Criticisms of IMF

The fund believes it is fulfilling the tasks assigned to it promoting b all told told-shaped constancy, helping development countries in transition win not only stability but a the like growth. I believe, however, that it has failed in its mission, that the failures be not tho accidental but the consequences of how it has understood its mission. This is what Stiglitz pronounces in his book, and is too his platform on how he feels ab emerge the worldwide M angiotensin-converting enzymetary investment firm. He believes that the IMF has a narrow view stating that what the financial community views as good for the global economy is good for the global economy and should be done.Stiglitz criticizes that the IMF has done great damage to the countries wherein they impose economic policies that must be followed in order to qualify for an IMF loan, or for loans from banks and opposite private- empyrean l containers that look to the IMF to depict whether a borrower is credit entryworthy. Stiglitz argues that the world(prenominal) Monetary investment comp any(prenominal) and its officials stick ignored the ramifications of having incomplete information, inadequate commercializes, and unworkable situations, all of which are oddly present characteristics of revolutionaryly developing countries.Stiglitz states that the worldwide Monetary caudex called for policies that conform to luculent textbook economics, however, they do not make sense to the country that the policies are going towards to provide relief. Stiglitz seeks to shew that the consequences of these misguided policies bind been disastrous, not just according to abstract statistical measures but in hearty human suffering, in the countries that mystify followed the. (Stiglitz, 2003).The most traditional and perhaps best-kn profess IMF policy passport is for a country to cut political science spending or raise taxes. Either one of these actions, or two would be manipulationd to bal ance a countrys budget and eliminate the need for establishment borrowing. Most people believe that a cover of g all overnment spending is wasteful anyway. Stiglitz accuses the IMF for reverting to Herbert Hoovers economics in imposing these policies on countries during deep recessions.The deficit, at this time, is mostly the core of a stimulated veritable(a)fall in r level(p)ues. Stiglitz argues that cuts in spending or tax hikes only make the downturn worse. He also emphasizes the social cost of cutting back on various kinds of political sympathies programs, such as eliminating diet subsidies for the curt, which Indonesia did at the IMFs request in 1998, only to be engulfed by food riots. Anformer(a) standard IMF recommendation is high gratify rates, which make deposits and other assets denominated in the currency much attractive to hold.Most countries go to the IMF be act they unwrap themselves having trouble maintaining the exchange value of their currencies. Stiglit z argues that the high interest rates imposed on many countries by the IMF have made their economic downward spirals even worse. Countries are intended to battle flash that was not a serious problem to begin with. Stiglitz repeatedly declares that the IMFs policies stem not from economic analysis and bill but from ideologyspecifically, an ideological commitment to free markets and a concomitant antipathy to presidency. In part, Stiglitz complaint is that the International Monetary strain did not understand or even try to understand, his and other economists supposititious work depicting that markets that are pretty often unregulated do not necessarily chuck up the sponge positive results when information or market structures are incomplete (Stiglitz, 2003). A country that currently has loans from the International Monetary Fund is the country of Venezuela. Venezuela low gear negotiated an economic program with the International Monetary Fund in the year of 1989. In the mid 1970s, vegetable oil prices soared and seemed unstoppable.Venezuela is a country genuinely rich in oil, so at this time, they accumulated a lot of money from oil revenues, but also from loans from international banks. The government then used this money to expand state-owned industries, however, the government ended up supporting the to the lowest degree effective enterp rotates, which came to rely on government credits and direct subsidies. Government investments were fruitless from 1974 1989. As government expenses continue to increase, the gross domestic product grew very little as a ratio of the government expenditures.The overabundance amount of money supply, created by government spending, raised the price index by a component of 15, interest rates 3. 