IMF Will Address Global Inequality, Says Managing Director Christine Lagarde
Deborah James: Inequality is unlikely to be addressed or achieved through existing IMF policies
SHARMINI PERIES, TRNN PRODUCER: This is The Real News Network. I’m Sharmini Peries in Baltimore.
World finance ministers, led by Christine Lagarde of the IMF, will be in Washington this week for the World Bank and IMF meetings. They are set to debate a handful of measures, including the delayed IMF reforms aimed at giving more weight to the emerging economies.
Now joining us to discuss all of this is Deborah James. Deborah James is the director of the International Programs at the Center for Economic and Policy Research in Washington, D.C. She has over a dozen years of experience working on trade and democratic global governance at CEPR. Her work focuses on the World Trade Organization, the International Monetary Fund.
So, Deborah, thanks for joining us, and it’s great to have you on The Real News.
DEBORAH JAMES, DIRECTOR OF INTERNATIONAL PROGRAMS, CEPR: Thanks so much for having me.
PERIES: Deborah, tell us, what are the leading issues that they’re going to be discussing at the meetings?
JAMES: Well, as you know, in front of the meetings, the IMF always comes out with the World Economic Outlook, the WEO, and that projects what the state of the world economies are and how much growth can be expected in the next few years. And this WEO came out just a few days ago, and it does project that there will be about 3.7 percent economic growth worldwide, unfortunately not that much in Europe because of the recessionary policies many times imposed by the International Monetary Fund that we can talk about.
But it’s also very interesting to note that Christine Lagarde has recently been taking up an issue that’s near and dear to many of our hearts, which is the issue of inequality and talking about the very big problems of inequality in the world and how this is actually a drag on growth, because for a long time there was a consideration that increasing inequality would sort of lift all boats–you know, we raise the top and then the bottom will get raised as well. And what we’ve actually seen over the last many years, especially if you look at the last few years of the economic crisis, from 2010 to 2012, the 95 percent of the increase in incomes in the recovery has actually gone to the top 1 percent.
And the unfortunate thing is that even though Lagarde and the IMF may be bringing up this issue, that the policies that they are still imposing to this day on countries around the world that have to accept loans from the IMF, as well as the policy advice that they give to countries that are not under IMF loan conditionalities, are still actually exacerbating inequality to an amazing degree. And I think that is something that the IMF still, you know, very much needs to take to heart, take seriously. And that should be a focus of discussion this weekend, but unfortunately will not be.
PERIES: Deborah, picking up on this issue that Lagarde wants to address, in terms of not only growth, but also inequality, it seems that her counterpart at the World Bank is actually saying the same thing. This week he was in a interview on Al Jazeera, where he was also talking about income inequality and how the World Bank is going to also shift its focus towards that. Tell me–and you yourself alluded to the fact that this–you know, how serious are they about this and how they have contradictory policies. Can you take a case, country-specific example and walk us through it?
JAMES: Sure. Well, just to give a little bit of a history of some of the research that’s been done worldwide, CEPR did a study, actually, a number of years ago, because at the beginning of the economic process, if I can just back up, the IMF acknowledged that there needed to be injections of funds into the global economy and that they needed to give loans to countries that were having balance of payments problems in order to stimulate the global economy and promote growth. And they said that quite a bit in 2008 and 2009. And we did a study, actually, at that time that looked at 41 countries, and we found that in 31 of them, they were still promoting contractionary economic policies.
Now, this has been updated, and actually the IMF took some of this to heart and they did a review of conditionality of their loan programs to look at the impacts it was having, and they actually found that for the previous about 15 years, that there was an average of about 17 conditions that were contractionary that the IMF was imposing on recipient countries and that this needed to be reduced. And so in the–and this was in 2011, okay?
Now, just this week, there was another groundbreaking study by the group Eurodad, which is the European Network on Debt and Development, and they actually just looked at the loans since this report came out, this internal report by the IMF showing that they had too many conditionalities and it needed to be reduced. And what the new data shows is that actually since that point, since 2011, the number of conditions has actually increased to nearly 20 per recipient country. And this is low-income countries and middle-income countries together. They looked at 22 different loans that were just the new loans.
