The IMF and the Rationalization of the World

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The International Monetary Fund (IMF) is one of the major global financial institutions. It is an agency of the United Nations with seat in Washington DC. Its goal is to promote international trade and monetary cooperation by helping member states through balance of payment difficulties and financial crises. The IMF was established in July 1944 as part of the Bretton Woods conference. It wanted to prevent the recurrence of protectionist policies and cutoffs from the global financial system due to the inability of member states to pay debts. As part of the Bretton Woods regime, most developed countries pursued fixed exchange rates, i.e. the countries would tie their currency to the value of the dollar, whose value was fixated at the value of gold, and gold could theoretically be redeemed from the US vaults. The IMF’s task was to oversee this fixed exchange rate regime, and if some countries were going through an economic or balance of payment crisis they would provide special drawing rights, i.e. loans, to those countries.

The US was the linchpin of the global financial regime, and it abandoned the fixed exchange rate regime under Bretton Woods, which created the floating exchange rate regime in 1971. Thereafter, the IMF expanded its mandate by creating IMF loan agreements to countries with balance of payment difficulties. No longer would short-term loans be given out without precondition. The loan agreement determined whether the shortage of capital was due to economic fluctuations, e.g. demand decline for the main export product of a country, or economic policy. The loans would now be tied to conditions called “structural adjustment” that could include government budget austerity, export promotion, devaluation of currencies, trade liberalization (fewer import/ export restrictions), balanced budget stipulations, removal of price controls and state subsidies, privatization of state companies, more rights for foreign investors, fight against corruption. In other words, the IMF is the agent of enforcing rationalization among the debtor countries, i.e. the conditions to promote capital accumulation in the name of macroeconomic stabilization.

The 1980s was the heyday for structural adjustment programs. The 1970s oil crisis resulted in substantial debts among oil-importing countries. The newly independent countries of the Global South that had just gained independence from the European colonial powers lacked the capital to develop and they took out loans from western multinational banks flush with oil money, some of which to develop their own industries, some of it to create welfare states, and some of it was wasted in corrupt ways by the political leaders. The terms of trade of many Global South countries was deteriorating, and their raw material commodities were sold cheaply in the world market, while they had to obtain the expensive machinery and consumer goods at stable global market prices. This was caused by a global recession in the 1980s. To counter inflation, the US decided to raise the interest rate on US treasuries (the so-called “Volcker Shock”), pushing up the value of the US dollar, the world reserve currency. The higher the US interest rate, the less global investors were inclined to purchase the bonds of the poorer countries, so capital flight from the Global South increases the likelihood of a debt crisis in these countries.

Major financial crises occurred in Mexico in 1982, Brazil in 1987, East Asia in 1997-1998 and Russia in 1998. Each of these countries eventually made an economic turnaround: Mexico is highly integrated into the US economy via the maquiladora, the tariff-free US companies taking advantage of cheaper Mexican labor. Brazil expanded its soybean, oil and iron ore exports in the 2000s. Russia benefited from higher oil prices in the 2000s and many East Asian countries, most prominently South Korea, focused on export promotion and high savings rates to never have to return to borrowing from the IMF again. In 2010, the eurozone crisis commenced with Greece admitting to higher debts than were originally reported. The IMF was told to step in unlike other cases did not impose debt restructuing/ haircut, so as to ensure that the German and French banks would be made whole, thus reducing the domestic blowback among these two countries. Greek austerity programs were severe resulting in a limited economic recovery. The GDP is substantially below its pre-crisis peak, although there is a recovery since 2021. In 2022, Greece paid off the IMF 2 years ahead of schedule. In 2023, Greece returned to investment grade credit rating.

Structural adjustment programs are deeply unpopular because they punish the poorer countries and the poor members of society via massive austerity programs that often exacerbate the economic crisis through cuts in aggregate demand/ consumption. Structural adjustment hits farmers in poor countries, because the IMF requires the states to remove import restrictions on food allowing the highly subsidized western agricultural products to outcompete the domestic farmers. Furthermore, austerity means cuts in budget support for the local farmers, thus driving them out of business. Public health has deteriorated with structural adjustment programs, e.g. a rise in tuberculosis deaths, largely because of budgetary savings in the health care system. Structural adjustment is associated with rising income inequality.

Jeffrey Sachs (2005) remarked that the “IMF’s usual prescription is ‘budgetary belt tightening to countries who are much too poor to own belts.” Joseph Stiglitz (2002) concludes, “Modern high-tech warfare is designed to remove physical contact: dropping bombs from 50,000 feet ensures that one does not ‘feel’ what one does. Modern economic management is similar: from one’s luxury hotel, one can callously impose [structural adjustment] policies about which one would think twice if one knew the people whose lives one was destroying.”