7 times and the devaluation of the national currency by a factor of 10, all happening during the same period. In addition to all of this, Venezuelas strange debt increase to a evidence level of $33 billion and their payme nts could not be honored. Venezuela undertook negotiations with the IMF when they were under all of this pressure from the decreasing oil prices and the rapidly rising interest rates on their immense foreign debt.They had tried to borrow money to finance some of their debt however, the international markets had been apprehensive for Venezuela had refused to work with the IMF. Venezuela had first turned to American banks for proposed finance because it did not want to agree with an economic program with the International Monetary Fund. The International Monetary Fund percipient a loan of about $453 million to the country of Venezuela. Officials declared the loan as a first installment of what is expected to be a credit package that may total as much as $4.6 billion from the international berth to support Venezuelas economic reform program over the next three age. They believe that Venezuelas economic allowance account program should encourage a secure reflow of private capital to the South American country. The planned economic reforms were aimed at freeing and unifying Venezuelas foreign exchange rates, deregulating interest rates and opening the countrys economy to foreign trade by removing quotas and tariffs. The austerity program is the price that Venezuela had to pay for the aid in financing from the IMF.Domestic interest rates were allowed to rise substantially and the government had cut several important subsidies as part of a proposed economic program with the IMF. Since Venezuela agreed on an economic program with the IMF, commercial bankers seem a lot much ready to compromise with them. The IMF reform program included many policies. As a result The per capita gross domestic product fell around 8% from 1989 to 1993 the inflation index rose almost 10 fold the outstanding foreign debt increased by $5 billion and the banking crisis that burst out in 1994 erased 10% of the GNP and $6 billion of the countrys international reserves. What the Venezue lan government basically did was sign an agreement that led to a transfer of money from private sectors to the pockets of the wasteful government. The government attempted to balance its accounts through its citizens, by change magnitude the taxes and increasing the interest rates. Little oversight was apt(p) to increasing the productive capacity of the nation, but was all focused on the pecuniary demands of the state. In recent years, Venezuelas economy has bygone from bad to worse. Its deterioration corresponded with the implementation of policies recommended by the International Monetary Fund.Venezuela has gone through two IMF aid packages start out in 1989. Since the implementation of the most recent package in 1996, Venezuelas interest rates have more than doubled to 68 percent annually. The national currency, the Bolivar, has been dissipated by 94 percent, accumulated inflation has reached 218 percent and production output has stalled. Capital flight has languid more t han $2 billion from Venezuelas international reserves, which are much lower now, than they were before the International Monetary Fund package was signed.The fiscal deficit has been declared unmanageable and Venezuelas stock market is down more than 50 percent. This downward spiral was the result of the tax increases, devaluation, few privatizations and public assist rate hikes in the 1996 IMF package. The repeated devaluations have increased be to the private sector and ignited inflation. The IMF also allowed the government to delay reforms of ineffectual state hospitals and public schools. In the case of the country of Venezuela, Stiglitzs criticisms of the IMF do apply.The IMFs policies do not choose into account the economic and social circumstances that currently go in the country where it is applied to. As per usual, the International Monetary Fund used its traditional methods on Venezuela. Increase taxes, and have higher interest rates. The positive effects of any loan ob tained from the IMF or other financial institutes are useless because of the collection of interest and the rising interest rates. For developing countries such as Venezuela, the benefits from an agreement with the IMF cannot be seen for the large burden of clearing away their large foreign debt blocks their view.The IMF did not take into consideration the social insinuations that would be caused when such harsh adjustment measures are put into operation. The poor are always the most affected. Their frustration was seen in Venezuela, as outbreaks of violence. The Venezuelan currency kept worldness adulterate constantly therefore workers had to pay more for their essential needs, as their wages began to decline. The unemployment rate would then rise and that is why it is no surprise to why the people of Venezuela turned to violence. When bitterness and despair take hold, sometimes violence may be the only way to be heard.It becomes imperative in times like this to have concrete n egotiations on a debt plan to achieve a substantial reduction in debt and in interest payments. While losing many of its systemic functions, the Funds operations during the 1980s became henpecked by dealing with the debt difficulties faced by a relatively small group of highly obligated(predicate) developing countries. All the Funds lending was to developing countries, and the majority of it was to the highly indebted(predicate) countries, even though the majority of architectural plans remained with low-income countries.The Fund frequently became depicted as a development agency fling concessional assistance to developing countries. Even some of its staff bemoaned what they saw as the loss of its monetary characteristics and thus much of its financial reputation (Finch, 1988). The least subtle criticisms of this type tended to use the phrase development agency almost as a term of abuse. What the Fund was doing was perceived as macrocosm bad in and of itself. The more subtle cri ticism was that the Fund had largely been pushed by political pressure into lowering its own financial standards.The criticism here was not so much that development