CSS 2020 Solved Essay | IMF Bailouts: Roads to Stability or Recipes for Disaster | CSS and PMS Solved Essays by Sir Syed Kazim Ali Students
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Outline
Introduction
Thesis Statement: Although the International Monetary Fund (IMF) bailouts have been designed to provide economic stability to developing nations, they have instead become recipes for disaster due to their biased creditor protection policies, conditional loan implementation, debt trap-causing structural adjustment programs, non-transparent bailout mechanisms, and the damage to the sovereignty of the indebted countries, as illustrated by case studies of Pakistan and Tanzania, emphasizing the need for self-help rather than IMF loans for sustained economic development.
- ✓ A country’s economic stability, determining its international standing in the fast-advancing and competitive world
- ✓ In many developing nations, an International Monetary Fund (IMF)-dependent economy overshadows all other concerns the countries face today
- ✓ IMF, protecting creditors, not debtors, making the loan conditional on the implementation of certain economic policies, reducing the budget on the public facilities, and damaging the sovereignty of the country
- ✓ Case studies of Pakistan and Tanzania, proving that IMF is not a path to prosperity but instead a guarantee of failure
- ✓ Some pragmatic measures, reversing the assumption that IMF bailout is the solution and understanding that self-help is more reliable in providing sustained services than IMF bailouts, helping the developing nations achieve economic stability
What is IMF?
- ✓ The International Monetary Fund (IMF) provides financial assistance and advice to member countries
Understanding the relationship between IMF bailouts and economic growth
- ✓ IMF bailouts, contributing positively to developing and less developed countries economic growth and development
- Case study of Jordan
- Bill Gates view
- ✓ IMF bailouts failing to bring about the self-supporting economic development of the recipient countries
- Case study of Egypt
- David Graeber view
IMF bailouts are recipes for disaster
- ✓ Conditioning loans with the implementation of certain economic policies
- In the Asian crisis of 1997, many countries, such as Indonesia, Malaysia and Thailand, pursuing tight monetary policy and tight fiscal policy
- In 2001, Argentina being forced into a similar policy of fiscal restraint
- ✓ IMF’s stubborn adherence to structural adjustment
- In 1980, the total external debt of all developing countries $609 billion; in 2001, after 20 years of structural adjustment, $2.4 trillion
- Nigeria debt is around $5 million dollar but the amount was compounded to $16 billion only in one year period
- ✓ Reducing the budget for the public facilities
- African countries spending most of the government budget on debt repayment instead of spending on healthcare and education
- Kenyans, Botswana, South Africa, and Zimbabwe citizens dying because of HIV and AIDS infection due to not enough money for medical treatment
- ✓ Bailout mechanism, non-transparent and unaccountable
- Representative Maxine Waters, “We have painfully discovered the way the IMF works causes children to starve.”
✓ Goldenberg scandal
o IMF intervention in Kenya in the 1990s, removing Central bank control over flows of capital, making it easier for corrupt politicians to transfer money out of the economy
o The economist Joseph Stiglitz, criticizing the more monetarist approach of the IMF, saying the IMF “was not participating in a conspiracy, but it was reflecting the interests and ideology of the Western financial community.”
