After the Argentina debacle, the IMF endorses weakening capital controls in Ecuador

20 December 2019 by Lara Merling

Protest against the IMF outside the Ecuadorian embassy in Buenos Aires, 11 October 2019 | Carol Smiljan/NurPhoto/PA Images

The IMF is backing a tax reform bill in Ecuador that will enable capital flight and further austerity.

Over the past year, a rebranded IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
returned to Latin America with promises of loan agreements that would be different than the dreaded “structural adjustment Structural Adjustment Economic policies imposed by the IMF in exchange of new loans or the rescheduling of old loans.

Structural Adjustments policies were enforced in the early 1980 to qualify countries for new loans or for debt rescheduling by the IMF and the World Bank. The requested kind of adjustment aims at ensuring that the country can again service its external debt. Structural adjustment usually combines the following elements : devaluation of the national currency (in order to bring down the prices of exported goods and attract strong currencies), rise in interest rates (in order to attract international capital), reduction of public expenditure (’streamlining’ of public services staff, reduction of budgets devoted to education and the health sector, etc.), massive privatisations, reduction of public subsidies to some companies or products, freezing of salaries (to avoid inflation as a consequence of deflation). These SAPs have not only substantially contributed to higher and higher levels of indebtedness in the affected countries ; they have simultaneously led to higher prices (because of a high VAT rate and of the free market prices) and to a dramatic fall in the income of local populations (as a consequence of rising unemployment and of the dismantling of public services, among other factors).

programmes” of the past. Behind statements about inclusive growth and protecting the most vulnerable, are policies similar to the structural adjustments of the Washington consensus era. While the Argentina programme has already imploded, leaving behind soaring poverty and a collapsed economy, the IMF seems determined to push forward its agreement with Ecuador.

Things have not been smooth for the IMF in Ecuador. Massive protests erupted after an attempt to impose fuel price hikes as part of the IMF agreement – forcing the Ecuadorian government to withdraw the measures and temporarily put its agreement with the IMF on hold. The IMF recently announced it plans to resume its programme in Ecuador after the country’s National Assembly passed a tax reform bill.

However, the IMF’s press release fails to mention that the bill contains several provisions that aim to weaken and essentially render Ecuador’s capital controls ineffective. Ecuador introduced a series of measures to discourage capital flight and prevent speculative flows of capital back in 2007 by taxing outflows that did not meet the criteria of productive foreign direct investment (FDI). The measures have been successful in strengthening macroeconomic stability and raising revenues for the government.

It is important to note that under the original bill, inflows financing productive activities and staying in the country for at least one year were already exempt from this tax. It also specified that outflows to a list of tax havens cannot be exempt from paying the tax.

The new bill passed by the Ecuadorian assembly removes the provision on tax havens, shortens the wait period for some investments to be exempt from the tax, and withdraws it altogether for equity Equity The capital put into an enterprise by the shareholders. Not to be confused with ’hard capital’ or ’unsecured debt’. and security markets as well as financial investments.

The changes to the law effectively open the door to financial speculation. Furthermore, by removing the tax haven Tax haven A territory characterized by the following five independent criteria:
(a) opacity (via bank secrecy or another mechanism such as trusts);
(b) low taxes, sometimes as low as zero for non-residents;
(c) easy regulations permitting the creation of front companies and no necessity for these companies to have a real activity on the territory;
(d) lack of cooperation with the inland revenue, customs and/or judicial departments of other countries;
(e) weak or non-existent financial regulation. Switzerland, the City of London and Luxembourg receive the majority of the capital placed in tax havens. Others exist, of course, such as the Cayman Islands, the Channel Islands, Hong Kong and other exotic locations.
provision, the new law allows both domestic and foreign investors to reroute their money as “phantom FDI” – avoiding both income and capital outflow taxes.

The measures included in this bill are in direct contradiction with the Fund’s supposedly evolving position on capital controls. A recent article in the Financial Times praised the IMF’s warming towards capital controls, going over a series of statements made by high ranking IMF officials on what they refer to as “capital flow management”. These statements are in line with the IMF’s institutional view on capital flow management released in 2012. That position recognized that capital account liberalization might not be the appropriate measure under all circumstances, moving away from the neoliberal dogma of open capital accounts.

It is also stated in the IMF’s Articles of Agreement that Fund resources cannot be used to “meet a sustained outflow of capital”. However, this is exactly what happened in Argentina, where $36.6 billion left the country as the IMF disbursed $44.5 billion. Sustained capital flight was undeniably a main contributor to the colossal failure of the IMF’s latest Argentina programme.

It seems natural to ask under these circumstances and given the context, why the IMF is pushing for measures that weaken Ecuador’s current capital controls. Since the tax on outflows already did not apply to productive, long-term investments, attracting more (real) FDI cannot justify these measures. On top of all this, the unpopular measures that the IMF demanded and that fuelled massive protests earlier this fall have only been postponed.

It appears the IMF will double down on an austerity programme in Ecuador, which is likely to result in a prolonged recession and growth projections that never materialize (a common feature of IMF programmes). It is thus unrealistic to believe that the measures in the new tax bill will massively attract new productive investments. The most likely outcome is an increase in volatile capital flows that will further threaten the macroeconomic stability of Ecuador’s dollarized economy. Even in the programme itself, the IMF acknowledges that the current environment, which has only worsened since the agreement was signed, might not be the best time to remove the tax on transfers abroad.

The IMF nevertheless states that these measures are “laying the groundwork for robust and sustainable growth, while protecting the most vulnerable”. Yet the tax bill does nothing of the sort. It enables local elites to take their money out of the country cost-free; it makes tax avoidance and speculation easier; and it introduces regressive taxation measures, placing the burden of adjustment on Ecuador’s most vulnerable. Unfortunately, rather than learning from its mistakes in Argentina, the IMF appears to be repeating them.

Lara Merling

works as an economics researcher at the International Trade Union Confederation



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