IMF and World Bank Essay Question

‘The IMF and the World Bank have failed the world’s poor.’ Discuss.

SEE PAGE 14  

The IMF and World Bank - Slideshare

Lesson 5 the imf and world bank from James Foster

IMF, World Bank laud RBI’s efforts to strengthen banking supervision

IMF and Bitcoin

IMF and BIS—Working Together to Boost Financial Stability

As prepared for delivery

February 8, 2018

I. Introduction & Theme

Thank you, Agustin, for the kind introduction, and thank you to the BIS for co-hosting this important event.

Our discussions today will focus on how to further strengthen the expertise of our member countries in financial sector supervision and regulation.

This is an area where both of our institutions have extensive experience—from providing hands-on assistance and training, to sharing valuable knowledge across countries.

This is what we mean by “capacity development.”

It is a major part of how the IMF and the BIS are promoting financial stability, which underpins durable and inclusive growth.

We have been deeply committed to capacity development because, in the words of Benjamin Franklin, “ an investment in knowledge pays the best interest.”

As you know, in addition to being a statesman, author, and diplomat, Benjamin Franklin was a scientist and inventor—focusing relentlessly on applying practical knowledge to improve the wellbeing of people.

He shared this passion with his friend Voltaire who once said: “ Aucun problème ne peut resister à l’assaut de la pensée soutenue,” “No problem can withstand the assault of sustained thinking.”

Sustained thinking and applying practical knowledge—these are some of the key things that you, the practitioners and experts, do every day.

The reality is that, ten years after global financial crisis, your work on financial sector supervision and regulation is more important than ever. This work is not only about preventing the next crisis.

It is also about fostering healthier financial systems that can channel investment into the most promising ventures—the start-ups, the firms looking to expand, the high-quality infrastructure projects—that can boost productivity, incomes, and jobs.

History matters

We have been doing this for some time.

At the IMF, it all started in the 1960s, when we first provided technical assistance to central banks. At the BIS, of course, this particular work has an even longer history.

Today, capacity development accounts for more than a quarter of the IMF’s total budget—about $267 million in 2017.

With this substantial commitment, we can help our 189 member countries strengthen their economic institutions and policies.

II. Capacity Development—People-focused

While numbers tell part of the story, our capacity development work is not just about facts and figures.

This is about people—about meaningful human interactions—from coaching teams, to gaining insights and skills, to sharing knowledge with partners around the world.

That is why I would like to share with you some of the experiences of our so-called “long-term experts.”

They are representative of the incredible commitment and energy that drives our capacity development—and their stories illustrate how capacity development works in practice.

a) Meet Carmencita Santos

Here I would like to recognize the work of Carmencita Santos.

Over the past 23 years, Carmencita has been working closely with bank supervisors, financial regulators, parliamentarians, and central bankers—building expertise, learning from her clients, and spreading best practices across countries.

How did she get there?

Carmencita started her career at the Central Bank of the Philippines, where she rose through the ranks—from bank examiner to senior executive.

Then she decided to take a risk. After leaving her central bank position, she began a series of one-year and two-year assignments with the IMF—delivering expert-level training on financial sector supervision and regulation.

This work involved being on the ground, working face-to-face with clients, and—over the years—moving from Guyana to Lesotho, to Tanzania, to Rwanda, to Ghana, and most recently to Myanmar. What a journey!

During her professional tours, Carmencita developed what we call the “working team approach.” It means that clients absorb fresh knowledge so well, that they themselves can quickly start teaching it to their fellow teammates.

This method can facilitate the transfer of deep expertise and encourages the building up of institutional knowledge.

b) Meet Leonard Chumo

Let me also introduce you to Leonard Chumo, who will participate in one of our panel discussions this afternoon.

Leonard started out as a financial accountant and analyst in his native Kenya. He then worked as a banking supervisor at the Bermuda Monetary Authority and the Central Bank of Ireland. He also served as a mission chief for the European Central Bank.

Now he is using his expertise as an IMF long-term expert based in Nigeria, where he works closely with the banking supervision experts of the Central Bank of Nigeria.

For example, he is supporting the implementation of the so-called “Pillar 2” of the Basel framework. He is coaching teams on how to assess bank capital levels.

He is also providing training on stress-testing methods, while developing training materials that are tailored to the specific circumstances of Nigeria’s financial sector.

