Download Dialoguing with the IFIs at the National and International Level

IFIs’ response to the financial and
economic crisis
Peter Bakvis, Director
ITUC/Global Unions - Washington Office
ITUC-FES Seminar on “Challenging the IFIs in CEE”
Warsaw, 4-5 October 2011
2. Initially, IFIs fail respond to global
financial and economic crisis
• The IFIs failed to predict the crisis that broke out in 2007-2008
and initially do not recommend strong action
• In July 2007, two weeks before sudden tightening of global
credit conditions, IMF increases its economic growth forecasts
• After global credit squeeze, IMF leaders caution against new
regulations that might “stifle financial innovation”; WB president
recommends that US should take action to boost inflated
housing prices
• Until 2010, the US, which is where the global financial crisis
began, is exempted from IMF’s financial sector assessment
programme
3. After some hesitation, IMF responds to global
financial and economic crisis
• In early 2008, IMF changes position and recognizes that a
serious economic crisis is underway
• IMF recommends that industrialized and some emergingeconomy countries adopt counter-cyclical economic stimulus
policies
• In late 2008, IMF favours new global financial regulations to
control damaging practices that led to September 2008 financial
collapse
4. Global crisis gives renewed role
to IFIs, especially IMF
• Starting in September 2008, IMF negotiates emergency loans
with several countries affected by the global crisis for amounts
of up to $40 billion
• The biggest concentration of emergency loans has been in
Europe – 13 countries so far
• In April 2009, leaders of G20 countries agree to triple IMF’s
lending resources, from $250 billion to $750 billion, and to grant
$283 billion in Special Drawing Rights to all member countries
5. Increased lending by World Bank
and regional banks
• Increased lending also took place, but in a much smaller scale,
at World Bank: +23% to $72 billion in 2010
• The regional development banks have also increased lending,
such as in the case of the EBRD: +17% to € 9.0 billion in 2010
• WB and regional banks have all sought capital increases or
additional grants for concessionary (zero-interest) loans
6. Pro-cyclical stance of many IMF
emergency loans criticized
• Even though, starting early 2008, IMF counsels many nonborrowing countries to engage in counter-cyclical expansionary
fiscal and monetary policies, it initially advises most borrowing
countries to engage in pro-cyclical policies
• Borrowing countries advised to reduce spending and deficits,
freeze or reduce public sector wages and hiring, increase taxes
and, in some cases, increase interest rates
• In early 2009 IMF introduces condition-free Flexible Credit Line,
but only Poland, Mexico and Colombia, which meet “rigorous
upfront qualification criteria”, are accepted
7. IMF’s responses to trade unions’ proposals
concerning anti-crisis policies (i)
• Trade unions have been the most vocal among those urging the
IMF to support counter-cyclical economic policies in all
countries, both borrowing and non-borrowing
• IMF relaxed deficit limits for 2009 in several borrowing countries,
but only because the economic decline was far worse than IMF
predicted
– In loan to Ukraine beginning November 2008, IMF requires a
balanced budget (no deficit) and predicts that GDP will grow by
2.5% in 2009
– In reality Ukraine’s GDP falls by 15% in 2009; in July 2009 IMF
allows for deficit equivalent to 8.6% of GDP
8. IMF’s responses to trade unions’ proposals
concerning anti-crisis policies (ii)
• In some cases, IMF said it supported tax measures promoted by
unions to finance employment measures or limit social program
cutbacks (Serbia, Romania) or progressive income taxes in the
place of “flat tax” (Latvia), but none of these were adopted
• In one country (Bosnia), IMF defended collective bargaining
rights threatened by government’s austerity program
• IMF has stated that social expenditures should be given priority,
but does not make them loan conditions
9. In 2010, IMF returns to austerity policies
• After showing some flexibility and support for expansionary
fiscal policies in 2008-2009, the IMF in 2010 began obliging
borrowing countries to engage in “fiscal consolidation”, meaning
a reduction in government deficits
• These fiscal consolidation programs have entailed reductions in
public-sector wages and in pensions, dismissals of public-sector
workers, and increases in taxes or public service fees
• These policies are having the effect of cutting important public
services and of slowing down the recovery in countries affected
by the global economic crisis
10. ITUC/Global Unions proposals
to IFIs for crisis response
• In response to the global jobs crisis, IFIs should encourage and
support countries’ employment-intensive growth strategies,
emphasizing decent work, i.e. adequate income, social
protection and workers’ rights
• Encouraged by IMF, almost all G20 countries engaged in “fiscal
consolidation” in 2010-2011, which has contributed to the
renewed economic slowdown of 2011
• IMF and WB should encourage countries to maintain countercyclical stimulus policies until recovery is assured, i.e. no
premature exit strategies
11. ITUC/Global Unions proposals for crisis
response in IMF borrowing countries
• To avoid prolonging the recession, IMF should allow borrowing
countries hit by 2008-2009 economic crisis a longer period
before engaging in “fiscal consolidation” and reduced deficits
• IMF should assist countries to regulate destabilizing capital
movements and to apply debt payment moratoria when in
financial difficulty
12. Other anti- or post-crisis proposals made
by ITUC/Global Unions to the IFIs (i)
• Increased developing/emerging-country representation in
decision-making structures of IFIs
• End all SAPs and other economic policy loan conditions and
instead provide financing of public services and state-run
pensions without demanding their privatization
• Support negotiated reduction of sovereign debts in countries
with unsustainable debt levels, e.g. Greece, and reduction of
mortgage debts of home-owners holding loans that exceed
home values
13. Other anti- or post-crisis proposals made
by ITUC/Global Unions to the IFIs (ii)
• IMF and WB should encourage equitable sharing of the fiscal
burden of anti-recession strategies, ensuring speculators pay at
least as high tax rates as workers and ending “flat tax” regimes
• IMF should support a Financial Transactions Tax (FTT) so that
financial sector pays part of costs of financial crisis and to
discourage damaging speculative transactions
• IFIs should promote improved trade union rights in all countries,
with particular attention to high trade-surplus economies where
they can help to correct “global imbalances” (mandate given to
IMF by G20)