Tuesday, December 20, 2011
Unfair Play
The following article was published in today's Republica. Direct link is here. I had published this as a blog post a few days ago here.
The International Financial Institutions Advisory Commission’s 2003 report suggested that the International Monetary Fund’s system of short-term crisis management was “too costly… responses too slow… advice often incorrect… and efforts to influence policy and practice too intrusive”. That was one of the first reports to come out about international aid organizations like the IMF and the World Bank’s effectiveness, or lack thereof, in helping poor nations. That and several other reports in the past few years have asked some pertinent questions: Is the IMF doing any good? Is it being faithful to its core customers or to its core donors? Is it perpetuating the Western dominance in the Eastern and African countries?
For those who are unaware, the IMF is like a bank that gives money to countries that need them. Like normal people, countries also go into debt that they, sometimes, cannot pay. During such times, like normal people, the countries are not able to get credit from lenders due to their previous default. During those times, the IMF acts as a lender of last resort, albeit with some conditions. The applied condition, about 99 percent of the time, is an immediate restructuring of the borrower country’s economy through IMF’s macroeconomic stabilization policies.
The IMF carries out its macroeconomic stabilization policies in four basic steps. First, the borrowing country must abolish or liberalize the foreign exchange and import controls. Second, the official exchange rate of the borrower is devalued. Third, the borrower must open up its economy and accept FDI inflows. And, fourth, the borrower must accept IMF’s strong anti-inflation program.
These steps look innocuous. So, why do countries, more often than not, oppose IMF’s policies and programs? Well, the main reason is because IMF acts and imposes these programs like a schoolyard bully. Time and again it has been heavy-handed in dealing with poor countries that have little say in the international arena. Yet, at the same time, it cannot speak a word against the heavy donors that “fund” the Fund.
For instance, when the global financial crisis began in 2008, the G20 summit in London in the first week of April 2009 came up with a plan to give US $750 billion to the IMF in order to rescue the countries hit the hardest by the crisis. However, by the end of April, only Japan had given its share of $100 billion to the IMF. The promises made by other rich countries turned out to be hollow. This is but only one example. The IMF has, time and again, been unable to rein its richer ponies.
Also, no matter what the cause of macroeconomic problem (in any country in any corner of the world), the IMF’s most common solution is to ask countries to reduce inflation. The Fund has to realize that all diseases do not have the same cure. Macroeconomic conditions and problems in different countries are diverse and varied. For an organization that boasts of many eminent scholars, researchers and bureaucrats, the IMF’s dogged inflationary stance makes it look like a one-trick pony.
Reducing inflation does not solve all systemic macroeconomic problems. You need inflation to achieve economic growth. If inflation really hampered macroeconomic stability and economic growth to the extent that the IMF policymakers think, why are high inflation countries like India, China, and Bangladesh achieving almost double-digit economic growth while low inflation countries in Europe along with Japan and the United States are growing below three percent?
And, why is it that it is always the poorer countries that are asked to restructure their economy? The IMF says that restructuring is a pre-condition to its assistance. Why are such pre-conditions not applied when the richer countries borrow from IMF? If restructuring is a pre-condition to the assistance, why is the United States, the world’s largest debtor, never asked to restructure its economy? Why is Italy or France not asked to restructure its economy when it borrows?
Then, there’s the issue of transparency. It has not gone unnoticed to scholars like Jeffrey Sachs that for an organization that touts itself as a watchdog, and one that seeks openness from its clients, the IMF is very secretive. Independent observers say a serious appraisal of IMF programs and policies is nigh on impossible. This is unlike the World Bank, which produces diligent and honest assessment of its programs and policies. The World Bank’s own assessment of its African performance suggested a 73 percent failure rate. When was the last time anything like that was heard from the IMF camp? Indeed, who watches the watchdog?
When the global financial crisis started to bite in late 2008, the IMF was very flexible to the European countries that asked for emergency loans to survive the crisis. Yet, it spared no mercy for Pakistan, Bangladesh and the African countries. They were still asked to cut their spending even though they were going through the same crisis as their European counterparts. Therefore, the IMF has a double-standard when it comes to applying its pre-conditions. That’s unfair. If the rules do not apply equally to all players of the game, I don’t want my country playing that game at all.
