The International Monetary Fund

The International Monetary Fund (IMF) is a world renowned institution. After WWII, the IMF was called into action to revive struggling countries who were affected by the war. The institution was initially expected to help bring upon trade and reconstruct damaged economic systems, but now, their role is much more prestigious. Today, the IMF has been given the title of: The Lender of Last Resorts. What this means, is that developing or struggling countries depend on guidance from the institution, in hopes of reestablishing their crumbling or close-to disintegrating economies. However, in doing this, the IMF applies conditionalities to the short term loans that these countries take from them. They do this, to provide structure and control in their lending process, therefore, making sure these countries don’t take advantage of the system. There are many debates regarding whether the IMF should be placing strict conditionalities on loans to these already struggling countries. In my perspective, I think these conditionalities are meant to serve an important purpose, especially when it comes to preventing issues, such as, moral hazard (taking advantage scenario). However, in some cases, I don’t think the IMF goes about setting these conditionalities in neither a fair or professional manner.
The IMF is well known for its short term lending. These short term funds are supposed to be the little push that a country needs to re-stabilize their economy. For better words, they help them get back on their feet before their economy collapses. However, sometimes these supposed delicate countries will take advantage of this lending process. For instance, if a country is in debt but yet continues to borrow money from others, knowing they won’t be able to pay it back, they will continue to take this money because they know the IMF will rescue them. This is relatively unfair. In a sense, these countries continue to misbehave because they know that the IMF will not let them down, or refuse to lend them funds. The IMF is aware of this kind of exploitation from countries, so they decided to instill a system of conditionalities onto these loans. The IMF makes this system even more secure by not only attaching conditionalities to them but by dispersing these loans into tranches (segments). Conditions must be met or attained by the borrowing countries, or else, they will not get the funds they desire. For example, let’s say that a country receives their first segment of the loan. Now, they desire to obtain the second. They must meet all of guidelines proposed by the IMF on that segment if they wish to gain the remainder of the loan. In my eyes, this is a practical method of action on the IMF’s part. It is one that provides control, structure and encourages responsibility.
These conditionalities have proved in numerous cases to be capable of restarting these crumbling economies. From the supervision and guidance of the IMF, many countries were able to jumpstart their economies and make better developments for their people. According to the most recent lending arrangements from the IMF, a decent amount of countries who have underwent this conditionality program, have been able to pay back almost half of what they borrowed from the IMF (Figure #1 ; #2). Also, another goal of the IMF is to reduce poverty in struggling countries. According to an article by John Lipsky, who was the First Deputy Managing Director of the IMF, a country that has benefitted the most from these set reforms, is Ghana.
From 2007 -2009, the Global Financial Crisis was unraveling. According to the Reserve Bank of Australia, “Many banks around the world incurred large losses and relied on government support to avoid bankruptcy”. The unfortunate aspect of this crisis, is that many countries were affected because of the interconnected relationships they all had amongst each other. Ghana, most specifically, was horribly susceptible to the rough aftermath that would follow this crisis. Lipsky goes on to say, “Ghana has benefited considerably from the new policies: One of the largest IMF operations in Africa in 2009 was the $600 million three-year arrangement with Ghana”. Recently, as of 2017, IMF Acting Chair and Deputy Managing Director, had this to say, regarding the progress of the conditionalities taken on by Ghana: “Implementation of the ECF-supported program has significantly improved in 2017… growth has rebounded, the fiscal deficit has declined, leading to a primary surplus for the first time in fifteen years” (Tao Zhang). According to Figure # 3, we can see that Ghana as of October 2018, has been able to sustain its 6 – 10 % GDP growth.
According to, “The IMF Strikes Back”, an article by American Economist, Kenneth Rogoff, he is able to perpetuate how the IMF is much more beneficial than most critics would argue. I am not 100% in favor of everything he has to say, but I do agree with the overarching argument that the IMF was created with the intentions of helping these struggling economies. For instance, when it comes to conditionalities, he argues, “One strike against the moral hazard argument is that most countries generally do repay the IMF, if not on time, then late but with full interest.” Oddly however, he mentions how he won’t dismiss moral hazard entirely despite this opinion. In my eyes, I think would say that it is because of the IMF’s effort to prevent countries from trying to cheat the system, that these countries feel inspired to pay these amounts back. I also believe that because the IMF has the legal obligation (hard law) to implement these regulations, it justifies their goals to help these struggling countries.
