IMF & Developing Countries - an argumentative essay
-
Upload
maas-riyaz-malik -
Category
Documents
-
view
110 -
download
1
description
Transcript of IMF & Developing Countries - an argumentative essay
IMF’s Policy Involvement
Running head: IMF POLICY INVOLVEMENT IN THE DEVELOPING COUNTRIES
International Monetary Fund’s (IMF) Policy Involvement in the Developing Countries Should be
Immediately Revised.
Maas Riyaz Malik
International Islamic University
Malaysia
1
IMF’s Policy Involvement
Abstract
During the last two decades, the focus of IMF involvement in the developing world, and
especially in the low income countries, has shifted. IMF involvement became more long term,
but also oriented toward policy reform, rather only assisting with a macroeconomic crisis. This
paper explores the deficiencies in IMF policy prescription and implementation in the developing
countries. The information were collected using a library research where books, journals, articles
and online resources were used. The paper further clarifies reasons behind the failure of
structural adjustment programs and the danger of neo liberal based economic policies imposed
on low-income countries. The research concludes IMF’s enormous financial and political power
should be used in the betterment of people in the developing nations.
2
IMF’s Policy Involvement
Contents
1. Title page 1
2. Abstract 2
3. Contents 3
4. Introduction 4-5
5. Argumentation
5.1. Mismanaged lending and debt crisis in the developing countries 6-7
5.2. Undemocratic bureaucracy and lack of transparency in the administration 8 -10
5.3. Counter Argument and Refutation 11-13
5.4. Violation of Islamic economic principles 14
6. Conclusion 15-16
7. References 17-18
3
IMF’s Policy Involvement
4. Introduction
Capitalism has been international in scope since the man went out to discover the world
500 years ago. Since then, this economic system has gained the confidence of people and rose
upon suppressing other economic models. The latest model of capitalism subscribes to the notion
of globalism enabling long distance interchange among economies. What is this thing called
globalization? Definition of the term is still being contested. Scholars have given number of
definitions to the globalization and yet a common explanation is to be reached. Writer Peet
(2003) outlines two consistently related themes of globalization “global space is effectively
getting smaller (‘compressed’) in terms, for instance, of the time taken for people, objects and
images to traverse physical distance; as a result, social interactions are increasing across spaces
that once confined economies and cultures”(p.1).
However, behind this optimistic statement lurks the possibility of something different. It
is basically a manipulated process that forced on the countries around the globe. The perpetrators
or engineers of the globalization have dominated and ultimately manipulated a world of
consumers (Peet, 2003). Allegedly, International Monetary Fund (IMF) and World Bank are the
two dominant governance institutions and prominent advocates of globalization. The activities of
these organizations around the world, particularly in the developing world should be closely
monitored in order to comprehend the adverse effects of their policies.
The history of these organizations runs back to the post world war era where the United
States (U.S) and United Kingdom (U.K) met to discuss the economic plans for the post war
peace (Tabb & William, 2005). At the Bretton Woods Conference in New Hampshire in 1944,
U.S and U.K along with other countries successfully created the IMF and World Bank. As
decided in Bretton Woods IMF was assigned two tasks: it would assist the countries with balance
4
IMF’s Policy Involvement
of payment difficulties and reduce foreign currency restrictions. Although its mission statement
remains same, IMF has undergone major changes in the past few decades to become a
powerhouse in the global economy. According to Peet (2003):
Today IMF policies directly affect the economies of 184 countries and influence,
sometimes drastically and often disastrously, the lives of the vast majority of the worlds
people. Today the IMF is probably the single most powerful non-state (governance)
institution in the world. Publicly, governments have to praise the IMF, while complaining
privately about the policies imposed on them. By contrast, workers and students
demonstrate against the IMF, in many cases losing their lives in the process (p.56).
Many claim that IMF economic policies produce poverty, hardship and starvation in the
Developing World. Policy prescriptions to the Third World are attached as the “conditions” for
lending (IMF, 2007). Loan conditionality, together with economic policies imposed is a way for
the IMF to regulate the country’s entire economic policy. Therefore, IMF as one of the largest
international financial institutions should be revised because of decades of mismanaged
lending, undemocratic bureaucracy in administration and failed structural adjustment
programs.