Perhaps due to that pushback against the pro-austerity logic, the IMF began to warm up to the idea of debt forgiveness in the heavily indebted Third World. 36 countries have received such debt relief, which is funded by the IMF and bilateral lenders. Beneficiaries include Afghanistan, Guyana, Haiti, Sierra Leone, among many others (IMF 2023).

Currently, the largest IMF debtors are Argentina ($30 billion), Egypt ($11 billion), Ukraine ($9 billion), Pakistan ($6.5 billion), Ecuador ($5.7 billion), Colombia ($3.2 billion), Angola ($3 billion), Kenya ($2.5 billion), South Africa ($1.9 billion), Ghana ($2 billion) (IMF 2024). I take the four largest IMF debtors as case studies for analysis.

Argentina

Argentina is a country that has structurally faced debt crises. It was one of the more peripheral Spanish colonial possessions, having too few Native Americans that could be recruited into the encomienda (land grants to Spanish conquistadores) system. It did not have gold mines, which is what the Spaniards were greedy for, so there was little need for slaves unlike Brazil, a Portuguese colony, or Venezuela. 0.7% of the present Argentinian population is of African descent. There was, however, some cloth manufacturing and livestock/ cattle raising in the wide steppes of Patagonia. There was not much international trade except with the Spanish motherland which had monopsony power over Argentinian exports.

Argentina obtained independence from Spain in 1810, but had a civil war that lasted until 1818. The outcome of the war was the formation of free trade regime and open economy. Its economy improved with better terms of trade in livestock and cloth. But the openness of the economy came at the expense of rising British influence in the 1820s: there was no protectionism against British industrial goods, the central bank was managed by British investors. These investors also controlled the port of Buenos Aires and ship trade, and they exploited the natural resources. Independence also meant higher vulnerability to a debt crisis as the government borrowed heavily to finance new projects and pay off old war debts. This resulted in the devaluation of the peso in the late-1820s.

The high point of the Argentinian economy was reached between 1860 and 1930, when the agricultural export economy boomed. In addition to livestock, Argentina increasingly grew wheat and other grains. Argentina also benefited from the building of railroads beginning in the 1850s, which connected more farmers to the global economy. By 1905, Argentina reached central European income levels. The booming economy attracted European immigrants, especially from Italy, Spain, France and Germany. But there were still financial issues like the 1870s debt crisis which was followed by suspending peso convertibility that increased inflation but lowered debt. There was a financial crisis in 1890. World War I was a harbinger for bad times to come as foreign investment stopped and trade declined, though there was a trade recovery in the 1920s.

The Great Depression of the 1930s became a game changer: protectionism increased elsewhere, so exports declined. Finding global markets unreliable successive governments turned to develop a self-sufficient industry to replace export-oriented agriculture. This was the beginning of import substitution industrialization pioneered by the Argentinian economist Raul Prebisch. The government decision to divert agricultural funds toward industrial development resulted in a drop in agricultural production. There was an increasing migration from the countryside to the large cities, and the growing urban working class became more receptive to left-wing political messages that were provided by the military general Juan Peron, who seized power after a coup in 1943. Peron was elected president in 1946 and instituted corporatism, where powerful organized interest groups negotiated for resources and positions within the state. His administration led to the growth of state-owned companies, higher public investments, higher taxes, higher government spending especially on welfare, and more government control over rents and prices. Business owners not only detested the higher taxes but also the excessive regulations which led to more disregard for the law. Inflation increased thanks to the populist policies. The unions then struck for higher wages, but prices increased even faster resulting in real wage cuts. Economic growth was slower than in neighboring Brazil and Chile. This eroded the popular support for Peron who lost the election in 1955. A coup brought Juan Carlos Ongania to power in 1966 and he supported a large public sector and state control of the money supply, wages, prices and bank credit, although he also promoted privatization.

By 1970, import substitution was considered a failure, and the government devalued the currency. Inflation remained high, resulting in ever higher wage demands. The 1973 election returned Peron back to power, and he doubled down on expansive monetary policy and even higher inflation. Peron died in 1974, so his wife Isabel took over but she was toppled in 1976. The military leadership under Jorge Videla lowered import barriers, liberalized restrictions on foreign borrowing and supported the peso against foreign currencies. The greater import of industrial goods revealed that Argentinian industrial companies were not competitive. Argentina liberalized the capital market, but this was followed by increasing public debt. The currency became overvalued as currency depreciation was outpaced by higher inflation, so there was capital flight. Government spending remained high, wage rises large and production remained inefficient. By 1982, the fiscal burden became so huge that Argentina turned to the IMF for financial assistance. The IMF programs failed several times, because Argentina spent more funds and printed more money than they had agreed to with the IMF. This was the beginning of a long relationship with the IMF but the underlying problem of non-competitive industries, high inflation and state budget spending.