This is the kind of work that our long-term experts do every day.

They are in many ways “the face of the Fund”—because they are teachers, ambassadors, and trusted advisers.

I think we all remember our favorite teachers—I certainly do. Why? Because our teachers open the doors to great intellectual adventures and because we trust them to point us in the right direction.

I would like to take this opportunity to recognize the outstanding contributions of all the members of our expert network.

Putting people at the center of the Fund’s work is good for our member countries and good for global financial stability.

This brings me to some of the other dimensions of our capacity development. These include what I would call “products” and “partnerships”

III. Capacity Development—Products and Partners

a) Products

The product dimension is about how we can share knowledge most effectively.

Our goal has always been to help our members build capacity in a range of areas—from fiscal, to monetary, to statistical, to financial. Let me give you two financial sector examples:

• In Cambodia, the IMF worked with the government to create key central bank functions after the country’s civil war. These multi-year efforts on banking regulation and supervision paved the way for commercial bank lending that has supported growth and employment.

• In Jamaica, the Fund has recently supported the country’s Financial Services Commission in strengthening supervision of insurance and securities firms. By identifying—and addressing—risks in this area, Jamaica can make its financial system more stable and more supportive of economic growth.

When we engage on these and many other cases, we can draw on our global perspective, our wealth of experiences, to provide high-quality advice and training.

These examples also show that there is no one-size-fits-all. Our goal is to help members meet the needs they have identified. This can be seen in how we help our members adapt the global regulatory reforms to their specific circumstances.

And our work continues to evolve.

One of our key objectives today is to help our members deal with the challenges and opportunities of fintech, including virtual currencies and new financial business models.

Yes, we all need to be extremely vigilant about the risks of financial innovation—think of the heightened risk of money laundering and the broader financial stability concerns.

But the long-term potential of virtual currencies and their underlying technologies need to be taken seriously—especially when it comes to regulations.

Of course, in this new environment, cybersecurity is more critical than ever.

I recently had the opportunity to participate in an IMF workshop on managing cyber risk—a key threat to financial stability. Our growing experiences in this area will allow us to improve our policy advice and capacity development.

And we will—as always—share our cutting-edge knowledge with our entire membership.

But we are not doing this alone, which brings me to the partnership dimension.

b) Partners

Last year, more than 40 member-countries provided funding for our capacity development efforts. These partners—led by Japan and the European Union—finance about half of our work in this critical area.

They are doing this in multiple ways—from sponsoring highly qualified experts, to financing specific technical assistance programs, to helping fund our global network of capacity-development centers.

Our partners also contribute to our “thematic funds” that support member priorities, including on financial stability and strengthening financial integrity.

Of course, partnership also means working with other organizations to provide the best possible support to our members.

Online courses are a great example—and one where we have an opportunity to further strengthen our collaboration with the BIS.

The Fund has made great progress in this area by helping train nearly 10,000 government officials [1] through free online courses.

At the same time, our members have long benefited from the incredible online training expertise of the BIS and its Financial Stability Institute. [2]

That is why we are now working together to create a new online course on banking supervision. [3] Some 200 government officials from 41 countries are expected to participate in this joint course later this year.

We know that we can often get the best results by combining well-designed online courses with face-to-face training and assistance.

This is one of many examples of how capacity development can help empower individuals and institutions—boosting financial stability and fostering durable and inclusive growth.

Conclusion

Let me conclude with an old proverb “ Tell me, and I forget. Teach me, and I remember. Involve me, and I learn. ”

By stepping up our capacity development efforts and by further deepening our collaboration with the BIS, we can involve our member countries in a powerful learning experience.

Let us be teachers, ambassadors, and trusted advisers.

Thank you.

Read more

Key IMF Activities

The IMF supports its membership by providing

• policy advice to governments and central banks based on analysis of economic trends and cross-country experiences;
• research, statistics, forecasts, and analysis based on tracking of global, regional, and individual economies and markets;
• loans to help countries overcome economic difficulties;
• concessional loans to help fight poverty in developing countries; and
• technical assistance and training to help countries improve the management of their economies.

