Cover image courtesy of International Monetary Fund
–by John Betsill–
Abstract
The International Monetary Fund (IMF) has prescribed a restructuring of the economy of South Africa to produce higher and sustainable economic growth for the country. Through the Western societal urge to help Africa, agencies like the IMF are employed by the West to advise and oversee economic policy implementation. These economic measures are shown to often be more self-serving for the West and restructuring recommended by the IMF in South Africa will be at the expense of the South African people.
The IMF Recommends Restructuring South African Economy
On June 29, 2018, an annual press release by the IMF concerning the state of the South African economy was released and “bold” structural reforms were prescribed as being urgently needed to achieve strong and sustainable economic growth. The measure, ironically, includes addressing the pervasive corruption of the political economy and the strengthening of effective governance. According to the IMF, these actions would promote competition in the product markets by restructuring the weak state-owned enterprises (SOEs) and provide labor market reforms which would increase the quality of education for long-term job creation. The IMF’s policy mix is geared towards alleviating public debt, slowing down rising inflation and moving closer to the midpoint of the target band, and help maintain what is seen as the strong focal point of South Africa’s economy, its financial systems.[1] The irony here lies in the fact that South Africa has been a member of the IMF since 1945 and its guidance, through the brutal apartheid government to the African National Congress has led South Africa to persistent corruption and heightened unemployment for a nation that is industrialized and possesses the 2nd largest economy on the continent by GDP.[2]
Origins of the IMF
The IMF, founded at the famous Bretton Woods Conference in 1944, is an official international organization for securing cooperation in monetary and financial matters between the nations of the world to prevent global economic recessions and depressions that helped create the conditions for World War II. The Bretton Woods Conference was a meeting on international monetary policy that included famous Western economists including Englishman John Maynard Keynes and then United States Secretary of the Treasury, Henry Morgenthau, Jr., and would make decisions for how the world’s economy would function following the conclusion of hostilities in the Second World War, which was still being waged at the time but victory for the Allies was already a foregone conclusion. As the IMF was born of this meeting of Western minds and thought, it is a decidedly Westernized organization that seeks to impose its own order and goals on global economic development and sustainable growth.
The IMF is structured in a way that it is headed by the Board of Governors, each of whom represents one of the IMF’s nearly 180 member countries. The governors are usually comprised of a nation’s central bankers or its finance ministers and meet annually to discuss the operations of the IMF. One rung below the board of governors is the Executive Board which is made up of 24 “executive directors,” eight of whom represent the United States, the United Kingdom, Russia, Japan, Germany, France, China and Saudi Arabia. The remaining directors representing the other approximately 170 nations by the remaining regions of the world. This board is lead by the managing director, who is traditionally of European citizenship.[3] It is plain to see that Africa, among other developing parts of the world, is marginalized in the decision-making process of this powerful international economic organization.
A Brief History of the IMF in the Developing World
During the debt crises of the 1980s, developing and Third World nations were not able to repay loans secured from Western banks which provided an opportunity for the West, through institutions like the IMF, to forcibly open and access the markets of these countries. The method of accessing these markets was achieved by implementing IMF and World Bank programs known as “Structural Adjustment Programs” or SAPs. The West had lent large sums of money to these countries, including South Africa, during the 1970s when oil-prices had risen steeply. To regain the money that the developing world was unable to repay by the 1980s, the West enforced privatization of industries, such as health-care and utilities, demanded austerity measures to cut government spending while securing the liberalization of capital and trade markets, which raises costs of goods and destabilizes currency markets. The SAPs imposed specifically by the IMF in the 1980s allowed it to become “one of the most influential institutions in the world.” The IMF’s staff of roughly 3000 people are able to dictate the economic conditions of over 1.4 billion humans in over 70 developing nations. According to a three-year, multi-national study released by 2002 by the Structural Adjustment Participatory Review International Network (SAPRIN), SAPs are responsible for “expanding poverty, inequality and insecurity around the world.” SAPs’ financial and trade sector reforms have ruined domestic manufacturing sectors in many countries, causing massive unemployment in the impacted areas. Reforms on other industries like agriculture have threatened food security, and privatization measures have allowed for massive lay-offs, lower worker wages, fewer benefits and general lowering of the standards of worker conditions. The privatization of national assets has allowed Western companies to remove resources and permanently extract wealth from the nations where SAPs are implemented.[4] With a record like this in the developing world, is listening to the IMF the best strategy to help South Africa out of its unemployment crises or help the stagnated economy recover and grow at a rate comparable to the best performing developing economies in the world? The urge for Westerners to help, especially in nations like South Africa, appears to be more centered on helping themselves first and foremost while continuing to implement failed economic policies for those intended to receive the help.
