Conditionalities: Ties that Bind or Enable?
The International Monetary Fund, World Bank, and various regional development banks have commonly issued conditionalities on the loans they provide to developing countries: conditions that require certain structural adjustments to a borrowing country’s national economic, monetary, and social policies (such as lowering government spending, eliminating subsidies to domestic industries, promoting greater interstate trade by reducing tariff and non-tariff barriers, and limiting the authority of its central bank to set interest rates or the value of its currency). Examples abound of the alleged harmful impact that these strict conditions have on developing nations and their capacity to grow economically and create stable, competitive economies. Consider, e.g., recent criticisms of IMF policies toward the African bloc or the IMF’s historical impact on Jamaica’s economy or Pakistan’s turn to the World Bank and its reliance on further IMF loans to pay off its existing debt to the organization.
Are conditionalities on such loans justified? Why or why not? In answering this question, you must (1) briefly explain what you believe the central point is of these conditions, (2) find one example in which a developing country received loans from the IMF, World Bank, or some regional development bank, which entailed certain structural adjustments, (3) briefly describe the example and the conditions that the borrowing country was required to meet, (4) explain how the country instituted these necessary changes, and lastly (5) describe what the long-term impact of these loans and structural adjustments were on the borrowing country’s economy.
11 responses to “Prompt 6 (Gov’t/Capitalism 2015)”
Success for the IMF in Latvia
These conditions are put in place so that the countries who receive the loans are able to get to a point where they are able to pay back their loan. It also makes sure that the country is able to succeed with the money and not have any further turmoil. Latvia is one example where the IMF imposed structural adjustments. It was a success case for the IMF.
Latvia needed to cut its budget as one of its adjustments. When it did not cut it enough, “Latvia missed a 200 million euro disbursement from the IMF” (Weisbrot 2009: 1). The IMF wanted a 5% budget deficient in the GDP and because of this “Latvia [was] already cutting its budget by 40%, and [planned] to close some public hospitals and schools in order to make the IMF’s targets, prompting street protests”(Weisbrort 2009: 1). The IMF sanctions also led to “Latvia’s GDP crashed by 18% in the first quarter of this year, after a 10.3% drop in the preceding quarter. These [were] among the worst declines in the world.” (Weisbrot 2009: 1). All of the problems with the IMF budget decrease requirement would imply that the IMF was making matters worse for the country instead of improving it, counteracting my point that the IMF was successful in improving Latvia’s economy.
However, today “Latvia is now the European Union’s fastest-growing economy” (Blanchard, Griffiths and Gruss 2013: 1). The IMF’s plan of a “combin[ation of] a budgetary squeeze, which lowers domestic demand, with a devaluation, which provides an offsetting stimulus from net trade” has worked in Latvia and has greatly improved their economy (Blanchard, Griffiths and Gruss 2013: 1). Latvia now has joined the EU and has the Euro for its currency. It has grown immensely since it was a part of the USSR.
The Latvia case would indicate that the IMF and its structural adjustments actually do help a country succeed. Although it might appear that the sanctions hurt the country, in the long run, they can lead to overall attainment of a prospering financial system. (348)
Blanchard, Griffiths and Gruss. “Extreme Economics.” Economist. 21 Sept. 2013. Web. 11 Mar. 2015.
Weisbrot, Mark. “The IMF Is Hurting Poor Countries.” Guardian. 13 May 2009. Web. 11 Mar. 2015.
Success and Failure in Responsibility to Solve the World’s Economic Crises
Response to Emily
The IMF and World Bank are international banks developed to help indebted countries pay back their debt and foster economic growth and stability via issuing loans. Just like any other bank then it must attach certain terms and conditions that adjust a country’s economic policies to overcome the problems that led it to seek financial aid from the international community in the first place (IMF). Similarly to Emily, I would like to show how the much maligned structural adjustments that do not always work for a variety of factors, do in fact have success stories.
