The IMF and its promises of reform

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Allowing a modicum of policy autonomy while under IMF programs has been at the forefront of developing countries’ and observers’ criticisms for decades. Such concerns — and the poor record of IMF programs — sparked a period of widely advertised reforms to conditionality over the 2000s.

In recent years, the conditionality attached to IMF loans reportedly was streamlined to enable policy flexibility in borrowing countries. In 2014, IMF Managing Director Christine Lagarde appeared puzzled when a journalist asked about the organization’s structural adjustment programs. “Structural adjustments? That was before my time. I have no idea what it is. We do not do that anymore.”

Should we believe this IMF rhetoric, broadcast in a series of fact sheets, news releases and public statements? We investigated the issue by identifying and systematizing the 55,465 policy reform conditions mandated in all IMF programs between 1985 and 2014. We recently published our results in the Review of International Political Economy, in an article titled “IMF conditionality and development policy space, 1985-2014” (pdf).

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Promises betrayed

There is a mismatch between what the IMF says and what the IMF actually does. Available evidence provides little support for the organization’s fundamental-transformation rhetoric. Instead, we find that the scale of organizational change was both modest and short-lived.

At the core of the controversy are IMF-mandated structural reforms. Unlike common IMF macroeconomic conditions (e.g., requiring borrowing countries to balance their budgets or reduce public debt), these types of policy reforms directly target market-state relations in borrowing countries. For example, they mandate the privatization of public utilities or changing the competition framework. As a result, governments’ freedom to select policy instruments in dealing with crises is constrained.

At first, countries indeed saw fewer structural reform conditions attached to their loans. So, in 2008, as the figure below shows, the average number of structural conditions applicable in IMF programs reached the lowest point since the beginning of the decade. Since then, structural conditions have been a growing component of IMF programs. In 2014, the total number of structural conditions in the average IMF loan reached 12.1, identical to the mean of the 2001-2007 period.

The IMF pushed hard on labor and pension reforms

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The case of labor-related conditionality illustrates the gap between organizational rhetoric and actual IMF policies. The organization reports that labor market reforms are peripheral to its programs and that it would phase out limits on public spending on salaries. Critics of the IMF linked these policies to the inability of understaffed governments to provide essential public services in health and education.

A closer look at recent conditions reveals that the IMF still becomes directly involved in labor issues. For instance, IMF programs in Ivory Coast (2009-13), Honduras (2010-11) and Moldova (2010-12) mandated ceilings on the government wage bill. In particular, Moldova’s IMF-designed labor-related reforms included measures to “optimize the number of employees in the budgetary sector [… by] eliminat[ing] at least 4,000 positions” in 2010, as well as further policy changes that affected civil servants.

Similarly, several countries’ lending programs included extensive pension reforms. Romania’s program targeted pensions, including a 15 percent pension cut and other changes to reduce payouts and raise the retirement age. The measures were controversial, and the Romanian constitutional court struck them down. Yet, a few months later, the IMF reintroduced the same reform package as part of its updated adjustment program. This stipulated the parliamentary approval of pension reform legislation, and the measure eventually passed despite objections from the Romanian president.

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The recent IMF programs in euro-zone countries also relied heavily on labor-related reforms, including deregulation, government wage spending and social security systems. For instance, Greece’s conditionality program stipulated extensive labor market liberalization. This included “substantive legislative changes…easing employment protection legislation and collective dismissals, reforming minimum wages, reducing overtime premia” and reforms to the collective bargaining system.

Similarly, Portugal’s adjustment program stipulated a higher retirement age, less leeway for collective bargaining on wage issues, and the alignment of the civil service employment regime to that of the private sector.

Structural adjustment means fewer choices

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As the case of labor market reforms suggests, the IMF’s trademark structural adjustment policies remain core elements of its recent lending programs.

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Here’s why this matters. Countries in economic trouble need policy space — that is, the ability to select the policy instruments to address their economic problems, free from coercive externally imposed conditionalities. The underlying intuition is that governments have more knowledge and resources to implement domestically designed policy reforms.

To be sure, a country that requests IMF assistance commonly experiences some underlying economic troubles, and we might expect somewhat limited policy flexibility. But even under constraining economic conditions, policy options remain. The question is who gets to define these policy options: the countries themselves, following domestic political processes, or external actors?

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Having such policy space to design individual paths out of crisis also allows governments to factor in long-term considerations. For example, while privatizations may be good policies for raising cash in times of trouble, they can limit governments’ abilities to use industrial policy as a development engine in better times.

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These insights are not new. Thirty years ago, the Group of 24 on International Monetary Affairs — a group of developing countries — argued that “conditionality must take account of the need for growth in production and employment and respect each country’s own ability to formulate and execute its adjustment plans.”

The return of structural adjustment brings these decades-old criticisms of IMF programs back to the fore. The scale and pace of reforms to the IMF’s practices do not match the organization’s rhetoric.