assistance is inappropriate, but kind of that the IMF is an inappropriate institution through which to give it. This argument sees it as important to retain the revolving character of Fund resources, as well as the Funds short-term monetary perspectivefeatures, so it is claimed, that testament be lost if the Fund is forced to lend over the presbyopic term on the fanny of unviable programmes and unachievable targets. The plea has been strongly articulated to let the IMF be the IMF (Finch, 1988).An extension of this argument is that unsuccessful programmes impart damage the reputation and credibility of the Fund and obstinately affect its catalytic role. The claim that financial standards have been sacrificed is intimately related to the debt crisis. In essence, it is that the governments of countries where the priva te banks are located, and in particular the United States, encouraged the Fund to lend to the highly indebted countries in order to reduce the probability of default. In the early years of the debt crisis, the argument could be made that such action was sustaining the stability of the international banking system.But as the banks themselves adjusted to the crisis by reducing their exposure, strengthening their capital adequacy, provisioning, and expanding other lines of business, this systemic argument for lending by the IMF disappeared. Even critics who move up the issue from a rather different angle, having more in common with the traditional criticisms of Fund conditionality, have concluded that the main beneficiaries of Fund lending to highly indebted developing countries during the 1980s were the international banks.Simply put, the claim is that it was positive net transfers from the Fund that financed negative net transfers with the banks. This is a claim that is at least sup erficially consistent with the evidence at aggregate level, but it is not an interpretation that finds ready acceptance in public at leastinside the Fund, where the accusation that it had bailed out the banks has been, often staunchly, rejected. Yet the criticism that the Fund failed in its dealings with the highly indebted countries during the 1980s has more dimensions to it than this.First, there is the argument that, along with others, the Fund mis construe the very spirit of the debt crisis by treating it either as a liquidity crisis or as one of short-term internal adjustment rather than as a more deep-seated problem of structural adjustment which required important supply-side responses as well as the appropriate management of demand. This meant that the Fund opted to support new financing which assisted countries in meeting their outstanding debt-servicing obligations but which did little to compensate specialty-term viability to their balance of payments.The nature of the programmes supported by the Fund has, in relation to this, been criticized for an overemphasis on devaluation resulting from a desire to strengthen the tradable sector of the economy and thereby to facilitate debt servicing, and an over-ambitious attempt to achieve stabilization and liberalization simultaneously. A long-standing misgiving associated with the use of devaluation is that a shift in the nominal exchange rate will fail to alter the historical exchange rate because of the inflation it generates.Devaluation is seen as destroying the nominal anchor, or to use the older slang reserve discipline, that a fixed exchange rate provides. Is this not a particular worry in highly indebted countries where the inflation record is frequently very poor and where the reputation of governments as inflation fighters is often weak? Just as the counter-inflationary merits of fixed exchange rates were being acknowledge and accentuated in the context of the European Monetary System, were they not being run outed by the IMF?Critics of the Funds approach to conditionality at bottom the highly indebted countries have argued that, whereas devaluation may certainly be appropriate in some circumstances it may be inappropriate where the fiscal deficit is under control and where the income redistributive effects, particularly in name of lowering the urban real wage, spark off political unrest and measures to restore real wages. In these circumstances, the price of non-tradeables may also rise, with the result that the relative price effect of devaluation on the internal terms of trade is lost.The dangers of a vicious circle, whereby inflation leads to devaluation which then leads to further inflation, have long been acknowledged in Latin American economies where there is a legacy of rapid inflation and a low degree of money illusion. Indeed, in the context of forward-looking models of economic policy which emphasise the richness of the governments reputation, the viciou s circle can take on an additional twist.Here the use of devaluation redress a governments anti-inflation credentials private agents anticipate devaluation and mark up prices ahead of it the inflation thereby caused itself forces the government to devalue. Expectations become self-fulfilling and generate their own internal dynamics. The Fund has also been seen as being over-ambitious. Its stabilisation and liberalisation objectives have been interpreted as paying inadequate regard to the potential inconsistencies that may exist between them.Within developing countries, in particular, revenue from tariffs may be an important element in total government income. Tariff reduction can therefore exert a world-shaking adverse impact