In 2005, former Argentine president Nestor Kirchner, after paying off his country’s debt to the International Monetary Fund said, the IMF has “acted towards our country as a promoter and a vehicle of policies that caused poverty and pain.” He was right.
The history of IMF involvement in Latin America can be traced back the 1980s, known as the lost decade, during which Latin America experienced its worst economic crisis since the Great Depression; the common link among nations was their external indebtedness to the international private banking system.
In contrast to the great depression, during the 1980s, Latin America faced strong pressures to avoid prolonged defaults and was forced to adopt contractionary macroeconomic policies, much of it by the IMF.
As a result, as economist Mark Weisbrot has pointed out, “Since the IMF and the World Bank began their structural adjustment programs there in the early 1980s, the whole continent has actually had a per capita growth rate of about zero,” whereas in previous decades was consistently above at least 4 percent.
The Best of Times, the Worst of Times
This zero growth rate started when Latin American nations had accumulated massive debts during the 1970s. Large amounts of liquidity had flooded international capital markets, and as a result interest rates fell precipitously. Latin American countries, in response, went on a borrowing spree. And the banks were only all too happy about the arrangement.
The cheap loans were “an irresistible temptation,” as economic historian Victor Bulmer-Thomas has put it. Nearly all Latin American states, especially those governed by the military, borrowed heavily in these years, using the money to cover current expenses, forego tax increases, or invest in white elephant projects. Sometimes the money just disappeared into corrupt hands.
But the fun lending-spree times would have to come to an end.
Because of most of these loans were in U.S. dollars, and the dollars and the 1970s oil crisis in the United States led to a hike in interest rates, known as the Volcker Shock, interest payments were raised, meaning that Latin American nations were unable to pay off their debt.
As a response, the U.S. government, desperate to avoid losses for Wall Street, rapidly mobilized the IMF and World Bank to disburse large bailouts for developing country governments around the world. Starting with the US$4 billion bailout of Mexico, the IMF and World Bank rapidly saw their international leverage increase. Unsurprisingly, they were immediately accused of fending for the large banks — not for the poor countries they purported to “bail out.”
IMF to the Rescue
This “saving” of the debt crisis would lead to what became known as the Washington Consensus, the forced policy prescriptions from the IMF and World Bank of neoliberal policies that included free capital flows, a deregulated financial sector, powerful private banks, the prioritization of debt repayments, and cuts in social spending. However, these turned out to be disastrous for Latin American economies.
As former World Bank Chief Economist Joseph Stiglitz would later put it during the Asian Crisis of 1997-’98, the “medicine” prescribed by these international financial institutions actually killed the patient. And former Colombian Finance Minister Jose Antonio Ocampo called the bailout responses “an excellent way to deal with the U.S. banking crisis, and an awful way to deal with the Latin American debt crisis.”
What all this meant was that while U.S. banks were turning a huge profit on high interest rates, Latin America was slipping into the worst crisis of its history. During the next two decades, Latin America would barely grow, poverty would increase and all social indicators would be woeful, most of it due to these IMF and World Bank neoliberal policy prescriptions. Fightback But this all changed in 2003 when Nestor Kichner temporarily defaulted to the IMF rather than accept its conditions. This was an extraordinarily gutsy move – no middle-income country had ever defaulted to the IMF.
The IMF backed down and rolled over the loans. After this, Argentina went on to grow at around 8 percent annually and pulled 11 million people, over one-quarter of its population, out of poverty. This successful standoff with the powerful institution came at a time when the Fund was losing influence in the region with the spread of left-wing leaders rejecting outside imposed neoliberal policies. From Venezuela to Bolivia, the IMF era was coming to an end.
And since the IMF was, at the time, the most important avenue of Washington’s influence in low- and middle-income countries, this also contributed to the demise of U.S. influence, especially over the recently independent countries of South America. Today, the situation has changed completely. Latin American countries are no longer among the world’s largest debtors – which are now the industrialized countries. According to figures published by Deutsche Bank Research, the public debt of the 10 largest emerging economies decreased from 50 percent to 25 percent of gross domestic product from 2000 to 2012, while the ratio with the G-7 members grew from 80 percent to 110 percent over the same period.
This content was originally published by teleSUR at the following address: