The end of World War II witnessed an acute financial predicament. With the start of the Great Depression, it became clear that “international economic cooperation” needed a backup plan.
The International Monetary Fund (IMF) was set up in 1944 to help with situations like those that happened after the Great Depression. Another reason was to dispel the myth that akin institutes were biased toward lending to wealthy countries.
Besides this, the IMF has come a long way. It is now present in 190 countries. Since there were no more self-inflicted depressions, the establishment had plenty of time to move away from its original goal. It is more of a “lender of last resort” that gives money to developing countries when needed. It also garnered a name for itself. We shall uncover whether fame is well-off or underserved in this article.
The Downsides of the IMF
As a “global crisis and prevention manager,” the IMF assists any country in financial distress. While that may be the case, it has often failed to live up to its name.
The Asian financial crisis of 1997 highlighted a problem. South Korea, Thailand, Malaysia, Indonesia, and the Philippines had to summon the IMF when, due to various reasons, the assets from the countries started to flow out. The Fund had to bail the countries out with $40 billion. More so, the Fund tightened the reign on the fiscal and monetary policies of the nations. Instead of prospering financially, the countries fell into a much deeper recession.
Now, the problem it highlighted was not a new one. Christened as a “moral hazard,” the funding gives investors and banks an excuse for a potential bailout. This has often been reported to lead to thoughtless and rash investments.
Robert J. Barro, a professor of economics at Harvard University, avows, “banks will often lend at interest rates that do not reflect fundamental risks.” In dummy terms, reassured that they will be bailed out of their monetary slums, banks do not indicate any state of impending emergency in their interest rates. This loop furthers as time passes because there seems to be no limit to bailouts.
Likewise, the loaned funds bring the IMF an economic entitlement. Its propensity towards free markets is always frowned upon. The problem with this is the reduced check and balances of the government. Without any of it, market prices will eventually go up, tax evasion will be rendered ordinary, and child labor may bloom. In addition, the IMF openly supports the privatization of government institutes. While this may be a sound decision in some other universe, the IMF seems to insist upon it. It also maintains in its conditional clauses the elimination of subsidies. In a country that already meanders for meager resources, eradicating subsidies further impoverishes its underprivileged citizens.
One example is Pakistan. The South-Asian country has had a long history with IMF. Only recently has it received a fund of $1 billion. In turn, Pakistan will keep the oil prices high to ensure repayment to the Fund.
The IMF targets criticism because of its uniform and rigid policies. It is incapable of handling different countries properly. Since every country has a separate dynamic structure, an unchanging and stagnant approach will not work for everyone. The IMF fails to see this or at least pretends to do so.
Moreover, according to the Fund, a successful mission ends when the borrower country pays off the loan. Rather than aiming for economic growth, the IMF has a record of leaving countries in far worse situations, focusing more on the balance of payments and macroeconomic development.
The IMF isn’t that bad, or is it?
The IMF may come off as an interventionist party that doesn’t know how to do its job correctly. But the fact that it still provides bailouts is highly debatable among the economic community.
One article on the Fund’s website reads, “Free markets may not be perfect, but they are probably the best way to organize an economy.” Especially in an economy that is spiraling ever downward.
And let us not forget that desperate times call for desperate measures. The policies of the Fund are a target of harsh criticism because of their unrelenting nature. But hard times do not avail easy choices. The IMF tries its best to ensure the country generates enough capital to pay back loans.
Furthermore, one upside to the Fund is that it doesn’t forcibly intervene in other countries. Unless a nation approaches them willingly, the Fund cannot do anything other than sit and watch.
Nevertheless, the Fund may be one of the most reputable ones among similar establishments.
It is highly debatable whether it is an ill-achieved way to destroy economies or a force for good. It is for economists to decide whether the Fund functions as a “lender of last resort” or a “crisis and prevention manager.” Even the Asian crisis is recounted as a success, as per some economists.
However, we have enough insight to say that the IMF needs improvement and does not deserve elimination. We can ask a few questions.
What were the findings of the IMF, and why did they fail to foresee the Mexican and Asian crises?
What does it make of “moral hazard,” and what criteria does it hold when lending out funds?
And how can we be sure that a “small group of 1000 economists” in Washington D.C. will be able to prevent further economic crises?
Because history has not changed the Fund’s view on bailout funds, these essential questions need answers.