What Goes Around, Comes Around: the eurozone crisis, the BRICS and the IMF

Ilene Grabel

From 1980s through the early 2000s developing countries faced repeated demands to get their financial houses in order as a condition of financial assistance from the international financial institutions (IFIs) and the world’s leading economies. The Washington Consensus codified the standard conditionality. It tied financial rescue on all manner of draconian policies that were designed to ensure that developing country governments could meet obligations to their international creditors. In pursuit of solvency, few public sector expenditures were exempt from the neoliberal axe. Social welfare spending was slashed, taxes on all but the wealthy and large firms were raised, markets were liberalized, enterprises were sold off to the presumably more efficient private sector (though often the “private sector” were domestic elites with privileged access to the assets at bargain prices), and barriers to international trade and financial flows were rescinded. All of this was done with the expressed goal (among others) of demonstrating worthiness for continued lending by IFIs.

Of course, it seemed to many of us at the time that “solvency” was a euphemism for the protection of the interests of the immensely powerful international financial sector and home-grown neoliberals. Though the rhetoric of economic transition emphasized the need for all to share the pain of economic restructuring, there never was any serious chance that those interests that were best situated so as to be able to bear the costs of restructuring would face the greatest burdens. No progressivity of distribution was ever countenanced, let alone pursued, in these cases. No—the formula was to impose pain strictly in inverse relationship to political and economic power. Those without voice in the political sphere or veto authority in the economic sphere were to face the brunt of the adjustment costs. In contrast, those with influence were to be protected to some degree or other from the disruptions that attended neoliberal reforms. And at the top of the pyramid, finance capital was to be insulated virtually entirely from the hardships so liberally distributed to others. Indeed, to the degree possible, finance capital was to be assisted in its mission of profiting from the economic implosions affecting the indebted societies.

But oh how the worm turns. Today many developing countries have escaped the vice grip in which indebtedness had placed them in the past. Not just Brazil and China, about which we hear so much, but also Turkey, South Korea, Argentina, South Africa, Russia and several other rapidly-growing developing countries have amassed sufficient reserves so that they are no longer the target of IFI conditionality. And in a most remarkable twist of fate, some of these countries now find themselves being courted for a second time by the very same IFIs that squeezed them in the past to assist with crisis alleviation in Europe.

In the early days of the financial crisis, several developing countries committed to purchase the IMF’s first-ever issuance of its own bonds. In April 2009, China committed to purchase $50 billion of IMF bonds, while Brazil, Russia, South Korea and India each committed to purchase $10 billion.  This was a landmark event in the institution’s history as developing countries emerged as lenders to the institution. At the same time it became clear that any chance of a global recovery hinged on the performance of a larger group of economically-vibrant developing countries.  And now, in the face of the excruciatingly slow pace of the Eurozone’s march off of a cliff, the IMF has again gone hat in hand to the developing countries (after developing countries rejected requests to provide bilateral assistance to Europe a few months ago). As of this writing, Eurozone governments are still trying to figure out how and which country’s central banks will provide €150 of the €200 billion in bilateral loans to the IMF to which they committed at a Brussels summit on December 9.  Needless to say, the politics of contributing are complicated, not just by Britain’s refusal, but also by the political backlash against such moves in the Czech Republic and by Germany’s continued brinksmanship.  And let’s not even get into the question of where €500b for the European Stability Mechanism is going to come from when it will supposedly be launched in July 2012.

This brings us back to the developing world and the IMF.  Against this backdrop, new Managing Director Lagarde has gone on a charm offensive in the global south in the strange new world wherein policymakers there trust the Fund more than they do Europe.  Among developing countries Brazil’s government has been most receptive to Lagarde’s bid, though to be clear President Rousseff has wisely not announced the precise nature and dollar amount of the country’s new contribution to the Fund.  She is waiting (quite sensibly) to hear something concrete on the matter of IMF governance reform and a something credible and consistent from Eurozone leaders.  She has also made clear that decisions on new funding to the IMF will come out of the BRICS (Brazil, Russia, India, China and South Africa) meeting in February 2012.  Never one to miss a chance to note ironies, Brazil’s Finance Minister Mantega quipped during Lagarde’s visit to the country: “[i]t’s a great satisfaction to us that this time the IMF did not come to Brazil to bring money like in the past but to ask us to lend money to developed nations.”

The Russian, Chinese, Korean, and Mexican governments have also indicated that they would likely offer new support to Europe through the IMF, though they, too, are conditioning new support on a real plan and firm financial commitments from Europe.   Indeed, a few days ago Russian president, Dmitri A. Medvedev said Russia might pledge up to $20 billion to the IMF (to be used in Europe), half of which would come from Russia’s decision to let the Fund postpone repaying it the $10B it owes the country (as a consequence of its 2009 commitment to the Fund). That promise should help to quell criticisms of the recent elections in Russia!

The IMF needs the cash for its European reclamation project, and traditional funders like the US are a bit preoccupied these days with cleaning up their own little messes. Suddenly, the BRICS are the only available potential lenders.

So once again we’re about to witness the flow of funds from the global South to the global North—only this time, the funds are flowing from a position of strength, not weakness—and the ultimate net economic and political benefits from this resource transfer will likely flow from the North to the South.

But there is one constant in this otherwise shifting landscape of economic and political power.  Once again assistance to countries in trouble is predicated on meeting conditions (whether manufactured in Washington, Brussels, Berlin, or Frankfurt) that will impose the greatest costs on those least able to bear them; all social welfare programs, entitlements and public amenities will be slashed so as to preserve national solvency. And once again, solvency should be understood as the protection of the one interest in the global economy that is best able to bear the costs—finance capital. All manner of hardships are and will be imposed on the most vulnerable of the Greeks, Italians, Spaniard and Portuguese—in order to do what? To ensure that the banks shed not one Euro while the rest of society sheds tears and blood.

The BRICS have become central players in what is looking like an increasingly desperate effort to save the Eurozone. In this sense, so much has changed in the global economy since the heady days of the Washington Consensus. Unfortunately, so much also remains the same…