First off, why do these loans experience issues? The fund was established in a much simpler economic world and was designed to specifically help re-build war torn Europe (Vasquez 1999). Today it’s operating in an extremely interconnected global economy and assumes primary responsibility in dealing with economic crises across all seven continents (Vasquez 1999). Therefore, when the fund does act irresponsibly and attaches the exact same loan on to two different countries of differing backgrounds and regions we can expect to see at least one of the countries loans to fail. Efforts to make Jamaica a global competitor failed, while as Emily noted, worked in Latvia.
Jordan, a country that relied heavily on discounted energy prices from neighboring nations in exchange for some of their labor force was in financial turmoil following the 70’s oil crisis (Dimou 2010). In 1989 they received their first loan from the IMF and it did not initially take flight into economic growth. This was because at the time the Jordanian economy was unable to deal with the constant instability of the Middle Eastern region. Ever present wars and fighting in the Middle East meant one day Jordan was receiving adequate aid and the next they were not (Dimou 2010). The loan given in 1989, seeked to control public debt and deficits, lower inflation, privatization, and relax trade policies. Jordan was issued EFF loans throughout the 90’s that relied on larger foreign investment and easier trade policies (Dimou 2010). These loans culminated in greater domestic saving and investment and better governmental budget balance (Dimou 2010). Jordan exited direct IMF aid in 2004 and in 2008 when the global financial crisis hit Jordan compared to other WTO members came out surprisingly well. This is in part due to a government that acted quickly from the crisis, they ordered all banks in Jordan to disclose their toxic notes and in doing so the system suffered a 40 million dollar loss. However, when you take into account they still made over 1 billion dollars that year it can be concluded that the economic downturn had marginal effects on Jordan just four years after it’s severing ties with the IMF.
As Emily pointed out, these success stories of Latvia and Jordan actually do support structural adjustments. The IMF’s structural adjustments in both countries supported the adoption of fiscally and economically responsible government for the first time in decades.
Dimou, Antonia. “Middle East.” Jordan: Success Story of the IMF. World Press, 19 Aug. 2010. Web. 13 Mar. 2015.
“Factsheet — IMF Conditionality.” IMF, 30 Sept. 2014. Web. 12 Mar. 2015.
Vasquez, Ian. “The International Monetary Fund: Challenges and Contradictions.” Cato Institute. CATO Institute, 28 Sept. 1999. Web. 13 Mar. 2015.
Response to Emily
While the IMF claims Latvia is “success” story, it seems a bit like plagiarism on IMF’s behalf. When the IMF gives a country a short-term loan, the organization sets in place certain conditionalities that the recipient state must follow. In the case of Latvia, their contract with the IMF was centered around internal devaluation, pegging its currency (at the time, the Lat) to the Euro, extreme budget cuts, and increased taxes (Stewart 1).
My colleague claims (with support from The Economist) that “the IMF’s plan of a “combination of] a budgetary squeeze, which lowers domestic demand, with a devaluation, which provides an offsetting stimulus from net trade” has worked in Latvia and has greatly improved their economy (Blanchard, Griffiths and Gruss 2013: 1).” However, when looking at the record of events, it becomes clear this is not what actually happened. Internal devaluation begins with driving down wages and creating mass unemployment followed by a change in the real exchange rate and a resulting increase in exports (Weisbrot 1). The problem with using this system of internal devaluation, is that Germany, the power house of the European Union and the internal devaluation success story, is an industrial titan. Consequently, Germany was able to increase exports and their competitiveness abroad. Latvia, a country with less industrial infrastructure, could not hope to achieve such results through internal devaluation, and instead suffered involuntary employment rates of 20%, lost 10% of their work force abroad, and though they recovered from their recession in had little to nothing to do with their IMF conditionalities (Steward 2). It was actually the rejection of IMF budget slashing in 2010, some well timed inflation to alleviate the pressure of growing public debt, combined with loans to ensure an accurate value on the Lat that pulled the country out of the depths of recession.