Read more

How the IMF promotes Global Stability

Promoting economic stability is partly a matter of avoiding economic and financial crises, large swings in economic activity, high inflation, and excessive volatility in foreign exchange and financial markets. Instability can increase uncertainty, discourage investment, impede economic growth, and hurt living standards. A dynamic market economy necessarily involves some degree of volatility, as well as gradual structural change. The challenge for policymakers is to minimize instability in their own country and abroad without reducing the economy’s ability to improve living standards through rising productivity, employment, and sustainable growth.

Economic and financial stability is both a national and a multilateral concern. As recent financial crises have shown, economies have become more interconnected. Vulnerabilities can spread more easily across sectors and national borders.

How does the IMF help?

The IMF helps countries implement sound and appropriate policies through its key functions of surveillance, technical assistance, and lending.

Surveillance : Every country that joins the IMF accepts the obligation to subject its economic and financial policies to the scrutiny of the international community. The IMF’s mandate is to oversee the international monetary system and monitor economic and financial developments in and the policies of its 189 member countries. This process, known as surveillance, takes place at the global level and in individual countries and regions. The IMF assesses whether domestic policies promote countries’ own stability by examining risks they might pose to domestic and balance of payments stability and advises on needed policy adjustments. It also proposes alternatives when countries’ policies promote domestic stability but could adversely affect global stability.

A- Consulting with member states

The IMF monitors members’ economies through regular—usually annual—consultations with each member country. During these consultations, IMF staff discusses economic and financial developments and policies with national policymakers, and often with representatives of the private sector, labor and trade unions, academia, and civil society. Staff assesses risks and vulnerabilities, and considers the impact of fiscal, monetary, financial, and exchange rate policies on the member’s domestic and balance of payments stability and assesses implications for global stability. The IMF offers advice on policies to promote each country’s macroeconomic, financial, and balance of payments stability, drawing on experience from across its membership.

The framework for these consultations is set forth in the IMF Articles of Agreement and the Integrated Surveillance Decision. The consultations are also informed by membership-wide initiatives, including

• work to systematically assess countries' vulnerabilities to crises;
• the Financial Sector Assessment Program, which assesses countries’ financial sectors and helps formulate policy responses to risks and vulnerabilities; and
• the Standards and Codes Initiative in which the IMF, along with the World Bank and other bodies, assesses countries’ observance of internationally recognized standards and codes of good practice in a dozen policy areas.

B- Overseeing the bigger picture

The IMF also closely monitors global and regional trends.

The IMF’s periodic reports, the World Economic Outlook, its regional overviews, the Fiscal Monitor, and the Global Financial Stability Report, analyze global and regional macroeconomic and financial developments. The IMF’s broad membership makes it uniquely well suited to facilitate multilateral discussions on issues of common concern to groups of member countries, and to advance a shared understanding of policies needed to promote stability. In this context, the Fund has been working with the Group of 20 advanced and emerging economies to assess the consistency of those countries’ policy frameworks with balanced and sustained growth for the global economy.

The Fund has reviewed its surveillance mandate in light of the global crisis. It has introduced a number of reforms to improve financial sector surveillance within member countries and across borders, to enhance understanding of interlinkages between macroeconomic and financial developments, and stimulate debate on these matters. The IMF has also strengthened its analysis of macro-critical structural reforms to the macroeconomy to help countries promote durable and inclusive growth.

Data : In response to the financial crisis, the IMF is working with members, the Financial Stability Board, and other organizations to fill data gaps important for global stability.

Technical assistance : The IMF helps countries strengthen their capacity to design and implement sound economic policies. It provides advice and training in areas of core expertise—including fiscal, monetary, and exchange rate policies; the regulation and supervision of financial systems; statistics; and legal frameworks.

Lending : Even the best economic policies cannot completely eradicate instability or avert crises. If a member country faces a balance of payment crisis, the IMF can provide financial assistance to support policy programs that will correct underlying macroeconomic problems, limit disruption to both the domestic and the global economy, and help restore confidence, stability, and growth. The IMF also offers precautionary credit lines for countries with sound economic fundamentals for crisis prevention.

Read more

Why have IMF and World Bank not Reduced Poverty?

Discuss 3 Factors that can explain the persistence of poverty, despite the efforts of the IMF and the World bank.

The IMF and World Bank are focused on giving loans to countries. Usually with conditions of free market deregulations.