5
IMF’s Policy Involvement
5.1 Mismanaged lending and debt crisis in the developing countries
Over the past five decades, IMF and the World Bank have steadily gained the power and
influence, becoming the key players determining which countries will receive the big chunk of
loan. Most importantly, these loans are attached to IMF’s so called conditionality which binds
the lending country on a number of policies. Conditionality is viewed as a central feature of IMF
lending, which is essential to IMF’s success:
Conditionality is seen as central to IMF lending, meant to assure a borrowing country that
if it takes certain well-specified actions, continued financing will be forthcoming. It is thus
seen as following the country to invest in longer term policy adjustment by assuring them
that if they do so, IMF financing will not cut off. (Ranis et al., 2006, p. 53)
Conditionality is essentially a US policy for the operation of IMF, opposed to the
position of Developing World (Peet, 2003). In the view of other member states, these conditions
infringe with country’s national sovereignty to use loans independently.
Since the creation of both the IMF and the World Bank over 63 years ago, both have
provided trillions of dollars in loans to poor countries. The Third World sits on debts of over
$1.3 trillion, which has seriously hindered the third worlds abilities to provide for the basic
needs of their citizens (IMF, 2007). In addition, third world debt has long been recognized as a
major obstacle to human development. Rising debts in the third world has led many economies
to a crisis, where they have no salvation. The debt crisis in early 1990 is a reflection of massive
lending and failure to service these debts.
Debt crisis was first triggered in August 1982 when Mexico announced that it could no
longer make loan payments (Peet 2003). The latest crisis in Latin America has attracted the
criticism on IMF lending arrangements for Developing World. It is important to examine the
6
IMF’s Policy Involvement
factors that have been contributed towards the recent debt crisis around the world. One of the
major reasons that triggered the debt crisis is increasing odious debt, where debt has been
incurred without the informed consent of the people. In detail, “Odious debt is an established
legal principle. Legally, odious debt is debt that resulted from loans to an illegitimate or
dictatorial government that used the money to oppress the people or for personal purposes”
(Shah, 2003, p.1)
IMF has engaged in numerous odious debts lending where it financed dictatorial
governments with a hidden agenda. South Africa as an example, has found it now has to pay for
its own past oppression (Shah, 2003). These loans are to be repaid by new generation of South
Africa which had nothing to do with racial discrimination in the past. As one of the report
outlines problem has a far more reaching impact on the region as a whole. According to his
report, Albeit (1998):
Apartheid -caused debt at £28 billion [about $46 billion at the time the report was written].
That is the £11 billion [$18 billion] that South Africa borrowed to maintain apartheid, and
the £17 billion [$28 billion] that the neighbouring states borrowed because of apartheid
destabilization and aggression. This is 74% of the present regional debt of £38 billion
[$62.5 billion] (p.1).
Among other countries Tanzania, Indonesia and Argentina have been repaying
illegitimate debts that accumulated over the years. In response to rising criticism, IMF in 1996
introduced Highly Indebted Poor Countries (HIPC) initiative, another prototype for existing
agenda. In reality, the HIPC process is aimed not at canceling debts, but at ensuring that they can
be repaid (Transfer, 2000, p.4). The program has not been designed in a way that reduces the
burden of Third World but steady cash flows to the rich nations in the west.
7
IMF’s Policy Involvement
5.2 Undemocratic bureaucracy and lack of transparency in the administration
The IMF’s transformation has been rapid since the 1970s when it turned the attention to
Latin American debt problems. Today in the poorest regions, it is engaged in establishing
macroeconomic policies. However, since the client base has changed considerably, the
mechanisms by which decisions are taken have not revised accordingly (Carin & Wood, 2005).
Heavy criticism has directed towards IMF’s accountability and transparency in operations as it is
strictly closed to outside scrutiny.
One of the central problems of the IMF operations is that developing nations are
marginally represented in the administration level. Today, the IMF’s programs are entirely
executed in the developing countries, making them the largest stakeholders of IMF’s client base
(Carin & Wood, 2005). However, little opportunity is provided for the developing countries to
put their concerns on the board’s agenda. In other words, priorities of the IMF do not necessarily
reflect the view of those developing nations.
In the administration level these countries ability to participate in the policy making has
been severely obstructed. Many of the poorest countries, which are most regularly in discussion
with the IMF about debt relief and structural adjustments programs, are barely represented in the
IMF’s decision making structures (Carin & Wood, 2005). A larger part of board seats are held
by developed countries than developing countries. In order to reduce poverty it is highly
essential to enhance the representation of developing countries, where poor are concentrated
(Carin & Wood, 2005; Ranis et al., 2006).
