The IMF, like the World Bank, lends money to low-income countries, and has become one of the few sources of such loans since Mexico threatened to default in 1982. The IMF is structured in a similar way to the World Bank: each member country contributes an amount to the pool to be loaned depending on the size of its economy and this determines its voting power. As with the World Bank, the US has an effective veto because important decisions require an 85 percent majority to pass.
The IMF, together with the World Bank, imposed conditions on countries borrowing money to ensure they are able to repay the loans. These structural adjustment programs resulted in less money being spent on social services such as health, education, housing, transport and water supply, while great effort is put into mining the countries’ natural resources or producing raw materials for export. These measures affected the poor in the low-income countries worst: government cutbacks in services led to more unemployment, while food subsidies were cut and prices for essential commodities like water went up.
Because many countries were exporting the same raw materials—such as copper, iron ore, timber, sugar, cotton and coffee—the prices for these export goods dropped dramatically during the 1980s. When the prices went down, each individual country had to export more to earn the same amount to pay its debts; and the more it exported, the more the prices went down. Between 1980 and 1987 the prices of thirty-three commodities exported by low-income countries went down by an average of 40 per cent. During that time, the price of food fell by 10 per cent per year and the price of minerals by 6 per cent. This gave affluent countries cheap raw materials for their manufacturing process but kept the poorer countries in a cycle of worsening debt. Some countries depend on just two or three commodities for export earnings.
This situation meant that even though many low-income countries increased the quantities of their exports, their incomes went down. For example, between 1980 and 1985 Thailand increased its rubber exports by 31 per cent based on an average of the previous five years, but it earned 8 per cent less for them. Latin American nations doubled exports in the early 1980s but found that export earnings fell by 5 per cent per year.
The Economic Policy Institute of Washington found that these falls in commodity prices were a direct result of IMF/World Bank policies and their advice to low-income countries. It resulted in the huge increase in the supply of commodities on the international market. While the low prices were devastating to low-income countries, they were a boon to high-income countries that were able to keep inflation down in their own local economies.
The requirement to export also added to poverty and hunger. Land which had previously been used for growing food crops is set aside for growing export crops such as tea and coffee. As prices have plummeted for these export crops, small farmers have found it hard to afford the food that previously they would have been growing themselves.
Writing in the magazine Third World Resurgence, Michel Chossudovsky outlined how World Bank and IMF policies transformed low-income countries into open economic territories and ‘reserves’ of cheap labour and natural resources available to multinational companies and consumers in high-income nations. In the process, governments in low-income countries handed over economic control of their countries to these organisations, which acted on behalf of powerful financial and political interests in the USA, Japan and Europe. Having handed over this control, they were unable to generate the sort of local development that would improve the welfare of their own people.
The IMF had not started off with free-market policies. It was originally established to maintain economic stability, based on a Keynesian understanding of how this would be achieved. Keynes argued that economic downturns could be remedied by governments increasing aggregate demand and stimulating the economy. The IMF could help poor countries to do this by loaning them money raised from the taxes of wealthier countries.
The former chief economist of the World Bank, Joseph Stiglitz, says of the IMF:
Founded on the belief that markets often work badly, it now champions market supremacy with ideological fervor. Founded on the belief that there is a need for international pressure on countries to have more expansionary economic policies—such as increasing expenditures, reducing taxes, or lowering interest rates to stimulate the economy—today the IMF typically provides funds only if countries engage in policies like cutting deficits, raising taxes, or raising interest rates, that lead to a contraction of the economy.
Other influential nations tend to go along with free market policy prescriptions because nations are represented on the IMF by their finance ministers and central banks and these tend to represent the financial communities and be staffed by people who have had careers, or hope to, with private financial firms and banks. In addition, economists in the bureaucracies of many countries have been trained in neo-classical theory as orthodoxy.