- ✓ Damaging the sovereignty of the country
- The Thai government, reducing its fiscal deficit despite a very fragile recovery
- Indonesia opening its retail trade to foreign investors despite the consequences of higher unemployment
Case studies show that the IMF bailout is not the path to economic stability but instead a guarantee of failure
- ✓ Tanzania
- ✓ Pakistan
Way forward
- ✓ To restructure the economy through an institutional change
- ✓ To make countries aware that self-help is more reliable than IMF bailouts
Critical Analysis
Conclusion
A country’s economic stability determines its international standing in the fast-advancing and competitive world. Without any doubt, it is the economy that manifests the fate of a nation worldwide. Countries like America, China, and South Korea have risen to prominence because of their good economic growth. Yet, in many developing nations, an International Monetary Fund (IMF)-dependent economy has overshadowed the countries’ concerns today. Andres Velasco, the Dean of the London School of Economics, aptly said that nothing hampers the country’s economic prosperity the way IMF does. But, unfortunately, it only provides temporary relief to the sorry state of the developing economies. In this regard, there is a list of factors that prove IMF bailouts as recipes for disaster rather than roads to stability. First, the IMF is really designed to protect creditors, not debtors. Second, the IMF makes the loan conditional on implementing certain economic policies, which worsens difficult economic situations. Next to it, the structural adjustment program of IMF causes many countries to fall into a debt trap and unable to repay the loan debt. Besides that, the indebted countries are forced to pay their debt interest by reducing the budget for public facilities. Furthermore, the bailout mechanism of the IMF for international finance capital is non-transparent and unaccountable. Last but not least, the IMF policies damage the country’s sovereignty. To add a little further, the case studies of Pakistan and Tanzania prove that IMF bailouts are no roads to stability but instead guarantee failure. Therefore, to achieve economic stability, it is necessary to reverse the assumption that the loan shark offered by the IMF is the solution and understand that self-help is more reliable in providing sustained services. Thus, the essay comprehensively analyses how IMF bailouts are recipes for disaster rather than roads to stability for many developing nations.
The International Monetary Fund (IMF) is an international organization that provides financial assistance and advice to member countries. It provides a systematic mechanism for foreign exchange transactions to foster investment and promote balanced global economic trade. To achieve these goals, the IMF focuses and advises on a country’s macroeconomic policies, which impact its exchange rate, governmental budget, money, and credit management. Quota subscriptions fund the IMF. Member states pay according to the size of their economy, and voting rights are based on this quota. Out of 195 countries worldwide, 190 countries are members of the IMF. However, the International Monetary Fund (IMF) was originally created to work with member nations to implement measures to ensure the stability of the international financial system and correct balance-of-payment maladjustments. By the early 1980s, however, it took a different course. Rather than helping governments avoid currency crises, it has persistently pressured them to abandon cross-border trade regulation and financial flows, resulting in massive trade imbalances and reckless financial speculation.
Before moving toward the factors that prove IMF bailouts as recipes for disaster, it is important to understand the relationship between IMF bailouts and economic stability. Many economists believe that IMF bailouts contribute positively to developing and less developed countries’ economic growth and development. For example, bill Gates, the president of the Bill and Melinda Gates Foundation, argues that IMF is an effective organization for lifting the poor out of poverty. Further, there are several cases where it can be proved that the IMF has been very effective in lifting countries out of poverty onto a path of sustainable growth. Jordan is an excellent case in point in this context. Jordan had been impacted by its wars with Israel, civil war, and a significant economic recession. In 1989, the country struggled with a high unemployment rate and an inability to pay its loans. From 1993 to 1999, the IMF gave Jordan three extended fund facility loans. As a result, the government undertook massive reforms of privatization, taxes, foreign investment, and more straightforward trade policies. As a result, Jordan was also able to bring down its overall debt payment and restructure it at a manageable level. Thus, Jordan is an example of how the IMF can foster strong, stable economies that are productive members of the global economy.
However, Jordan’s case contrast with many other developing countries in which IMF bailouts have failed to bring about the self-supporting economic development of the recipient countries. Since 2011, the percentage of Egyptians living below the poverty line has risen from 25.2 per cent to 32.5 per cent. Most Egyptians have seen their real incomes fall, leaving them with less purchasing power. This is, in large part, a result of IMF reforms. Around 70 per cent of taxes paid by Egyptians now go towards debt servicing rather than public services or development. Further, many economists believe that IMF does not contribute to developing and less developed countries economic growth and development. David Graeber, an American anthropologist and author, argues that IMF is designed to protect creditors, not debtors.
The above example shows that IMF has failed to help developing countries achieve economic stability. Here, the light will be thrown on some factors that prove IMF bailouts are recipes for disaster rather than roads to stability. To begin with, on giving loans to countries, the IMF makes the loan conditional on the implementation of certain economic policies. However, the problem is that these policies 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 the IMF to pursue tight monetary policy and fiscal policies to reduce the budget deficit and strengthen exchange rates. Unfortunately, these policies caused a minor slowdown into a serious recession with very high levels of unemployment. Similarly, 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.
