The IMF and the World Bank’s continuing roles in deepening inequality

HERALDED by International Monetary Fund Managing Director Christine Lagarde as today’s global driver of growth, the Asian region exhibits one of the highest and fastest growing rates of income inequality globally.

About four-fifths of the region’s population experience this widening of inequality, including the Indonesian people where it has reached unprecedented levels, by the World Bank’s (WB) own account.

From 42% in 2002, the wealthiest 10% of Indonesians consumed as much as the poorest 54% in 2014.

Inequality, however, did not unfold overnight, and has a history where the International Monetary Fund and the World Bank key roles. Deepening already sharp inequalities in Asia, these international financial institutions (IFIs) extended loans packaged as Structural Adjustment Programs (SAPs) that imposed stringent repayment conditions on borrowing countries.

Developing countries were compelled to align their economic policies with market-based approaches, open their economies to the flow of goods, services and capital, privatize state facilities, imposed regressive consumption taxes and drastically cut social spending.

A fact that the IFIs admit today, the consequences of the IFIs intrusion into national policy proved disastrous, especially for the poor and low-income. Much-touted export growth was found very narrowly based on resource extraction and cheap labor, and was eventually overran by deteriorating terms of trade and costlier imports.

Trade and current account deficits swelled as the IFIs neoliberal economic model of open markets and private sector-led growth was imposed. The external debt situation that the IFIs avowedly meant to solve in the first place with SAPs, worsened even more.

Domestic production deteriorated and triggered lay-offs and closures of local business enterprises.

In Bangladesh, the rapid removal of tariffs, “opened a floodgate of imports from better-financed transnational corporations”. Import-substituting industries waned with industry-led employment substantially shrinking.

In the Philippines, a formerly booming garments sector contracted as cheaper goods swamped markets, causing a fall in export demand.

SAPs’ promotion of market flexibility and wage caps dealt heavy blows to labor. In addition to promoting wage stagnation, they impeded the protection of collective bargaining and freedom of association rights.

Labor flexibilization heightened job insecurity, especially for women already discriminated by insecure, low-paid employment. Even without specific reference to labor conditions, SAPs enabled the these assaults on labor, and the accumulation of capital.

The biggest winners of these policies, then and now, are wealthy, politically well-placed elites and multinational corporations.

As the IFIs persist with their policy prescriptions, they sustain adverse outcomes of neoliberal policy on the working poor. A third of the region’s workers still remain below the international poverty threshold of $1.90 per day in purchasing power parity. Wage workers were paid only US$73 per month in Nepal in 2008, US$119 in Pakistan in 2013 and US$121 in Cambodia in 2012. For Southeast Asia, wage growth has fallen behind South Asia and East Asia’s.

Many women in poorly remunerated, insecure employment are among the most adversely affected by consumption taxes such as Value Added Tax (VAT). Bangladesh, the Philippines and other developing countries enacted VAT laws as part of loan agreements with IFIs. Still part of standard IFI advice, tax-related conditionalities in loan agreements, including implementing or raising VAT, increased ten times globally between 2006 and 2010.

Inevitably, those without the means and support to weather external shocks bear the harshest consequences. Many Asian developing countries, including recipients of IFI lending, are also marked by inadequately financed, badly equipped and understaffed public health systems.

In 2010, Asia had the largest concentration of people with “catastrophic health spending” (i.e. exceeding a household’s ability to pay) and the highest rate of “impoverishing health spending” or cutting back on other essentials due to a health concern in the family.

The climate crisis further illustrates how risks are multiplied by inequalities of income, access and opportunity. Six of the 10 most climate-threatened countries are in Asia.

In these countries and other developing regions, mortality rates from climate disasters are four-to-five times higher than in developed countries. Millions of those supposedly lifted by growth over the last two decades are being pulled back into poverty, yet the IFIs continue to invest in climate-threatening fossil fuels.

The International Finance Corporation (the private sector arm of the WB) for example, is currently the subject of a complaint submitted by the Philippine Movement for Climate Justice before the IFC Compliance Advisor Ombudsman for its role in helping finance 19 active or proposed coal-fired power plants through investment in financial intermediaries in the Philippines.

Privatization, a pillar of SAPs, has recently been met with growing rejection, as demonstrated by the success of Indonesian civil society in reclaiming water services from the privatized set-up imposed as a loan condition in the 1990s. Yet, this policy advice persists, together with social spending cuts, wage ceilings, reduction of employers’ social contributions, poverty targeting rather than universal social protection, and regressive instead of sharply progressive taxation.

The more unorthodox views of some IMF staff reports, such as increasing public investments, a higher wealth tax and charging a financial transactions tax, do not seem to have made a dent on policy statements, much less actual policy. Without a shift away from fiscal neoliberalism, these only serve to affirm the IFIs’ well-known ways of double-speak as they strive to save what little is left of their legitimacy and relevance. One is reminded of the emperor insisting he is wearing new clothes, as the IFIs essentially pursue the same neoliberal path that brought us to where we are now – in an inequality trap that stretches across generations, past and present.

A just framing of this narrative is urgently required – one that holds the IFIs, complicit states and elites accountable for their key roles in deepening inequality, and is grounded in lived experiences of poverty and deprivation. But more importantly, this alternative narrative should be a hopeful one: a clarion call for transformative actions to end inequality and injustice in all its forms is required.

From the waves of opposition by those in the North and the recent protests in the Middle East, to the resistance movements in Asia that will intensify beyond the 2018 Annual Meetings, that narrative is already being written by the peoples of the South.


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