The representation in executive board and IMF finance committees is decided on the
country’s strength in the global economy. The structure at IMF is naturally designed to favor the
rich nations who act as the lenders to the fund. The fact that 24 African nations are represented
8
IMF’s Policy Involvement
by only two Board members in the IMF and World Bank reflects the undemocratic
administration in these multilateral organizations (Ranis et al., 2006). This means that the
developed countries can naturally dominate board decisions and it is virtually impossible for the
developing countries to put their priorities on the agenda (Carin & Wood, 2005). It is largely
agreed that policies made without adequate reference to developing nations are less than optimal.
These policies have failed to recognize the microscopic issues of a particular country that need
to be addressed with careful attention.
A good global governance system is essential to reduce poverty and inequality
worldwide, based on a just market economic system (Ranis et al., 2006). Power without
responsibility proves to be inadequate, where the living conditions in some countries are badly
deteriorating. Calls for IMF accountability have amplified in recent years; it has failed to
consider negative consequences of its policy prescription on the developing world (Carin &
Wood, 2005). As the former World Bank director sitgtliz (2002) outlines:
One of the important distinctions between ideology and science is that science recognizes
the limitations on what one knows. There is always uncertainty. By, contrast, the IMF
never likes to discuss the uncertainties associated with the policies that it recommends, but
rather, likes to project an image of being infallible. This posture and mind-set makes it
difficult for it to learn from past mistakes – how can it learn from those mistakes if it can’t
admit them (p.67).
Critics hold IMF responsible for the policies imposed on weaker governments; most of
these policies have failed to accomplish the intended objectives. Thus, “despite a growing body
of evidence, the IMF appears to continue to pursue a set of policies apparently inappropriate to
many developing countries needs, priorities and capacity” (Carin & Wood, 2005, p.68). IMF in
9
IMF’s Policy Involvement
its policy implementation bears nor responsibility upon any failure. Indeed IMF has not properly
reconsidered its policies in the light of growing attention as a massive lender to the Third World.
As a multilateral organization, whose principal function is to provide advice, the IMF should be
accountable for the quality of decision.
10
IMF’s Policy Involvement
5.3 Counter Argument and Refutation
Nevertheless, proponents of the IMF policy prescription argue that the best way a country
could rally towards the economic growth is through embracement of economic liberalization.
Economic liberalization has been defined by Nonneman (2002) as:
A reduction in the direct involvement of the state in economic activity and a reduction of
state control of economic processes like prices and production in order to pave the way
for private sector and liberalizing the foreign trade (p.3).
Nonneman (2002) further stated that, liberalization of the economy was argued to be helpful in
three ways. First, it would allow the input of new resources from foreign investment and from
domestic liquidity that had so far remained untapped. Second, it would allow economic
dynamics to emerge because more accurate signals, responsive and flexible reaction from the
market. Third, the opening up for domestic and international competition would sharpen
competitive skills, thus reinforce the entire process, and eventually promote economic growth.
As mentioned by Nonneman (2002) and Goldman (2005) most significant effects of the
debt crisis were the dramatic shift in power that took place between borrowing states and the
IMF and World Bank. Their Structural Adjustment Programs (SAP) have liberalized the markets
in less developed countries to push production for export rather than to produce for domestic
needs, to reduce trade barriers and tariffs, and to open up public sectors for international
competition. This is mainly to reduce the debt burden and open the markets of the less developed
counties.
11
IMF’s Policy Involvement
However, there has been much controversy over the lending practices of IMF and World
Bank over the fairness of structural adjustment programs. Structural adjustment program (SAP)
is a policy package in line with what is often called "neo liberalism," a far-reaching version of
the "free trade" agenda. According to Shah (2007), Key structural adjustment measures include:
privatizing government-owned enterprises and government-provided services, slashing
government spending, orienting economies to promote exports, trade and investment
liberalization. The basic idea of these policies is to shrink the size and role of government, rely
on market forces to distribute resources and integrate poor countries into the global economy.
For poorer countries, these changes can be devastating as structural adjustments have
failed to address the social, cultural and environmental impacts of the projects (Peet, 2003). For
example, Kevin Watkins of Oxfam reveals (as cited in Peet, 2003) the effects of SAP in sub-
Saharan African as follows:
Contrary to World Bank and IMF claims, the position of the poor and most vulnerable
sections of society has all too often been undermined by the deregulation of labor markets
and erosion of social welfare provisions, and by declining expenditures on health and
education. Women have suffered in extreme form. The erosion of health expenditure has
increased the burdens they carry as care-takers, while falling real wages and rising
unemployment have forced women into multiple low wage employment (p.140).
