IMF bail outs: Recipes for disaster?
THE International Monetary Fund (IMF) was established in 1944 with the aim to provide financial assistance to
countries in economic distress. IMF, a lender of last resort, was a linchpin of the post-war international financial order established at Bretton Woods Conference. Since then, this financial firefighter has been providing bailout packages to the crisis-ridden countries across the world. It was supposed to foster international cooperation, promote liberalization of trade, induce financial stability and alleviate poverty in the long run.This monetary body since its creation has furnished short-term loans to numerous war-torn countries to address their balance of payment crisis and sustain dwindling reserves in their central bank.Although there are certain model states which after acquiring loans from IMF overcame their fundamental economic issues and ultimately embarked on the path of progress and economic autarky, the stiff medicine doled out by IMF has remained a subject of much controversy. Agroup of economic experts is of the view that IMF program and associated structural adjustment policies have made the situation of countries in economic crisis worse. These experts opine that the Extended Fund Facility of IMF require states to promulgate certain structural economic reforms that often prove to be counterproductive in the immediate run.
Although, initial years of IMF are marked by some success stories in offsetting economic distress; there are certain case studies that delineate that these bailout packages and attached conditions are detrimental to countries’ economy in the long run. IMF, in the backdropof Latin American financial crunch in 1990s, introduced Washington Consensus under which Structural Adjustment Policies (SAPs) were promulgated. These policies enhanced the role of market forces in economic policies. In addition to it, lending states were required to implements reforms that include but are not limited to cutting-off government subsidies, free-floating currency, free trade, higher taxes, privatization of state-owned enterprises and reduction in government spending. These adjustment policies put forth such stern conditions that countries cannot implement making them more and more dependent on IMF.
There are certain loopholes in IMF bailout program and the conditionalities attached to it that ultimately prove to be recipes of disaster. The first and foremost lacunae is ‘one size fits all’ approach of IMF policymakers. IMF applies strict conditions to all the lending countries irrespective of their domestic socio-cultural background and economic status. What is suitable for economic reforms in Latin American countries can and should never be applied in the other region of the world but IMF completely ignores the rule while doling out its loans. Joseph Stiglitz, a renowned economist, criticizes this approach and considers it ridiculous to blindly apply such conditions to countries across different regions of the world. There are scores of examples that indicate the problematic approach of IMF revolving around ‘one size fits all’ phenomenon. For example, Bordo and Schwartz (2000) examined the overall economic performance of 11 Latin American and 13 Asian countries during the period of 1973-1988, and found that the economic health of these countries became worse in the aftermath of IMF program.
Another flawed aspect of IMF bailout packages is that it requires stiff conditions like austerity measures to be implemented within short span of time. These measures include reduced government expenditures by reducing development sector spending, eliminating subsidies, and privatizing PSEs.
These measures add insult to injury as they result in deepened economic meltdown increasing inflation, layoffs and pushing masses further below the poverty line, as the overall purchasing power of masses gets seriously affected. During Asian Financial crisis of 1990s IMF treated this emergency situation in an ordinary way, and required states to implement structural adjustment policies in return for loans. As a result, inflation skyrocketed and unemployment reached at its tipping point in these countries. IMF, so-called rescuer of countries in economic meltdown, through its reforms package fuels instability which often results in regime change and socio-political chaos in respective countries. The structural adjustment policies more often than not enjoin stern and unpopular economic measures that incite public sentiments against the regime of time. The opposition forces use this foreign-induced crisis as a breeding ground to excel their activities aimed at toppling the existing regimes. This creates a vicious cycle of uncertainty and instability that adds fuel to the fire of already debilitating economy. If government under pressure pursues popular measures to sustain its foundations it also harms economy in the long run.
It’s high time that countries looked outside for their economic rescue should reorient their strategies for the salvation of their economic crisis. These bail-out packages create a dependency syndrome whereby countries resist structural reforms which are indispensable for sustainable economic growth. IMF bail-out packages and the associated conditionalities in their existing form further magnify the crisis making these bailouts recipes for disaster. Thus, unless IMF provides breathing space to these countries for implementation of these reforms, bailouts will remain recipes for disaster.
The writer is Research Associate, South Asian Strategic Stability Institute, Islamabad
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