on the fiscal balance unless this source of revenue is replenished by other tax changes. establish suggesting a falling rate of success in achieving programme targets is cited as supporting the claim that Fund-supported programmes in highly indebted countries have been unrealistic.In the case of intermediate targets, relating, for example, to aspects of credit creation, such a record reflects an increasing problem of non-compliance. Countries have often simply not complied with strategic elements in Fund-supported programmes. Some authors have once again sought to explain this phenomenon in terms of the specifics of the debt problems with which highly indebted countries have been faced, the argument being that Fund-supported programmes have offered little domestic rate of return. The principal beneficiaries have instead been private foreign creditors.The distribution of the costs and benefits of the programmes has established a set of incentives that is antagonistic towards a high degree of compliance. The debt overhang has had the effect of debilitative Fund conditionality through acting as a tax on necessary reforms, with one implication being that it has become increasingly difficult to muster the necessary domestic political suppo rt for such reforms (Sachs, 1989 Krugman, 1988). In this context it is claimed that debt relief is unavoidable to create the necessary incentive structure to adjust.The Fund has been criticised for flunk to recognise this. Indeed, its policy of assured financing, whereby IMF support was predicated on countries continuing to meet their outstanding obligations to the banks, has been interpreted as systemically discouraging the provision of debt relief by the banks and thereby impeding the resolution of the debt crisis. At the beginning of the crisis the Fund had some success in encouraging new commercial money inflows by making these a precondition of its support, but this insistence faltered as the banks reluctance to lend became more pronounced.Moreover, it is argued that the Funds inappropriate approach to the debt problem was reflected by its apparent neglect of the distinction between new financing and debt reductiona distinction which was being accentuated in the academic lite rature as the 1980s progressed (Krugman, 1988). Critics suggested that this neglect again showed the Fund as being primarily concerned with cash flow rather than medium and longer-term problems.Yet, even in a short-run context, the different expectational responses to new money and debt reduction can cause different effects, with new money leading to further indebtedness and therefore the prospects of additional domestic fiscal and monetary problems. Statements emanating from the Fund about its own perception of its role in the debt crisis tended to side-step these analytical issues and stick with broader organizational ones, which emphasized its strategic importance as an honest broker or catalyst (Nowzad, 1999).The Fund set forth its objective as that of normalising creditor-debtor relations and restoring country access to sustainable flows and spontaneous lending. The means to this end were to be vigorous and sustained adjustment efforts by the debtors, and a co-operative conce rted approach involving creditors, the Paris Club, commercial banks and the trade credit agencies. While recognising that progress had been uneven and vulnerable, by the mid-1980s the Fund was interpreting its overall record on the debt problem as encouraging (Nowzad, 1999).At the same time, however, critics were assessing that, the IMFs recent record in the debtor countries is one of failure (Sachs, 1989a). Such disagreement persists because there is no universally accepted set of criteria by which the Fund may be judged. Apart from anything else, there is always the basic problem of the counterfactual what would have happened if the Fund had done things differently?Accepting this difficulty, a superficial review of the empirical evidence suggests that the Funds record in terms of dealing with the debt problem of the 1980s was, at best, mixed. Certainly it managed to help forfend a major systemic international financial failure and this was no small achievement. But, by other cri teria, no substantial or sustained degree of success can be claimed. By the end of the ex, creditor-debtor relations had not been normalised, and access to spontaneous lending had not been restored.Indeed, the creditworthiness of the highly indebted countries, as be by the secondary market price of their debt, had continued to fall net transfers to highly indebted countries were suave meaningfully negative a concerted and co-operative approach to the debt problem had not emerged most debt indicators failed to show any notable or sustained improvement and macroeconomic performance in the highly indebted countries was poor and often deteriorating, with forward-looking indicators such as the investment ratio and import volume suggesting bleak prospects for the 1990s.Even IMF-specific indicators were discouraging, with declining programme compliance, rising arrears and the increasing use of waivers. Episodic successes existed but the overall picture was not reassuring. During a deca de in which open economy macroeconomics became more sophisticated, the accusation was increasingly made that the model underpinning the Funds operations had failed to be modified and that it was out of date and inappropriate. look for of an excellent academic standard conducted indoors the Funds own