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Latin America, the IMF and the World Bank: More of the same?

2020-02-27T15:18:25.164Z

The abstinence period ended in 2018, when Argentina became the first country in the region to re-sign an agreement with the IMF



For approximately 12 years, Latin America managed to overcome its historic addiction to loans from the International Monetary Fund (IMF). However, the period of "abstinence" initiated in 2005 came to an end in June 2018, when Argentina, submerged in a new economic crisis, became the first country in the region to re-sign an agreement with the IMF to be followed only by Ecuador. It is precisely that agreement, the largest in the history of the financial institution, that today keeps Argentina immersed in intense negotiations to restructure its already unsustainable debt to that institution. If judging by the headlines of the national and international press, there is no doubt, the whole world, and most of all Latin America, follow these negotiations closely. On its outcome will depend not only the future of the IMF's controversial relations with Latin America, but also the stability of Argentina and the professional reputation of the Fund. The funny thing is that while everyone has their sights set on this single agreement, no attention is paid to the many dozens of agreements that the World Bank (the IMF Twin) has in the region today - agreements that carry many more debts. Why this difference?

The IMF and the World Bank (WB) were created at the Bretton Woods Conference in July 1944. The founding group of both institutions was made up of 45 states from the Allied bloc, including all Latin American countries except Argentina, which He joined them in 1956. Today, 189 of the 193 members of the United Nations are members of both institutions. Since its withdrawal in 1964, Cuba is the only Latin American country that remains outside both institutions. While the thaw of US-Cuba relations towards the end of the Obama era led the IMF to speculate that Cuba would knock on its doors again (as Eastern Europe did in the 1990s), everything changed with the arrival of Donald Trump.

The IMF and the WB complement each other. The first focuses on the financial aspects of its member states and the second on the promotion of "development" - a surprisingly diffuse concept whose content has varied since the 1940s. While developing countries, including Latin America, have always perceived to the BM as "the carrot" and to the IMF as "the club" and for this reason they have tried more than once to be members only of the first, that has never been allowed. In fact, the Bank's Constitutive Agreement states that if a country wishes to be a member, it must first adhere to the IMF. The question is to what extent this dichotomous perception reflects the activity of both institutions in Latin America. To answer this question, it is enough to observe what is happening today in the only two Latin American countries that have agreements in force with the IMF: Argentina and Ecuador.

Argentine President Alberto Fernández has recently concluded a tour of various European capitals in order to obtain support to restructure the $ 44 billion debt that his country maintains with the IMF. This debt is the result of a stand-by agreement (that is, with conditions included) of 50,000 million dollars that former President Mauricio Macri signed in June 2018 and was extended to 57,500 million in September 2018. Two years of Recession and an inconceivable poverty rate of 40% have impaired the ability to face the amount and services of Argentine public debt. Italy, Germany, Spain and France, and even Pope Francis, have given Fernandez explicit support. This means that when the IMF Executive Board must approve the restructuring of the Argentine debt, the representatives of those countries will support the agreement. This is not the first time, and probably not the last, that a Latin American president goes on tour to ensure that the countries with the highest voting power in the IMF (USA, Japan, China, Germany, France, United Kingdom) vote in favor of an agreement that is relatively pious with debtor countries. But efforts aimed at debt renegotiation do not culminate there.

In mid-February 2020, an IMF mission landed in Buenos Aires to study the government's economic plan and an Argentine mission left for Washington. At the same time, the financial institution and the Argentine Government agreed to reopen the permanent office that the IMF maintained in the country and that had been closed since 2001. Moreover, the Government has placed a long series of officials at the head of the negotiations. Executive Branch, Ministry of Economy and the Central Bank - part of them full time. However extreme this situation may seem, it is nothing more than a reflection of what it means to be a debtor Member State. The challenges facing Argentina today are part of the intense work mechanism that has characterized the relations between the IMF and Latin America since Peru became, in 1947, the first country in the region to contract a loan from it.

The situation created in Ecuador as a result of the controversial agreement signed by President Lenín Moreno in February 2019, presents significant similarities with the Argentine case, despite being an even more demanding pact than the stand-by agreed with Argentina. Ecuador has signed an Expanded Service (SAF) for a total of 4.2 billion dollars. The firm was conditioned to the implementation of an adjustment program of at least three years, which includes, among others, the drastic reduction of public spending, pro-investor legislation, flexibilization of the Labor Code, privatizations and more. Criticism and protests against this program, present from the outset, became massive and violent in October 2019, when Moreno announced the elimination of fuel subsidies.