Democracy returned in 1983. In 1991, economy minister Domingo Cavallo put an end to the inflation by pegging the peso to the dollar. With risk of devaluation removed, foreign capital poured in and economic growth and job growth resumed. The currency peg was not socially sustainable. The country developed a large trade deficit and could become more competitive only with lower prices. Wage cuts occurred in a period of elevated unemployment, so social unrest increased. By 2001, there was a new economic crisis and capital flight threatened to destabilize the banking system, so the authorities froze withdrawals. Social unrest and poverty was spreading, and the IMF suspended further disbursements. Argentina defaulted on its debt payments and abandoned the currency convertibility regime. It was now able to devalue the currency to become competitive without cutting wages and prices. But, in the meantime, the capital flight worsened, which increased unemployment and reduced economic output.

Nestor Kirchner, a Peronist, won the presidential election in 2003. The economy recovered somewhat on the back of rising soybean, wheat and beef exports. Some firms were renationalized following disappointment with the neoliberal experience. IMF loans were paid off in 2005, but mainly because of Venezuelan loans. Venezuela was led by Hugo Chavez, a fellow left-wing leader, who was exploiting the nation’s oil money to support other left-wing allies in Cuba and Argentina. Kirchner stepped aside in 2007 and died in 2010. He was inherited by his wife Cristina Fernandez. She nationalized the private pension funds, officially to protect the pensions against falling stock prices, but also to appropriate extra funds for the state. Rising inflation and capital flight returned in the early-2010s, so the government curtailed access to dollars and imposed capital controls. This created a black market for dollars which was valued higher than in official exchange rates. Inflation spiked. In 2014, a New York court forced Argentina to pay the remaining bondholders, American vulture funds, but Argentina refused which resulted in a new default.

Macri was a neoliberal and won the election in 2015. He lifted foreign exchange restrictions, devalued the peso by 30%, but unemployment and layoffs increased. He lifted the export restrictions on agricultural staples which promptly resulted in large food price increases. Macri also returned to borrowing from the IMF via a 2018 Stand-By Arrangement, which was a $15 billion loan. No wonder that Macri lost to the Peronist Alberto Fernandez in 2019. His vice president was Cristina Fernandez, no relation. Fernandez faces the Covid pandemic, which resulted in higher fiscal burden from the quarantine and lockdown. The government subsidized businesses even during closure. Inflation surpassed 100% for the first time since the early-1990s. Fernandez also requested more IMF loans, hoping that it will help Argentina pay down some of the debt.

It was this bad experience that resulted in the election victory of Javier Milei, a right-wing libertarian, in 2023. Milei read Friedrich Hayek and Milton Friedman and was thoroughly convinced that Peronist socialism and the lack of market discipline had destroyed Argentina’s economy. He denounced climate change as a socialist hoax. When he became an MP in 2021, he gave away his government salary in a raffle to strangers, believing that this salary was theft from the taxpayers. He worked a regular job as economics professor. He pledged to introduce an economic shock therapy to restore the competitiveness of Argentina. During the election campaign, he held up a chainsaw, promising to cut the government regulations, budget and departments down to the bone, to balance the budget and stabilize the currency via dollarization. 10 government departments were abolished by merging them into existing departments. 35% of the government budget was slashed. Pensions declined by 36%. Transfers to the provinces declined by 32%. Social programs declined by 11% (Garcia and Venturi 2024). Inflation slowed and Argentina achieved a budget surplus. These policies were pushed through with presidential decrees due to the opposition of the Peronists in parliament.

The IMF liked the new tune and restored payouts to Argentina. The foreign investors are very willing to purchase the dollar-denominated Argentinian bonds, which drives up their price. The pushback against Milei came from the trade unions, who were opposed to the public sector layoffs. The university students and teachers were opposed to the deep cuts to the universities which brought out more protesters. Poverty increased and economic activity declined, but half the country still supports Milei. The macroeconomic stabilization is achieved at the expense of the population, although if he can attract foreign capital and develop competitive industries perhaps the economy could recover, and all the pain will be forgotten. Milei lines up with a pro-western foreign policy by sending friendly overtures to US, Ukraine and Israel, while being hostile to BRICS and Venezuela. Milei applied to become a NATO partner. Milei is a libertarian economic ideologue, and he is willing to bleed his population, expecting that things will turn around for the better. Will Argentina wean itself off the IMF dependence?

Egypt

The Egyptian economy’s historic staple has been cotton. Egypt is a an agriculture-based economy with powerful landlords and many peasants producing wheat, barley and lentils among others. In the nineteenth century there was an attempt at industrialization, but the British, who later colonized Egypt, imposed a commercial treaty on Egypt, keeping their tariffs low and their own manufacturing products uncompetitive against the British imports. The few industrial enterprises were owned by foreigners, usually Greeks and Turks. Industrialization took a new spurt in the 1930s during an era of economic depression, high tariffs and diminished global trade. Egypt imported more raw material and machinery, and imported fewer manufacturing goods, which were self-produced. Manufacturing industries included textiles, rayon, plastics, chemical fertilizers, rubber goods, pharmaceutics, steel castings, and refrigeration.

