2007-2008 returned it to the centre of international economic governance.

At its 2009 summit, the Group of 20 committed $750 billion to expand IMF operations, leading its Managing Director to proclaim with justification that "the IMF is back".

Earlier criticism, combined with the nature and scale of the new global crisis, prompted an internal reassessment at the IMF, including revisiting parts of the "neoliberal agenda".

This included developing the theory of "macro-criticality" to justify the possible inclusion of an expanded range of issues, such as social protection, in its analyses and prescriptions.

Many of the critics, however, are not convinced that the basic policy paradigm has changed.

Some have characterized the changes at the IMF as "a smokescreen designed to deflect criticism" and part of its "escalating commitment to hypocrisy" and have pointed to evidence that "structural conditionality remains alive and well", suggesting a return to the "old" IMF.

At the outset, it should be noted that IMF, for all its homogeneity and hierarchy, is not a monolithic institution without any internal diversity of views or differences in operational practice. As with any complex international organization, its approach is evolving.

According to the Special Rapporteur, the current Managing Director (Christine Lagarde), like her predecessor, has championed major changes, including a newfound focus on issues such as inequality, gender equality, governance, climate change and social protection.

Much of the new discourse, and the research underpinning it, is welcome from a human rights perspective, but the real test is whether it will be fully translated into operational reality, which is where new ideas meet entrenched institutional culture, vested interests and ideology, said Mr Alston.

Before focusing on how the potentially very flexible notion of macro-criticality has been approached in practice in relation to social protection, it is instructive to consider the macro-criticality of human rights, military expenditure, corruption, inequality and gender equality, said Mr Alston.

The present analysis shows that the sole taboo at the IMF seems to be human rights, although IMF analyses do in fact note the relevance of political conflict, violence and social unrest.

The Special Rapporteur's report noted that the IMF has not adopted an official legal opinion in relation to human rights.

Some grey zones

The IMF first addressed corruption in-depth in a 1997 guidance note on "governance issues". Increased attention to the issue at IMF and the World Bank at that time reflected a realization on the part of the proponents of the Washington Consensus that corruption had undermined the institutions that had been key to successful policy reform and economic development.

Recent examples of countries where the IMF considered corruption to be "macro-critical" are Mozambique, where enormous loans made to State-owned enterprises were concealed, the Congo, where authorities recently announced plans to arrest corrupt officials in order to meet IMF loan conditions, and Ukraine.

But in other States experiencing major corruption scandals, IMF has confined itself to general observations about the desirability of something being done.

"Such timidity contrasts with its strong measures to combat money laundering and the financing of terrorism, in relation to which it has provided technical assistance to 120 countries."

The IMF is currently in the midst of a major review designed to make its corruption policy more effective.

Challenges include the risk of becoming involved in politically charged debates and of not being perceived as "even-handed", how to determine macro-criticality and what information sources to rely upon, and the need for specialized staff with appropriate expertise.

"While none of those issues is straightforward, failure to take a strong line on an issue such as large-scale or systemic corruption, which has major macroeconomic ramifications, leaves a large dent in the credibility of IMF," Mr Alston emphasised.

A stronger anti-corruption policy would also enable the IMF to contribute to the realization of target 16.5 of the Sustainable Development Goals.

At the IMF, military expenditure is an even more sensitive topic than corruption.

However, despite the clear links between reigning in military spending on the one hand, and promoting fiscal consolidation while creating fiscal space for social protection on the other, there is an almost complete absence of the subject from IMF macroeconomic analyses.

"This represents a major strike against its claims to be above politics and to go wherever the economic facts lead it," said the Special Rapporteur.

It is true that isolated examples of IMF engagement with military spending can be found, and relevant military spending data are made available through its Government Financial Statistics Yearbook.

But, in general, said the rights expert, Governments still seem to believe that "national security, and judgments regarding the appropriate level of military expenditures required to assure that security, [are] a sovereign prerogative of national governments and ... not in the domain of the work of the Fund".

But such views are surely "macro-incompatible", especially after a decade in which military expenditures have risen 64 per cent in Asia and Oceania, 48 per cent in Africa, 19 per cent in the Middle East and 6 per cent in Europe.

In the years ahead, even more dramatic increases look likely. While the issue is a potential minefield for the IMF, its impact on the overall macroeconomic equation is so great that it can hardly be ignored.