And when we talk about the conditions, it’s important to, you know, think about what they actually are. We’re talking about reducing or slashing pensions. So, you know, a person who’s worked their entire life, maybe had a, you know, smaller salary, counting on that pension to survive as an older person, having the IMF actually mandate that countries have to reduce pensions, decreasing labor rights, so making it more easy for employers to fire people, and also reducing the minimum wage, which is incredible when you think about the Democrats here in the United States fighting to increase the minimum wage that we’re also at the same time funding the IMF to impose policies that freeze or reduce the minimum wage. And these are actually conditions in the loans. It also talks about, for example, reducing subsidies, so gas subsidies or electricity, and also food, and then cutting social spending of course, so health care, education, things like that.
And these types of conditions, of course, you know, every country’s loan is different, but these types of conditions have such a drastic negative effect, obviously increasing inequality and shutting down a lot of growth for the poorest countries and for the poorest people in any of the countries. And then they also, of course, mandate an increase in taxes, and, unfortunately, we’re not seeing an increase in taxes on the extreme wealthy. For example, you might have noticed the Thomas Piketty book that people are talking about. He said that economically what makes sense for the top 1 percent of a country is to actually have an 80 percent tax on their income. So that kind of tax or a tax on speculation and financial transactions that CEPR has long advocated, that would be a great source of revenue.
The IMF is not promoting those kind of taxes, although they have done a paper in favor of financial transaction taxes, but instead, you know, regressive consumption taxes that hit the poorest harder in their pocketbook. And just to give the most extreme example, ’cause you asked me to put a country to this, we actually see now with this supposed bailout of Ukraine, a $14 to $18 billion package that the IMF is offering them now and that they’re going to be accepting, it includes many of these policies. It includes a 10 percent cut on pensions. It includes a 40 percent increase in the consumer prices for gas to heat their homes. And this has a big effect on a country where, you know, the average wage might be $275 a month, to suddenly have your gas price double, you know, that’s going to hit a lot of people really hard. This is a country with–a quarter of it is in poverty already. And with the type of policies that they’re going to be imposing through the IMF agreement, there is some speculation that the actual amount of impoverishment in Ukraine could double in the next couple of years. I mean, the loan agreement even includes a mandated reduction in the subsidies that the government can give families with newborn babies. Okay? So when we talk about the policies, they actually have a very draconian impact.
And that’s why, of a big study that was done by Columbia University last year that actually looked at hundreds and actually thousands of protests around the world, you know, what are the reasons people are protesting, they found that the IMF was the thing that people were most protesting in 20 percent of the protests around the world. So, if you can imagine, more than any other institution, people around the world know that the IMF is behind a lot of these policies that are actually shrinking growth and increasing inequality.
PERIES: A point you made about the financial transaction tax. This is something I see that the governor of the Bank of China is also supporting, and he’s going to be advocating for that at these meetings. Tell us more about that. Is there a broader support for that kind of a move?
JAMES: Well, there certainly should be. Unfortunately, the U.S. Treasury Department is against it. And we see this as a result of the fact that the financial industry is so awash in cash that they have been propping up both Democrats and Republicans. So the Obama administration has not been in favor of financial transaction taxes, and in fact has sent our representative to Europe to try to convince Europe, which is moving forward with adopting financial transaction taxes, to lobby them against it, because they’re saying, you know, it’ll hurt the financial industry. These are taxes that are actually very targeted. And they have two goals. One of them is raising money that can be used for, you know, things like global climate funds, or they can be used for, you know, just dealing with the budget deficit domestically. So they would raise money, obviously. And the amount, you know, obviously, would depend on how big the transaction tax is and how many different financial instruments would be included in it.
But it is also intended to actually reduce harmful behavior in the financial industry. And we have a situation where, you know, financial speculation and the finance industry actually cause this global recession that we’ve been off-and-on living in for the last five or six years, and yet they haven’t had to pay for the damage that they’ve done. And this would be intended to reduce some of the harmful speculative behavior that you might have seen. For example, highlighted a lot, you know, in the last week is this new book, Flash Boys, by Michael Lewis, and he’s talking about this flash trading that doesn’t actually add anything to the economy but is just a way that some of these high financiers are sucking money out of the economy without actually contributing anything to economic development or growth, and a financial transaction tax is actually the simplest and easiest way to reduce that kind of harmful behavior. So it has that effect as well. And the IMF actually did do a paper, you know, saying that it would be feasible, it would work to have a financial transaction tax, and it is one of the most important things that we could do to reduce the harmful financial behavior and, you know, generate funds for much-needed public investment. But, unfortunately, I don’t think it’s going to be, you know, discussed quite enough this weekend, and partially that has to do with the amount of corruption in the U.S. political system from the financial sector.