But the growth of manufacturing did not displace dependence on agricultural exports. Cotton crops were reducing by the early-1900s. Soils were overused as perennial irrigation lessened the fertility of the soil. Agricultural productivity decreased. Egypt is mostly desert, and only the Nile and the Nile delta were useful for agriculture and settlement. As the population kept expanding, spaces became more cramped, which became more acute in the second half of the twentieth century. Cairo was growing along with the slums for low-income residents. Nasser’s officer corps took power in 1952 and prioritized economic development, which resulted in flourishing economic development until 1967. Thereafter, Egypt was involved in expensive wars with Israel (Six Day War and Yom Kippur War), which resulted in a declining economy. Fortunes improved with the rising oil prices in the 1970s, as oil is an important resource that Egypt produced. With the crashing oil prices by the 1980s and rising US interest rates, Egypt fell into a debt crisis. In 1991, Egypt embarked on economic liberalization by reducing price controls, reducing subsidies, controlling inflation, cutting taxes, privatization and promoting trade and investment.

With the growing population, Egypt became very dependent on wheat and maize imports, which make up about half of total consumption. Egypt imported pharmaceuticals, cars and car spare parts in exchange for its exports of gas, oil, clothes, cotton textiles, petrochemical products, citrus fruits, rice, dried onion, cement, steel and ceramics. Domestic food production is threatened by climate change and rising temperature rotting the crops. An important cause for the Arab Spring that brought down the Hosni Mubarak regime was the discontent with the rising food prices. The turbulence of the Arab Spring lowered tourism, an important source of foreign exchange. The Muslim Brotherhood briefly took power but was then toppled by another military dictator Abdelfattah El-Sisi in 2013.

By 2008, Egypt became a net importer of oil due to falling oil production and rising domestic consumption. Egypt became dependent on the Gulf states for their oil. There are new gas sources that have been coming online, although the Egyptian government began to limit export of gas due to rising domestic demand around 2014. Weak governance implied very low tax collection and a large informal sector covering 62% of the labor force. The government budget deficit is consistently at about 10% of GDP per year. Macroeconomic conditions worsened with the Ukraine War because the blockage of Ukrainian wheat in the Black Sea reduced food imports. The Israel Gaza war since October 2023 created a spillover effect in the Red Sea, because the Hamas allies were the Yemeni Houthis, who were disrupting sea traffic via the Red Sea. Egypt relies on the Red Sea trade via the Suez canal, which connects Europe and the Mediterranean Sea with the Indian Ocean leading to Asia (IMF 2024). A lot of sea traffic is rerouting via South Africa, which is a much longer trek, but it meant decline of 66% of trade volume via Egypt’s Suez canal. The irony is that many Egyptians have profited from selling weapons to Hamas via the border crossing with Gaza.

Due to the economic crisis Egypt became dependent on IMF loans that started flowing in large numbers in 2016, 2020 and 2022. IMF conditions for the loans include a shift to a flexible exchange rate system, monetary and fiscal policy tightening, lowering inflation, budget support for the poor, and the promotion of the private sector (IMF 2024). IMF loans are often used inefficiently, because most of the government food or fuel subsidies benefit the non-poor, thus raising the fiscal burden to the treasury. Given that IMF loans began to flow mostly since 2016, we cannot say that Egypt is a chronic client of the IMF as is the case in Argentina. But there are no indications that they will quickly get out of the loan crisis. To get more economic stability, they need more peace in the region.

Economic development is held down by the heavy bureaucracy and the difficulty of starting businesses. There is no bankruptcy law, so entrepreneurs failing to repay debt can face prison time, which deters business creation. The fast growing population due to the high fertility rate keeps businesses well supplied with low-wage labor. There is extensive corruption in the state sector, which involves the necessity of paying officials extra fees to get things done.

Ukraine

Ukraine came into being with the collapse of the Soviet Union in 1991. The territory of Ukraine has been considered the European breadbasket going back to ancient Greek days. Its rich fertile soils are called chernozem, producing an abundant amount of food often in excess of domestic demand. Wheat became an important export commodity. Ukraine lacked secure border and was regularly plundered by Cumans, Mongols and Tatars and lastly by the Russians. It had Russian military outposts by the 17th century, while most of the fields were not made useful.

