IMF austerity’s historical shadow

KARACHI: While the IMF has often been the lender of last resort for countries going through economic crises, there continue to be debates regarding the effectiveness of its prescriptions and their long-term impact -- some arguing that the austerity it imposes does lead to stability.

In 1976, the then British prime minister James Callaghan, of the Labour Party, was forced to seek a $3.9 billion bailout from the IMF. At the time, the UK was dealing with excessive inflation that saw the pound decline sharply in value against the dollar, leading it to seek what was then the largest amount ever requested from the IMF.

In return for the assistance, the UK had to cut public spending and balance its budget which, according to some, helped investors regain confidence. Though the value of the pound had recovered by 1980, some have argued that the austerity the UK signed up for had ended attempts to improve social services and grow the economy.

The 1980s also brought rapid deindustrialization to the UK with the manufacturing sector reportedly declining by an estimated two-thirds in the three decades between 1981 and 2011. Some analysts argue that what has replaced the shift away from manufacturing and industry has not brought the same number of jobs or the same level of income -- at least in the areas where manufacturing was a dominant part of the economy, making them more dependent on state welfare and government jobs.

Formed out of the 1944 Bretton Woods conference in the US, the IMF was one of two institutions, the other being the World Bank, conceived to establish a stable exchange rates system and help rebuild European economies in the aftermath of the Second World War. Today, the IMF has 190 member countries seeking to maintain a stable global economy. The institution has become a multilateral lender of last resort, providing financial assistance to countries in times of crisis.

The overall impact of the effectiveness of this assistance, however, remains a topic of debate. Harvard University economist Benjamin Friedman has reportedly argued that since it is impossible to accurately gauge the path countries and the global economy would have taken had the IMF not offered assistance at various points, it is basically impossible to determine if IMF intervention has made things better or worse.

One criticism has been that the conditions the IMF imposes on countries in exchange for its assistance, often involving cuts in government borrowing and lower corporate taxes and barriers to investment, are too harsh. Others have argued that the Fund’s near-uniform policy descriptions are not suited at all times and for every economy while its bailing out of countries after their leaders pursue flawed and irresponsible policies has been seen as enabling such recklessness, delaying reforms and creating long-term dependency.

In more recent times, the IMF assistance offered to Greece in the aftermath of the Eurozone crisis has come under criticism for imposing harsh austerity that has caused economic and social damage.

The IMF’s own Independent Evaluation Office (IEO) has said that the Fund was “overly optimistic” about the economic growth potential of those Eurozone countries that received bailouts.

Though Greece paid off the loans owed to the IMF by 2022 it is now, as per the Financial Times, the poorest country in the Eurozone and the second poorest economy in the European Union as a whole after maintaining a GDP per capita close to the EU average until around 2009. Higher taxes and lower spending were implemented to secure a bailout from the IMF and EU and the Greek economy shrank by nearly 30 per cent.

In 2024, the Greek economy is almost one-fifth smaller than what it was in 2007 while the overall EU economy has risen 17 per cent as a whole. According to George Lagarias, chief economist at Mazars Wealth Management, such a steep decline is almost unprecedented in the modern era and is only comparable to the 1930s US Great Depression.