Critical Evaluation - Role of the Imf

8/12/2019 Critical Evaluation - Role of the Imf

1/8

CRITICALLY EVALUATING THE PERFORMANCE

OF THE IMF

Overseas Development Institute (ODI) research undertaken in 1980 pointed to five main

criticisms of the IMF which support the analysis that it is a pillar of what activist Titus

Alexander calls global apartheid.

Firstly, developed countries were seen to have a more dominant role and control over less

developed countries (LDCs) primarily due to the Western bias towards a capitalist form

of the world economy with professional staff being Western trained and believing in the

efficacy of market-oriented policies.

Secondly, the Fund worked on the incorrect assumption that all payments disequilibria

were caused domestically. The Group of 24 (G-24), on behalf of LDC members, and the

United Nations Conference on Trade and Development (UNCTAD) complained that the

Fund did not distinguish sufficiently between disequilibria with predominantly external

as opposed to internal causes. This criticism was voiced in the aftermath of the 1973 oil

crisis. Then LDCs found themselves with payments deficits due to adverse changes in

their terms of trade, with the Fund prescribing stabilisation programmes similar to those

suggested for deficits caused by government over-spending. Faced with long-term,

externally generated disequilibria, the Group of 24 argued that LDCs should be allowed

more time to adjust their economies and that the policies needed to achieve such

adjustment are different from demand-management programmes devised primarily with

internally generated disequilibria in mind.

The third criticism was that the effects of Fund policies were anti-developmental. The

deflationary effects of IMF programmes quickly led to losses of output and employment

in economies where incomes were low and unemployment was high. Moreover, it was

sometimes claimed that the burden of the deflationary effects was borne

disproportionately by the poor.


2/8

Fourthly is the accusation that harsh policy conditions were self-defeating where a

vicious circle developed when members refused loans due to harsh conditionality,

making their economy worse and eventually taking loans as a drastic medicine. Lastly is

the point that the Fund's policies lack a clear economic rationale. Its policy foundations

were theoretical and unclear due to differing opinions and departmental rivalries whilst

dealing with countries with widely varying economic circumstances.

ODI conclusions were that the Fund's very nature of promoting market-oriented economic

approach attracted unavoidable criticism, as LDC governments were likely to object when in a

tight corner. Yet, on the other hand, the Fund could provide a 'scapegoat service' where

governments could take loans as a last resort, whilst blaming international bankers for any

economic downfall. The ODI conceded that the fund was to some extent insensitive to political

aspirations of LDCs, while its policy conditions were inflexible.

Argentina, which had been considered by the IMF to be a model country in its compliance to

policy proposals by the Bretton Woods institutions, experienced a catastrophic economic crisis in

2001,which some believe to have been caused by IMF-induced budget restrictionswhich

undercut the government's ability to sustain national infrastructure even in crucial areas such as

health, education, and securityand privatisation of strategically vital national resources.Others

attribute the crisis to Argentina's misdesigned fiscal federalism, which caused subnational

spending to increase rapidly. The crisis added to widespread hatred of this institution in

Argentina and other South American countries, with many blaming the IMF for the region's

economic problems. The currentas of early 2006trend toward moderate left-wing

governments in the region and a growing concern with the development of a regional economic

policy largely independent of big business pressures has been ascribed to this crisis.

In an interview, the former Romanian Prime Minister Clin Popescu-Triceanu claimed that

"Since 2005, IMF is constantly making mistakes when it appreciates the country's economic

performances."


3/8

Support of military dictatorships

The role of the Bretton Woods institutions has been controversial since the late Cold War period,

due to claims that the IMF policy makers supported military dictatorships friendly to American

and European corporations and other anti-communist regimes. Critics also claim that the IMF is

generally apathetic or hostile to their views of human rights, and labour rights. The controversy

has helped spark the Anti-globalization movement.

Arguments in favour of the IMF say that economic stability is a precursor to democracy;

however, critics highlight various examples in which democratised countries fell after receiving

IMF loans.

Impact on access to food

A number of civil society organisations have criticised the IMF's policies for their impact on

people's access to food, particularly in developing countries. In October 2008, former US

president Bill Clinton presented a speech to the United Nations World Food Day, which

criticised the World Bank and IMF for their policies on food and agriculture:

We need the World Bank, the IMF, all the big foundations, and all the governments to admit that,

for 30 years, we all blew it, including me when I was president. We were wrong to believe that

food was like some other product in international trade, and we all have to go back to a more

responsible and sustainable form of agriculture.Former U.S. president Bill Clinton, Speech at

United Nations World Food Day, October 16, 2008

Impact on public health

In 2009 a study by analysts from Cambridge and Yale universities published on the open-access

Public Library of Science concluded that strict conditions on the international loans by the IMF

resulted in thousands of deaths in Eastern Europe by tuberculosis as public health care had to be

weakened. In the 21 countries to which the IMF had given loans, tuberculosis deaths rose by

16.6%.