The International Financial Institutions Advisory Commission’s 2003 report suggested that the International Monetary Fund’s system of short-term crisis management was “too costly… responses too slow… advice often incorrect… and efforts to influence policy and practice too intrusive”. That was one of the first reports to come out about international aid organizations like the IMF and the World Bank’s effectiveness, or lack thereof, in helping poor nations. That and several other reports in the past few years have asked some pertinent questions: Is the IMF doing any good? Is it being faithful to its core customers or to its core donors? Is it perpetuating the Western dominance in the Eastern and African countries?
For those who are unaware, the IMF is like a bank that gives money to countries that need them. Like normal people, countries also go into debt that they, sometimes, cannot pay. During such times, like normal people, the countries are not able to get credit from lenders due to their previous default. During those times, the IMF acts as a lender of last resort, albeit with some conditions. The applied condition, about 99 percent of the time, is an immediate restructuring of the borrower country’s economy through IMF’s macroeconomic stabilization policies.
The IMF carries out its macroeconomic stabilization policies in four basic steps. First, the borrowing country must abolish or liberalize the foreign exchange and import controls. Second, the official exchange rate of the borrower is devalued. Third, the borrower must open up its economy and accept FDI inflows. And, fourth, the borrower must accept IMF’s strong anti-inflation program.
These steps look innocuous. So, why do countries, more often than not, oppose IMF’s policies and programs? Well, the main reason is because IMF acts and imposes these programs like a schoolyard bully. Time and again it has been heavy-handed in dealing with poor countries that have little say in the international arena. Yet, at the same time, it cannot speak a word against the heavy donors that “fund” the Fund.
For instance, when the global financial crisis began in 2008, the G20 summit in London in the first week of April 2009 came up with a plan to give US $750 billion to the IMF in order to rescue the countries hit the hardest by the crisis. However, by the end of April, only Japan had given its share of $100 billion to the IMF. The promises made by other rich countries turned out to be hollow. This is but only one example. The IMF has, time and again, been unable to rein its richer ponies.
Also, no matter what the cause of macroeconomic problem (in any country in any corner of the world), the IMF’s most common solution is to ask countries to reduce inflation. The Fund has to realize that all diseases do not have the same cure. Macroeconomic conditions and problems in different countries are diverse and varied. For an organization that boasts of many eminent scholars, researchers and bureaucrats, the IMF’s dogged inflationary stance makes it look like a one-trick pony.
Reducing inflation does not solve all systemic macroeconomic problems. You need inflation to achieve economic growth. If inflation really hampered macroeconomic stability and economic growth to the extent that the IMF policymakers think, why are high inflation countries like India, China, and Bangladesh achieving almost double-digit economic growth while low inflation countries in Europe along with Japan and the United States are growing below three percent?
And, why is it that it is always the poorer countries that are asked to restructure their economy? The IMF says that restructuring is a pre-condition to its assistance. Why are such pre-conditions not applied when the richer countries borrow from IMF? If restructuring is a pre-condition to the assistance, why is the United States, the world’s largest debtor, never asked to restructure its economy? Why is Italy or France not asked to restructure its economy when it borrows?
Then, there’s the issue of transparency. It has not gone unnoticed to scholars like Jeffrey Sachs that for an organization that touts itself as a watchdog, and one that seeks openness from its clients, the IMF is very secretive. Independent observers say a serious appraisal of IMF programs and policies is nigh on impossible. This is unlike the World Bank, which produces diligent and honest assessment of its programs and policies. The World Bank’s own assessment of its African performance suggested a 73 percent failure rate. When was the last time anything like that was heard from the IMF camp? Indeed, who watches the watchdog?
When the global financial crisis started to bite in late 2008, the IMF was very flexible to the European countries that asked for emergency loans to survive the crisis. Yet, it spared no mercy for Pakistan, Bangladesh and the African countries. They were still asked to cut their spending even though they were going through the same crisis as their European counterparts. Therefore, the IMF has a double-standard when it comes to applying its pre-conditions. That’s unfair. If the rules do not apply equally to all players of the game, I don’t want my country playing that game at all.
Labels: IMF, jeffrey sachs, world bank
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