My colleague ultimately believes that these conditionalities exist, “to make sure that the country is able to succeed with the money without any further turmoil.”
However, with the situation in Latvia worsening while following the path the IMF laid in front of them it was clear that the structural adjustments were not working. It was actually the rejection of IMF budget slashing in 2010, some well timed inflation to alleviate the pressure of growing public debt, combined with loans to ensure an accurate value on the Lat that pulled the country out of the depths of recession. If the conditionalities were truly intended to make sure Latvia would be able to implement reform with the IMF money in a way which would ensure they needed no additional assistance and faced no additional turmoil, then they should not have needed further financial assistance from Europe, whether it came from the IMF or (as it happened) from other Banks and regional development funds.
Structural adjustments are well intended by the IMF and other regional development funds, however copy and pasting one country’s recipe for success onto the paperwork for another seems sloppy and idealistic.
Stewart, Heather. “If Latvia Is a Bailout Success Story, Be Very Scared of Failure.” Guardian. 10 Dec. 2011. Web. 12 Mar. 2015.
Weisbrot, Mark. “Christine Lagarde’s Perverse Praise for Latvia’s Economic ‘success'” Guardian. 7 June 2012. Web. 12 Mar. 2015.
Structural Adjustments produce undesirable effects for developing nations
Although the International Monetary fund and the World Bank were created in order to preserve free trade and capitalism in the aftermath of World War II, they have hindered development of some of the nations that accept the conditions of their loans due to the strict conditions and high interest rates that goes along with them. The repercussions of these organizations and the conditions they impose on these less developed nations have had quite the opposite effect, creating a dependency on the IMF and the World Bank. Thusly the conditions imposed on these nations by the World Bank are unjustified.
When the World Bank draws up a loan to a developing nation they included conditions like elimination of trade barriers and domestic subsidies which are meant to help introduce that nation into global trade so that nation might benefit from importing goods that they can’t make and exporting goods that they make efficiently. They might also impose conditions that reduce food aid replacing it with food imports. This is meant to reduce dependency on food aid and help less developed countries become a player in the global market and not just a dependency. However the implementation of these conditions sometimes produce opposite effects than desired.
Jamaica has been a dependent on the World Bank, IMF system for the last thirty to forty years, obtaining 18.5 billion in loans. Jamaica like many of the developing countries that receive loans from the World Bank/IMF had conditions that they had to follow in order to receive finical assistance that were intended to produce considerable economic independence. However, these conditions had the exact opposite effect. Some conditions that were imposed on Jamaica were the “Abolition of food subsidies and currency devaluation [that] made the cost of food rocket, while the IMF held down wages. Health, education and housing were run into the ground.” (Deaden, 2013) In order to fulfill these conditions the Jamaica government reduced spending on food subsidies and devalued the Jamaican currency allowing local prices to rise as prices from over seas lowered.
These practices resulted in the absence of growth in the Jamaican economy and the dependence on foreign loans. This was due to the forced reforms, which caused domestic production to hinder. “The devaluation of currency, and the elimination of limits on imports, meant that the price of local produce went up while imports from richer countries sold more cheaply.” (Dashiell, 2002) The inability for domestic products to compete with U.S prices lead to local food industries like dairy and potatoes, some of the countries strongest industries, to run out of business. An economy that was stagnate and loosing domestic production was unable to repay loans and was forced to take out further loans to repay old ones. These high interest rates on existing loans prevented Jamaica from ever becoming independent of the IMF/ World Bank system.
In Jamaica’s case and many developing countries like it, the IMF and World Bank high interest rates and strict conditions hurt domestic economy. Allowing developed countries like the United States to export to lesser-developed countries, destroying domestic production because they are unable to compete with countries like the U.S. without subsidies or tariffs.
