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Contemporary debates around the governance of the global economy often center on the role of the International Monetary Fund (IMF), arguably the most powerful international organization that—among other responsibilities—provides loans to countries in economic crisis. The most recent iteration of these debates took place in Marrakesh in October 2023, where IMF member-states agreed on increases to its lending capacity, while preserving the current allocation of votes, which overwhelmingly favors large Northern economies. This perpetuated the widespread perception that the IMF is the enforcer of creditor countries, a concern bound to reemerge at the IMF and World Bank Spring Meetings, taking place this week in Washington, DC. While the IMF’s loans carry low interest rates, their true cost for debtor countries is the obligation to implement far-ranging economic reforms.
IMF loans were not always tied to such obligations. The IMF was established at the Bretton Woods Conference in 1944 to regulate the international financial system. Its key responsibilities were twofold: the now defunct role of overseeing a system of pegged exchange rates, and a role as the world’s lender of last resort to countries that have trouble financing necessary imports or servicing their external debt. Initially, the IMF provided loans without any conditions attached—consistent with the view of John Maynard Keynes, representing the British government at Bretton Woods. By contrast, its other chief architect, Harry Dexter White of the US Treasury, was ultimately successful in his push to mandate the implementation of policy reforms in return for financial assistance, a practice known as conditionality.
But why rely on conditionality in the first place? There are two main rationales: first, to purportedly ensure that funds are actually repaid to the IMF, and second, to avert “moral hazard,” the risk that countries continue to adopt unsustainable policies if they can always anticipate yet another IMF bailout with limited strings attached. The former concern is overblown: countries rarely ever don’t repay the IMF, and the few failures of repayment are generally temporary in nature. The second argument neglects the fact that many countries fall into economic crisis because of external shocks over which they have little control. The Covid-19 pandemic was case in point, as increased government spending to fund the recovery left many countries with unsustainable debt repayments.
The introduction of conditionality was a controversial move. Britain advocated a lenient approach where loans would just need to be paid back at a relatively low interest rate, whereas the United States pushed for expansive conditionality. The Bretton Woods approach to placating these positions was for the final agreement to be vague on the specifics of conditionality, an issue to be worked out at a bureaucratic-technical level once the IMF was already established. Thus, the precise terms and conditions of the IMF’s loans were left to be worked out in its initial loans, and then remained remarkably consistent up until the 1970s.
In these early years of the IMF’s operations, its staff demanded that borrowing countries met a set of aggregate economic targets, like reaching budget balance, increasing international reserves, limiting domestic credit expansion, or eliminating exchange restrictions. All were intrusive measures that borrowers often objected to, but they were limited and predictable, as well as temporary and reversible. A government might have balked at reducing civil servant wages, implementing a hiring freeze or reducing public investment, but it was free to increase spending in the future, when it was no longer under IMF tutelage and when economic conditions were more amenable.
In the 1980s, however, the nature of conditionality dramatically changed. As the 1982 debt crisis engulfed the developing world, the IMF—at US initiative and insistence—began to change the ways in which it provided support to borrowers. In line with the neoliberal Zeitgeist in ascendance at the time, government intervention was seen as a key determinant of economic problems, and expanding the remit of markets was the prescribed solution. The ensuing set of reforms became known as “structural adjustment” policies, and they are often very difficult to reverse—this is indeed part of their appeal to the IMF. For example, once a natural resource is privatized, re-nationalizing it is extremely challenging. Structural adjustment policies remain the cornerstone of IMF lending today.
How IMF conditionality has shaped the world we live in
Conditionality matters. For borrowers, the implications are direct and obvious. The arrival of IMF staff to a country’s capital to “negotiate” a loan marks the beginning of a usually long period of political and social turmoil, as the IMF team examines the nature of economic problems and puts forth a range of reforms to address them. These reforms seek to fundamentally alter key parameters of the borrower’s economy, like the role of the state, the remit of markets, and the degree of international integration.
A closer look at the IMF’s application of conditionality reveals the scale of the organization’s engagement in the reshaping of domestic political economies. Figure 1 presents a world map showing the total number of conditions applicable in all IMF loans between 1980 and 2019. The countries shaded black have the highest number of conditions over the period, where the total number of conditions is greater than 1050. The countries shaded in light grey have the lowest conditions, at 350 or less. Countries without any shading had no conditions at all during the period. Armenia, Kyrgyzstan, Malawi, Pakistan, Romania, and several West African countries emerge as countries with highest overall conditionality burdens: all have received repeat loans that carried a high degree of conditionality.
Figure 1: Total IMF conditions, 1980–2019
Countries have clearly had diverging experiences with IMF conditionality. For example, Mauritania had IMF programs active for thirty of the forty years covered, carrying a total of 1,175 conditions. Other countries had only brief encounters with the Fund, reflected in relatively limited conditionality. For instance, South Africa only had a one-year loan carrying eleven conditions between 1982 and 1983. Lithuania, with 417 conditions, held the median number of conditions for IMF borrowers. Most high-income nations did not have any conditions during the period covered because they did not borrow from the IMF, although Cyprus, Greece, Iceland, Ireland, and Portugal are notable exceptions.
Of course, even though suggestive, there are limits to such aggregate condition counts. Not all IMF conditions are the same, and common criticisms that the IMF advocates for “one size fits all” policies are often exaggerated. Each IMF program is different in the precise mix of policies it seeks to reform, and this differentially impacts borrowers. The program typically contains a highly formulaic conditionality element that applies to all borrowers (for example, the commitment to not incur new debts), as well as a tailor-made element comprising structural reforms across a range of policy areas.
Three types of reform merit specific attention. First, privatization measures directly target state involvement in the economy. The targets of these policies are commonly state-owned enterprises, which have been set up by many countries to create or nurture markets, often meant to ensure that the exploitation of natural resources yields public, rather than private, profits. Similar to their private counterparts, these enterprises are often mismanaged or stay uncompetitive. However, while badly-run private sector firms can go out of business, state-owned enterprises continue to be subsidized by the public budget and accrue major losses. The IMF’s standard response has been to advocate for their privatization, which can yield some income for a cash-strapped state but takes areas of economic activity out of public hands. Investors buy these state-owned enterprises at a low cost, as the economic downturn suppresses their valuation and currency devaluations make them more attractive to holders of foreign currency. Often, these investors are foreign multinational companies, who are then protected by international trade law and other legal arrangements from possible future policy reversals.
Second, economic deregulation allows market forces to operate with fewer regulatory requirements set by state bodies. Its proponents argue that the market, rather than the public sector, is best equipped to allocate resources efficiently. Yet, economic deregulation typically favors the interests of large corporations—for example, through changes in the tax code—while neglecting the needs of small-scale companies and the labor force. Indeed, deregulation of labor markets has been a staple IMF policy. Such reforms affect both public and private sector employees: the former commonly see their numbers reduced, their salaries frozen, and any new hiring suspended; and the latter witness the dismantling of collective bargaining arrangements, along with the overall flexibilization of employment conditions, including on hiring and firing and dismissal compensation.
Finally, trade liberalization measures entail reductions in tariffs and nontariff barriers to trade in order to facilitate integration into the global economy. Although such measures can stimulate economic growth, gains from trade liberalization are typically distributed unevenly to highly specialized labor rather than to poor households. These measures can also expose domestic industries to international competition before they are able to compete, essentially preventing global South firms from receiving the kind of state support that nurtured global North industries at earlier stages of their development process.
The IMF’s conditions aspire to no less than fundamental overhauls of countries’ political-economic arrangements, creating domestic winners and losers in the process. Once in place, these reforms create self-reinforcing dynamics, as policy areas that are marketized are difficult to re-regulate and increased international economic integration is difficult to reverse.
But IMF borrowers are not the only ones affected by conditionality—countries in the global North are indirectly impacted as well. IMF calls for deregulated labor markets, low taxation, and increased economic openness in a developing country grant firms in the North new opportunities to take their production offshore, thus cutting jobs and investment in their country of origin. Economic liberalization and deregulation in the global South have follow-on effects for the global North; consequences which have contributed to the current wave of skepticism vis-à-vis globalization.
