The organisation that keeps the poor in poverty

The new leader takes charge of a financial institution that is intellectually bankrupt


Unless you are a keen follower of the business pages, you probably haven't heard of Rodrigo Rato. Yet he is about to acquire more power over the poorest people in the world than Tony Blair, Thabo Mbeki or any democratically elected leader on earth

Unless you are a keen follower of the business pages, you probably haven't heard of Rodrigo Rato. Yet he is about to acquire more power over the poorest people in the world than Tony Blair, Thabo Mbeki or any democratically elected leader on earth. He is the next managing director of the International Monetary Fund, and he has the lives of hundreds of millions of people in his hands.

He takes charge of a glittering Washington-based financial institution that is intellectually bankrupt. His task can only be understood in the context of the IMF's history. It was founded at the Bretton Woods conference in 1944, where global elites publicly acknowledged the lessons of the 1930s. The collapse of global capitalism had taught the world that preaching "austerity" and "balanced budgets" at all costs led to mass unemployment, the growth of psychotic political movements and world war.

Standing at the graveside of the old liberalism, they turned to the philosophy of John Maynard Keynes. He argued that global capitalism needs periodic state intervention to stay afloat. The IMF was created to put his arguments into practice.

For 30 years, that's pretty much how the IMF operated. It was fairly successful, and global economic growth was far higher than in the previous few decades. But then, in the early 1980s, the IMF was hijacked by a group of market fundamentalists. Economists associated with the Thatcher and Reagan revolutions were convinced that Keynes' vision had in fact been a "Socialist nightmare", so they declared that a return to the philosophy of the 1930s was necessary.

They turned the IMF's purpose inside out. Instead of promoting government action to turn around slowing economies, they made their loans to poor countries conditional on governments paralysing themselves through slashed public spending and the privatisation of key services. This process is politely called "structural adjustment".

The new IMF-ers imposed on the world a massive economic experiment - and we are now in a position to judge the results. The countries that have most closely followed the IMF agenda - the east Asian tiger economies and Russia - suffered more than a decade of economic collapse, riots and appallingly low growth. The developing countries with high growth rates today - like Botswana - booted the IMF out and pursued a sensible development agenda of their own.

Russia is the clearest illustration of the IMF's economic miracle-working. The Fund told the battered, confused Russian population that its "shock therapy" programmes would bring US-style capitalism to Russia. In fact, the IMF imposed a form of capitalism far, far more extreme than anything ever attempted in the United States or any other democratic country. Even under the Bush administration, the US has countless institutions to protect its citizens - and capitalism itself - from the tendency of markets to destroy their own rules and descend into corporate plutocracy.

Yet the IMF instructed Russia - and other developing countries - not to put these checks and balances in place, because they "obstruct" business. As a result, an uncontrolled corporate horde pillaged Russia's resources, stashed their profits abroad, and suppressed the real sources of capitalism: small businesses and fair competition.

The IMF ideology should have been killed by the Russian experience. Russian GDP and life expectancy actually fell significantly below the levels of even the Soviet Union. Market fundamentalism was shown in practice to be as disastrous as Soviet anti-market fundamentalism.

Of course the IMF did not do any of this out of malice. It seems to have genuinely believed that its wild ideology could make the world better off. No matter how much evidence piles up against it, it clings to its precepts, like Bolsheviks at the height of the Ukrainian famine. Even today, the Russian failure is being repeated with only mild variations across the globe.

The proposed IMF agenda for Iraq - being resisted by Iraq's trade unions - is, the Nobel prize-winning economist Joseph Stiglitz tells me, "almost an exact repeat of Russia. It's as if they thought Russia was a major success, and the only problem is that they didn't go far enough."

Developments in Iraq might yet focus the world's attention on the terrible damage the IMF has been doing to developing countries. Here, at last, is a poor country being closely watched by the rich. If the West is serious about Iraq becoming a successful democracy then the mass unemployment and economic vandalism of the IMF must not be imposed on the country.

Yet Rato takes over an institution that has barely acknowledged the systematic failure of its policies. He has been selected as the Business as Usual candidate, a conservative finance minister from a conservative Spanish government that has just been booted out of office.

Clearly the policies prescribed by Keynes in the 1940s would not be appropriate today. But there must be a return to the spirit of the IMF's founders, particularly a belief that markets - essential for generating wealth - can only thrive alongside a strong public sector, and yes, strong government intervention and regulation. The world's poor desperately need the IMF to be rescued from the market fundamentalists and put to work on their behalf. Rato, it seems, will only continue structurally adjusting them into the dust.

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