Deaden, Nick. “Jamaica’s Decades of Debt Are Damaging Its Future.” Guardian. N.p., 16 Apr. 2013. Web. 10 Mar. 2015.
Dashiell, Chris. “Life and Debt.” CineScene. N.p., 2002. Web. 10 Mar. 2015.
Conditionalities Beat Bankruptcy
Conditionalities on are a normal facet of any loan. Major conditionalities imposed by the IMF and World Bank, however, are often criticized for setting the recipient states up for failure (and thus further loans). This argument finds ground in the fact that countries that take out loans often repeat the process in the future. In fact “Twenty out of the 22 countries with new IMF programs from 2011 to 2013 had borrowed in the past decade, and a majority had borrowed in the previous three years.” (Yukhananov) This seems to point to the ineffectiveness of these conditionalities on restoring economies, but one could also view this as a failure of the state to follow these measures properly.
Another viewpoint is that the conditionalities imposed are not appropriate for the country taking the loan. What worked for one country might not work for another, yet “the IMF, World Bank, and U.S. Treasury Department, were passing out this one-size-fits-all solution.” (Cohen) Blindly applying conditions ignores the temporal dimension of a state’s economy and undermines the chances of success before the process even starts. A similar statement was made by Joseph Stiglitz, ex-chief economist of the World Bank, in 2001: “Each nation’s economy is analysed…then the Bank hands every minister the same four-step programme.” (Palast)
Ukraine has been a recent recipient of an IMF loan, with the key conditionalities being reducing expenditures and cracking down on corruption. Subsidies to the Ukrainian state energy company Naftogaz have been a major source of losses, but gas prices have risen from $85/1000 m^3 in April (Moghadam) to $268.50/100 m^3 in September (Interfax). This rise in utility price comes alongside “laws to improve state procurement transparency” (Rastello) which means the IMF considers Ukraine to be “on track” for further aid. (Washington).
In February, the IMF announced a further loan to Ukraine along with the same line of conditionalities as the ones involved in the loan last April. The cuts to social services along with an $8m a day war effort are making this “the most difficult year since at least the second world war” (Luhn). Despite this, the IMF still believes its plan will save Ukraine. The outlined strategy stated that “the budget deficit will increase between 2013 and 2014” but will “place public debt firmly on a declining path from 2015 on.” (Moghadam) It’s easy to draw parallels to what happened in Russia in the 1990’s and denounce the IMF’s efforts, but one must keep in mind that these are different times, places, and policies. At any rate, having money and conditionalities is probably better than being bankrupt.
Cohen, Josh. “Ukraine Can’t Afford the IMF’s ‘Shock Therapy’.” Foreign Policy. 10 Sep 2014. Web. 09 Mar 2015.
Interfax. “Naftogaz, Gazprom sign supplement to gas contract, set gas price for Ukraine in Q1, 2014 at $268.5 per 1,000 cubic meters. – Stavytsky.” Interfax. 01 Sep 2014. Web. 09 Mar 2015.
Luhn, Alec. “IMF announces $17.5bn loan for Ukraine.” Guardian. 12 Feb 2015. Web. 09 Mar 2015.
Moghadam, Reza. “Ukraine Unveils Reform Program with IMF Support.” IMF. 30 Apr 2014. Web. 09 Mar 2015.
Palast, Gregory. “IMF’s four steps to damnation.” Guardian. 29 Apr 2001. Web. 09 Mar 2015.
Rastello, Sandrine. “Ukraine Gets IMF Approval for $17 Billion Load Amid Unrest.” Bloomberg. 30 Apr 2014. Web. 09 Mar 2015.
Yukhananov, Anna. “IMF loan conditions grow despite vows to limit them: study” Reuters. 02 Apr 2014. Web. 09 Mar 2015.
Washington. “IMF says Ukraine on track with conditions of loan program.” Reuters. 28 Aug 2014. Web. 09 Mar 2015.