1. These loans are not Targeted to development.

Often they are to meet government deficits and / or lack of foreign exchange. Therefore, may not be used for development. However, the injection of foreign funds can make a difference, through a trickle down effect. Also, some economists argue the conditions that the IMF impose, can help significantly in reducing corruption and economic mismanagement, therefore this is most effective kind of AID, because it makes them reform inefficient economies.

2. Rural Areas need AID most.

AID improved economic development most when it is targeted in certain ways: for example, investment in better technology, education and training for certain workers. AID targetted at rural areas. AID from the world bank is a relatively small % of GDP.

3. Domestic Savings

Harod Domar model considers domestic savings to be the key to economic development. This domestic savings enable higher levels of investment. Higher investment is crucial to economic development (take off period), also domestic investment is usually more beneficial than investment from outside.

However, the importance of domestic savings is less important than some economists believe. Loans from IMF can have the same effect as domestic savings in stimulating investment. The key is how are the loans used.


Other factors worth considering:

• IMF impose economic conditions e.g. privatisation and deregulation. However, it is debatable whether these are actually appropriate for developing countries.

Read more

Policies for Economic Development

Economic development implies an improvement in economic welfare through higher real GDP, but also through an improvement in other economic indicators, such as improved literacy, better infrastructure, reduced poverty and improved healthcare standards.

Policies for economic development could involve:

1. Improved macroeconomic conditions (create stable economic climate of low inflation and positive economic growth)
2. Free market supply-side policies – privatisation, deregulation, lower taxes, less regulation to stimulate private sector investment.
3. Government interventionist supply-side policies – increased spending on ‘public goods’ such as education, public transport and healthcare.

For developing economies, other issues could involve:

1. Export Oriented Development – Reduction in tariff barriers and promoting free trade as a way to improve economic development.
2. Diversification away from agriculture to manufacturing as a way to promote economic development.

Policies for Economic Development

Macroeconomic Stability

Macroeconomic stability would involve a commitment to low inflation. Low inflation creates a climate where foreign investors have more confidence to invest in that country. High inflation can lead to devaluation of the currency and discourage foreign investment. To create a low inflationary framework, it requires:

• Effective monetary policy. E.g. given a Central Bank independence to control inflation through using monetary policy.
• Disciplined Fiscal Policy – i.e. avoid large budget deficits.
• For example, if you look at the current situation of China and India – they both have high rates of economic growth, but the concern is that their economies could easily ‘overheat’ and cause inflationary pressures. Therefore, to keep a lid on inflation is an important underlying factor in sustainable economic development.

A potential problem of macroeconomic stability is that in the pursuit of low inflation, higher interest rates can conflict with lower economic growth – at least in the short term. Sometimes, countries have pursued low inflation with great vigour, but at a cost of recession and higher unemployment. This creates a constraint to economic development. The ideal is to pursue a combination of low inflation and sustainable economic growth.

It depends on the economic situation, some countries may be in a situation where there is a fundamental lack of demand due to overvalued exchange rate and tight monetary policy. Therefore, economic development may require demand-side policies which boost aggregate demand.

Macroeconomic stabilisation may involve policies to reduce government budget deficits. However, this may involve spending cuts on social welfare programs.

2. Less Restrictive Regulation and Tackle Corruption

Some developing countries are held back by over-restrictive regulation, corruption and high costs of doing business.  To attract both domestic and inward investment, it is necessary to remove these costs and create a climate which is conducive to business. To tackle corruption may not be easy, but it is often one of the biggest constraints to economic development.

Also, in the effort to reduce levels of regulation, it is important that useful regulations such as protection of the environment aren’t discarded in efforts to attract inward investment. Otherwise, economic growth may come at the expense of sustainable development.

3. Privatisation and De-regulation

An important aspect of China’s rapid economic development was the decision to move from a Communist economy to a mixed economy. Several state-owned industries were privatised. This gives firms a profit incentive to cut costs and aim for greater efficiency. De-regulation involves making state-owned monopolies face competition. This greater competitive pressure can help to create incentives to cut costs. Greater competitive pressures may also be gained through liberalising trade and opening markets to international competition.

A potential problem of privatisation is that it can exacerbate inequality in society. In Russia, privatisation enabled a small number of oligarchs to gain control of key industries at low cost. Arguably, this does little for economic development because the nation’s resources become owned by a small number of very rich individuals, and there is little ‘trickle down’ to poorer members of society.