African scenario shows that IMF had undermined the health of Africans through the
policies imposed by SAP. The key issue here as outlined by Peet (2003) is whether they build the
capacity to recover and whether they promote the long-term development. It is crystal clear that
African countries need essential investment in Health and other social services before they can
compete globally. Astonishingly IMF required countries to reduce state support and protection
12
IMF’s Policy Involvement
for many social and economic activities and forced African nations into markets where they are
unable to compete (Peet, 2003).
This is further elaborated by Peet (2003) where he stated that IMF policies have long
drawn massive and violent protest from millions of people adversely affected. Until the mid-
1970s, when IMF conditionality took a turn for the austere, controversy over the Fund had taken
from mainly of intergovernmental arguments and the institution. Additionally, Peet (2003) also
pointed out that trade liberalization is not redistributing wealth to non-industrialized countries,
but in fact further widening the huge gap between the rich and poor nations. Lending by IMF
creates more long term dependency than it gives short term assistance, which it has failed to
improve the economies of less developed countries.
Likewise, Danaher (2001a) as well criticized that the Structural Adjustment
Programs (SAP) policies attached to IMF and World Bank loans may help countries make
payments on their old debts. He argues this may create some millionaires but the majority of the
population suffers lower wages, reduced social services, and less democratic access to the policy
making process. Those developing countries that have experienced the greatest economic
successes in recent decades have violated many of the central precepts of structural adjustment.
For instance, millions of Brazilians go hungry on regular basis. Although the government
has been faithfully collaborating with IMF and World Bank officials in making payments on the
foreign debt, Brazil is more deeply in debt now than it was twenty years ago (Danaher 2001a).
Never before has there been such a stark contrast between the mass of working families waging
daily struggles for survival and pervasive media reports about unprecedented prosperity
(Danaher 2001b).
13
IMF’s Policy Involvement
5.4 Violation of Islamic economic principles
The case against IMF from the Islamic perspective is based on the discussion of morality
and human well being. In the Islamic economic system, Income distribution is regarded as a vital
element in realizing economic goals. This is achieved by elimination of income inequalities to a
level that every individual enjoys a fair share in the economy. In the broader perspective,
equality of economic opportunity is essential to elevate poverty and social distress (Syed, 2008).
The economic policy of Islam has also been explained in the Quran in the most unequivocal
terms “so that this (wealth) may not circulate solely among the rich from among you "(Al-Quran.
59: 7). Therefore, the economic system should ensure to redress social injustice and guarantee
equality of economic condition (Syed, 2003).
In contrast, IMF policy prescription has disregarded the above mentioned Islamic norms
and principles rather nurturing the wealthy. As a result, income disparity in developing countries
has widened and created a social distress in the civil society. IMF adjustment programs have
limited the expansion of agriculture sector where majority of the low income groups depend as
the main source of income (Peet, 2003). Moreover, reduction in government social spending in
health and education means poor no longer can afford these services. Syed (2003) stated, that
Liberalists backed by IMF maintain that poverty as unfortunate or even unfair but not unjust,
even if people die of hunger.
The Holy Quran unambiguously states that the poor have a due share in the wealth of the
rich. Syed (2003) further explains the Islamic position of economic right of poor “the originality
of the Islamic position stands out; it ordains returning to the poor their rightful share in the rich
man’s wealth”. The IMF policies have completely ignored the share of poor in the economy and
further engaged in exploiting the resources of Muslim nations.
14
IMF’s Policy Involvement
6. Conclusion
Since its establishment in 1947, IMF has undergone numerous changes to become the
pioneer of economic and trade labialization. However, the consequences of IMF policy
prescription have been devastating. Entirely driven by U.S foreign policy, Washington based
IMF has failed to meet the expectations of developing nations (Vaknin, 2005). As pointed in this
essay gigantic IMF has fallen short of the intended objective of poverty reduction. Moreover, the
IMF’s moral integrity in dealing with the developing economies is constantly being questioned
by various groups in the civil society.
Inappropriate and Mismanaged lending have largely contributed towards the current debt
crisis in the developing world. Conditionality is viewed as a central feature of IMF lending
where it infringes with the country’s national sovereignty to use loans independently.
Furthermore, illegitimate debts made to dictatorial governments have further worsened the debt
crisis. As a responsible organization, IMF should evaluate the creditworthiness and legitimacy of
the receivers before making any loan arrangements. In the case of illegitimate debt, the problem
is not necessarily with borrowers, but with lenders (Shah, 2007).