In summary, what has made the IMF such a controversial institution in the region have not only been the loans it has granted, the debts that these loans have originated and the conditions stipulated therein (rate increases, employee layoffs public, salary freeze, liberalization of foreign trade and a profound reform of the state, to name just a few), but also the overwhelming work routine that condemns debtor countries to an endless series of mutual visits and missions, audits, periodic reviews , negotiations and more. It should not surprise us, then, that for years various governments have requested that meetings with the IMF be held only in Washington DC (the headquarters of the Fund and the World Bank), in order to avoid criticism and protests that the presence of their missions arouses In the local scene. This routine is particularly intense in Latin America as there are many countries that have suffered recurrence and have contracted a series of loans that were partly used to settle debts created by previous loans. For example, since joining the IMF, Argentina has signed 21 agreements with this organization, Ecuador 19, Brazil 16, Chile 15, Mexico 16, Peru 25, Haiti 27 - the majority of the stand-by type. In the '60s and' 70s, almost all Latin American countries maintained stand-by agreements with the IMF.

At the beginning of the 21st century, with the rise of the "New Latin American Left", several countries decided to end the debts with the IMF and the overwhelming work routine that they entailed. Presidents like Néstor Kirchner and Lula da Silva in 2005, Tabaré Vasquez in 2006, Hugo Chávez and Rafael Correa in 2007, settled, in a single payment and without prior notice, all outstanding debts. The IMF, beaten by the unexpected loss of such loyal customers, was forced to do what it has always demanded from Latin America, that is, to reorganize itself, cut budgets and lay off staff. Indeed, both the IMF and the World Bank are banks whose bureaucracies need to remain active (grant loans, send missions, etc.) to increase their income and justify their own existence (as they are multilateral institutions that report to their member states). It is precisely this need to remain active that leads me to anticipate that, as on past occasions, Argentina and the IMF will soon reach an agreement. Otherwise, not only will Argentina not be able to pay off its debt (which would be catastrophic for both the country and the IMF), but it would send a warning signal to other countries in the region and these, instead of asking again Fund support, will continue to seek alternative sources of financing (such as China).

What is known as the "World Bank" is officially called the World Bank Group as it is made up of five institutions. By World Bank here we refer only to one of them: the International Bank for Reconstruction and Development (IBRD). IBRD, the Group's largest institution, grants loans to governments of middle-income and low-income countries with payment capacity, including the vast majority of Latin American countries. Their loans cover part of the cost of development projects; the rest (the majority) must be covered by the Government (national or provincial), state-owned companies, and / or private companies and investors (local and foreign). The type of projects co-financed by the World Bank has changed based on the evolution of the concept of "development" and the factors necessary to promote it. Until the 1970s, the loans were intended for projects in the areas of agriculture, energy, transportation, industry, etc. In the 1980s, the WB created the Structural Adjustment Loan (SAP) which, unlike traditional loans, is not subject to a specific project. The rationale is that the WB (and not just the IMF) can provide temporary financing to settle debts. Like IMF loans, SAPs are conditional and require macroeconomic (and neoliberal) reforms.

Since 1985, PAE type agreements have become common in Latin America. Each signed agreement has conditions and carries the same work routine that IMF loans entail: missions, reports, audits, negotiations, etc. That is, ministers, governors, mayors, directors of state-owned companies, bankers and others devote part of their precious time to the management of bank projects and loans. Unlike the IMF, which grants one loan at a time, the WB can grant several loans simultaneously, which implies that the routine of working with it, as well as debts, are multiplied. This explains, among others, why the IMF has 2,700 employees and the WB with more than 10,000. Brazil, the country that has received more loans in the region, has signed, since its first loan in 1949, nothing more or nothing less than 503 agreements, 45 of them still active. Mexico has signed 329 agreements, with 22 still active; Argentina, 229 agreements, with 30 assets. Since 2005, Venezuela is the only Latin American country that does not borrow. Although the loans of the WB (whose repayments cannot be restructured) present several of the components that have made the IMF a target of criticism, the truth is that most of them, despite not being less conditional than the IMF loans , serve as a starting point for the realization of important development works that could not be specified otherwise.

It depends on the governments of Latin America how to manage their relations with both institutions to ensure that they do not only entail debts and overwhelming negotiations, but fulfill their mission of contributing to the stability, growth and development of their member states. Meanwhile, the countries of the region will continue to avoid resorting to the IMF, and, on the contrary, will continue to sign agreements with the World Bank.

Claudia Kedar , historian, is a professor and researcher in the Department of Spanish and Latin American Studies of the Hebrew University of Jerusalem.

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Source: elparis

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