Conditionality in the present
The IMF has taken center-stage in dealing with fiscal and debt pressures since the onset of the Covid-19 pandemic. Excluding emergency pandemic-era loans, forty-seven countries have turned to the IMF for conditionality-carrying loans since 2020. The majority of these loans are for three- or four-year lending programs that stipulate extensive policy reforms. Not only does this include some of the world’s poorest countries like Afghanistan, Chad, and the Democratic Republic of Congo, but also middle-income countries like Argentina, Egypt, and Seychelles.
The comparative experience with these loans suggests that austerity is on the rise. Uganda provides a case-in-point, entering a three-year IMF program in June 2021 to support the response to the Covid-19 crisis and improve debt sustainability. The IMF called for a steep decline in the primary budget deficit: from 7.1 percent of GDP in the 2020–21 fiscal year to 3.4 percent of GDP for 2021–22, with further reductions scheduled in subsequent years. These objectives were underpinned by quarterly performance criteria on the primary budget balance of the central government and a structural condition requiring the Ministry of Finance and Uganda Revenue Authority Commissioner to adopt a revenue strategy implementation plan. These cuts disproportionately hurt poorer households and undermined the ability of Uganda to invest in its climate adaptation and mitigation strategies.
In Bangladesh, the IMF called for a decline in the primary budget deficit from 3.8 percent of GDP in 2023–24 to 3.3 percent of GDP by the end of the three-year program, to be achieved through energy subsidy reductions. While the IMF claimed that subsidies would be phased out in a way that protects the poor by sustaining public investment spending and supporting poverty reduction, it offered no specifics for how this would be achieved, prompting scrutiny from civil society groups. Indeed, the IMF has a track record of not coupling the elimination of energy subsidies with sufficient energy access or other forms of social protection for those most affected by them, as shown by recent protests in Pakistan and Sri Lanka.
The IMF claims it now cares about the negative consequences of austerity, often citing how social spending is protected from cuts through conditions that stipulate spending floors. Yet, an Oxfam analysis of seventeen recent IMF programs found that for every $1 the IMF encouraged these countries to spend on social protection, it told them to cut $4 through austerity measures. The analysis concluded that social spending floors were deeply inadequate, inconsistent, opaque, and ultimately failing.
Is there a better way?
IMF lending programs and their associated conditionality are intrusive and cumbersome, and countries tend to avoid them for as long as they can. In some cases, countries build up foreign reserves to support their currencies in case an economic crisis arises. This is a helpful tactic, but it cordons off funds that could be used in more productive ways, thereby limiting governments’ fiscal space. Or, deterred by strict conditionality, countries avoid requesting IMF assistance until the very last moment, when a crisis might have intensified, necessitating greater degrees of economic consolidation.
Reforming the IMF’s lending practices so that they deliver more effective and timely advice is necessary for the organization to live up to its promise. With this in mind, at the top of the agenda—especially during this year’s Spring Meetings—is the need for the aims and ambitions of conditionality to be revisited, not just in terms of reducing the number and scope of conditions included in a program, but also challenging the underlying logic of austerity. The austerity agenda is, at its core, only a short-term and short-sighted solution to fiscal problems. It frees up resources for governments to repay debt, but damages people’s lives and livelihoods in the process. In the longer term, austerity is neither socially nor economically sustainable, as meeting pressing challenges— like climate change and rampant inequalities—will require public investment.
A common talking point of the IMF is that sound public finances are a necessary condition for development. We do not disagree with this logic, but we argue that it is not a sufficient condition for sustainable development. Without social protection policies to maintain livelihoods and stimulate economic demand, public finances will ultimately suffer and development will falter. In other words, austerity is self-defeating and profoundly costly in social terms. It cannot remain the primary policy response to instability and crisis.
This piece draws on Alexandros Kentikelenis and Thomas Stubbs’s recent book, A Thousand Cuts: Social Protection in the Age of Austerity (available from Oxford University Press).
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