4. Effective Tax Structure and Tax Collection

One of the challenges developing economies often face is to effectively tax and collect what they are supposed to. If the government is unable to collect sufficient tax from the richest aspect of the economy (e.g. production of natural resources) there will be little funds to finance necessary public sector investment in services with a high social benefit. For example, the average tax rate in Sub-Saharan Africa is only 15% of GDP – compared to an average of 40% of GDP in the developed world.

But average revenue collection rates in Sub-Saharan African countries stood at only 13.3 percent of GDP during 1990 to 1994. They increased very slightly to 15.6 percent during 2000 to 2006… And the researchers found that – and this is even more alarming – most of this slight increase came from sources such as value added taxes, which tend to burden the poor more heavily than the wealthy. Oxfam blog

5. Investment in Public Services

In areas such as education, healthcare and transport, there is often market failure – the free market doesn’t provide sufficient levels of education. A key factor in improving economic development is to increase levels of literacy and numeracy. Without basic levels of education and training, it is very difficult for the economy to develop into higher value-added industries.

Evidence on returns from investing in education are mixed. Often investment takes a long time to feed through into directly higher rates of economic growth. pdf World Bank But, on its literacy is an aim of development.

6. Diversification away from agriculture

A constraint developing economies may face is that their current comparative advantage is in the production of primary products. However, these limit economic development due to volatile prices, a low-income elasticity of demand and finite nature. Therefore, economic development may require government encouragement of new industries in different sectors, such as manufacturing. This may require a temporary commitment to tariffs (see: infant industry argument)

See also: Lewis’ model of a dual economy and arguments for shifting labour to manufacturing.

Attempts to diversify away from agriculture can have mixed results. Sometimes, countries with a poor basic level of infrastructure struggle to make effective use of capital investment in manufacturing. Some argue government attempts to encourage manufacturing industry is misplaced because they tend to have poor information about best kinds of industries to promote. It is better to allow the free market to decide to which industries to invest in.

Role of IMF in Economic Development

The IMF can play a role in dealing with economic crisis. The IMF can give a country a loan to meet a temporary fiscal or balance of payments problem. This loan can be vital for helping the economy to deal with an unexpected crisis. Without the loan, the economy may have to experience a bigger fall in living standards to meet the creditors.

However, the role of the IMF is often criticised. In return for a loan, the IMF has often insisted on certain free-market reforms in return for the loan. This has included

• Privatisation
• Tax reform
• Cuts in government spending (often on welfare payments)

These free market supply-side policies have arguably often harmed economic development, e.g. reducing access to basic necessities and lower government spending on the poor.

However, the IMF often point out that they are usually asked to help only in crisis so there is often a difficult choice to make

See more on: criticisms of the IMF

World Bank and Economic Development

• The World Bank is a financial body committed to the reduction of poverty in developing countries. It offers long-term loans for capital programs.
• The World Bank is committed to achieving its aims through the promotion of international trade, capital investment and foreign investment.
• The World Bank has often been criticised for its promotion of structural adjustment policies. These free market-oriented policies have often caused, at least temporary, upheaval in the economy.
• In particular structural adjustment policies implemented in sub-Saharan Africa arguably failed to alleviate poverty when introduced in the 1980s. (Criticism of S.A.)
• In response to these criticisms, the World Bank has sought to change its policies of structural adjustment placing greater emphasis on maintaining social spending and improving education.

Other Issues in economic development

• Role of foreign aid Foreign aid can help boost capital investment in schemes which improve economic development. However, it depends on the type of foreign aid. Does Aid increase economic welfare?
• Harrod Domar – model of economic growth – the role of savings and capital in promoting economic development
• Economic development and tourism
• The role of MNCs in developing economies

Read more

IMF Advantages and disadvantages

With economies around the world on the verge of collapsing. Some are pointing to the IMF as a potential saviour of the world economy. They argue that the IMF can play a key role in avoiding financial crisis and restoring confidence to a battered international economy. Yet, at the same time many view the IMF with disdain, arguing that their intervention causes more problems than it solves. (see: Criticism of IMF)

• What does the IMF actually do? and Why is its role so Controversial.