The IMF’s Articles of Agreement state that “economic adjustment should be undertaken in ways that are not destructive of national prosperity.” However, the IMF prioritizes macroeconomic stability and the balance of payments over economic growth which has led many economists to argue that the IMF should withdraw from lending to developing countries that have low incomes because it is seen as being ineffective and harmful to a nation’s economic success in the long-term.[5]
The Tools of the IMF
The IMF seeks to promote effective economic reform and stabilization through a myriad of different methods. Multilateral surveillance and policy papers are designed to “help” improve global outcomes; but with the majority of the wealth of the world belonging to the top 1% of the population, it is questionable if this help is intended for the developing world or the First World benefactors of this development. An example of the help from multilateral surveillance and policy papers is that they provide policy advice on how to avoid potential negative side effects from the implementation and eventual exit from IMF monetary policy. The IMF provides policy advice to countries on monetary policy action to obtain control over inflation, as well as how to establish an effective monetary policy and financial regulation policy framework. The Financial Sector Assessment Program (FSAP) provides member countries with a financial system evaluation and advice on policy frameworks to contain and manage financial stability risks, including the macroprudential policy framework. Individual country programs, (like SAPs, supported by an arrangement with the IMF,) include steps to help strengthen monetary policy, especially concerning central banking. Technical assistance is another IMF tool that helps countries develop more effective institutions, legal frameworks and economic sectors through training for the populace. The topics in technical assistance include monetary policy frameworks, exchange rates, controlling inflation and improving central bank operations such as open markets.[6] The reoccurring themes of allowing the West to help through these advisements have proven to be problematic with growth but perhaps not exclusively damaging to all developing or recovering economies that seek arrangements with the IMF.
An IMF Success Story?
With the majority of the evidence suggesting that the IMF is not a good economic partner, is there any evidence that the IMF has helped a nation in which its policies have been enacted? The country of Jordan is a small nation in the Middle East that lacks access to clean water and oil resources as well as many other natural essential resources but whose economy is functioning at high developing rate. A regional economic boom in the 1970s enabled substantial transfers of goods, resources, and workers to Jordan that helped to contribute to rapid economic growth of a staggering 350%. On the other hand, falling oil prices and associated recessions in the oil-exporting nations of the Middle East had a large adverse impact on Jordan in the second half of the 1980’s, causing the economy to contract by roughly 30%.
During the 1980s recession in Jordan, initially, the authorities resorted to borrowing funds externally to fill the problematic revenue gap which lead to an increase in Jordan’s external debt. By 1989, Jordan’s unemployment rate had risen to over 30%, and Jordan was struggling to repay the high debt it had accrued from extensive borrowing. The structural weaknesses in Jordan’s public finances and balance of payments led the government to the country’s first arrangement with the IMF in 1989 to help facilitate orderly and beneficial external financial agreements to reverse the decline in economic growth.[7]
The key objectives of the economic reforms in Jordan were focused on the reduction of public debts, reduction of the budget deficits, managing inflation, tax reforms, credit policy reforms, investment incentives, privatization and less restrictive trade policies. The same remedies that had failed so many other nations previously. Jordan agreed to a series of five-year reforms sponsored by the IMF from 1993 to 1999. The IMF gave Jordan multiple loans and saw to it that the required reforms were being undertaken. As a result, Jordan began the massive reforms while prioritizing foreign investment and opening up their trade markets to the West. By 2000, Jordan had been admitted to the World Trade Organization (WTO), and in 2001 it signed a Free Trade Agreement with the United States. The IMF and Jordan agreed that overall debt payment and restructure of the economy was now at a manageable and improving level.
Not So Fast…
Unfortunately for Jordan, all is not well with the economy in 2018. Jordan’s economy remains in a low-growth scenario after the global economic recession in 2009 with GDP expected to increase by only 2.4% in 2018 from 2.1% growth in 2017. Improvements in the tourism sector and mining drove improvement in growth in 2017 but the economy remains burdened with uncertainty in Syria, a slow revival of economic cooperation with Iraq, and an economic slowdown in the Gulf Cooperation Council (GCC). Jordan’s economy is also suffering from the IMF’s slow structural reforms that are helping impede a stronger sustained economic growth level. The unemployment rate in Jordan was at an elevated 18.5% in the fourth quarter of 2017–unchanged compared to the third fiscal quarter of 2017 which was up from 18% even at the beginning of 2016. Poverty levels are likely to have risen in Jordan given growing inflation, unemployment and sluggish growth.[8] The verdict is still out on whether Jordan has been a success story for the IMF and its economic restructuring policies in a developing nation. How are the same “helping” methods working in another complicated and developing economy like South Africa?