Ukrainians have an ambivalent relationship with Russians, on the one hand they were two Slavic people with high intermarriage rates, and, on the other hand, the Ukrainian nationalist movement has been suppressed by Russia’s Ukrainian language prohibition campaigns. Under Stalin, millions of Ukrainians perished from misguided agricultural policies that deprived peasants of their means of livelihood called Holodomor. Agricultural productivity remained low throughout the Soviet period due to inefficiency problems of collectivized agriculture, resulting in food imports to the Soviet Union. Some Ukrainians also resented the Soviets for the suppression of the pro-nationalist movement of Stepan Bandera, who was, for a time, backed by Nazi Germany to defeat the Soviet army in World War II. Bandera lived in exile in West Germany after World War II and was assassinated by KGB agents in 1959.

In the nineteenth century, industrialization promoted mineral mining (pig iron, iron ore, steel, coal, gas) in the eastern Donbas, which is still highly prized by Russia when it seized Donbas in 2014. After the Nazi removal from the Donbas in 1943, many Russians were settled in the Donbas eventually coming to outnumber the ethnic Ukrainians residing there. They populated the heavy industry. The fall of the Soviet Union was devastating for the Donbas because there would be no more state subsidies to keep the steel and heavy industries alive. The Donbas continued to produce some industrial inputs that were exported to Russia. In addition to the dominance of the Russian language (Ukrainian language was suppressed during the Soviet era), the economic dependence on Russia created a pro-Russian political bloc in the Donbas that was highly skeptical of the western Ukrainian ambition to join the EU and NATO. Ukraine’s westernization pull happened anyway, as Viktor Yushchenko won the contested presidential election in 2004. He formulated his interest to join NATO, but that request was denied in the 2008 Bucharest meeting of NATO largely due to French and German opposition.

Russia punished Ukraine with gas shutdowns and haggling over higher gas prices. This measure also disrupted gas supplies to western Europe and was the major reason that Germany was insistent on building the Nordstream pipeline over the Baltic Sea, which was opposed by Ukraine, Poland and the Baltic states. Another reason for the pipeline was that the Russians and Germans no longer wanted to pay the price for the Ukrainians stealing the Russian gas and reselling it. Viktor Yanukovych had won the 2010 elections and continued his predecessor’s negotiation with the EU for an association agreement. The EU was clearly the larger consumer market and the Ukrainians needed the technical know-how and investments of western Europe similar to what the central and eastern European former Warsaw Pact states received.

Russia then offered Ukraine cheaper gas and Yanukovych decided to cancel the EU association agreement. Ukraine was about to become another Belarus, a quasi Russian colony. That was the beginning of the Maidan protests. The first demand was for Yanukovych to restore the EU association agreement but these attempts were rebuffed and the authorities cracked down. More and more protesters entered the street, and the US and European officials spoke out in favor of the protesters. Once the protests grew too large to contain, Yanukovych fled to Russia to the chagrin of Russian leader Vladimir Putin, who rightfully feared that he was losing a reliable client state. Putin stopped purchasing Ukrainian goods, and the Ukrainian economy shrank by nearly 7% in 2014. What helped the economy from 2015 onward was the visa liberalization in Europe which increased the number of Ukrainians moving to Europe and paying remittances back home. The higher incomes and greater political freedoms enjoyed by the Ukrainians residing in Europe reaffirmed the pro-western orientation of the country. Trading with China also increased due to China’s insatiable demand for Ukrainian grains.

Putin seized Crimea and funded a military campaign in support of the Donbas separatists. The ironic outcome was that by seizing these pro-Russian portions of Ukraine, he diminished any electoral chances for a pro-Russian presidential candidate. Even the provinces of Kharkiv and Odesa with many Russian speakers turned against Russia and declared their loyalty to the Ukrainian government. Thereafter, Kyiv would be ruled by a pro-western government with clear ambitions for NATO and EU membership. Putin’s only way to restore control over Ukraine was by invading it.

The Russian invasion of Ukraine in February 2022 immediately destroyed significant parts of the Ukrainian economy. The city of Mariupol along the Sea of Azov that had half a million residents prior to its capture by Russia was completely wiped out. Russian bombs flattened towns along the frontline, including Kyiv and Kharkiv that were not taken but surrounded, and destroyed a lot of infrastructure via missiles far behind the frontline, e.g. Lviv or Odesa. Ukraine’s economic output had already been hampered by the loss of the industrial heartland of the Donbas and now the core of the country was also getting destroyed. Remarkably, Ukraine was still able to do the crop harvest in the unoccupied territories, but the challenge was to export it. Normally, the exports happens via the Black Sea port via Odesa, Mykolaiv and Kherson. Kherson fell under Russian control for the first year of the war and Mykolaiv was a frontline city. The port of Odesa was effectively blockaded by the Russian Black Sea fleet stationed in Crimea. The economic situation stabilized somewhat because the Ukrainian drone boats have destroyed a lot of the Russian navy, so the remaining Russian ships retreated to Novorossiysk. That cleared the Black Sea route and undermined the Russian blockade of Ukraine.

