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.”

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