PERIES: That is a shame, because there is quite a great deal of support for it in the U.S. in terms of–you know, the Nurses Association has taken this up as a big issue, and they’re campaigning around domestically.
Deborah, can you also–let’s talk about the reforms that were actually proposed in 2010 and not yet achieved. And I understand China is also complaining about that particular issue. But tell us what the reforms are. And why is it being delayed?
JAMES: Well, as we know, the Bretton Woods institutions, the IMF and the World Bank, were created in the aftermath of World War II. And as we know, at that time the global distribution of economic activity is quite different than it is today. You know, in the last ten years, everybody knows we’ve seen the emerging markets, what are called middle-income countries. And they have actually not been able to increase their voting share within the IMF, unfortunately. There had been very minor reforms that have been carried out to date in terms of the voting share. The voting power in the IMF is basically decided by the amount of money that you contribute to the IMF. So it’s–it doesn’t have to do, necessarily, with the amount of economic activity or the share of the global economy that you have.
And so we have a situation where the United States has over 15 percent of the voting shares in the IMF, and the IMF’s rules state that for any loan agreement or a change or for any type of agreement, that there has to be over 85 percent of the voting shares in favor of it, which means that the United States has, throughout the whole history of the IMF, a veto power over any decision that the IMF makes, which is why, you know, it’s generally considered to be an institution that’s run by the U.S. Treasury, because they can’t pass anything that we oppose.
So the majority of countries around the world have already, you know, voted in favor of this. It would actually–it would reallocate some of the voting shares to give some middle-income countries a little bit more–not anywhere near what they actually should have for their participation in the global economy, and especially considering the fact that with a very low growth rate in Europe and a very high growth rate in China, China has been the engine for economic growth and keeping the rest of the world afloat during the global economic crisis. So they really should be given a much bigger share. Other emerging markets should be given a bigger share. And, of course, the recipient country should have a much bigger share in the voting/decision-making power as well. But that’s not quite, you know, contemplated. What’s contemplated is a slight reduction for Europe and an increase for some emerging-market countries.
The U.S. has actually not passed–in our Congress we have to pass the changes, and we just haven’t yet. And it’s kind of incredible. I mean, our organization is in favor of the reforms, but we don’t think it’s going to be a panacea, because of the fact that the institution is still so committed to these contractionary monetary and economic policies.
PERIES: Deborah, just one last question. I know that Christine Lagarde is the first woman to head up the IMF. Do you think as managing director she is having a different impact on the IMF and its policies?
JAMES: Well, I would say that the policies have not shifted as much as they should have, given the situation that has happened. I think at least she has lifted some of the scandal that DSK had brought to the IMF because of all of his problems. I think people feel that the institution, maybe internally it’s being a little bit better run. But, you know, until we see a change fundamentally and a removal of some of these harmful conditionalities–. And, really, the IMF also needs to step up to the plate with issues like debt cancellation, when you have a country like Jamaica that has almost 150 percent debt-to-GDP ratio. They’re continually being impoverished by their IMF agreement. So there needs to be debt cancellation. There needs to be globally a sovereign debt workout mechanism. It’s extremely important. It’s been demanded by civil society and governments that are, you know, having this terrible debt problem, the hangovers, for so long. And it’s something that the G20 actually discussed in their last meetings. And the UN Conference on Trade and Development is working on proposals, UNCTAD in Geneva, working on proposals for a sovereign debt workout mechanism. But it should not be located in the IMF, actually, ’cause, obviously, they’re a creditor and they have an interest.
But we need to see much bigger changes happening with the policies and the IMF and Lagarde, not just speaking out against inequality and not just speaking out against contractionary policies, but actually making those policy changes within the IMF which we are still waiting to see.
PERIES: That’s great. Thank you so much, Deborah, for joining us.
JAMES: Thank you.
PERIES: And thank you for joining us on The Real News Network.
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