But this is merely a small victory. Ukraine’s economy decreased by nearly 30% from 2022 to 2023. There was an economic recovery of 6% in 2023, but the recovery is not about improved living standards for the Ukrainian people but the creation of a war economy similar to what is happening in Russia. Even before the war, the IMF has continuously granted loans to Ukraine from 1998 onward. The IMF was highly critical of the low Ukrainian commitment to structural reforms, implying regularly high budget deficits and elevated rates of inflation, although it was the worst in the mid-1990s. A 2002 loan was not paid out because the IMF didn’t like the large VAT-refund arrears to Ukrainian exporters which was hiding a budget deficit. A 2009 loan was frozen because Ukraine raised the minimum wage and pensions which was against IMF recommendations.

Things became dicey when the Maidan uprising overthrew Yanukovych. The new government under Yatsenyuk received a $15 billion IMF aid package in exchange for cutting natural gas subsidies, which raised the gas prices by 50% for consumers. The EU offered an additional 1.6 billion euros in aid but only because the IMF package went through. The IMF also made demands on lowering corruption via the establishment of an anti-corruption bureau. A 2017 loan was not given out because IMF was unhappy that only pension reform was achieved and not sufficient progress on anti-corruption, land reform, privatization and harmonization of gas market laws with those of the EU. In 2020, the IMF granted a new $5 billion loan in exchange for lifting a ban on the sale of farmland and a banking law that prevented two oligarchs from purchasing PrivatBank. These oligarchs are the products of the post-Soviet appropriation of state property similar to what had happened in Russia.

With the Ukraine-Russia War in 2022, IMF has granted $1.4 billion in emergency finance to Ukraine at the outbreak of the war. A further $122 billion support package mainly funded by the western countries out of which $15 billion came from the IMF was approved in 2023, but the IMF makes demands on Ukrainian tax authorities to improve their tax collection capacities. They should also be more transparent in their budget preparation, fiscal risks and public investment tenders. Ukraine is advised to introduce more exchange rate flexibility, ease foreign exchange controls and lower inflation in the middle of the war (IMF 2024). Inflation can be held down via western financial support, although a war-weary west could force the Ukrainian central bank to print more money to fund the budget, which would raise inflation. But the IMF also became more flexible during the war by not requiring Ukraine to raise energy tariffs during the war unlike the previous programs. It is also not demanding deep cuts to social services given that an increase in poverty could undermine public support for the war. IMF is not a generous creditor asking Ukraine for 6% interest compared to the US grants, EU interest free loans and 1.5% loans from Canada (Betliy 2023).

With the passage of the EU-Ukraine Association Agreement in 2014, Ukraine has committed itself to further institutional reform, which means the adoption of EU standards on economic and trade policy, legislation, court system, equal rights for workers, visa free movement of people, and the modernization of the energy infrastructure.

Pakistan

Pakistan has been part of the Indus Valley civilization that stretched through South Asia. It had many urban settlements from 3500 BC onward. That civilization practiced agriculture, domesticated animals, using copper, bronze and tin tools. The Indus valley had a thriving river-borne commerce through the Indus river. Overland trade happened via the Khyber Pass connecting the Punjab region with Afghanistan, which connects to Middle East and Central Asia. When the British East India company conquered much of South Asia, the economic status of the area of Pakistan shifted from the exporting of processed goods to the exporting of raw materials, especially cotton, opium, indigo and silk, and the importing of British manufacturing goods. The Punjabis were exporting cotton, wheat and oilseeds. The British ensured with their trade rules that the South Asians would remain at the bottom of the global economic pyramid.

Pakistan was part of India throughout British rule, but the push for independence resulted in the Muslim League under Ali Jinnah declaring an independent Muslim state, which separated Pakistan from India. The latter is formally secular but has a Hindu majority. The split of the country might have created a safe haven for Muslims, but it came at the cost of border conflicts around Jammu and Kashmir. Bangladesh, which was East Pakistan, was resentful of the economic resources being controlled by the Punjabis in West Pakistan, so it became an independent country in 1971 after a short war with West Pakistan. Military conflicts were an expensive fiscal drag, and it gave the military outsize influence in national politics. Pakistan’s military runs over 50 commercial entities, thus having their own economic fiefdom.

In the early decades of independence in the 1950s and 1960s, there was large manufacturing and economic growth. Pakistan developed their own automobile and cement industries. They constructed dams, canals, power stations and space programs. Land reforms consolidated land holdings and increased agricultural output. There were issues with crony capitalism, as 22 families dominate the economy by holding most of the industrial and banking assets. Pakistan’s economy was helped by US economic aid, but that aid declined with the global oil crisis in 1973. Pakistan is a net importer of oil and has been harmed by rising global oil prices.