"It is the proverbial elephant in the room, and it behoves IMF to engage with it and to explore what options might be feasible to draw the attention of Governments and others to the macroeconomic significance of military spending," the Special Rapporteur pointed out.

Tackling inequality and promoting gender equality

According to the report, the work of the IMF on social protection is closely linked to its work on tackling growing inequality and promoting gender equality.

Oxfam has praised IMF for becoming a global leader in highlighting the economic inequality crisis in recent years.

Indeed, comments by the Managing Director have attracted much attention, and IMF research has shown that "lower net inequality is robustly correlated with faster and more durable growth" and "redistribution appears generally benign in terms of its impact on growth."

Those findings challenge the orthodox views about an inevitable trade-off between redistribution and growth, and have implications for IMF policy advice.

But considerable tensions remain between that theory and IMF practice, which is still more likely to be pre-occupied with efficiency and targeting than redistribution aimed at lowering inequality. While change might be afoot, it has not yet consistently made its way into policy advice.

Mr Alston also noted that until around 2013, "gender" had not been a term that could easily be found in IMF documents.

Initially, the IMF had focused on female labour force participation and income inequality. In 2015, gender was included as a structural issue that staff could consider in Article IV surveillance, and gender pilot studies were then undertaken in Article IV reports.

More recently, a number of IMF loans, including to Egypt and Jordan, have included "gender conditionalities".

"These are very important steps forward, but much remains to be done," said Mr Alston.

Observers have criticized the IMF for focusing too much on labour-market participation and micro-level gender budgeting decisions.

An example of the IMF ignoring gender in the broader macroeconomic context is the constitutional amendment passed by the Government of Brazil in 2016, capping public spending for 20 years, which has been characterized as "the mother of all austerity plans".

The IMF very publicly supported the initiative. Brazilian researchers claim that, subsequent to the amendment, "expenditures specifically benefiting women were reduced by 58 per cent".

Unsurprisingly, Oxfam has called on the IMF to focus on the gender impact of its core macroeconomic advice, as well as on the creation of fiscal space to support quality public care services and the discontinuation of "policy advice that is shown to have negative impacts on gender equality".

In dealing with an issue like gender equality, IMF also needs to overcome its aversion to ever mentioning human rights.

IMF and social protection

The Special Rapporteur noted that in the aftermath of the global financial crisis and in response to the increasing backlash against neoliberalism, IMF has gradually moved over the past few years to accept the macro-criticality of some elements of social protection.

Five recommendations emerging from a 2017 report of the Independent Evaluation Office of those initiatives were subsequently supported by the Executive Board.

Given the inconsistent and contingent past practice at the IMF and the uncertainty of its staff about its role, the report's key message was the need for a clear strategic framework to guide IMF involvement in social protection.

In January 2018, a management implementation plan announced the preparation of a paper to be discussed by the Executive Board in February 2019 that would address a definition of social protection, the macro-criticality of social protection, the affordability and efficiency of social protection systems, potential forms of IMF engagement with social protection, the position of IMF on universal access to and targeting of social programmes and collaboration with other institutions.

The strategic framework would also provide guidance on effective programme design, covering both the General Resources Account Arrangements and concessional lending.

"The IMF has committed to consult with civil society on the development of its new social protection strategy, but that process has to date been relatively opaque and formalistic, reflecting the culture of control at the IMF and the relatively few civil society organizations that focus on scrutinizing its activities."

The Special Rapporteur also pointed out that the social safety net approach generally adopted by the IMF is often so minimal that it barely warrants the term "social protection".

In the words of the Independent Evaluation Office, the view of the IMF is that "[s]ocial safety nets are necessary to mitigate adverse short-term effects of fiscal adjustment, economic reforms, or external shocks on vulnerable population groups".

In essence, social protection is a short-term fix to help the "most vulnerable" to overcome temporary economic hardship. Often, that group is not coterminous with the worst-off in society, but with those hit by the economic adjustments the IMF is promoting.

Furthermore, affordability is the overriding consideration, defined in almost circular terms that assume that responsible fiscal consolidation will be unable to provide a genuine floor to ensure the survival of those living in extreme poverty.

The interest of IMF is in mitigation, not transformation, and social protection is embraced for largely pragmatic programmatic considerations, rather than for the principled reason that any macroeconomic framework should protect those who cannot protect themselves.