4/8


5/8

also Germany, the primary and politically most fragile supporter of a euro currency bailout

would benefit from IMF recognition of their leadership in green technology, and directly from

Green Fundgenerated demand for their exports, which might also improve their credit standing

with international bankers

Conditions of Loans

On giving loans to countries, the IMF make the loan conditional on the implementation of certain

economic policies. These policies tend to involve:

Reducing government borrowingHigher taxes and lower spending

Higher interest rates to stabilise the currency.

Allow failing firms to go bankrupt. Structural adjustment. Privatisation, deregulation, reducing corruption and bureaucracy.

The problem is that these policies of structural adjustment and macro economic intervention

make the situation worse.

For example, in the Asian crisis of 1997, many countries such as Indonesia, Malaysia and

Thailand were required by IMF to pursue tight monetary policy (higher interest rates) and tight

fiscal policy to reduce the budget deficit and strengthen exchange rates. However, these policies

caused a minor slowdown to turn into a serious recession with mass unemployment.

In 2001, Argentina was forced into a similar policy of fiscal restraint. This led to a decline in

investment in public services which arguably damaged the economy.

IMF conditionality policies have come under severe criticism for at least three reasons:

(i) that there has been "over-reach" in that the conditions widened in range through time to

include "structural policies" not needed for managing the crisis;

(ii) that the policies in the core economic and financial areas of IMF competence have also been

inappropriate as they were contractionary and did not generate growth; and
http://www.economicshelp.org/dictionary/f/financial-crisis-asia-1997.htmlhttp://www.economicshelp.org/dictionary/f/financial-crisis-asia-1997.html


6/8

(iii) that the policies were designed in ways insensitive to social impacts, and the burden of

adjustment fell heavily on the poor and at the expense of social and public services.

Scope of conditionality too broad

The scope of IMF policy conditions has been increasing through the years and has become far

too broad. Many of the conditions were not relevant or critical to the causes or the management

of the crisis the countries found themselves in. Some of these conditions were put into the

conditionality package under the influence or pressure of major IMF shareholders for their own

interest or agenda, rather than in the interests of the debtor country.

On many areas where conditions are set, neither the IMF nor the World Bank has the expertise to

give proper advice, and thus the potential to commit a blunder is high and the negative effects

can also be high. This includes the area of political conditionality and issues relating to

"governance".

During the Indonesia crisis, the IMF advice to the government to close 16 banks, without first

assuring the public that their deposits in the banking system were safe, led to large deposit

withdrawals and capital flight from the country. This is now recognised as a blunder.

Even in a major economic area of structural conditionality, i.e. that of trade policy and reform,

the potential of mistakes can be high. The IMF and World Bank are well known for advising

developing countries under their charge to undergo rapid trade liberalisation.

The appropriateness of the advice to undergo "big-bang" or rapid liberalisation is now

contentious. In many countries, import liberalisation has led to domestic firms and industries

having to close down as they were unable to compete with cheaper imports, and de-

industrialisation has been the result.

There is now strong emerging evidence that trade liberalisation can successfully work only under

certain conditions. Factors for success or otherwise include the ability of the country's enterprises

and farms to withstand import competition, its production and distribution capacity to export, as


7/8

well as the state of commodity prices and the degree of market access for its products. In the

absence of positive factors, import liberalisation may cause the country into deeper problems.

Exchange Rate Reforms.

When the IMF intervened in Kenya in the 1990s, they made the Central bank remove controls

over flows of capital. The consensus was that this decision made it easier for corrupt politicians

to transfer money out of the economy (known as the Goldman scandal). Critics argue this is

another example of how the IMF failed to understand the dynamics of the country that they were

dealing withinsisting on blanket reforms.

The economist Joseph Stiglitz has criticised the more monetarist approach of the IMF in recent

years. He argues it is failing to take the best policy to improve the welfare of developing

countries saying the IMF "was not participating in a conspiracy, but it was reflecting the interests

and ideology of the Western financial community."

Neo Liberal Criticisms

There is also criticism of neo liberal policies such as privatisation. Arguably these free market

policies were not always suitable for the situation of the country. For example, privatisation cancreate lead to the creation of private monopolies who exploit consumers.

Free Market Criticisms of IMF

As well as being criticised for implementing free market reforms Other critise the IMF for

being too interventionist. Believers in free markets argue that it is better to let capital markets

operate without attempts at intervention. They argue attempts to influence exchange rates only

make things worseit is better to allow currencies to reach their market level.

There is also a criticism that bailout countries with large debt creates moral hazard. Because of

the possibility of getting bailed out it encourages people to borrow more.

Lack of Transparency and involvement


8/8

The IMF have been criticised for imposing policy with little or no consultation with affected

countries.

Jeffrey Sachs, the head of the Harvard Institute for International Development said:

"In Korea the IMF insisted that all presidential candidates immediately "endorse" an agreement

which they had no part in drafting or negotiating, and no time to understand. The situation is out

of handIt defies logic to believe the small group of 1,000 economists on 19th Street in

Washington should dictate the economic conditions of life to 75 developing countries with

around 1.4 billion people."

Critical Evaluation - Role of the Imf

Documents

Transcript of Critical Evaluation - Role of the Imf