Why Is the IMF Controversial
Why Is the IMF Controversial

After the collapse of the Soviet Union, the western approach to market liberalization, privatization, fiscal austerity, and free trade that had produced economic growth in the developed countries—especially in the United States—was exported to developing countries through the International Financial Institutions (IFIs). Since they were headquartered in Washington, D.C. the IFIs’ strategy was called the “Washington Consensus.” As summarized by the World Bank, it had ten basic points:

    1. Fiscal discipline (that is, not too much government spending).
    2. Redirection of public spending toward education, health, and infrastructure.
    3. Tax reform (that is, broadening the tax base and cutting tax rates).
    4. Market-determined interest rates.
    5. Competitive exchange rates.
    6. Trade liberalization (that is, eliminating quotas and tariffs).
    7. Openness to foreign direct investment.
    8. Privatization of state enterprises.
    9. Deregulation.

Legal security for property rights. The success of industrialized nations when following these practices in comparison to Communist countries’ lack of economic development caused western economists and politicians to assume their infallibility and enticed many developing countries into following them. However, the way in which the Washington Consensus was uniformly presented to a wide range of national economies is said by critics to have contributed to serious problems. . when following these practices in comparison to Communist countries’ lack of economic development caused western economists and politicians to assume their infallibility and enticed many developing countries into following them. However, the way in which the Washington Consensus was uniformly presented to a wide range of national economies is said by critics to have contributed to serious problems.

Critics attack four interrelated aspects of the implementation of the Washington Consensus.

First, critics say that the conditions placed on loans are too intrusive and compromise the economic and political sovereignty of the receiving countries. For example, Joseph Stiglitz, a winner of the Nobel Prize in economics and former chief economist of the World Bank, writes that those conditions, often referred to as a whole as “conditionality,” are not just the typical requirements that anyone lending money might expect the borrower to fulfill in order to ensure the money will be paid back. Rather, says Stiglitz (2002), “‘Conditionality’ refers to more forceful conditions, ones that often turn the loan into a policy tool.” 

The IMF has used conditionality to exact major changes, called ” structural adjustments,” in borrowing countries’ fiscal and monetary policies, including such issues as banking regulations, government deficits, and pension policy. He cites the example of the IMF’s insistence that the Korean Central Bank focus on fighting inflation during the 1997 Asian Financial Crisis, not because monetary policy was a cause of the crisis, but rather because the IMF believed that fighting inflation should be the primary purpose of a central bank.

According to Stiglitz, many of these changes are simply politically impossible to achieve because they would cause too much domestic opposition. Even in the United States, he points out, the Federal Reserve Bank is not charged with just fighting inflation, but also with promoting employment and economic growth, and an attempt by a powerful senator in the mid-1990s to refocus its charter just on inflation was beaten back by the White House.

Second, critics say that the IMF imposed the policies of the Washington Consensus on countries without understanding the distinct characteristics of the countries that made those policies difficult to carry out, unnecessary, or even counter-productive. According to Stiglitz, for example, the economists of the IMF had a “one-size-fits-all” policy based on their academic training, which focused on economic models with unrealistic assumptions about how real-life economies work.

They do not generally specialize in the economies of the countries whose policies they oversee, often do not live in those countries and mostly work from Washington, D.C. and have little appreciation for the political circumstances under which the governments operated. When crises arise, therefore, says Stiglitz (2001), the IMF instinctively blames the governments of the countries suffering the crises.

Third, critics say that the policies were imposed all at once, rather than in an appropriate sequence. For example, the IMF demands that countries it lends to privatize government services rapidly—that is, sell them to private investors rather than operate the services itself—such as water supply and utilities. According to Stiglitz, this is a result of the IMF’s “market fundamentalism,” a blind faith in the free market, that ignores the fact that the ground must be prepared for privatization. Private owners are most interested in operating a company efficiently, which often means letting go of staff.

But, says Stiglitz (2002), if a country’s unemployment program and other social safety nets are not sufficiently developed, those fired staff will have no way to support their families. “Privatization needs to be part of a more comprehensive program, which entails creating jobs in tandem with the inevitable job destruction that privatization often entails. Macroeconomic policies, including low interest rates, that have helped create jobs, have to be put in place. Timing (and sequencing) is everything.”

Fourth, critics say that the IMF was not open to criticism or public oversight when working on these policies, leading to arrogance and a lack of connection to the reality on the ground in the affected countries. For example, Stiglitz points out that the agreements between the IMF and borrower countries were always kept secret from the general public in those countries. Sometimes, he says, the agreements were kept even from him and his colleagues at the World Bank when working on joint projects with the IMF.

At the same time, the government officials of borrowing countries often felt powerless to question the IMF’s policies, believing that just to ask a question would be viewed by the IMF as a challenge to its authority and jeopardize the loans it was offering. A great lack of trust, therefore, characterized relations between the Fund and its borrowers, as the public and governments of its borrower countries felt out of the loop on the decisions that would shape their economic future.

Some opponents of the IMF, and globalization in general, go even further. They claim that the entire international financial system is corrupt and unfair. They criticize not just the implementation of the Washington Consensus, but its very existence. One group, for example, called 50 Years Is Enough, argues that the IMF, World Bank, and the World Trade Organization (WTO) are anti-democratic institutions, responsible for the impoverishment of the developing world and benefiting only rich countries and multinational corporations.This group wants an immediate end to the IMF’s policies, a cancellation of all outstanding government debts in the developing world (discussed in more detail below), and reparations for the damage, in their view, that the IMF and World Bank’s policies have caused.

As you can see, three views of the IMF’s role are possible. First, the IMF views itself as committed to sound financial management, lending money and providing surveillance and advice to help countries avoid economic collapse. Second, however, IMF critics claims that the IMF’s policies are often poorly planned, and even counter-productive. Third, the most radical critics of the IMF contend that the whole international finance system, of which the IMF is one of the leading institutions, should be dismantled for the benefit of the world’s poor.

Click here to watch Laurence Meyer, a former governor of the Federal Reserve Bank, discussing the operations of the International Monetary Fund (IMF) and the reasons why it is so controversial.

 

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