That same year Zulfikar Ali Bhutto became prime minister and he pursued socialist nationalization policies involving the steel, chemical, cement, banking and agricultural sector. The nationalization lowered national income, poverty and inflation increased. Decisions in nationalized businesses were based on administrative fiat rather than market-based. Bhutto was toppled by the military in 1977 and was sentenced to death in 1979. General Muhammad Zia-ul-Haq liberalized the economy by removing controls on industry and he promoted self-sufficiency in basic food stuffs, which happened via investments in fertilizer and two large dam and irrigation projects. More and more Pakistanis were leaving for abroad, especially for Saudi Arabia, UAE, UK and US, paying remittances back to their homeland. In the 1980s, the Soviets fought an expensive war in Afghanistan, which induced the US to increase their foreign aid to Pakistan, which delivered military supplies to the mujahideen over the poorly guarded border to Afghanistan. From 2001 onward, the US fought a war with Afghanistan and this also coincided with more US aid. Despite higher aid in remittances and stable balance of payments, fiscal deficits were high and public savings were low (Khanna 2002).

The Pakistani economy deteriorated in the 1990s due to poor governance between Benazir Bhutto and Nawaz Sharif. They were both frequently removed by the military. Inflation, inequality and poverty increased. Exports stagnated, and most of the exports were still textiles and food stuffs. An effort to push manufacturing was undermined by the removal of restrictions on imports, which violates the infant industry protection principle essential to manufacturing development. As a result, the trade balance became more negative. Military dominance in the 1980s implied less development of the civilian economy. The large fiscal deficits resulted in ever rising interest payments on the debt. Efforts under Zia to raise taxes in 1979 were promptly abandoned due to public pushback. Remittances that used to be very reliable began to decline in the 1990s, while foreign debt interest rates increased. The government permitted people to hold foreign exchange, which promptly resulted in more dollarization and less demand for rupees. The west imposed economic sanctions on Pakistan for testing their first nuclear bomb in 1998. This meant cuts in financial loans on which it was dependent to pay for its imports. The people reacted by pulling their funds out of Pakistan, so the government restricted capital movement, but that accentuated capital flight even further. Under the military general Pervez Musharraf western loans were restored, and the balance of payments stabilized.

The first IMF loan was disbursed in 1958, which was followed by many more disbursements, becoming ever more common by the late-1980s. IMF conditionality focused on the obligation to raise more taxes and cut social spending, which were deeply unpopular programs. The government finally reduced military spending, but it also cut the development/ infrastructure budget, which hurt potential economic growth especially in manufacturing. The IMF also makes demands to boost sales taxes that are not only unpopular but can squeeze economic output that worsens the debt crisis.

There was some economic recovery in the 2000s thanks to greater US aid during the war in Afghanistan and the budget balance improved with greater tax collection efforts. Musharraf was ousted in 2008 and he fled to exile where he passed in 2023. Asif Ali Zardari, the widower of Benazir Bhutto who was assassinated in 2007, became president. Nawaz Sharif returned to political leadership in 2013. The new leadership faced energy shortages, hyperinflation, low growth, high debt and large budget deficits again. Imran Khan, a former cricket player, won the 2018 elections and promptly begged the IMF for more funds in exchange for cuts to energy subsidies, privatization, higher tariffs and currency depreciation. Khan also improved the business climate by making it easier to register businesses. Khan complied with the G7 demand to fight money laundering to finance terrorism, which eased Pakistan in obtaining credit and inward foreign investment. Khan was removed by a parliamentary no-confidence motion in 2022 and was replaced by Shehbaz Sharif, a military-backed candidate and Nawaz Sharif’s younger brother. To the chagrin of the IMF, the new government continued the fuel subsidies that were passed by Khan. The 2024 elections affirmed Shehbaz as prime minister and he vowed to receive more IMF loans.

Pakistan weathered the Covid pandemic quite well, as textile exports were quickly restored and the public budget deficit remained stable. More problematic was the floods in the summer of 2022. The cost of the damage was nearly $15 billion, while reconstruction costs top $16 billion. There has been immense human suffering due to a lack of drinking water, waterborne diseases and skin infections. Over 1,700 people were killed and nearly 13,000 people were injured. The Ukraine war increased the oil and food import bills. Ukraine has been a major supplier of crops to Pakistan (Mehmood 2023). The 2023 government budget is $52 billion. Total external debt reached $124 billion in June 2023, while the poverty rate is 37% (IMF 2023). Inflation rate hit 25% by 2024. The government revenue is $43 billion, while debt service is $25 billion (Wikipedia).

