- Dr. Kaze Armel, Xiangtan University, School of Law, China-Africa Institute for Business and Law, Associate Research Fellow
- Zhang Wenxuan, Xiangtan University, School of Law, Master Student
- Strong Demand for adjustments within the IMF and WTO
At the upcoming BRICS summit in Kazan, scheduled for October 2024, a significant focus will be on reforming international financial institutions, particularly the International Monetary Fund (IMF) and the World Trade Organization (WTO). Russian Foreign Minister Sergey Lavrov has underscored the urgency of these discussions, emphasizing that such reforms are crucial for enhancing global economic governance and ensuring it better reflects the growing influence of emerging economies.
The Global South nations are advocating for changes that align the governance structures of the IMF and WTO with contemporary economic realities. They contend that these institutions remain skewed in favor of developed nations, marginalizing the Global South. Among their key demands are adjustments to the IMF’s quota system to grant more influence to developing nations and the revitalization of the WTO’s dispute settlement mechanism, which has been paralyzed for years.
This conversation arises amidst long-standing dissatisfaction with the IMF and WTO, as their policies have frequently been seen to exacerbate economic challenges in borrowing nations. In particular, IMF loans have often been tied to conditions that force countries to implement austerity measures and remove subsidies, leading to widespread unrest in nations such as Egypt, Brazil, Morocco, and Venezuela, among others.
- Global South nations face IMF austerity measures: Historical background
Egypt’s 1977 Bread Riots remain one of the most significant episodes of social unrest linked to IMF-imposed austerity measures. In exchange for a loan, the Egyptian government attempted to reduce its deficit by cutting subsidies on basic food items, including bread, a staple for much of the population. This decision sparked widespread protests across major cities like Cairo, Alexandria, and Suez. Demonstrators, many of whom were already grappling with poverty, saw the subsidy cuts as a direct attack on their livelihoods. The unrest, which resulted in numerous deaths and the deployment of military forces, was severe enough that the government quickly reinstated the subsidies to restore order.
Fast-forward to more recent times, Egypt’s engagement with the IMF remains fraught with controversy. In 2016, the country secured a 12 billion USD loan, which came with conditions such as further subsidy cuts, tax reforms, and a reduction in the public sector wage bill. These measures triggered further protests, particularly when bread subsidies were again targeted in 2017. This economic liberalization strategy, while aimed at addressing Egypt’s chronic budget deficit and foreign exchanges shortages, has led to rising inflation and exacerbated inequality. With over 30% of Egyptians living below the poverty line, these austerity measures have sparked fears of renewed instability similar to the 1977’s riots.
Brazil experience with IMF programs, though different in scope, also highlighted the tensions between austerity and social welfare. In the late 1990s, Brazil turned to the IMF during a financial crisis, securing billions in loans to stabilize its currency. However, the IMF insisted on strict fiscal austerity measures, including cuts to public services and government spending. While the program helped stabilize Brazil’s economy in the long term, it was met with widespread opposition, particularly from labor unions and civil society groups. Critics argued that the austerity measures hindered growth, increased unemployment, and disproportionately affected the poor.
Morocco’s 1981 subsidy cuts, imposed under IMF pressure, led to the infamous Casablanca riots, often referred to as the Bread Riots. The Moroccan government, facing a balance-of-payment crisis, lifted subsidies on essential goods such floor, sugar, and milk, resulting in price hikes up to 76%. This triggered widespread protests, primarily in Casablanca, where thousands took to the streets to demonstrate against the rising cost of living. The unrest escalated into violence, with government forces responding harshly. Official estimates placed the death toll at 66, but opposition groups claimed it exceeded 600. The unrest underscored the deep social discontent triggered by IMF austerity measures, particularly in countries where large segments of the population rely on subsidies for basic necessities.
Similarly, in Nigeria, the IMF Structure Adjustment Program or SAP, led to widespread protests in 1989. The SAP, aimed at restructuring Nigeria’s economy through austerity measures, included the removal of subsidies and devaluation of the currency. These policies sparked protests, starting with university students and quickly spreading across the country. Demonstrators, frustrated with rising inflation, unemployment, and economic hardship, turned violent, leading to riots in major cities. The Nigerian government refused to back down from the IMF-imposed policies, despite the unrest and loss of lives. The protests forced the government to introduce some relief measures, including job creation programs and bursaries for students, though the core elements of the SAP remain intact.
