For 80 years, the IMF and World Bank have played a key role in the global financial system. However, both institutions have failed to provide resilience and stability to global finance. Their interventions in debt crises have often worsened social and economic inequalities. By focusing on austerity measures, promoting neoliberal economic practices, and prioritizing debt repayment, they have led to long-term economic stagnation, social unrest, and environmental damage.
Failure to address the root causes of the debt crisis
The IMF and World Bank have failed to address the root causes of debt crises and countries’ dependence on debt because they focus only on short-term macroeconomic stabilization without addressing the underlying structural problems that cause debt crises, such as corruption, weak institutions, and dependence on volatile commodity markets. They have also failed to prevent low-income countries from falling back into debt distress. For example, many countries that benefited from the Highly Indebted Poor Countries Initiative have seen their debt burdens rise again due to external shocks, such as commodity price fluctuations or inadequate domestic economic policies. These institutions have not sufficiently addressed the systemic issues that lead to recurring debt crises. The IMF and WB have also been unable to address global economic shocks like the 2008 financial crisis and the COVID-19 pandemic, which have exposed the inadequacy of current debt restructuring mechanisms. In these crises, many countries faced sudden, massive debt burdens but were not provided with rapid or effective restructuring options. They have been slow to respond to such systemic crises, resulting in prolonged economic hardship for debtor countries.
These financial institutions have not fully acknowledged that we are currently facing the worst debt crisis, especially for countries in the Global South. Their rhetoric about the burden of heavy debt is not matched by swift action, as their response has not only been slow thus far, but also favors the interests of creditor countries and private lenders rather than the borrowing countries. The debt restructuring processes are designed to ensure that creditors are paid as much as possible, even if it means prolonging the debt burden on the debtor country. The IMF and World Bank have failed to compel private creditors to participate in debt restructuring. For example, during the COVID-19 pandemic, under the G20’s Debt Service Suspension Initiative, private creditors were not required to participate. This left many debtor countries still burdened by high payments to private creditors.
To this day, the IMF and World Bank have not promoted a fair, orderly, and predictable restructuring mechanism, and efforts have resulted in very minimal progress. In addition, neither the IMF nor the World Bank, nor the G20, have taken any steps to respond to calls from civil society and leaders of the Global South for debt cancellation and reform of the debt architecture.
Failure to address the need for long-term economic growth
The IMF and World Bank’s failure to address the root causes of the debt crisis is compounded by their requirement that countries implement austerity measures as a condition for receiving loans. These measures often involve cutting government spending on social services like education, healthcare, and welfare programs. The conditions that force countries to prioritize debt repayment further weaken their ability to develop their economies and escape the cycle of debt. This also leads to rising unemployment, as countries are often required to reduce public sector jobs and privatize state-owned enterprises, which can result in widespread layoffs.
Although their interventions may stabilize a country’s finances in the short term, especially during economic crises, they often fail to create sustainable long-term economic growth. The IMF and World Bank promote a “one-size-fits-all” model of economic development based on neoliberal principles, also called a market-based development model, without considering alternative development approaches that may be better suited to local conditions. This has led to the implementation of policies that do not align with the cultural, social, and economic realities of many developing countries. In other words, the IMF and World Bank’s interventions come with conditions that impinge on national sovereignty, as countries are forced to implement policies — such as fiscal austerity, trade liberalization, and privatization — based on these institutions’ assessments rather than their own domestic priorities.
The IMF and World Bank’s approach should be reconsidered to ensure that debt relief and economic stabilization mechanisms do not harm a country’s development or the well-being of its people.
A lack of commitment to climate funding
The IMF and World Bank have failed to recognize the responsibility of countries in the Global North to address climate change and fulfill their climate funding commitments to countries in the Global South. They should adhere to the principle of common but differentiated responsibilities and respective capabilities, which is a benchmark of genuine climate justice. Often, IMF and World Bank financing leads to environmentally damaging practices, cases of violations of local communities’ rights, etc. One example in Indonesia is the construction of the Kedung Ombo mega-dam project funded by the World Bank. Additionally, there are cases where loans and financial support from the World Bank and IMF are directly or indirectly given to fossil fuel-related projects in Indonesia.
In countries experiencing political instability, conflict, or extreme poverty, the focus of lending is often on maintaining economic stability, even if this involves supporting industries that destroy the environment. The approach that economic stability will lead to political stability should not come at the expense of inflicting further damage to the environment. Their market-based model in providing assistance and financing practices that prioritize economic development over environmental protection should be changed.