As the Spring Meetings of the International Monetary Fund (IMF) and the World Bank began on April 10, questions emerged as to whether progress would finally be made to address the severe debt crisis that has engulfed large parts of the Global South. Ultimately, and perhaps unsurprisingly, the meetings ended without offering any real solutions to alleviate this distress, despite the IMF and World Bank’s own stark warnings of the fallout.
The scale of the crisis is staggering. Research from Debt Justice shows that external debt payments for lower income countries are set to reach the highest levels in 25 years in 2023.
A new dossier published by the Tricontinental Institute for Social Research interrogates the historical role of International Financial Institutions (IFIs), including the IMF, in perpetuating a “permanent debt crisis” in the Global South.
It does so by grounding its understanding of the crisis in the revolutionary call for a ‘United Front Against Debt’ issued in 1987 by Burkina Faso President Thomas Sankara, recognizing debt for what it is—neocolonialism.
In its World Economic Outlook report in January, the IMF warned that “the combination of high debt levels from the pandemic, lower growth, and higher borrowing costs exacerbates the vulnerabilities of these [poorer countries] economies, especially those with significant near-term dollar financing needs.”
When it comes to responding to this crisis, however, the Fund regurgitates the age-old, failed policies of austerity, albeit with new names.
The ‘silent revolution’ and the dawning of structural adjustment
According to the founding Articles of Agreement of the IMF, which were adopted with little inclusion or input from the then colonized countries, its purpose was to prevent “any short-term problems from becoming long term-crises.”
This was all in service of certain ‘primary objectives’ of economic policy, which included “the expansion and balanced growth of international trade,” the promotion of high levels of employment and real income, and the “development of productive resources.”
The way in which the Fund would provide financing changed dramatically after 1982, the year Mexico announced that it would default on its US$80 billion sovereign debt.
As the product of a ‘silent revolution’, the IMF introduced the Structural Adjustment Facility (1986) and the Enhanced Structural Adjustment Facility (1987), making financing conditional on economic reforms.
A “singular recipe was put on the table,” the dossier states, to “privatize the economy, including the state sector, commodify areas of human life that had up to that point been in the public domain, terminate any government deficit financing, and dissolve any barriers on foreign capital investment and trade.”
Tested in Bolivia, Chile, and Peru in the 1950s, this approach would be applied en masse to countries in Africa, Asia, and Latin America, at a time when they were trying to advance a New International Economic Order (NIEO) to replace an existing international system built on colonialism and capitalism.
The product of the Fund’s ‘silent revolution’, which its own chief economist likened to “financial colonialism,” pushes poorer countries into a spiral of indebtedness and poverty—a lack of capital, much of it due to colonial theft, leads countries into short-term balance of payments debt, and then, at the direction of the IMF, they cut public spending on critical services to prioritize debt payments to rich bondholders.
This is accompanied by the export of “cheapened” raw materials, the sale of public assets, and the borrowing of more money just to repay debts, all while the IMF severely undermines the ability of poorer countries to implement effective monetary and fiscal policies.
Spending on debt repayments consistently outpaces spending on public services including health and education—something which did not change during the COVID-19 pandemic.
Who is to blame, who profits?
Who must be held responsible for this crisis? A cursory glance at much of the coverage of debt across countries in Africa sees repeated mentions of “debt-trap diplomacy,” with the principal perpetrator identified as China.
Not only is the characterization of Chinese lending as a “trap” false, it obscures the reality of the present crisis—namely, as the dossier emphasizes, that the debt crisis on the continent has been mainly created by private creditors, a majority of whom are based out of rich countries like the US and the UK, through Eurobonds (or the issuance of bonds in US dollars and Euros).
For instance, shortly after Zambia obtained its first sovereign credit rating in 2011, it issued two Eurobonds in 2012 and 2014. Within three years, Zambia’s external debt soared by 300%. Between 2010 and 2020, the stock of Eurobond debt of countries in ‘sub-Saharan’ Africa had shot up by 322%, far exceeding debts incurred from multilateral and bilateral (other countries) sources. Africa’s total Eurobond debt in 2020 stood at US$135 billion.
This in turn also exposes the failures of existing mechanisms to address the debt crisis, including the G20’s Debt Service Suspension Initiative (DSSI) and the Common Framework for Debt Treatments.
The DSSI expired in 2021 with little success, given that it only applied to official multilateral and bilateral creditors. The Common Framework is plagued by similar problems, including an emphasis on official credit, all of which works against providing urgent debt relief, or even restructuring.
While countries have been forced to make brutal cuts to public spending, private lenders have stood to make up to 250% in profits.
Building emancipatory alternatives for the Third World
Countries across the Global South are in the midst of fiscal crises. While the COVID-19 pandemic and subsequent global supply chain disruptions over the past year have exacerbated these conditions, they are “fundamentally a result of an unsustainable build-up of sovereign debt in the last decade, fuelled by cheap credit from Western economies and encouraged by international financial institutions,” argues the Collective on African Political Economy (CAPE).
As desperate countries continue to turn to the IMF, claims that the institution has in any way reformed away from austerity do not hold up to scrutiny.
Even when the IMF claims to be protecting populations through what it calls ‘Social Spending Floors’, analysis shows that for every $1 that governments were told to keep for social spending, the IMF directed them to cut $4 from the state budgets.
How is it that countries approach the IMF time and again and nothing changes?
“The reason is that IMF assistance has never confronted the structural factors that have continued to consign many countries to the ranks of the poor,” CAPE emphasizes. “The IMF, as the archetypical Northern institution, is duty bound to maintain and entrench this status quo,” the development of the North at the cost of the underdevelopment of the South, as articulated by revolutionary thinkers such as Walter Rodney.
Blaming economic crises on government corruption and mismanagement in the Global South—which may not be entirely untrue—also tends to be rooted in colonial tropes that open up poorer countries to forms of intervention not seen in the Global North, where such problems are similarly prevalent.
Meanwhile, the “IMF conditionality rarely confronts the fact that state capacity and autonomy have been eroded in Africa largely as a result of the tax dodging practices of transnational corporations,” CAPE highlights.
All of this points to the urgent need to develop alternative, “emancipatory” frameworks and institutions for the Third World.
Some crucial immediate steps have been presented in ‘A Plan to Save the Planet’, including the invalidation of historical debts, the seizure of assets held in illicit tax havens, the building of progressive tax codes including taxes on wealth and inheritance, reforming domestic banking structures, and curbing speculative financial activity.
At the international level, this involves measures to prevent capital flight, a robust wealth tax collection system, pro-labor distribution policies, and the prevention of dollarization, which as CAPE has highlighted, acts as a “strong lever of IMF conditionality.” Building alternatives also includes investments and financing from institutions that do not impose structural adjustment, local currency central bank swap arrangements, ceilings on interest rates charged by commercial and multilateral lenders, and advancing regional trade and reconciliation mechanisms.