Research Department was, according to this view, no longer having a significant operational impact.Indeed, and again at a superficial level, the empirical evidence seemed to suggest that the conventional burlesque of a Fund-supported programme involving a combination of exchange rate devaluation and the deflation of aggregate demand through credit control was more accurate during the 1980s than it had been before (Edwards, 1989). At the same time as Fund-supported programmes were being criticised for lacking intellectual sophistication, evidence as to their adverse social and human implications was also being more systematically collected and coherently presented (Cornia et al., 1997 Demery and Addison, 1997).Increasing infant mortality and morbidity, malnutrition and falling life expectancy were now being attributed, at least in part, to IMF-backed programmes. And the design of programmes which emphasised reduced government expenditure rather than increased tax revenue was being seen not only as endangering important welfare schemes in developing countries, but also as reflecting the dominant current politico-economic paradigm within the developed countries, where the role of the state was under stark review.This in turn highlighted another areathe sequencing of reformin which the Fund came in for criticism. Merely designing an appropriate programme of policies was now seen as inadequate more consideration needed to be given to the order and inter-temporal distribution of elements of an adjustment programme, particularly as even research conducted within the Fund itself was beginning to suggest that Fund-supported programmes could have a negative effect on outp ut, at least in the short run (Khan et al., 1996 Vines, 1990).Earlier models, which formed the basis for financial programming within the Fund, most notoriously the Polak model, had basically assumed away such an effect by making output exogenous. Yet even the more outspoken critics of the Funds handling of the debt crisis suggest that its approach changed towards the end of the 1980s, particularly afterward Michel Camdessus took over as Managing Director in 1987.This change of approach found expression in terms of a softening attitude towards debt relief, a change in the treatment of arrears, with the Fund becoming ready to make loans while countries were in arrears with the banks, and an increasing concern for the effects of Fund-supported programmes on income distribution and the related light that income distributive effects might be important in determining the political, and therefore practical, feasibility of programmes.Although criticisms subdued remained, for example th at the Fund placed too much reliance on voluntary forms of debt reduction which, given the associated free rider problems, should instead be treated as a public good, they became slightly more muted. If the Fund was still not coming up with right answers, at least, according to some critics, it seemed to be asking more relevant questions. Moreover, some of the broader criticisms relating to the input of the Research Department were suspended awaiting the impact of the involution of a new Managing Director.On top of this there appeared to be a growing acceptance that macroeconomic stability was a necessary precondition for sustained economic development, and this took some of the sting out of the old weigh about IMF conditionality. At the beginning of the 1990s private capital began to return to some of the lightly indebted countries, to the extent that some commentators claimed that the Latin American debt crisis was over. This was not the case in Africa, and it is unclear as to h ow significant the Funds input was in generating capital inflows. References Cornia, G. A. , Jolly, R. and Stewart, F. (eds) (1997) appointment with a Human Face Protecting the susceptible and Promoting Growth, Oxford Oxford University Press. Demery, Lionel and Addison, Tony. 1997. The Alleviation of Poverty Under Structural Adjustment, Washington, DC World Bank. Edwards, S. 1989. The International Monetary Fund and the maturation Countries A Critical Evaluation, Carnegie Rochester Conference Series on Public Policy 31. Finch, David C. 1988. Let the IMF be the IMF, International Economy, January/February. Krugman, Paul. 1988. Financing versus Forgiving a Debt Overhang. Journal of Development Economics 29.Khan, Mohsin, Montiel, Peter and Ul Haque, Nadeem (1996) Adjustment with Growth Relating the Analytical Approaches of the World Bank and the IMF, World Bank Discussion Paper, Washington, DC World Bank. Nowzad, B. (1999) The Debt conundrum and the IMFs Perspective, in Graham Bird (ed. ), Third World Debt The Search for a Solution, capital of the United Kingdom Edward Elgar. Sachs, Jeffrey D. 1989a. Strengthening IMF Programmes in Highly Indebted Countries, in C. Gwin and R. Feinberg (eds).The International Monetary Fund in a Multipolar World Pulling Together, US-Third World Policy Perspectives No. 13, Washington, DC Overseas Development Council. Sachs, Jeffrey D. 1989b. Conditionality, Debt Relief, and the Developing area Debt Crisis, in Jeffrey D. Sachs (ed. ), Developing Country Debt and Economic Performance, Vol. 1. International Financial System, Chicago, IL University of Chicago Press. Stiglitz, Joseph E. 2003. Globalization and its Discontents. refreshing York Norton. Vines, David. 1990. Growth Oriented Adjustment Programmes A Reconsideration, London Centre for Economic Policy Research Discussion Paper No. 406, March.