Between Sovereignty and the IMF

Across the world, countries in dire financial straits are giving up economic sovereignty in exchange for emergency loans from the International Monetary Fund (IMF). Sri Lanka, for example, reached a deal with the IMF to restore economic stability after it ran out of fuel and other essentials earlier this year due to mismanagement by former president Gotabaya Rajapaksa. As Pakistan endures an economic crunch and recovers from floods that covered up to a third of the country, it is receiving a $1.1 billion bailout from the IMF to help it stave off default. Some countries have even reached deals with the IMF in anticipation of financial crises that have not yet arrived. In August, the IMF approved an $18.5 billion precautionary flexible credit line to Chile over concerns about a global slowdown and sinking commodity prices. Egypt has applied for a new loan from the IMF to deal with drastic increases in the price of food.

All these bailouts require the involved countries to adopt policies preferred by the IMF in exchange for funds, even if these policies may have negative consequences for their most economically vulnerable citizens. For example, critics of Egypt’s relationship with the IMF have noted that the requirements of previous loans actually increased the cost of living for ordinary Egyptians.

Jamie Martin’s new book, The Meddlers: Sovereignty, Empire, and the Birth of Global Economic Governance, arrives at a critical moment, as many countries are asking the IMF and other international institutions to help them address economic and environmental crises. An economic historian at Harvard University, Martin offers a helpful economic and social analysis of the history of international intervention in sovereign economies. He traces the origins of many of today’s debates on economic sovereignty to institutional design choices made during and after the world wars. Martin covers the rise of institutions from the Bank of International Settlements (created to facilitate German war reparations after World War I), to the League of Nations (the interwar precursor to the United Nations), to the IMF’s founding as part of the UN in 1945.

As Martin shows, international organizations have often imposed constraints on sovereign economic management as a condition for financial support. In the aftermath of World War I, both Austria, during a League of Nations intervention in 1922, and Germany, under the Dawes Plan, were forced to accept foreign economic controls. In Austria, austerity was enacted to remove tens of thousands of supposedly superfluous government workers and stabilize the country during a period of hyperinflation. In Germany, the Dawes Plan was implemented to ensure that the Germans would pay their wartime debts to various Entente powers. Prior to the end of World War I, these types of economic controls had been imposed only on countries in Africa or Latin America. As a result, in both Germany and Austria, concerns over the loss of economic sovereignty were fused with worries about being treated like developing countries.

The League of Nations imposed similar political constraints on countries in need of economic development such as Greece. After a refugee crisis in which millions of Greeks emigrated from the territories of the former Ottoman Empire, the League of Nations bankers, concerned about the type of mass politics practiced in Greece, created a Refugee Settlement Commission outside of the Greek government’s direct control.

Martin notes that foreign aid always comes with a political agenda. For example, during this same period, Japan attempted to take full control of reconstruction and development in China by becoming the nation’s sole financier. The Japanese stated that they would resist any foreign financial aid to China, even if the Chinese requested it.

Predictably, at the outset of the IMF, some in developed nations worried they would end up subsidizing the rest of the world. For example, far-right organizations in the United States, such as National Blue Stars Mothers of America, claimed that the IMF would simply offer handouts to the “have-nots” of the world.

But Martin shows how wealthy countries also worried that the IMF could potentially violate their own economic sovereignty. Despite Great Britain’s intimate involvement in the creation and staffing of the IMF, the British government was concerned that the institution’s design could lead to Britain being treated like a delinquent Latin American country. These fears turned out to be unfounded at the time. Instead, unequal treatment was restricted to countries like Mexico, which thought the IMF would even the playing field for loans. During the 1948–1949 exchange crisis, the IMF told Mexico it would have access to fund only in exchange for fiscal restraint.

But more recent events suggest that those early fears of developed nations might have had some basis in reality. When, in the fall, Liz Truss’s planned tax cuts caused the pound to drop precipitously, bankers at an IMF meeting jokingly compared the UK’s problems to those of less developed countries. Brazil's central bank chief Roberto Campos Neto quipped, “It was the first time in a long time that we see a reaction from markets on a fiscal package that resembles very much my daily life, which is how markets react to a fiscal package in emerging-market countries.” The IMF even noted that Truss’s “mini-budget” was going against central-bank policy. In their view, monetary policy should take precedence over fiscal policy. The IMF was right to call out bad policy, but the continuing pattern of monetary policy being decided beyond the purview of national politics is unhealthy. It will likely lead to popular resentment as central banks across the world tighten rates and the public has no recourse.

Still, to date, IMF loans to countries in the Global South tend to come with more conditions than those given to more developed Western nations. For example, one of the requirements of the IMF loan to Sri Lanka was stronger central-bank autonomy. Pakistan had to raise electricity and fuel rates, along with lifting a variety of economic subsidies. Even in Chile, where the IMF program is a flexible credit line instead of a bailout, credit is contingent on Chile continuing to enact policies the IMF prefers.

Martin’s book shows how many of our controversies over international lending have their origins in the decisions made by the winners of World War I when they were designing economic institutions to ensure that debts would be paid and economies wouldn’t collapse. While seen as radical in scope at the time, these institutions would soon gain even more powerful tools for influencing national economic policies. By the 1980s the IMF was forcing policies like central-bank independence and deregulation on debtor nations.

Martin leaves open the vital question of how to balance concern over these violations of economic sovereignty with the fact that international economic cooperation always involves some constraints on national sovereignty. New models like the Bridgetown Initiative—championed by Barbados to equitably fund climate mitigation through a mix of IMF spending, grants, and low-interest loans—might offer a different approach. But previous attempts to make the international economic order fairer to developing nations—like the demands of the New International Economic Order of the 1970s—have been successfully resisted by developed nations.

The Meddlers
Sovereignty, Empire, and the Birth of Global Economic Governance
Jamie Martin
Harvard University Press
$39.95 | 256 pp.