The South African Economy and the IMF
The history of South Africa’s political economy is a long and complicated story of colonization, racism, apartheid governance and revolution that has only recently been opened up to all citizens of the nation. Apartheid was the name of the brutally repressive racial institution of domestic governance and economic policy that was established in 1948 by the National Party, primarily made up of Afrikaners of Dutch descent that arrived in South Africa in the early 17th century. These Afrikaners governed South Africa all the way until 1994, when the African National Congress (ANC,) led by Nelson Mandela, helped end the system and include all South Africans in the nation’s political economy.
In 1978, United States National Security Advisor, Zbigniew Brzezinski, identified South Africa as a ‘regionally influential nation,’ noting that the economic changes taking place country, with help of the IMF, would have major consequences in the region.[9] If South Africa were such an important emerging center for the capitalist world in 1978 with support from the IMF, why is the country only ranked 77th overall as an economy in 2018? The world average growth rate for GDP is 2.7% but is much higher for countries that are quickly developing, such as 7.7% in India and even 7.2% for fellow African nation, Ethiopia. [10]
The 2013 assessment of South Africa’s economy contains many of the recommendations that are seen in the 2018 IMF press release that calls for restricting of the economy to “help” South Africa grow and become a prosperous political economy. The 2013 IMF assessment calls for more competition in the economy to create badly needed job growth. This revolves around liberalization of the economy and raising the costs of uncompetitive economic behaviors, which means more access for Western companies to South African markets. The South African National Development Plan (NDP,) which appears to be a rebranding of the failed SAP system, calls for 11 million jobs to be created in order for sustained and healthy economic growth; but if the markets are being opened to more foreign companies and corruption is already a major issue, it is unclear where those jobs would come from other than vague references to business sectors. Increased emphasis on education and vocational training to close skills gaps seems reasonable, but without the growth in the economy to provide funding and opportunities for increased access to education, where, other than loans from the West or now possibly China, will that money come from?[11]
The IMF is attempting to show through restructuring South Africa’s economy, that the process of reallocation of workers from the public to the private sector is essential to the recovery and growth of South Africa’s economy. The IMF argues that public sector workers are not as effective at producing the economic growth that the private sector workers do. Private workers are judged on productivity and effort while the stereo-type of government workers as being less productive and less efficient is promoted by the IMF. The IMF also contends that unemployment should increase worker effort in the private sector which would cascade into faster and more efficient growth for the economy.[12] Again, the helpful advice from a Western financial institute pushes towards an easier access to markets for the West and less proven outcomes for South Africa.
The Alternatives to the IMF for South Africa?
South Africa’s inability to maintain a positive employment and economic growth trajectory following the end of Apartheid can be understood through the under-performance of non-resource tradeables sector and manufacturing. Tradeables, in this case, are simply goods and services that can be traded internationally. If the South African manufacturing sector were allowed to expand rapidly, not something IMF is interested in prescribing with structural reforms over decades, economic growth would have been greatly increased and far more stable jobs produced. Reducing the chronic unemployment issues by expanding South Africa’s capacity to provide higher wage jobs for unemployed workers, be it in a privatized or public institution, through growth from within the South African workforce and political economy is a viable solution to a decades-long problem. On a microeconomic level, South Africa needs a more coherent and coordinated industrial policy to grow non-resource tradeables, which does not require loans from the IMF or major structural changes prescribed to other nations by the IMF who have yet to become prosperous economies. The macroeconomic level should target inflation and monetary policies that impact the real exchange rate of its currency, something which the IMF would agree with on an outcome level but not on a process to achieve the particular goal level. Together, the microeconomic and macroeconomic policies described previously can put South Africa on a path of structural transformation that invigorates non-resource tradeables, raises economic growth, and reduces unemployment without necessarily having to involve the IMF and their desired structural reforms that would leave South Africa vulnerable to further exploitation from the West under the guise of economic “help.”[13]
This post may have been edited by admin for clarity and length.
References
Primary
“IMF Executive Board Concludes 2018 Article IV Consultation with South Africa.” Www.imf.org, 30 July 2018, www.imf.org/en/News/Articles/2018/07/27/pr18319-south-africa-imf-executive-board-concludes-2018-article-iv-consultation.
“Jordan’s Economic Outlook – April 2018.” World Bank, 4AD, www.worldbank.org/en/country/jordan/publication/economic-outlook-april-2018.
Padayachee, Vishnu. “APARTHEID 80UTH AFRICA AND THE INTERNATIONAL MONETARY FUND.” African E-Journals Project, Michigan State University, pdfproc.lib.msu.edu/?file=/DMC/African Journals/pdfs/transformation/tran003/tran003004.pdf.
Rodrik, Dani. “Understanding South Africa’s Economic Puzzles*.” Economics of Transition, vol. 16, ser. 4, 3 Aug. 2008, pp. 769–797. 4, doi:10.3897/bdj.4.e7720.figure2f.
“The IMF’s Assessment of South Africa; 2013 Art IV Consultation.” Www.imf.org, International Monetary Fund, 1 Oct. 2013, file:///C:/Users/John/AppData/Local/Temp/100213.pdf.
