International Monetary Fund managing director Christine Lagarde, right, talks to World Bank president Jim Yong Kim during the IMF/World Bank annual meetings in Washington DC, US. Photograph: Yuri Gripas/Reuters
We hear you, poor people. That was the message that blared out from Washington last week. It came from Christine Lagarde of the IMF. It came from Jim Kim of the World Bank. It came from Roberto Azevedo of the World Trade Organisation. It came from every finance minister and central bank governor.
The people who run the global economy wanted the world to know that they understood what had caused Brexit and had given Donald Trump a shot at the White House. They talked a lot about the need for inclusive growth and a capitalism that worked for all. To those who have been left behind in the past three decades they said: We get it. We feel your pain.
The recognition that there is a problem is progress. Lagarde means it when she says that the growing gap between rich and poor is holding back the global economy. Kim genuinely wants to see the fruits of growth skewed towards the bottom 40% in every country. The Bank, the Fund and the WTO can sense that they are sitting on the edge of a volcano that could blow at any time. They fear, rightly, that a second big crash within a decade would create a backlash that would lead to protectionism and the rise of dark political forces that would be difficult, if not impossible, to control.
That there are ingredients for a fresh crisis became apparent at various stages last week. According to the IMF, global debt has risen to a record level of $152tn (£1223tn) – more than double world GDP – at a time when activity is sluggish. Collapsing commodity prices and weak demand from the west has meant growth in sub-Saharan Africa is running at half the level of population growth. Companies in the emerging world loaded up on debt during the commodity boom and are now vulnerable to rising US interest rates and any softening of the global economy. China is the most egregious example of debt being used to boost activity artificially.
The argument that rising debt is fine because on the other side of ledger is an asset increasing in value is specious. The only reason the assets are rising in price is because investors are taking on more debt to buy them. At some point, the asset bubble bursts leaving the borrowers in severe problem. This was the lesson of the sub-prime crisis and it is remarkable that memories are so short.
The next big one could come from anywhere and it is good that the Bank and the Fund are aware of the risks. Even so, there was an air of unreality about the discussions in Washington last week.
The reason was simple: there was not the slightest hint from the IMF or the World Bank that the policies they advocated during the heyday of the so-called Washington consensus – austerity, privatisation, financial liberalisation – have contributed to weak and unequal growth, with all the political discontent that has caused.
Even worse, Lagarde and Kim seemed oblivious to the fact that the Washington consensus approach is still alive and well within their own organisations. The IMF’s remedy for Greece and Portugal during the eurozone crisis has been straight out of the structural adjustment playbook: reduce public spending, cut wages and benefits, insist that state-owned enterprises are returned to the private sector, reduce minimum wages and restrict collective bargaining. Between them, the IMF and the European authorities are turning Greece into a third world country. It would be fascinating to see what sort of response Lagarde would get if she if tried talking about inclusive growth to the homeless huddled on the streets of Athens.
The IMF is now effectively two institutions. It has a research department that has broken with the Washington consensus, and it has its programme teams which operate in the field as if this was still the 1990s. Lagarde sides with the research team, yet the recent package prepared for Egypt was the familiar mix of subsidy cuts, the introduction of value added tax and cuts to red tape. There is not much evidence that those who put it together are on message.
As for the World Bank, research by Oxfam has shown that 51 of the 68 companies that were lent money in 2015 by its private finance arm, the IFC, to fund investments in sub-Saharan Africa use tax havens. That doesn’t square with the idea of inclusive capitalism. Nor is it immediately obvious why the Bank is supporting private schools in low-income countries when the evidence is that they exclude the poorest and, in particular, girls.
The Jubilee Debt Campaign has been keeping a close eye on Ghana (pdf), which grew strongly during the period after oil was discovered and commodity prices were rising but has been left exposed by the subsequent crash. More money was then borrowed to blunt the impact of the commodity-price fall but the halving of the Ghanaian currency, the cedi, meant debt-servicing costs increased. Almost a third of Ghana’s budget is now spent on external debt servicing.
In early 2015, the IMF and the World Bank said Ghana was at high risk of not been able to pay its debts. Seven months later, the Bank guaranteed $400m of repayments on a £1bn bond sold to private investors. It had to waive its own rules to do so because it is not supposed to guarantee loans to countries at high risk of distress.
The Bank says it was trying to help refinance expensive short-term debt and free up resources that could be used for investment, but the winners of this arrangement are the speculators who are getting a 10.75% return and will make money even if Ghana can’t repay the loan due to the World Bank guarantee. The losers will be the Ghanaian people, who under the terms of a new IMF programme will be subject to austerity. Ghana is planning spending cuts of 20% per head on 2012 levels by 2017.
Sub-Saharan Africa is not a homogeneous region. Some countries are still growing strongly, helped by falling energy prices. But Ghana is not the only country to fall foul of the boom-bust in commodities and the JDC is highlighting the risk of a fresh debt crisis.
Neither the World Bank nor the IMF consider this a serious threat. Kim said last week: “I am not yet concerned that we’re reaching a debt level crisis, certainly not in most of sub-Saharan Africa. But we have to watch it.”
The World Bank and the IMF need to be watched too. There’s nothing wrong with the rhetoric, but it is the performance that counts. Lagarde and Kim say the world needs to make a better fist of tackling inequality and hooray to that. The work starts with their own institutions.