Moreover, the IMF’s stubborn adherence to structural adjustment proves it a recipe for disaster. Over the last two decades, the results of the structural adjustment programs imposed by the IMF on close to 90 developing countries have been disastrous. For example, according to a World Economic Forum report, in 1980, the total external debt of all developing countries was $609 billion; in 2001, after 20 years of structural adjustment, it totalled $2.4 trillion. Moreover, in 2001, sub-Saharan Africa paid $3.6 billion more in debt service than it received in new long-term loans and credits. Further, an example of Nigeria’s debt was the government borrowing up to around 5 million dollars. Still, the amount was compounded to $16 billion only in one year because of the IMF’s high compound interest charge. Thus, in most cases, structural adjustment caused economies to fall into a hole wherein low investment, reduced social spending, reduced consumption, and low output interacted to create a vicious cycle of decline and stagnation rather than a virtuous circle of growth, rising employment, and rising investment, as originally envisaged by the IMF theory.
Besides that, the indebted countries are forced to pay their debt interest by reducing the budget on public facilities, which, again, proves IMF bailouts as recipes for disaster. In 2020, a United Nations Development Program report revealed that most poor African countries spend most of the government budget on debt repayment instead of healthcare and education. The consequences are some countries, such as Kenyans, Bostwana, South Africa, and Zimbabwe; citizens are dying because of HIV and AIDS infection due to not having enough money for medical treatment.
“In Korea, the IMF insisted that all presidential candidates immediately “endorse” an agreement 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.”
Jeffrey Sachs, the head of the Harvard Institute for International Development
Another major factor proving IMF is a recipe for disaster is the bailout mechanism of IMF for international finance capital that is non-transparent and unaccountable. Its vulnerable position was exposed during an early 2000 debate in the U.S. Congress over a G-7 initiative to provide debt relief to 40 developing countries. Legislators depicted the IMF as the agency that had caused the debt crisis of poor countries in the first place, and some called for its abolition within three years. As said by Representative Maxine Waters, “We have painfully discovered the way the IMF works causes children to starve.”
Verisimilarly, the Goldenberg scandal again proves that IMF bailouts are recipes for disaster rather than the road to stability. When the IMF intervened in Kenya in the 1990s, they made the Central bank remove controls over capital flows. The consensus was that this decision made it easier for corrupt politicians to transfer money out of the economy. Critics argue this is another example of how the IMF failed to understand the dynamics of the country they were dealing with – insisting on blanket reforms. The economist Joseph Stiglitz has criticized the more monetarist approach of the IMF in recent years. He argues it fails 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.”
Last but not least, the IMF policies damage the country’s sovereignty. Since the IMF never forgives and because of the huge debts developing countries owe the international financial institution, they (including the United States as a major partner of these institutions) control almost all the affairs of those poor countries. In other words, if any country doesn’t obey what the IMF says, then it must pay back the debt, and because it cannot pay back the debt, it must obey whatever instruction it forwarded to its face. For example, the IMF told the Thai government to cut its fiscal deficit despite a very fragile recovery. It pushed Indonesia to open its retail trade to foreign investors despite the consequences of higher unemployment.
The IMF is the International Mafia Federation. They’re the loansharks of last resort.