Secondary
Asad, Ismi. “Impoverishing a Continent: The World Bank and IMF in Africa 1 Impoverishing a Continent: The World Bank and the IMF in Africa.” Www.halifaxinitiative.org, July 2004, pp. 1–27., doi:ISBN 0-88627-373-0.
Bird, Graham, and Dane Rowlands. “The Effect of IMF Programmes on Economic Growth in Low Income Countries: An Empirical Analysis.” The Journal of Development Studies, vol. 53, no. 12, Feb. 2017, pp. 2179–2196., doi:10.1080/00220388.2017.1279734.
Chadha, Bankim, et al. “Economic Restructuring, Unemployment, and Growth in a Transition Economy.” SpringerLink, Springer, Dordrecht, 1 Dec. 1993, link.springer.com/article/10.2307/3867609.
McQuillan, Lawrence. “International Monetary Fund.” Encyclopædia Britannica, Encyclopædia Britannica, Inc., 1 Mar. 2018, www.britannica.com/topic/International-Monetary-Fund.
“Monetary Policy and Central Banking.” Finance & Development, Mar. 2017, www.imf.org/en/About/Factsheets/Sheets/2016/08/01/16/20/Monetary-Policy-and-Central-Banking.
Other
Dimou, Antonia. “Jordan: Success Story of the IMF.” Saudi Arabia – World Newspapers and Magazines – Worldpress.org, www.worldpress.org/Mideast/3610.cfm.
“The Fastest-Growing and Shrinking Economies in 2018.” The Economist, The Economist Newspaper, 5 Jan. 2018, www.economist.com/graphic-detail/2018/01/05/the-fastest-growing-and-shrinking-economies-in-2018.
“South Africa.” The Heritage Foundation, www.heritage.org/index/country/southafrica.
[1] “IMF Executive Board Concludes 2018 Article IV Consultation with South Africa.” Www.imf.org, 30 July 2018, www.imf.org/en/News/Articles/2018/07/27/pr18319-south-africa-imf-executive-board-concludes-2018-article-iv-consultation.
[2] “South Africa.” The Heritage Foundation, www.heritage.org/index/country/southafrica.
[3] McQuillan, Lawrence. “International Monetary Fund.” Encyclopædia Britannica, Encyclopædia Britannica, Inc., 1 Mar. 2018, www.britannica.com/topic/International-Monetary-Fund.
[4] Asad, Ismi. “Impoverishing a Continent: The World Bank and IMF in Africa 1 Impoverishing a Continent: The World Bank and the IMF in Africa.” Www.halifaxinitiative.org, July 2004, pp. 1–27., doi:ISBN 0-88627-373-0.
[5] Bird, Graham, and Dane Rowlands. “The Effect of IMF Programmes on Economic Growth in Low Income Countries: An Empirical Analysis.” The Journal of Development Studies, vol. 53, no. 12, Feb. 2017, pp. 2179–2196
[6] “Monetary Policy and Central Banking.” Finance & Development, Mar. 2017, www.imf.org/en/About/Factsheets/Sheets/2016/08/01/16/20/Monetary-Policy-and-Central-Banking.
[7] Dimou, Antonia. “Jordan: Success Story of the IMF.” Saudi Arabia – World Newspapers and Magazines – Worldpress.org, www.worldpress.org/Mideast/3610.cfm.
[8] “Jordan’s Economic Outlook – April 2018.” World Bank, 4AD, www.worldbank.org/en/country/jordan/publication/economic-outlook-april-2018.
[9] Padayachee, Vishnu. “APARTHEID 80UTH AFRICA AND THE INTERNATIONAL MONETARY FUND.” African E-Journals Project, Michigan State University, pdfproc.lib.msu.edu/?file=/DMC/African Journals/pdfs/transformation/tran003/tran003004.pdf.
[10] “The Fastest-Growing and Shrinking Economies in 2018.” The Economist, The Economist Newspaper, 5 Jan. 2018, www.economist.com/graphic-detail/2018/01/05/the-fastest-growing-and-shrinking-economies-in-2018.
[11] “The IMF’s Assessment of South Africa; 2013 Art IV Consultation.” Www.imf.org, International Monetary Fund, 1 Oct. 2013, file:///C:/Users/John/AppData/Local/Temp/100213.pdf.
[12] Chadha, Bankim, et al. “Economic Restructuring, Unemployment, and Growth in a Transition Economy.” SpringerLink, Springer, Dordrecht, 1 Dec. 1993, link.springer.com/article/10.2307/3867609
[13] Rodrik, Dani. “Understanding South Africa’s Economic Puzzles*.” Economics of Transition, vol. 16, ser. 4, 3 Aug. 2008, pp. 769–797. 4, doi:10.3897/bdj.4.e7720.figure2f.