The IMF was founded in 1944, to facilitate the post war economic recovery. In particular the IMF was to play a role in stabilising exchange rates and balance of payments, whilst its sister organisation the World Bank would provide loans for long term development.These days the IMF plays a role in:

• Compiling statistics and evaluation of its member countries economies (Nearly all in UN are members of IMF)
• Intervening in Financial crisis to provide loans and conditions for restructuring the economy to avoid future crisis. In recent months this has involved
• $2.1 billion to Iceland
• $15 billion to Hungary
• $16 billion to Ukraine
• An emerging markets fund of $200bn to stabilise financial systems.

Advantages of the IMF.

• IMF can be seen as lender of last resort. When a country is seeing an exodus of currency due to a balance of payments crisis, the IMF can provide crucial loans to stabilise the economy and prevent a collapse of confidence.e.g. Recent loans to:
• Supporters argue that the IMF can also impose necessary reforms on an economy. Reforms such as privatisation, fiscal responsibility, control of Money supply, and attacking corruption. These policies may cause short term pain, but, are essential for preventing future crisis and long term development.
• Provides an external assessment of the economy, which helps the government to implement popular ideas.

Yet, despite the potential benefits of having a monetary fund which can provide an effective counter to financial crisis, the role of the IMF has proved very controversial.
It's critics argue the IMF is dominated by the perspective of the G8 industrialised nations. They argue the IMF insists on blanket policies of structural adjustment which may actually harm the economies they are intervening. See: Criticisms of IMF

Yet, whilst it is easy to criticise the doctor which prescribes a bitter pill, there is a consensus that, now more than ever, we need an effective international organisation which can deal with the many financial crisis that are occurring around the world.

Read more

Recently few countries have turned to IMF for help. Could you please explain the role of IMF? How does it work and how is it funded?

The IMF was established in 1944 to help promote exchange rate stability and oversee the reconstruction of the post war financial system. Today its function is similar. In particular the IMF play a role in lending to countries during times of financial and balance of payments crisis. For example, recently the IMF agreed a loan of $2.1billion to Iceland to help stabilise the Icelandic economy.

• More on role of IMF and how it is funded

IMF Controversy

In the past, the role of the IMF has been controversial because of:

• Loans to military dictatorships such as Argentina and Brazil
• Making strict conditions for loans which often cause economic hardship, at least in short term. For example, the role of the IMF was very controversial during Asian Financial Crisis of 1997 when IMF conditions included a tightening of fiscal policy which exacerbated the downturn.

However, supporters of the IMF argue it can play a crucial role in stabilising exchange rates and dealing with financial crisis. They also argue IMF loans provide an excellent incentive to implement popular but necessary structural reforms.

One thing is for sure they will probably have quite a few crisis to deal with in the coming months, and their intervention will remain controversial.

Read more

Purpose of IMF Fund

Recently, the IMF have been working hard to establish a bigger fighting fund to help out insolvent Eurozone economies. (Although they say, it is not just for the Eurozone, but for the whole world economy.) Extra contributions from IMF members have raised an extra £300bn – taking the total of IMF funds to £1,000bn.

• The aim is to have a bigger ‘firewall’. If economies experience liquidity crisis – e.g. can’t meet borrowing requirements, then they can apply for a loan from the IMF.
• The fact that there is a lender of last resort like the IMF – means markets are, in theory, less worried about countries becoming illiquid and experiencing shortages. This confidence factor can help avoid capital flight in the first place.
• Given the greater uncertainty in the world economy, the IMF has been keen to build up an even bigger fund than usual.

How Do Countries Contribute to IMF?

• The UK recently gave £10bn to the IMF. This doesn’t come out of public spending. It is invested from UK foreign exchange reserves. The UK can also gain interest on this ‘investment’ into the IMF fund.

Limitations of the IMF Fund

• One Trillion pounds is a big fund, but given the amount of potential losses in the Eurozone, it would be insufficient to cope if countries like Spain or Italy defaulted.
• A fighting fund can help with liquidity issues, but insolvency is something much more difficult. Markets won’t be impressed by a bailout if it can’t deal with the underlying bank / government losses.
• The Euro crisis is much more than a shortage of funds. Struggling countries in the Eurozone like Greece, Spain and Portugal have a lack of competitiveness and no clear plan for economic growth. Usually, the IMF would recommend structural reforms, such as devaluation to restore competitiveness, but countries in the Eurozone can’t do this. Therefore, IMF bailouts may prove ineffective because they can’t address the underlying problems.
• The IMF have produced several reports about the likelihood that austerity policies will prove counter-productive. Therefore, there has been conflicting advice. On the one hand struggling economies are being told to cut deficits, but at the same time, evidence suggests cutting deficits is not solving the excessive level of debt to GDP
• Emerging economies bailing out richer economies. It does seem a paradox that a bailout of Europe requires funds from much poorer countries in emerging economies. It is a paradox that living standards can be relatively high, yet several countries at risk of default. Emerging economies will be wanting more say in how the IMF is run in return for funds.
• Will the Money Achieve Anything? A bailout fund of $300bn is no mean feat, but is it throwing good money after bad? There is still no clear path or plan for indebted countries to return to normal economic growth.  Therefore, it is only a small part of the solution.