Response to Paul
Efforts made by the International Monetary Fund to alleviate Ukraine of bankruptcy come from obliging intentions but lack the ability to produce a desirable outcome. Conditionalities are in fact essential to all types of loans or aid. But the greatest problem with conditionalities attached to loans provided by the International Monetary Fund or World Bank, is the success rate of actually leaving these developing countries off in a better state following the loan. The crucial reforms that the IMF has decided to put into practice in Ukraine are funded by a $17 billion loan (IMF.org). Reorganizing the exchange rate, fiscal policy, and energy policy are crucial pieces the IMF is pushing for to avoid bankruptcy for the country (IMF.org). However recuperative these policies may attempt to be for Ukraine, the efficiency and condition of this nation cannot fully progress from such conditionalities.
As noted by Paul, every country has a unique and diverse economic structure. For the IMF to simply create a universal set of conditions and then apply those to every country, is both naïve and ineffective. The fact that today’s Ukraine (historically speaking) is a newer country facing extreme economic and political challenges, both domestically and with neighboring countries, it calls for a specific set of conditions from the IMF to ensure a more favorable outcome. The civil war is consuming the people, government and economy and creates yet another obstacle President Poroshenko must factor into the new reforms. Ukraine is already predicted to require an additional 19 billion dollar aid because of increased military spending because of the battle within the country and extreme tension with Russia (Cohen). The eastern side, Donbass, is holding a majority of the fighting and is predicted to become further alienated, due to the reduction in energy subsidies and their predominance in industrialization (Cohen). On the surface level it looks as if the IMF is helping Ukraine. They are implementing reforms that are reducing the multi-billion dollar debt, but the result of such reforms are leaving this fragile country in an even more unstable standing.
http://foreignpolicy.com/2014/09/10/ukraine-cant-afford-the-imfs-shock-therapy/ (Josh Cohen)
Hindered Growth due to Blanket Policies
While many believe that the implementation of the International Monetary Fund, World Bank and other regional development banks have been beneficial in helping lesser developed countries make positive strides forward, this is often not the case. Many conditions imposed by these organizations end up severely destroying parts of the economy, reducing respect for democratic principles and leaving countries in a state similar or worse than the ones they were in before the loans were made. These conditions harm the country in question by preventing them from being competitive in the global market and only end up furthering the interest of larger (and typically) capitalist countries like the United States, Europe and China.
Greece in 2010 agreed to a new series of conditions outlined by the European Union and the International Monetary Fund for more than 100 billion euros. Included in this was a spending cut on government employees that included bonuses and was predicted to save 1 billion dollars. Additionally revenue coming in through sales tax increased on cigarettes, fuel and alcohol as well as other goods. Finally another condition was economic contractions beginning at 4% and lowering in the following years. (Weeks 2010: 1). Despite Greece implementing these structural changes years later in 2015 Greece had run into a wall and was incapable of making dept. payments to the IMF and ECM. The Greek economy was already in trouble before the IMF and ECM loans were implemented but while Greece’s budget deficit has been reduced, the country is in a much deeper recession and unemployment has reached 27% where is was at 12% in 2010. Reports went on to say that the IMF and its partners in the Greece bailout significantly underestimated how the conditions of the loan would impact the economy negatively. (Olster 2013:1). This is clear example of IMF conditionality not allowing nations to take charge of their economies and rather pushing them further into economic decline.
It seems that the general idea behind conditionalities imposed by the IMF have the right idea. They want to help grow or restore a countries crumbling economy and have several laid out step (conditions) to help achieve this end but it seems in many cases that they require countries to do things that are actually harmful to their economies like reduce infrastructure, removing trade barriers that make their good competitive in national markets and cutting spending on health and educations. IMF loan agreement have, in recent years been seen as well planned and strikingly blanket policy oriented and “the fund earned a reputation as a corps of technocratic drones pitilessly contented in their air-conditioned hotel rooms as they imposed cookie-cutter “solutions” on prostrate governments.” (Malcomson 2011: 1). To be more effective IMF loan conditionalities need to be more tailored to country specific issues and less tied to capitalist ideals that are being set forward. Several have argued that despite stories of failure, the IMF has helped several countries out of difficult times but it has been an overarching theme that IMF conditionalities are more detrimental than helpful for many countries.
