Criticism Of The International Monetary Fund Economics Essay

The IMF has not always been complemented about its way of working it also has been subject to a series of criticisms. These disapprovals were mostly concentrated on the conditions of the loans, but also on the lack of accountability and the will to lend to countries with bad human right records.

The first criticism is about the conditions of the loans. The IMF makes the loan conditional on following specific economic policies. A country has to fulfill certain conditions before the IMF loans the money. These conditions are:

Higher taxes and lower spending by reducing the government borrowing

Higher interest rates to stabilize the currency

permission for failing firms to go bankrupt

Structural adjustment like privatization, deregulation, reducing corruption and bureaucracy.

the problem with these economic policies is that they make the situation worse instead of better. Some examples are the Asian crisis in 1997, were the IMF forced countries to a tight monetary and fiscal policy to reduce the budget deficit and reinforce exchange rates. The result of this policy was a serious recession and mass unemployment. The same policy was ordered in Argentina in 2001, the outcome was a decline in investments in public services that damaged the whole economy.

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The IMF have also been criticized that they allow inflationary devaluations. A devaluation is a decline in the value of a currency. This leads to a more competitive export and a more expensive import. Inflation is an increase in the general price level. A devaluation could cause inflation for three reasons [2] .

The first reason is a possible increase in the aggregate demand (AD). When the currency devaluates, export becomes cheaper so more exports will be sold and the number of imports will decrease. A higher AD will cause demand pull inflation when an economy is close to full capacity.

Secondly there will be an augmentation in the price of imported goods. Imports have an essential share in the Retail Price Index, this means there will be cost push inflation.

The last reason makes the assumption that when there is a devaluation exports become less competitive because firms don’t have to do much effort to sell their products. The effect of this is that they don’t have the incentive to cut costs and as a result long term costs will increase. This has as a consequence that inflation will rise as well

The economist Joseph Stiglitz has critiqued the IMF on its exchange rate reforms. He criticizes the monetarist approach of the IMF. He claims that the organization is failing to take the best policy to improve the welfare of developing countries. Due to Stiglitz the IMF is reflecting the interests and system of the western financial community. The IMF fails to adapt and understand the dynamics of the countries they are dealing with.

An example of this criticism can we find in the 1990’s when the IMF intervened in Kenya. Before the IMF intervened in this country, the Kenyan Central Bank managed all currency movements in and out of the country. The association made a bad decision by removing the control over flows by the Central bank. They told the bank to allow easier currency movement. This decision resulted in almost no foreign investments but made it possible for corrupt politicians to transfer money out of the economy. Think about the Goldenberg scandal where the Kenyan government subsidized exports of gold outside the usual arrangements.

The next criticism that concerns the IMF are the neo liberal policies.

“Neo-liberalism” is a set of economic policies that have become widespread during the last 25 years. The effects of neo-liberalism stands as the rich grow richer and the poor grow poorer [3] .

The key ideas of neo liberalism [4] are:

The rule of the market

This means that unions try to liberate enterprises from any rules imposed by the government, more international trade and investments reduced wages and less workers’ rights, no more price controls and total freedom of movement for capital, goods and services.

Cutting public expenses for social services

This means less money for healthcare and education, less maintenance of roads, bridges, water supply,…

Deregulation

Decrease government regulation of everything that can reduce profits

Privatization

State-owned enterprises selling to private investors. The effect is that the customers have to pay more for their needs while there are a few people who get all the money.

No more “community” or “public good”

Eliminate this concept and replace it with “individual responsibility”.

These policies are not always suitable for the situation of the country. An example here is privatization that can lead to the creation of monopolies who abuse costumers.

The fifth criticism follows the previous one. In addition to the critics about implementation of free market reforms others criticize the IMF for being to interventionist. Advocates of the free markets say that it is better to let capital markets operate without intervention. They also believe that trying to influence exchange rates make things worse instead of better because it’s better that currencies reach the market level on their own.

There is also a criticism that countries with large debts creates moral hazard. People are encouraged to borrow more because of the possibility to get bailed out.

Lack of transparency and involvement is the next criticism that the IMF has to stand. The criticasters argue that the IMF makes policy decisions without consultation of the affected countries.

The head of the Harvard Institute for International Development, Jeffrey Sachs, 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 hand…It 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.” [5] .

The last criticism to discuss is the support of military dictatorships. The controversial role of the IMF was already a fact since the late Cold War period.

In the 1960s, the IMF and the World Bank supported the government of Brazil’s military dictator Castello Branco who received millions of dollars of loans and credit that were denied to other countries.

Because every story has two sides, we will give the weak arguments with which the IMF tried to refute these criticisms [6] .

Their first rebuttal is the fact that a crisis always lead to difficulties. Whatever policy they propose, they always have to deal with economic crises. It’s impossible according to the IMF to handle a balance of payments without readjustments.

Then they focus on the successes IMF have had. Everybody knows their failures, but they also did some good work. IMF says that it works on long term solutions and criticism concentrate on the short term problems.

Thirdly the IMF claims that investors still have confidence in the institution because they are the lender of last resort (an institution prepared to extend credit when no one else will). This is important to know when there is financial chaos.

The fourth refutation is that countries are not obliged to take a loan of the IMF. The countries have to ask the IMF for a loan, they don’t give it in advance. The fact that so many countries take a loan suggest that the IMF can offer some benefits to these countries.

And last but not least, the IMF is an easy target. They provide loans to countries in need who wants short term solutions. When the IMF intervene the government benefits from the loan, but the blame of difficulties is again for the IMF.

Impact of the IMF

there are a lot of organizations that criticize the IMF policies. The IMF programs had a lot of impact on some world issues.

First of all there was some disapproval from civil society organizations who criticized the IMF for their impact on access to food especially in developing countries [7] . The association believes that food is like all other products in the international trade but that’s a mistake. A lot of people died by lack of food or because they suffered hunger. the World Bank President Robert Zoellick, who is warned that high food prices could eliminate improvements against poverty and malnutrition, ignores the fact that some economic and social imbalances have been created by policies of his organization, associated with IMF.

“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.” [8] (Bill Clinton, 2008)

Secondly there is a study which reveals the impact of the IMF on public health. The strict conditions on the international loans resulted in thousands of deaths in Eastern Europe by tuberculosis. The reason for this is the fact that the public health care had to be weakened.

Figure 1. Trends in Tuberculosis Mortality Rates in Post-Communist European Countries, By Region

Data sources: authors’ calculations, WHO Global Tuberculosis Database 2007 [20], and World Bank World Development Indicators 2005 edition.

The Deadly Ideas of Neoliberalism: How the IMF has Undermined Public Health and the Fight Against Aids, a book by Rick Rowden(2009), claimed that the IMF’s monetarist approach which was in the first place price stability (low inflation) and fiscal restraint (low budget deficits) prevented developing countries from being able to scale up long-term public investment as a percent of GDP in the underlying public health infrastructure. The book also talk about the consequences. These where underfunded public health systems ,a non-sufficient number of health personnel and the brain drain of nurses from poor countries to rich ones.

The last impact is on the environment. The IMF makes it difficult for countries in debt to avoid damaging projects for the environment. These countries have to generate cash flow with oil, coal and forest destroying wood and agriculture projects.

As a solution for this problem the IMF proposed the IMF Green Fund. This tool would issue Special Drawing Rights directly to pay for climate harm prevention and other ecological protection.