Read more

The IMF and the Latin American Debt Crisis : Seven Common Criticisms

The IMF played a key role in developing and implementing the debt strategy throughout the 1980s. That strategy not only overcame the crisis but also produced successful transformationsof several major economiesin Latin America. Nonetheless, the IMF's role has also been criticized on several grounds. This study examines seven such criticisms.

Read more

Criticisms of IMF

Over time, the IMF has been subject to a range of criticisms, generally focused on the conditions of its loans. The IMF has also been criticised for its lack of accountability and willingness to lend to countries with bad human rights records.

Criticisms of IMF include

1. 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 borrowing – Higher 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 can make difficult economic situations 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 very high levels of 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.

2. 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 Goldenberg scandal, BBC link). Critics argue this is another example of how the IMF failed to understand the dynamics of the country that they were dealing with – insisting 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.”

3. Devaluations In earlier days, the IMF have been criticised for allowing inflationary devaluations.

4. 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 can create lead to the creation of private monopolies who exploit consumers.

5. Free market criticisms of IMF

As well as being criticised for implementing ‘free market reforms’ Others criticise 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 worse – it is better to allow currencies to reach their market level. [criticism of IMF]

• There is also a criticism that bailing out countries with large debt create moral hazard. Because of the possibility of getting bailed out, it encourages countries to borrow more.

6. Lack of transparency and involvement

The IMF has been criticised for imposing policy with little or no consultation with the 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 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.” source

7. Supporting military dictatorships

The IMF has been criticised for supporting military dictatorships in Brazil and Argentina, such as Castello Branco in 1960s received IMF funds denied to other countries.

Response to criticism of IMF

1. Crisis always lead to some difficulties

Because the IMF deal with economic crisis, whatever policy they offer, there are likely to be difficulties. It is not possible to deal with a balance of payments without some painful readjustment.

2. IMF have had some successes

The failures of the IMF tend to be widely publicised. But, its successes less so. Also, criticism tends to focus on short-term problems and ignores longer term view. IMF loans have helped many countries avoid liquidity crisis, such as Mexico in 1982 and more recently, Greece and Cyprus have received IMF loans.

3. Confidence

The fact there is a lender of last resort provides an important confidence boost for investors. This is important during the current financial turmoil.

4. Countries are not obliged to take an IMF loan

It is countries who approach the IMF for a loan. The fact so many take loans suggest there must be at least some benefits of the IMF.

5. IMF easy target

Sometimes countries may want to undertake painful short term adjustment but there is a lack of political will. An IMF intervention enables the government to secure a loan and then pass the blame on to the IMF for the difficulties.

6. IMF better then previous alternatives.

J.M. Keynes who helped found principles of IMF stated  “IMF is the exact opposite of the Gold Standard. It is an attempt at an improved system of international currency.”

Read more

IMF and Intervention

Problems in Iceland economy

• In lead up to 2008, the Icelandic economy ran a very large current account deficit, financed by financial flows into Icelandic banks.
• The large current account deficit and external debt, suggested the economy was living beyond means in era of tighter capital flows.
• The credit crunch of 2008 caused Icelandic banks to lose money and default.
• Collapse in Icelandic banks led to loss of confidence in Icelandic economy
• Withdrawal of money caused depreciation in currency.
• This depreciation caused inflation and necessity of higher interest rates

See more detail: Problems with Iceland economy

Rescue package to Iceland

• $2.1billion loan to Iceland. This represents 1,190 percent of Iceland’s quota.
  The loan is part of a package aiming at:
• restoring confidence in financial sector.
• stabilising Icelandic krona.
• Stabilising Icelandic fiscal position

Read more