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The IMF’s dispute with Greece teaching Portugal everything it needs to know

The IMF is having an identity crisis. By Francisco Louçã.

For a long time, the Fund was a pillar of the "Structural Adjustment Programs" that, tested in Africa and Latin America, always led to the same result, income transfer to the richest in society, the destruction of small-scale agriculture and urbanization and the privatization and specialization of each economy in the export sector, all of this having the devastating social consequences of impoverishment and unemployment for a large part of the population. More recently, this expertise has been used to design programs for Greece, Ireland and Portugal, with a similar result: recessive adjustment. However, in neither of the cases, not in the "Third World" or in Europe, have IMF officials ever been affected by any of the policies they themselves created. Until now.

In negotiations with Greece, the IMF has been both an advocate of "structural reforms", that is, the recessionary adjustment that leads to a fundamental change in the labour market, and an advocate for debt restructuring, whose sole objective, let’s face it, is to keep the patient alive so that measures can keep on being applied. The agreement this week has precisely this purpose, and nothing else. 

The problem for the IMF is that the effect of these strategies has always been an economic and social decline. Not only do the unemployed suffer (for obvious reasons), but so too do workers (due to reduced wages and precarious contracts) and the retired population (due to reduced pensions), all of whom are also affected by further tax increases. As well as this, affected economies also lose the capacity to expand, which leads to damage being done to their process of capital accumulation. Worse still, there are few alternative economic policies that could deal with a new financial crisis or a new recession because interest rates are close to zero. In short, it’s a colossal failure.

Some of the IMF's leaders now seem to have realized that they have a crisis at hand. One of the directors, Carlo Cottarelli, who is responsible for Portugal, appeared to criticize the harshness of the IMF towards the peripheral countries in the Jornal de Negócios. Another director, Nogueira Baptista, has gone even further stating, “it's all wrong”. Vítor Gaspar, who is now the Director of the Fiscal Affairs Department at the IMF, called for an increase in public investment, which was precisely forbidden by the adjustment programs that he supported. 

It is not difficult to conclude that these statements and good intentions have had little impact as of yet. When the Fund is conducting a concrete policy in a program for a country, these protests for social generosity are evidently ignored. This has been especially true in Greece where Poul Thomsen, the head of the operation, was caught threatening to leave the rescue mission, which would then mean pressuring the German government, as well as then proposing that bankruptcy be induced so that his proposals would be accepted more quickly.

However, amid the regrets comes a big scare. During the recent conference to present the forecasts for 2016, Maurice Obstfeld, the chief economist at the IMF recognized that we have had very weak growth for too long and that this result is related to low pay, in addition to creating the idea that it was the economic elite who benefitted during the period of austerity (press conference on the 12th April 2016). The IMF’s bulletin the following day went even further and recognized a deterioration of public debt, yet again (IMF Bulletin, 13th April 2016). A study carried out by an IMF team even considered that one of the causes of the recession is the increase in inequality in recent years. There’s just no way to move forward.

The IMF suggests a solution: an increase in investment into infrastructure, particularly public investment, which would mean expanding budgets (IMF, World Economic Outlook, Chapter 3, October 2014). In other words, do exactly the opposite of what has been enforced in various countries.

Will this be enough? It depends. William White, from the OECD warns that the next crisis could be even worse than the one in 2007 - we could have “epic” bankruptcies, he says. Maybe this is a result of it all being too easy: exaggerated profits, suggests The Economist, and unbridled speculation.

It was exactly what the IMF advocated: erase the regulations and restrictions on capital, let the monster out and we’ll prosper. The IMF only had the end result in mind, and now it is surprised by the creature it created. Portugal, one of the guinea pigs for this operation would do to well to heed the failure of the IMF.

Article published in the Jornal de Negócios on 31st May 2016. Translated by Luci Ruas for

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Professor universitário. Ativista do Bloco de Esquerda.
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