Ap. “IMF: We Made ‘Notable Failures’ In Greek Bailout, Underestimated Austerity’s Effects.” Huffington Post. 06 May 2013. Web. 11 Mar. 2015.
Papadimas, Lefteris, and Stephen Brown. “Greece Sees Problems Repaying IMF, ECB; Germans Air Mistrust.” Reuters. 25 Feb. 2015. Web. 11 Mar. 2015.
Weeks, Natalie. “Greece Outlines Conditions of EU-IMF Package: Summary.” Bloomberg. 2 May 2010. Web. 11 Mar. 2015.
IMF Loans: Adding Weight to a Sinking Ship
Response to AJ
The World Bank and the IMF, originating just after WWII, were designed to assist developing countries and help them get on their feet in a period of extensive globalization and economic growth. With these loans came conditions that simply, in many cases, led to an almost certain ill-fated future for the loan accepting country. With the initial implications of lifting developing countries and making them players in the global economy, it seems as if the exact opposite is the reality in so many cases. Burdening developing nations with hefty interest rates and conditions for the loans has only dug a deeper hole to escape from, and is making it increasingly more difficult for developing countries to regain their economic footing.
One key example highlighting the inherent problems surrounding IMF loans is Ukraine. Ukraine was approved for a $17 billion loan from the IMF in April of 2014 (Helmer, 2014). As Ukraine remains a war-torn country, the effectiveness and benefit from this IMF loan remains in question, and carries with it a significant amount of risk. It is stated that normal IMF practice is to lend only up to twice a country’s quote in one year; this loan was eight times as high (Helmer, 2014). One major issue is that almost none of the loan will be received from the war-torn East, where basic infrastructure has been destroyed for power generation, water, hospitals, and the civilian housing areas that were the target of attack (Hudson, 2014). With the loan, the IMF required Ukraine to reform natural gas subsidies raising the price by nearly 50%. Also, the IMF demanded that Ukraine would set up a new Anti-Corruption Bureau reducing internal conflict and risk for all involved (Gelpern, 2014). The IMF also required that Ukraine placed economic growth as most important. As the loans remain fairly recent, there is no way to extrapolate long-term impacts on the economy, but based off of current implementation, the economy could be in a prolonged downward spiral for quite some time.
I agree with you that in theory, the IMF intends to help out developing countries and boost them to a global economic player. However, the harsh reality remains that struggling countries bite off a little more than they can chew in accepting these loans putting them in a more compromised state than they started. Again, as you stated, the harsh conditions implemented by the IMF are a sort of “blanket policy,” and the specific needs of a country aren’t addressed, and instead are forgone in the name of capitalist ideals. Although the IMF has the reputation for doing more harm than good, that isn’t always the case. For example, in Mozambique, because of a loan from the World Bank, their growth episode is one of the longest for low-income countries in recent years. Their sustained, broad-based growth has helped reduce income poverty by 15 % between 1997 and 2003 moving nearly 3 million people out of extreme poverty out of a population of 20 million (World Bank, 2008). I agree that IMF conditions need to be revised in a way that there is less risk taken on by both fronts, and accepting the loan is equally beneficial for both parties.
Gelpern, Anna “Debt Sanctions Can Help Ukraine and Fill a Gap in the International Financial System,” Peterson Institute for International Economics, Policy Brief PB14-20, August 2014.
Helmer, John “Ukraine Takes Another $1.39 Billion from International Monetary Fund–$3 Billion in IMF Cash Already Sent Offshore–Insiders Suspected in Heist,” Dances with Bears, September 3, 2014.