I like to believe, like so many others, that the IMF was created with good intentions. However, aside from all the progress they have made with countries, there are some cases where their professional opinion lacks both common sense and functionality. Many critics, including myself, believe that if the IMF is going to have such a title like the Lender of Last Resorts, they should be exceeding even their own standards that they hold for these struggling countries. For instance, Joseph Stiglitz, economics professor at Stanford and previous vice president of the World Bank, chooses not to overlook the IMF’s questionable actions in the past and present. One important aspect that Stiglitz voices is the IMF’s “cookie-cutter approach” to going about recurring or newly occurring economic crises. For instance, he states, ” In a period of days or, at most, weeks, they IMF are charged with developing a coherent program sensitive to the needs of the country… a little number-crunching rarely provides adequate insights into the development strategy for an entire nation” (Stiglitz 3). However, he goes on to say that this shouldn’t label the IMF as a destructive institution with bad intentions, but should be alarming to the IMF itself. I too believe that the IMF should be taking initiative for any issues that follow their instruction. If the IMF is going to provide guidance to these countries, it should be taking the time to appoint the best reforms for these very different financial crises.
Two crises that emphasize the need for IMF reflection, are both the Asian and Latin American Financial Crises. In the 1980s, Latin America experienced a deficit crisis. The countries that suffered the most, were Mexico, Brazil and Argentina. These countries had borrowed so much money and spent so much, that they were unable to repay the interest rates that had been placed on the loans they had took out. The IMF came to a consensus, and decided that fiscal austerity and monetary policy reforms were in major need of enforcing. In other words, they believed that the best way Latin America could get on their feet was by privatizing, opening its economy to the rest of the world and devaluing its currency. These processes would allow their to be an inflow of capital. According to economist Paul Krugman, as a result of these reforms, “Interest rates came down; spending started to revive; and soon Mexico and Argentina were making a rapid recovery” (The Return of Depression Economic 51-52).
Unfortunately, much later, in 1997, Asia began to experience its very own financial crisis as well. Specifically, Thailand was a country that was most negatively affected by the crisis. For instance, things started to worsen for Thailand when they decided to devalue their currency, leaving themselves unable to repay their debt. To make matters worse, Thailand had taken too many loans, that they ended up being unable to pay back the interest rates on them. In hopes of rebuilding their economy, they reached out to the IMF. However, according to Stiglitz, this is where, the IMF exposes its unreliable nature. The IMF ended up applying the exact same conditionalities that it had imposed during on Latin American, onto the Asian crisis. Stiglitz states, ” As the crisis spread to other East Asian nations–and even as evidence of the policy’s failure mounted–the IMF barely blinked, delivering the same medicine to each ailing nation that showed up on its doorstep” (2). As an individual who looks at these reforms as a beneficial product of the IMF, this is very alarming. Why would the IMF diagnose Asia’s problems, with that of Latin America’s? Yes, they are both struggling, but these financial issues came about differently for both of them. For instance, in Latin America, the countries experienced high public debt and low private debt. With proper planning, the IMF came to the conclusion that they needed stricter fiscal austerity (reducing government spending and increasing taxes) and tighter monetary policy (raising interest rates and reducing credit creation). Whereas for Asia, those countries experienced high private debt and low public debt. A person who knows nothing about finance could tell you that because the two are exact opposites, they will most likely need different methods of actions.
The IMF’s inability to view both the Asian and Latin America crises as different, is very concerning. Just because both Asia and Latin America were suffering, it doesn’t mean that their problems were both caused by the same issue. If the IMF has this mentality that one solution is best for all, they are highly mistaken. So many depend on the IMF for guidance and financial stability, so. if they are mislead, things could go very wrong and be detrimental for the people that live in these already struggling countries. These easily preventable mistakes on the IMF’s part, are what give them such a bad reputation. The IMF is known for not only their guidance, but for their overbearing surveillance on these countries. If they were really paying attention, why is it that they did not plan accordingly? This is where Stiglitz’s main argument comes into play, “But, if the people we entrust to manage the global economy–in the IMF and in the Treasury Department–don’t begin a dialogue and take their criticisms to heart, things will continue to go very, very wrong” (The Insider 6).
The IMF and its conditionalities were created for a very important purpose: to stabilize crumbling economies. The IMF has proved on many occasions that they are capable of getting countries, like Ghana, back onto their feet. The IMF should be taking responsibility for their mistakes, not only for the sake of their reputation but for the well being of the countries that look to them for their honest and renowned expertise. If the institution does not own up to its mistakes and continues to hide behind its defensive nature, its conditionalities will not be taken seriously and their name will continue to be drug threw the mud.