Since 2009, only 15 per cent of IMF fiscal consolidation programmes for low-income countries has required the protection of vulnerable groups, and most of the relevant conditionalities "focused on improving the targeting [...] of the social safety net."

According to Mr Alston, the IMF has also strongly opposed universal programmes in some situations.

In 2017, after years of pressure from the IMF, Mongolia agreed to restrict the scope of the previously universal "Child Money" programme offered to the poorest 60 per cent of its children, which has since been raised again to 80 per cent. That structural benchmark in the IMF loan has reportedly been strictly enforced.

Similarly, in January 2018, the IMF announced that Kyrgyzstan would "amend the law on universal child allowances to reintroduce targeting". That policy change is said to have been adopted following the IMF review of the country's Extended Credit Facility.

Nonetheless, said Mr Alston, recent research on targeting in sub-Saharan Africa presents a compelling challenge to the logic of targeting, assuming the objective is to reduce poverty, rather than to promote neoliberal orthodoxy.

He also said the past decade has seen increased international attention to social protection and inter-institutional cooperation.

The United Nations System Chief Executives Board for Coordination adopted the Social Protection Floor Initiative in 2009 as a key response to the global crisis, and Member States endorsed it at the United Nations Conference on Sustainable Development, as did the Group of 20 and ILO (in its Recommendation No. 202).

Also in 2012, the Social Protection Inter-agency Cooperation Board, co-chaired by the World Bank and ILO, was set up to coordinate work in this area.

"However, social protection cooperation between IMF and United Nations agencies, including ILO, has been marginal at best."

In practice, IMF and UNICEF have had a complicated relationship since the publication of "Adjustment with a Human Face".

Following the 2008 financial crisis, the two organizations sought closer cooperation by undertaking social protection pilot studies in 11 countries.

The pilot studies reported some positive results in, for example, Burkina Faso, the Congo and Mozambique, but since that time, with the exception of Malawi, coordination has faltered.

There was little cooperation between the IMF and ILO until 2010, when the two executive heads agreed to collaborate on the Social Protection Floor Initiative, and on three pilot cases. Two failed, but in Mozambique, inter-agency cooperation succeeded until the relevant personnel changed in 2013, at which point cooperation ceased.

Despite the commitment of the Managing Director of the IMF to the Initiative in 2012 and 2014, cooperation between the ILO and IMF has stalled.

In other areas, the IMF has also been reluctant to cooperate with other international organizations with regard to social protection. Between 2012 and 2017, IMF representatives rarely attended meetings of the Social Protection Inter-agency Cooperation Board.

In 2018, IMF announced that it would attend, but only "when the issues under discussion are particularly relevant to the Fund's work".

According to the Special Rapporteur, the lack of cooperation described above might be explained by different conceptions of social protection, by the longstanding determination of IMF to remain independent of the United Nations, or the fact that the IMF is only committed to the Sustainable Development Goals in so far as they fall "within the scope of its mandate" and has expressed no particular interest in Goal 1.3.

Some conclusions and recommendations

Mr Alston said that fiscal sustainability is important, but it can be made compatible with the gradual introduction of broad-based systems of social protection, which in turn ensure the social sustainability of the overall situation.

Social protection reduces the economic drain of emergency care, expands employment capabilities, facilitates educational opportunities for the children of the poor and helps to break the cycle of dependency.

There are many social protection issues that should be dealt with by other organizations and should remain off the radar of IMF, but unless it more consistently promotes the creation of fiscal space for social protection, there is little that other actors can or will do.

"Given the impact of IMF policies, it is indispensable that the internal review currently underway examines ways in which it could actually evaluate the impact of its interventions on the bottom income quintile."

If IMF is to respond effectively in the years ahead to the challenges in a world in which both globalization and liberal democracy are increasingly under attack, it will need a different mindset from the modified neoliberalism that currently sets the parameters of its thinking, even as it talks about gender, inequality and social protection, said the rights expert.

Those concerns will not be truly integrated within its mission unless they are embraced as matters of principle and not just pragmatically-driven sideshows.

IMF insists that it does not insist on ever-more-precise targeting of social beneficiaries. That claim is difficult to support given the evidence available to the Special Rapporteur.

However, given that the scientific literature now highlights the failures of the proxy means tests used in most such targeting, it is essential that the IMF rethink its approach and acknowledge that excessively narrowly targeted social protection ensures that there will be, at best, weak political support for any resulting policies.

