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This article is written by Shristhi Debuka, a student of Jindal Global Law School
The International Monetary Fund is an international organization which was introduced in the year 1944 at the Bretton Woods Conference. This organization was set up to improve the economies of the member countries when required. IMF is an organization with 188 member countries, nurturing global monetary cooperation, sustainable economic growth, facilitate international trade, promote high employment, secure financial stability by making financial resources available to member countries when in need and also to secure balance of payment needs, exchange rates and reduce poverty.
The main aim of the organization was to assist the world in international payment system, thus the fund in this organization is contributed by the member countries so that the countries in crisis can borrow these funds when required. However by lending the fund, IMF demands for change in certain policies (conditionality) of the member countries, whereby working for the improvement in the economy of the member country which leads it to the crises.
The conditionalities are majorly adopted by the Washington consensus, it is the policies put by IMF on the borrowing countries so as to secure the re- payment of the borrowed fund whereby helping the countries to get out of the financial crises. The contribution of the countries towards the fund is on the basis of the ‘share of trade’ therefore, the process of voting in the country is according to contribution made by the member countries and not as one country one vote, for \example, US contributes SDR 42,122.4 million in the IMF and the number of votes they have is 421,961 i.e. 16.75% of the total votes whereas Argentina contributes SDR 2,117.1 million and the number of votes they have is 21,908 which is 0.87% of the total votes. Therefore, larger the country, stronger is its financial position, and is generally less likely to accept conditions which it does not want to agree whereby being in a stronger position to negotiate vis-à-vis the fund. On the other hand, a country with financial crisis is forced to accept all the conditions which may be considered politically unacceptable. Therefore it can be said that-
“When the Fund consults with a poor and weak country, the country gets in line. When it consults with a big and strong country, the Fund gets in line.”[1]
The funds lend by the IMF are short-term lending with structural changes in the economy of that particular country. Therefore, the borrowing countries are compelled to adjust according to financial imbalances forgoing the development and growth of the particular countries.
The conditionality put forward by IMF have improvised many developing countries which were and are in financial crises, even after the assistance given by the IMF. The IMF’s leniency with Argentina and the mistake it created in 1990s, contributed to the country’s major economic crisis in the late 2001[2]. The first important cause of the trouble in 1990 was the government’s decision to maintain a fixed rate of exchange; one peso for one U.S. dollar. In the past years, US dollars overvalued and so peso also overvalued. This means that the government has to give guarantee to anyone who wants dollar in exchange of peso and thus, there was a decline in demand for Argentine exports. Here, IMF supported Argentina by giving a loan of $40 BILLION which eventually got piled up as a foreign debt which was impossible to pay back.[3]
In 2001, IMF again gave loan on the condition that the Argentine government would eliminate its budget deficit. So, in December 2001/January 2002, under the economic policies imposed by the IMF supported programe, there was public debt default, fixed exchange rate abandonment, high levels of unemployment, and social and political turmoil. At this time, the fund refused to disburse one of its tranches and this defaulted Argentina on its debts and the value of the peso fell. This shows about the fragility of the IMF as previously, Argentina’s economic situation was very weak but now after the indulgence of IMF, it has now become unattainable.[4]
Another developing country whose economic conditions are not improved even after the assistance given by the IMF is Ukraine. Ukraine took seven loans from the IMF either financed fully or partially whereby leading to debt accumulation. In the year 2008, the country was supported by IMF to restore its economic and financial conditions, and in exchange agreed upon the conditions i.e. the reform package which were recapitalization of the banking system, pegged to a flexible exchange rate and restrictions on fiscal, monetary and wage policies. Therefore, the IMF provided Ukraine with three tranches but in case of the fourth tranche, IMF failed to make positive statement.[5] However, due to IMF failure in 2008, Ukraine, in 2014, is still facing economic crisis after six years for the second time. The main reason for the crisis is a steady rise in indebtedness, overvalued exchange rate accompanied by loose fiscal policy etc., these made the economy of the country more vulnerable to economic and political shock whereby leading to the current crisis.[6]
Therefore the two countries which are still in crisis even after being assisted by the conditionality of the IMF are not out of the crisis and still indebted. Hence, it is clear that these conditionalities are not as effective as it is thought to be and it does not help the developing countries to overcome their financial crisis fully. Moreover, the IMF also stepped in as a lender in the countries like Mexico, Indonesia, Brazil, Thailand, etc. during their financial crisis. Even after supported by IMF it could not stop the financial crisis amongst the countries whereby spreading to the other countries as well. Hence the conditionality’s were proved to be a bad medicine
Hence, at the end it can be seen that the IMF conditionality imposed by IMF does not help a developing country to overcome its debt to a very large extent. The clear picture of the failure of IMF is seen in the case of Argentina and Ukraine as these countries were forced to take multiple loans to come out of its financial crises. IMF also invades in the sovereignty of a country, by enforcing structural changes whereby governing their economy. The IMF conditionality is a hindrance in growth and development of a developing country, because of the structural changes made by them and are not left to the government of the country to decide, IMF forces the government of the developing country to reduce its expenditure in public sectors and welfare not paying any attention towards the growth of the economy. Therefore, due to the failure of the IMF conditionality, its major critique can be that it does not provide the countries with the time to experiment things which may be suitable for its economy as IMF provides with short term loans, only demand management is concentrated on them, the problem of inequality is also not assessed by them, and very importantly, IMF controls the exchange rate of the countries which should be determined by the market. Therefore, IMF conditionality is not helping the developing countries to develop in particular but is hindering its growth, leading to impoverishment in the long run.
[1]Ariel Buira, AN ANALYSIS OF IMF CONDITIONALITY, (G-24 Discussion Paper No. 22) August 2003
[2] Todd Benson, Report Looks Harshly at I.M.F.’s Role in Argentine Debt Crisis, The New York Times, http://www.nytimes.com/2004/07/30/business/report-looks-harshly-at-imf-s-role-in-argentine-debt-crisis.html (last visited 14th Nov. 2014)
[3]Independent Evaluation Office( IEO), The Role of the IMF in Argentina, 1991-2002, http://www.imf.org/external/np/ieo/2003/arg/index.htm (last visited 14th Nov, 2014)
[4] Carol Graham and Paul Robert Masson, The IMF’s Dilemma in Argentina: Time for a New Approach to Lending? http://www.brookings.edu/research/papers/2002/11/globaleconomics-graham (last visited 14th Nov, 2014)
[5] Fyodor I. Kushnirsky, Ukraine and The IMF: An Uneasy Cooperation (July 2014), http://thejournalofbusiness.org/index.php/site/article/view/572 (last visited 14th Nov. 2014)
[6] IMF Survey, Ukraine Unveils Reform Program with IMF Support, http://www.imf.org/external/pubs/ft/survey/so/2014/new043014a.htm (last visited 14th Nov, 2014)