Venezuela’s Caracazo riots of 1989 were a direct result of IMF-backed austerity measures that pushed the population into extreme economic hardship. After being elected on a platform of opposing neoliberal policies, President Carlos Andres Perez quickly reversed course and implemented a series of IMF-enforced economic reforms. These included sharp increases in fuel and transportation costs, liberalization of prices, and cuts to public spending. The steep hike in public transportation fares, combined with soaring prices of essential goods, ignited widespread protests in Caracas, and other cities. The government’s response was severe, deploying the military and enforcing a state of emergency, which resulted in mass casualties. While the official death toll was reported at around 300, estimates suggest that up to 3000 people may have died during the riots. The social unrest and heavy-handed repression of the Caracazo were pivotal in digitimizing Venezuela’s ruling order, ultimately contributing to the rise of Hugo Chavez, who leveraged the discontent to position himself as a champion of the poor.
Similarly, In Indonesia, Pakistan and Kenya, IMF austerity measures have triggered significant social and political turmoil. In Indonesia, during the Asian financial crisis of 1997, IMF-mandated reforms, including subsidy cuts and Bank closures, led to mass protests and riots. These conditions culminated in the fall of President Suharto’s regime. In Pakistan, successive IMF programs since the 1980s have enforced austerity measures that have exacerbated poverty and led to protests, often intensifying the country’s economic and political instability. Kenya experiences similar unrest in the 1990s due to IMF-imposed structural adjustment programs, which led to the removal of subsidies and public spending cuts, triggering widespread social unrest and long-term economic difficulties.
- IMF’s Structural Adjustment Programs
The core grievances of the Global South toward the IMF revolve around its Structural Adjustment Programs (SAP), these programs widely implemented during the 1980s and 1990s, demanded austerity measures, privatization, and trade liberalization as conditions for financial assistance. Critics argue that such policies disproportionately harm developing countries by prioritizing fiscal discipline and debt repayment over essential social services and long-term economic development. Furthermore, the IMF’s approach is often seen as undermining sovereignty, as it compels borrowing nations to adopt policies that primarily serve the interests of wealthy creditor countries.
Concerns also extend to the decision-making processes within the IMF, which are perceived to favor developed nations due to the disproportionate voting power they hold. This imbalance often results indecisions that do not align with the needs of the Global South. Additionally, the IMF’s frameworks for debt restructuring are seen as inadequate, with many developing countries arguing that these mechanisms fail to address the root causes of debt crises or provide substantial relief. The IMF’s emphasis on fiscal consolidation has also been criticized for leading to cuts in essential public services such as healthcare and education, which hinder sustainable development and exacerbate inequality.
- WTO Trade Rules
Similar frustrations exist with the WTO. Developing countries have long argued that the WTO’s trade rules disproportionately benefit developed nations. The agreement on Trade-Related Aspects of Intellectual Property Rights, or TRIPS for instance, imposes stringent intellectual property protections that restrict access to medicines and technology in poorer countries. Moreover, the WTO’s agricultural policies tend to favor rich countries with large agribusiness sectors, disadvantaging small-scale farmers in developing nations who struggle to compete with subsidized imports.
The disparity in negotiating power is another significant issue. Many developing countries lack the technical expertise and resources to engage effectively in WTO negotiations, leaving them at a disadvantage compared to wealthier nations. This often results in trade agreements that cater to the interests of developed countries. Additionally, the growing trend toward plurilateral agreements—where a subset of WTO members negotiate specific trade rules has raised concerns about the marginalization of countries outside these deals, particularly those in the Global South. This approach is viewed as undermining the multilateral nature of the WTO and threatening the inclusivity of global trade governance. The disfunction of the WTO’s dispute settlement mechanism has also drawn widespread criticism. With its Appellate Body effectively incapacitated, smaller and developing countries are particularly disadvantaged, as they rely on the system to challenge unfair trade practices by more powerful nations.
- Global South proposal for reforms within the IMF and WTO
In response to these challenges, the Global South has put forward several proposals for reform. First and foremost, they advocate for a restructuring of the IMF’s loan conditions to allow for more flexibility and consideration of the specific socio-economic contexts of borrowing nations. They also call for a reallocation of voting power within the IMF to reflect the current global economic landscape and ensure that developing countries have a stronger voice in decision making. On debt restructuring, the Global South has proposed the establishment of a multilateral legal framework under the United Nations, which would allow debtor nations to negotiate collectively fairer terms. This would help level the playing field and provide more effective debt relief mechanisms. There is also a push for the IMF to align its policies with the United Nation’s Sustainable Development Goals, integrating social and environmental considerations into its economic programs.
Developing countries emphasize the need for greater local ownership of IMF-supported reforms, urging the institution to work closely with local governments to design policies that are better suited to their specific needs. For the WTO, reforms must focus on creating a more equitable system that ensures all member countries, regardless of their economic power, have an equal say in shaping global trade rules. This include addressing imbalances in trade policies, improving transparency, and restoring the functionality of the dispute settlement system. Only through such comprehensive reforms, can these institutions regain the trust of the Global South and work toward a more inclusive global economic order.