Institutions are also the sum of their parts and the elite and highly specialized nature of the IMF is reinforced by the composition of its staff. If it is to become less inward-looking, less obsessively self-referential and more genuinely engaged, it needs diversity within.

First, Mr Alston noted, half of around its 2,400 staff members are economists, almost all of whom have been trained in the sub-field of macroeconomics.

Between 1980 and 2000, 74 per cent of all senior staff appointees had been educated in the United States of America or the United Kingdom of Great Britain and Northern Ireland, and 40 per cent had been trained at 10 elite universities in those two countries.

Much criticism since the Great Recession has focused on the increasing belief of economists from these leading universities that their profession is an almost natural science, based exclusively on mathematical models.

Second, cultural diversity is also limited. As at 2017, among "B-level" staff (from division chiefs to department directors), 5.4 per cent are from sub-Saharan Africa, 4.8 per cent from East Asia and 6 per cent from the Middle East and North Africa.

Third, only 25.2 per cent of "B-level" economists are women, including 3 of the 32 senior officials, and 3 of 24 Executive Directors, despite a commitment to enhance gender diversity at IMF.

While macroeconomics as a whole is a field dominated by men, research suggests that this has significant effects on policy preferences, with female economists favouring Government-backed redistribution policies more than males.

Extreme poverty is abject, violates basic rights and is a political choice. IMF needs to move beyond seeing it as just another abstract item on a balance sheet. At present, the professional mindset of IMF staff sees its role as essentially technical, scientific and apolitical.

The imagery often invoked by IMF staff is telling. In critical situations, they see themselves as emergency-room doctors, implying the routine application of prescribed surgical interventions, with no time to consider alternative medical approaches. In surveillance mode, they see themselves as police, also implying that there are rigid rules to be followed.

"What is missing is an underlying ethical framework. Fiscal consolidation, for example, is not neutral; it can be elite-reinforcing, or it can be pro-poor, or much in-between. The choices that are made reflect values, and the means of fiscal consolidation should not become ends in themselves."

IMF personnel often use the term "equity", but it has no defined meaning and rarely serves to focus policies on the situation of those living in poverty. They also speak often of "the vulnerable", but this too is an amorphous and open-ended concept that is rarely given fixed policy content.

Proactive steps are essential. IMF staff often complained to the Special Rapporteur that social protection only becomes a "hot" issue in times of fiscal crisis, by which time it has become unaffordable.

But IMF itself makes all too little effort to raise the issue in the (relatively) good times. A gradual and proactive approach to embedding social protection is required, both by IMF and Governments. The best starting point would be to engage seriously and systematically with the Social Protection Floor Initiative of the United Nations, ILO and WHO.

The political economy of promoting social protection, and inequality reduction, cannot be ignored since neither inequality nor social protection is likely to be taken seriously in authoritarian contexts.

This raises the issue of democratic governance, which IMF would like to assume is far beyond its remit. And indeed, in the broadest sense, it is. Yet many of its preferred policies promote institutional and budgetary constraints on the workings of democracies.

For example, entrenching deficit caps, debt limits and expenditure ceilings all reduce the scope for voters to influence a wide array of fundamental economic and social priorities. At that point, voters are readily tempted by populist political parties with nationalistic, xenophobic and other problematic platforms.

According to Mr Alston, the IMF frequently pays lip service to the important roles played by "development partners", "external stakeholders", "the World Bank and other institutions", and "country authorities" but, as one interlocutor put it, most observers think it acts as though it is a law unto itself.

The IMF should introduce more systematic consultations with a broad range of civil society groups in the context of in-country Article IV reviews, and it should be genuinely open to learning and adjusting its approach. The worldview that emerges from dealing only with the finance ministries of the world is hardly a balanced or adequate one on its own.

In a world that is now suffering the consequences of the past lopsided approach of IMF to globalization and its single-minded pursuit of a model of fiscal consolidation that relegated social impact to an afterthought, IMF not only bears responsibility for the past but will also determine whether the future will be different.

"To date, IMF has been an organization with a large brain, an unhealthy ego and a tiny conscience."

If it takes social protection on board seriously, rather than making a tokenistic commitment to minimal safety nets, it can show that it has actually learned from its past mistakes, Mr Alston concluded.

By Kanaga Raja.

Source: South-North Development Monitor SUNS #8701 Thursday 14 June 2018