How the IMF over-exploits developing nations, and why El Salvador adopting Bitcoin as Legal Tender might help to break this cycle in the future
This is somewhat of a long essay. A TL;DR is at the end.
It is known to everyone that the International Monetary Fund (IMF), as well as the World Bank, lends money to developing nations. It turns out that the interest these nations pay does not come only in the form of a premium on the amount they borrowed. What are the other determinants? The contract clauses these nations have to sign. We'll get back to these shortly.
The general aspect of the situation was summed up in a piece by J. Hickel, visiting scholar at the London School of Economics, and others:
Rich countries have a monopoly on decision-making in the World Bank and IMF, they hold most of the bargaining power in the World Trade Organization, they use their power as creditors to dictate economic policy in debtor nations, and they control 97 percent of the world’s patents.
The contracts have conditionality clauses that forbid borrowers from investing in their own development
Argentina has been a huge borrower from the IMF. The crisis they had in 2001 was partially due to their IMF binding clauses: they were told to cut government spending on specific areas, such as health, education and security. The IMF provided another set of loans and measures to enforce this would be paid. Amongst this:
- Argentina was forced to concentrate its economy on exports, therefore preventing the local market to develop industries such as microchip ones, as well as to open its market to the rest of the world. This resulted in a fair amount of local companies closing their doors, as they could not compete with the global market;
- Being forced to repay the loans and without the possibility to do so, they were forced to take even more loans, undermining their capacity to feed people.
Ghana also borrowed many times from the IMF. A period of loans goes between 1983-2006. The austerity measures required by the IMF included cutting funds for the National Health Fund (NHF), which funds the public healthcare service. This was supposedly with the excuse of having its money back. Between 2008 and 2009 alone, the allocation of resources to the NHF fell by 40% (48% if inflation is taken into account). This caused citizens to be left without proper healthcare service, overworked professionals and lack of material for medical procedures.
Another conditionality for Ghana's loan was that the government should delay payment to domestic suppliers. In addition to that, no investment projects were performed in 2009 due to the austerity measures. As a very detailed report on the matter writes:
[...] since no new opportunities are opened up by way of award of new contracts as a result of IMF conditionalities, laborers, artisans, food sellers and their households are badly hit [...]
GoG increase in electricity tariffs upon advice of the IMF has hit the vulnerable and the poor hardest. For instance, in June 2010, the Public Utility Regulatory Commission (PURC) proposed average increase of 89 percent and 36 per cent in electricity and water tariffs respectively. Therefore, the steep increases in the utility tariffs imply that this was a condition that needed to be met in order for the government to get other tranche of the loan.
The non-comprehensive list of examples is vast: Greece, Brazil, Venezuela, Peru, Chile, Mexico, Thailand, Malaysia, the Philippines, Nigeria, Lebanon, Tunisia, Turkey, Morocco, Jordan. Another piece states that
In Lebanon, debt service accounts for 47 percent of the government's budget. Jordan, Morocco, Tunisia and Turkey all spend more on debt service than they do on education; all spend twice as much on debt service than they do on health care.
Have the aids failed?
To the countries that borrowed, yes. To the lenders, no. A scientific paper from 2021 quantified the damages of unequal exchanges between the Global South (GS) and the Global North (GN). The TL;DR is
Over the whole period, drain from the South totaled $62 trillion (constant 2011 dollars), or $152 trillion when accounting for lost growth.
[...]
For every dollar of aid the South receives, they lose $14 in drain through unequal exchange alone, not counting other kinds of losses like illicit financial outflows and profit repatriation
These unequal exchanges can be understood with a simple analogy: if the minimum wage in a certain country is 2x less than in e.g. the US, this country needs to spend twice as much to import goods from the US, whereas the US only pays half as much to import the same amount of goods. In addition to that, there's no fair fight when discussing international monetary policies, according to J. Hickel:
Rich countries have a monopoly on decision-making in the World Bank and IMF, they hold most of the bargaining power in the World Trade Organization, they use their power as creditors to dictate economic policy in debtor nations, and they control 97 percent of the world’s patents.
Another difficult aspect is that the IMF loans money to the very group of people that put this or that country in economic distress. From here on, the clauses contribute to a snowball of bad decisions that lead population to suffer and to always be hostage of international policies.
El Salvador adopting Bitcoin as Legal Tender might help to break the cycle
To start with, El Salvador only invested around 1% of its Treasury into Bitcoin. It's unlikely they'll face bankruptcy on that or that they will default on their debts, as advertised North and South by traditional media outlets. That being said, the IMF was adamant and made many attacks on El Salvador due to its adoption of Bitcoin as a Legal Tender:
El Salvador president's bitcoin push casts shadow over IMF efforts
World Bank rejects El Salvador request for help on bitcoin implementation
IMF recommends El Salvador not use bitcoin as legal tender
Factbox: IMF asks El Salvador to drop bitcoin, more countries clamp down
There were even outlets spreading out El Salvador would default on their debt:
The big default? The dozen countries in the danger zone
Which, as we know, didn't happen, as they paid their debt in full last month:
Some time after the payment, the IMF acknowledged that the experiment did not completely fail:
IMF says El Salvador's bitcoin risks have not materialized but 'should be addressed'
In a recent document, which was reported in detail by a post from another user, the IMF stated that cryptocurrencies should not be used as a Legal Tender, allegedly to "o safeguard monetary sovereignty and stability". As discussed yet by other users in the sub, it seems they're simply afraid of other nations following El Salvador's queue. The reasons for that are many, but my main guess is related to the aspects explored in the first part of this post: if they're not issuing the currency, they don't have control over a nation's monetary policy.
El Salvador has not disrupted the system yet and is very far from doing so. The danger, however, is that they created a serious precedent. For the first time in modern history, rich countries can't control nor can they affect the issuing of a developing country's Legal Tender. Other countries might follow suit. Since all fiat currencies are somewhat tied to the US Dollar, be it by soft power or actual economic deals, this precedent is a serious disruption of the status quo that is in place since 1971.
There are flaws in El Salvador's Bitcoin adoption, though
It was reported by an actual El Salvadoran redditor (I couldn't find the posts) that the system implemented there has flaws:
- There was no educational period for the population to know what it is
- The control of the wallet's keys are not public, and people don't know who exactly have access to them
- At the end of the day, some places accept it, others don't, it is not a widespread thing
TL;DR
- The IMF impoverishes developing nations with austerity clauses that forbid them to actually invest in development
- El Salvador is far from "beating the system" with Bitcoin, but created a dangerous precedent as other nations might follow suit
- It's the first time in modern history that the IMF and its affiliates can't control nor can they affect the issuing of a country's Legal Tender. This might give developing nations more power to break the IMF-dependent loan cycle in the future.
I do want to see the next chapters.
Submitted March 07, 2023 at 09:49PM by reddito321 https://ift.tt/ziA2VYb
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