The accountability of the IMF still remains a big question in the wake of global debt
crisis. One of the central problems of the IMF operations is that developing nations are
marginally represented in the administration level (Carin & Wood, 2005). The developed nations
who act as lenders are bestowed with enormous power that can easily overturn the proposals of
weaker countries. Scholars have repeatedly stressed that decision making in IMF should be based
on a democratic framework where by developing nations are duly recognized in the funds
hierarchy (Carin & Wood, 2005).
15
IMF’s Policy Involvement
Another major criticism against the IMF is the economic reforms forced on debtor
countries. These structural adjustment programs are a complete failure as declared by the
intellectuals and the owners (World Bank) of the policies. IMF as one of the largest multilateral
organizations should reinvent it self by revising the policy making and implementation. Current
policies are no longer applicable in the developing world as they have largely failed with
disastrous consequences.
Apart from that, the leading policies of the IMF and the World Bank do not provide
development aid to the Third World, but fill the pockets of dictators and western corporations
while threatening local democracies and forcing cuts to social programs. Therefore, Danaher
(2001a) calls out to abolish the World Bank and the IMF that do more to prevent democracy than
to promote it. In order to avoid further crisis its enormous financial and political power should be
used in the betterment of people in the developing nations.
16
IMF’s Policy Involvement
8. References
Al- Quran, Al-Hashr: 7
Albeit. (1998). Action for Southern Africa. In Third World Debt Undermines Development:
Causes of the Debt Crisis. Retrieved January 10, 2007. from
http://www.globalissues.org/ TradeRelated /Debt/causes.asp
Boughton, J.M. (2001), From Suex to Tequila: the IMF as crisis manager. The Economic
Journal.110(460), 273-291
Carin, B. Woood, A. (1998). Accountability of the International Monetary Fund. Ottawa:
Ashgate.
Danaher, K. (2001a). Democratizing the global economy: The battle against the World Bank
and the IMF. Monroe ME & Philadelphia, PA: Common Courage Press.
Danaher, K. (2001b). 10 reasons to abolish the IMF and World Bank. New York: Seven Stories
Press.
Goldman, M. (2005). Imperial nature: The World Bank and struggles for social justice in
the age of globalization. New Haven, Conn & London: Yale University Press.
IMF and World Bank: Colonial tools to exploit the world. (2007). Retrieved December 20, 2007.
from http://muslimsinkenya.wordpress.com/2007/12/27 colonial- tools- to- exploit-
the- world.html
Mobekk, E. (2002). Re-evaluating IMF involment in low-income countries: The case of Haiti.
International Journal of Social Economics. 29(7), 527-537. From.
http://www.emeraklingsight.com/0306-8293.htm
17
IMF’s Policy Involvement
Nonneman, G. (2002). Political and economic liberalization: Dynamics & linkages in
comparative perspective. London: Lynne Rienner.
Peet, R. (2003). Unholy trinity: The IMF, World Bank and WTO. London: Zed books.
Ranis, G. Vreeland, J, R. & Kosack, S. (2006). Globalization and the nation state: The impact
of the IMF and World Bank. Oxon: Routledge.
Shah, A. (2007 June 03). Third World Debt Undermines Development: Causes of the Debt
Crisis. Retrieved December 20 2007. from http://www.globalissues.org/ TradeRelated /
Debt/ causes.asp
Stiglitz, J. (2002). Globalization and its Discontents. In Carin, B. Woood, A. (1998).
Accountability of the International Monetary Fund (p.67). Ottawa: Ashgate.
Syed Abul Aala Maududi. (2008). The Economic Principles of Islam. Retrieved January 13
2008. from http://www.islam101.com/economy/economicsPrinciples.htm.
Syed Nawab Haider Naqvi. (2003). Perspectives on Morality and Human Well Being: A
Contribution to Islamic Economics. Leicester: The Islamic foundation.
Tabb, William, K. Globalization. (2005). Microsoft® Encarta® 2006 [DVD]. Redmond, WA:
Microsoft Corporation.
The Transfer of Wealth: Debt and the making of a Global South (2000). Retrieved January
18, 2007. from http://www.focusweb.org/publications/Books/Transfer% 20of% 20
Wealth.html.
Vaknin, S. (2005). The Washington Consensus :The International Monetary Fund.
Retrieved January 8 2008. from http://samvak.tripod.com/pp152.html.
18
IMF’s Policy Involvement 19