— Gerald Celente
The above-discussed factors prove that IMF bailouts are recipes for disaster rather than roads to stability. Here are some case studies to further support the fact that the IMF has failed to promote economic stability in developing nations. The first is the case of Tanzania. In 1985, the IMF came to Tanzania intending to turn a broke, indebted socialist state into a strong contributor to the world economy. The first steps taken were to lower trade barriers, cut government programs, and sell state-owned industries. By 2000, the once-free healthcare industry started charging patients, and the AIDS rate in the country shot up to 8%. The education system that was once free started to charge children to go to school, and school enrollment at 98% in 1981 dropped to 66% in 2000. As a result, the illiteracy rate in the country increased by nearly 50%. In June 2020, the IMF approved $14.3 million of relief to Tanzania, noting in its press release that the money was critical to helping the country meet its debt service needs and freeing up resources for public health spending. Unfortunately, after over 35 years of IMF assistance, Tanzania still struggles to maintain consistent economic momentum. Problems with fiscal management have led to expenditure arrears and a higher level of non-performing loans. This is an example of how the organization failed to understand that a one-size-fits-all strategy does not apply to all countries.
The next is the case of Pakistan which shows the IMF bailout is not a path to prosperity but a guarantee of failure. Pakistan and IMF have signed 23 agreements for loans since 1958, comprising ten programs under PRGT (Poverty Reduction Growth Trust) and GRA (General Resource Account) of IMF and 13 bailouts. The current 39-month bailout plan has raised the figure by $6 billion and is the 14th time Pakistan has gone to IMF since the 1980s. This bailout has laid several conditions on the Pakistani government, including taxes and subsidies, government spending, interest rate, and foreign exchange rate. The debt taken by Pakistan from the IMF increased in rupee terms from Rs70 billion to Rs811 billion due to currency devaluation. Hence, in the long run, the IMF loan can potentially harm Pakistan and its economy in a more devastating and brutal way than the loan taken from China under CPEC. Multiple IMF programs, including the last, which ended in 2021, have yet to help Pakistan deal with weaknesses that have led to the balance of payments crisis. The main aim of the IMF is to increase the borrowing countries’ revenue, but in the case of Pakistan, they have not been able to do much in the past.
However, IMF has failed to achieve economic stability for developing nations. But there is still some light at the end of the tunnel to hit the jackpot. What should be kept in mind is that it will be something other than a meteoric rise for the struggling economies to be out of the woods shortly. In this regard, IMF dependence can be overcome only by restructuring the economy through an institutional change that enables the middle class and the poor to participate in savings, investment, and innovation. In addition, there is a need to reverse the assumption that IMF is the solution and understand that self-help is more reliable than IMF in providing sustained services. Furthermore, poor countries should be allowed to give subsidies and tariffs to develop their economies. To cap it all, mobilizing resources, bringing back the billions parked abroad, reforming institutions, improving governance, purifying politics, and broadening the tax net can help developing countries achieve economic stability.
After examining the impact of IMF in Pakistan and Tanzania, it is worthy to note that IMF in itself is not a problem but the circumstances, method of distribution, and use by the recipient country are the problems. In this regard, the IMF needs to be more effective and decisive in boosting the economic progress and development of a country. It is interesting to note that developed countries such as South Korea, the U.K., and Japan strive to hand over the potentially growing economy to their posterity. They also remain in the throes of financial shocks, but these states do not spread begging bowls in front of the IMF so that future generations do not face financial obstacles. On the other hand, developing nations are leaving a debt-ridden economy for their upcoming generations. They failed to understand that an IMF bailout is not a noble deed to help those in need; it’s a business model where any benefit to the poor is incidental.
To cap it all, it is no exaggeration to say that the one who gets the more benefit from the IMF bailouts is the donor, not the recipient. However, it is said that because the IMF deals with the economic crisis, there are likely to be difficulties in whatever policy they offer. It is only possible to deal with a balance of payments with some painful readjustment. Further, the failures of the IMF tend to be widely publicized. But, its successes are less so. Interestingly, an IMF intervention enables the government to secure a loan and then pass the blame on to the IMF for the difficulties. On the other hand, inflationary devaluations, privatization and interventionist policies by the IMF worsen the economic situation. In addition, bailing out countries with large debt create a moral hazard. The possibility of getting bailed out encourages countries to borrow more. Moreover, the IMF has been criticized for supporting military dictatorships in Brazil and Argentina, such as Castello Branco in the 1960s, which received IMF funds denied to other countries. Hence, the claim that IMF bailouts are roads to stability does not hold water.
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