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A Summary of “IMF/World Bank: A Modern Day Trojan Horse” by Alec Wills
The COVID-19 pandemic has thrust the world into a state of extreme uncertainty and grave socioeconomic instability. The damage has been twofold: a severe public health crisis combined with a massive contraction of the global economy. As a result, many countries have been put into a severely stressed economic position¹. Large amounts of resources are needed to craft and enforce appropriate policies, such as providing additional funding for the healthcare sector, financial relief for the unemployed and/or struggling, and vaccination procurement. The lack of wealth and resources in lower income countries might make these tasks immensely challenging. Enter the International Financial Institutions (IFIs)–specifically, the International Monetary Fund (IMF) and World Bank–whose roles are to provide loans to countries in crises and/or precarious economic positions, loans with conditionalities which the receiving government must comply with. What are the benefits and drawbacks of these transactions? Are the IFIs the saviour of the Global South? Or are their actions a Trojan Horse: a tactical maneuver designed to undermine and conquer disguised as a gift. This was the topic discussed in the “IMF/World Bank: A Modern Day Trojan Horse?” seminar for UTSC’s Global and International Health Week. Below, I offer a reflection on this presentation.
Historically, loans disbursed by the IFIs demanded the implementation of often damaging policies–epitomized by the Structural Adjustment Programs (SAPs)–which included deregulation, privatization, trade liberalization, and austerity (Klein, 2007; Chang, 2008). Critics argue that some of these policies have increased dependency and enforced Western values on Global South countries². Consequently, a great deal of skepticism has emerged regarding the motivations of these institutions and whether or not their policy outcomes actually benefit the least privileged societies in the world. The seminar’s presenters tackled these questions and challenged the assumptions of both proponents and critics alike.
In the context of the COVID-19 pandemic, the IFIs have programs in place for just such a scenario. Although there are a variety of lending mechanisms, the primary method discussed in the presentation are pandemic bonds: money invested into a pooled fund and held there for three years, earning high interest, but which is disbursed to countries in need in the event of a pandemic. There are two problems with this fund. First, such an investment is high-risk, with COVID-19 consequently deterring additional investments into the pool. Second, the stipulation that cases have to be rising for money to be released further problematizes the funds efficacy. Also discussed was the issue of the IFIs agreement to pause debt repayments during the pandemic. As the presenters explained, a pause is not a cancellation, nor is it applicable to private and trilateral investment. Under the combined contexts of the IFIs controversial history and its seemingly lacklustre pandemic relief policies, the remainder of the presentation focused on the aforementioned question: are IMF and World Bank policies a Trojan Horse?
Three case studies were presented regarding the IFIs pandemic policies: Afghanistan, Colombia, and Uganda. Critiques were given for each. For example, the credit received by Colombia amounted to 5% of GDP. However, most of it was kept in the reserve to attract further investment, and part of it was used to repay private loans. The major point of critique is that Colombia is taking on debt from the IMF and private sources and the extent of its indebtedness is creating dependency on these institutions. In Uganda, 70% of COVID-19 relief went to maintaining macroeconomic stability, meaning that most of the funds were also put in reserves to hedge against inflation. Although there may be an onus on each country’s governments if it was their choices to make, there might nevertheless be a soft form of coercion occurring on the part of the IFIs. For instance, if these countries are forced to use a disproportionate amount of their GDP on paying back loans then their potential for growth, increasing aggregate welfare, and mitigating the damage done by the pandemic is undermined.
Circling back to the metaphor of the Trojan Horse, these case studies may be seen as a strategy by the IFIs (in conjunction with the investors who fund them) to profit off of poorer countries’ perpetual indebtedness³. Rather than using the surplus product of their economic activities to foster independence it is instead channelled into debt repayments, furthering dependency and undermining economic stability, and at a time of heightened uncertainty and precarity as a result of COVID-19.
Therefore, my key takeaway from the seminar is that the lending practices of the IFIs should be viewed with skepticism and scrutiny. That is not to say that these institutions are pure evil. As one of the presenters discussed in the Q&A section: without conditionalities investors would have no incentive to provide loans. Furthermore, the financial power and organizational capacity of the IFIs makes them effective instruments for providing aid and relief. At times their efforts seem well intentioned but misguided. For example, the World Bank buys up large quantities of vaccines in order to sell them at a cheaper price than offered by the manufacturers. However, these large buy-ups increase already high demand and consequently raise prices further. The merits of the IFIs notwithstanding, it is important to analyze their operations and propose reforms. Although it might be naïve and unrealistic to expect a normative shift away from market-incentivized lending practices, there seems to be a need to tweak current organizational patterns for a more just and equitable arrangement.
¹ The World Bank (2021) reports a 4.3% contraction of the global economy in 2020. Although global GDP is forecasted to expand by 4% in 2021, the expansion is expected to be 5.3% lower than it would have been before the pandemic. Additionally, it will necessitate “proper pandemic management and effective vaccination limiting the community spread of COVID-19 in many countries, as well as continued monetary policy accommodation accompanied by diminishing fiscal support” (p. 5).
² For example, Jamaica’s agricultural trade liberalization under the IMF’s SAPs created heavy dependency on cheaper imports. This was particularly damaging to the dairy industry when the import of milk powder became available as a substitute (Weis, 2004). See Bradshaw and Huang (1991) on how financial dependence stunts economic growth and reduces quality of life. See also Chang (2008) on how Western and Eurocentric economic prescriptions are imposed on Global South countries.
³However, it should be noted that a report by the European Network on Debt and Development finds that economic growth is lowering interest repayments on foreign debt as a percentage of GDP (Griffiths, 2014).
Bradshaw, Y. W., & Huang, J. (1991). INTENSIFYING GLOBAL DEPENDENCY: Foreign Debt, Structural Adjustment, and Third World Underdevelopment. Sociological Quarterly, 32(3), 321-342.
Chang, H.-J. (2008). Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism. New York: Bloomsbury Press.
Griffiths, J. (2014). The State of Finance for Developing Countries, 2014: An assessment of the scale of all sources of finance available to developing countries. Brussels: European Network on Debt and Development.
Klein, N. (2007). The Shock Doctrine: The Rise of Disaster Capitalism. New York: Henry Holt and Company.
Weis, T. (2004). Restructuring and Redundancy: The Impacts and Illogic of Neoliberal Agricultural Reforms in Jamaica. Journal of Agrarian Change, 4(4), 461-491.
World Bank (2021). January 2021 Global Economic Prospects. Washington, DC: International Bank for Reconstruction and Development / The World Bank.