Hudson, Michael. “Losing Credibility: The IMF’s New Cold War Loan to Ukraine.” Michael Hudson. State of Globe, 9 Sept. 2014. Web. 10 Mar. 2015.
World Bank. 2008. “Mozambique Beating the Odds: Sustaining Inclusion in a Growing Economy.”
IMF Loans: Not Always Detrimental
Response to AJ
Your argument against the effectiveness of International Monetary Fund (IMF) loans is reasonable. It states that IMF loans usually end up being detrimental for the receiving country’s economy, and this has been shown to be the case many times throughout the examples of failures that we have examined in class. However you note that there are instances of success that occur from the loans. Your argument that loan conditions need to be tied to the specific needs of the country in order for the loans to be more effective does not hold true in every case, however.
Jordan was a recipient of IMF loans in the late 20th century, and its conditions required that it adhere to general practices of capitalism. The loans targeted controlling inflation, tax reforms, reducing debts, and establishing freer markets, which all cover the broad spectrum of the capitalist market (Dimou 2010). This use of loans correlates well with Jordan’s Human Development Index ranking of 77 with a “high human development” value of .745 as well as its development over time, since it had a value of .545 in 1980 (UNDP 2013).
IMF loans also do not only have success stories in countries targeted to develop, as exemplified by the largest loan (at the time) to the United Kingdom in 1976. The depreciation of their pound sterling prompted the nation to apply for a loan of $3.9 billion. This is another case of the IMF conditions requesting the country to focus on broad, pro-liberal endeavors, which were cutting the federal budget and deficit spending (UK National Archives 2015). They ultimately did not have to accept the entire loan, since their economic condition improved in 1977. Yet they still stuck to the requirements of the IMF, shifting away from socially-focused financial policy, and they are now financially safe.
These two examples show that even quite general conditions attached to loans are legitimate requirements for the IMF to suggest to countries in need. Doing this rather than tailoring conditions based on individual need may expedite the loan process overall, making it much more efficient. The successes of these countries also counter the point that IMF loans make a country worse off. However, these are only two isolated examples of happy endings to IMF loans. We have seen plenty of instances where the loans end up mutilating a national economy, such as in Jamaica or Equatorial Guinea. It is likely that there is no one factor which influences whether or not an IMF loan is successful, but responsible governance may have caused Jordan to develop and the United Kingdom to solve its crisis. Yet there are too many examples to denounce the hypothesis that the IMF is always beneficial to countries in need.
Dimou, Antonia. “Middle East.” Jordan: Success Story of the IMF. World Press, 19 Aug. 2010. Web. 10 April 2015.
The National Archives. “The Cabinet Papers.” Sterling Devalued and the IMF Loan. The National Archives. NDG. Web. 10 April 2015.
United Nations Development Program. “United Nations Development Report 2013.” Jordan. United Nations, 2013. Web. 10 April 2015.
United Nations Development Program. “Human Development Reports.” Table 1: Human Development Index and its components. United Nations 2014. Web. 10 April 2015.
Following WWII the world has gone through a vast period of globalization allowing networks of trade for nearly all products. The driving force in world the economic development of nations has been accredited to institutions such as the IMF and the World Bank. However, in accepting financial assistance these countries must undergo a thorough evaluation of their economic structures and then agree to strict conditionalities in order to receive funds. Controversy has surrounded these conditionalities from those who have received the money and witnessed its effects. One may assume that these conditionalities are justifiable as a procedure that any private bank would also establish to reduce risk and ensure long-term stability and growth. However, these institutions have instituted conditionalities that put unnecessary strains on already fragile economies. Leading in cases to a great deal of social instability, while in instances advantaging already developed economies.
These conditions are often pre-written and are only marginally tailored to meet the contemporary and future fiscal needs of the individual country; a factor that has been criticized by those receiving assistance. Some of these conditionalities include: the privatization of property and capital, eliminating trade-barriers/allowing for market controlled prices, creating fixed currency rates and aggressively reducing deficits.
