For most Americans, the International Monetary Fund is just one of the hulking edifices in downtown Washington, D.C., filled mostly with men in dark suits. But for millions of people in the developing world, the IMF is painfully familiar.

For more than a quarter-century, this public financial institution has imposed policies on countries that have been disastrous for the poor and the environment. Governments have gone along with these harsh measures for fear of losing the IMF “stamp of approval” needed to get credit from other sources. Today, however, South America is leading a historic break from the IMF.

At the forefront is Argentina, a country that was once a star IMF patient. In the 1990s, the country took a full dose of the IMF’s bitter medicine. Like medieval doctors, IMF economists prescribe the same “cure,” no matter what the ailment. While seemingly more sophisticated than bloodletting, the success rate of IMF policy reforms has not been much greater.

Based on textbook “free market” theories, the IMF prescription includes public spending cuts, market liberalization, deregulation, and privatization. Countries that implemented these reforms in the past 20 years had slower economic growth rates than during previous periods. In Argentina, millions of citizens suffered reduced access to services and lost both jobs and health care coverage.

In 2001, the country suffered a total economic meltdown. With their jobs evaporated and their currency worth next to nothing, thousands of formerly middle-class Argentines had to resort to selling their possessions on the street and rummaging through garbage for food. When the IMF ordered more spending cuts, the country exploded in riots. Only after the government threatened to default on its loans did the IMF back down. And once Argentina rejected the IMF’s medicine, it started a remarkable recovery.

That act of standing up to the IMF—and surviving—was empowering for other countries chafing at IMF control. Beginning in late 2005, Argentina and three other major IMF clients—Brazil, Uruguay and Ecuador—announced they would pay back their loans early and completely.

A reduced need for loans was one factor, but another was the emergence of the Venezuelan government as a major lender. Flush with oil money, Venezuela purchased bonds from Argentina and Ecuador to help them repay their IMF debts. This year, Venezuela and Argentina took steps to create a formal Bank of the South as an alternative to the IMF and other institutions that require similar loan conditions. Ecuador, Paraguay, and Bolivia are also initial backers of the new bank.

Some other key clients have followed Latin America’s lead. The IMF’s total loan portfolio has shrunk by more than two-thirds over the past couple of years, and most of the remainder is loans to one country—Turkey. By 2010, the IMF is expected to face an operating deficit of almost $400 million as its income from interest on loans dries up.

Citizens in countries liberated from IMF control will have greater power to advocate for more equitable economic policies that reflect each country’s particular needs. They can also enjoy the irony of the IMF itself faltering financially. We’ll see if the dark-suited economists care to drink their own medicine.