New IMF loans are in order like the $3 billion granted in June 2023. $45 billion is owed to multilateral institutions that include the World Bank, Asian Development Bank and IMF. Paris Club debt of $8.5 billion involves 22 creditor countries like those in G7 (USIP 2023). But Pakistan would benefit from debt restructuring as well. China is a major creditor accounting for 23% of all foreign loans and is regularly rolling over the loans (Mangi 2024). China has invested in the China-Pakistan economic corridor from 2013 onward as part of the Belt-Road Initiative. The crown jewel project is the deep water port in Gwadar in the Arabian Sea that provides a short cut in the China-Europe trade by circumventing the Straits of Malacca and Southeast Asia. China also funded the Gwadar international airport, coal power plant, a seawater desalination plant, and a technical/ vocational institute. China also invested in the electricity network, solar panels and highways/ railways, connecting Gwadar with the Chinese border. Some projects like the Gwadar airport were funded with grants, but most others were using loans with 7% interest rate. The rate of return could be 17%, although it’s too early to tell whether it works. Given the overall heavy debt, Pakistan will seek relief.

Another factor to consider is the burgeoning demographics, which is similar to what can be observed in Egypt. The fertility rate is still at about 3.5 and was above 6 before the mid-1990s. The growing population keeps the labor force large and young, but there are issues with the provisioning of health, education and food. The food import bill keeps rising, even as agricultural growth is happening. IMF-induced austerity makes public provisioning even more difficult, which depresses the legitimacy of the government. Can Pakistan grow out of their crisis?

Conclusion

The IMF remains a thoroughly disliked financial institution that is called in when countries go through economic and financial difficulties. Creditor countries are often willing to provide bilateral loans to debtor countries only if they also agree to IMF loans, because the IMF has the economic staff to monitor economic policy decisions of debtor governments. When the IMF enters loan arrangements, it comes with strict conditions. Some of them make sense like improving accounting standards, reduce corruption and improve tax collection. The IMF is an agent pushing the less developed countries on a trajectory of capitalism, rationalization and global economic integration. Currency devaluation to make domestic industries competitive in the world market also makes sense even as it lowers domestic living standards. On the other hand, strict austerity, privatization and shrinkage of public services can create significant social blowback and in nearly all cases structural adjustment implies growing income and wealth inequality.

The only countries that can stay clear from the clutches of the IMF are advanced capitalist countries that can generate macroeconomic stability from their strong export economy or internal consumer markets driving economic growth. That was the lesson for many Asian countries (e.g. Malaysia, South Korea) suffering from the Asian Financial Crisis in the 1990s, as they focused on export promotion and creating currency reserves. One might think that resource wealth would be beneficial to insulate against a debt crisis, but that is clearly not the case in many Global South countries who slide into debt crisis as a result of declining commodity prices. The other option is to remain a small peripheral economy where the governments and populations withstand the temptation of rich country banks lending huge funds at teaser interest rates. Think of a modern day Diogenes, who dwelled in a big storage jar on the street and publicly masturbated without any care for other people’s opinion. A country might be poor but without debt, there is no macroeconomic instability that would put the IMF around your neck. But who can reject the mammon of wealth? If a few ascetic individuals don’t want it, their compatriots want it and the governments will ask for it too.

There are fair critiques about the governance arrangements of the IMF, as the largest voting share is given to the core founding nation, the US, which presently still has the largest economy in the world. The directorship is given to a European. Emerging markets led by China do not like the rules written by the US and is advocating for alternative financial institutions, such as the New Development Bank (BRICS bank) and the Asian Infrastructure Investment Bank (AIIB). But how would a Chinese dominated financial institution operate? Would development loans that are not paid back be forgiven more easily? Are there going to be fewer conditions on loans? China does not have rule of law stipulations on their infrastructure development loans, but they do require Chinese content (e.g. using Chinese labor or construction firms) and debt forgiveness is not common despite high debt service burdens (Hudson Institute 2024).

But the irrelevance of the IMF in the immediate future is quite unlikely. Countries are deeply integrated into the global economy, and their economies are vulnerable to unforeseen events like war, a bad harvest or economic slowdown. A multilateral financial institution like the IMF provides the economic funds to meet the short-term financing needs of a country, even if that means enforced institutional reforms and unpopular austerity measures. The IMF is the agent of rationalization, i.e. making countries more capable of pursuing capital accumulation in the name of macroeconomic stabilization, and only a transcendence of the capital accumulation regime could potentially undo the power and influence of the IMF.

Further readings

https://en.wikipedia.org/wiki/International_Monetary_Fund

https://en.wikipedia.org/wiki/Economic_history_of_Argentina

https://en.wikipedia.org/wiki/Argentina_and_the_International_Monetary_Fund

https://en.wikipedia.org/wiki/Economy_of_Egypt

https://en.wikipedia.org/wiki/Economy_of_Ukraine

https://en.wikipedia.org/wiki/Ukrainian_Soviet_Socialist_Republic#Economy

https://en.wikipedia.org/wiki/Ukraine_and_the_International_Monetary_Fund

https://en.wikipedia.org/wiki/Economy_of_Pakistan

https://en.wikipedia.org/wiki/Economic_history_of_Pakistan

https://en.wikipedia.org/wiki/Pakistan_and_the_International_Monetary_Fund