Although this strategy has seen success in areas of the world, one area where the effects of such conditionalities has had little or even the opposite of the desired effect of creating economic security is in the “Asia economic crisis of 1997”. In which countries such as Malaysia, Indonesia and Thailand were required to agree to tough fiscal restrictions. Their budgets were reduced spending on roads, education and capital investment. These conditionalities were blamed for being overly austere and massively destructive. Although these measure assisted these nation’s currency, there were simply not enough funds to build infrastructure and accumulate capital with potential returns, creating economic stagnation and social-unrest.
Often these risks only become apparent in the long-term, taking years to develop into a crisis in Asia. As often cited, this is due to immediate measures taken to create short-term stability by mainly cutting deficits, while not evaluating long-term growth/investment.
An IMF Loan: A trial by fire for a developing economy
Response to Alex
Following Alex’s blog post, my preliminary impressions regarding IMF and World Bank loans are not particularly spectacular. Briefly, I believe Alex did a proficient job at summarizing the facets, and implications—positive and negative—of having structural adjustments with IMF and World Bank loans. Unfortunately, I was not able to extract an argument from Alex’s blog post. It would be advantageous to discuss how such loan conditionalities are justified; even though there are negative implications as Alex pointed out. Loan conditionalities are justified as the restrictions force a state to consolidate their wealth, staging a state to be competitive in the global realm.
Let us first discuss my reasoning behind having conditionalities being justified with the loans. In no doubt is opening a state’s economy to the globe going to be easy. Growing pains will be associated with these conditionalities. The driving force behind these structural adjustments is to prop up a state to hopefully be competitive among the global economy. According to the IMF, conditionality helps “countries solve balance of payments problems without resorting to measures that are harmful to national or international prosperity” (“Factsheet — IMF Conditionality”). The IMF also assesses the country’s need for conditions based off of four criteria. These include: “prior actions, quantitative performance criteria, indicative targets, and structural benchmarks” (“Factsheet — IMF Conditionality”). At the end of the day, the IMF is a bank and their loans need to be repaid. Due to this, the conditionalities are furthermore justified. If these conditionalities are not met, there is a significant level of risk that the IMF would not have their funds repaid. Conditionalities not only prop a country up to be competitive among the global economy, it ensures that the IMF will be repaid.
An example of these conditionalities is seen with the case of Jamaica. In addition to the imposed interest rates of the IMF loan that Jamaica received, one of the conditionalities was that that significant reform to the public sector had to be done. This is seen here: “…the Jamaican government had to divest or liquidate Air Jamaica by June 2010” (Johnston, Montecino 20). Jamaica instituted these changes with selling the airline to Caribbean Air (Johnston, Montecino 21). Unfortunately the results of these various structural adjustments was that it increased the drain on the economy, leading to low growth coupled with the need to repay the IMF.
A counterargument to this would be that these structural adjustments are not required with IMF loans. One would say that they do more harm than good for a country’s economy. This is more than exemplified with Jamaica. The IMF is a bank—not charity—and the loan needs to be repaid. This makes the IMF’s conditionalities more than justified. If a country’s economy were negatively impacted, the cynic’s view would be that the IMF is only concerned with repayment of their loan, not the long-term sufficiency of a country. If a country cannot be competitive on the global scale, the argument could be made that that country does not belong on the global scale.
“Factsheet — IMF Conditionality.” International Monetary Fund, 30 Sept. 2014. Web. 12 Mar. 2015. https://www.imf.org/external/np/exr/facts/conditio.htm
Johnston, Jake, and Juan A. Montecino. “Jamaica: Macroeconomic Policy, Debt and the IMF.” Center for Economic and Policy Research (2011): n. pag. May 2011. Web. 12 Mar. 2015. https://www.monroecollege.edu/uploadedFiles/_Site_Assets/PDF/cepr-jamaica-study.pdf