The role played by the IMF in support of economic reform in developing countries has been an issue of considerable criticism and scrutiny over many years. In 1999, the World Bank and IMF adopted a framework that could support developing countries. The framework consisted of two elements: Poverty Reduction Strategy Papers (PRSPs) that was expected to include several consultations with important stakeholders; and a tool for the provision of the organization’s concessional lending, PRGF (Poverty Reduction and Growth Facility), which was a replacement of the Enhanced Structural Adjustment Facility (ESAF). PRGF supported programs were derived from a member’s PRSP that ensured that reforms that were supported by the organization were owned by the country and oriented to realizing economic growth and poverty reduction goals (Vreeland 3). Although it may be too early to appraise the new framework’s success in achieving the objectives, it is a good time to evaluate progress to this day and discover shortcomings that may need course corrections in the initiative’s design and implementation.
About International Monetary Fund
The IMF was initiated at the Bretton Woods Conference in 1944 and created by 29 countries in 1945. The international organization’s main objective was to help in the construction of international payment system after the Second World War. Member countries help to contribute funds through a quota system where countries that face payment imbalances can borrow money and other resources. Through the fund, and surveillance of member countries economies and self-correcting policies demand, the organization works to recover the economies of member countries. IMF headquarters are found in Washington, D.C. (Jensen 3).
The IMF is an organization that works to promote world’s monetary cooperation, ensures that there is a financial stability, aid international trade, assists in employment issues and economic growth, and help to reduce poverty in the world. The IMF objectives are found in the Articles of Agreement, they are: promoting international economic co-operation, employment, international trade, and the stability of exchange rate by making finances available to members in order to meet the needs of the balance of payments (Woods 2).
The IMF fosters economic stability and global growth. The organization offers advice to policy matters and financial assistance to member countries that are in economic difficulties. IMF works together with developing nations to assist them achieve economic stability and poverty reduction. The justification for this assistance is that international capital markets work imperfectly and some countries have limited contact to financial markets. The market imperfections, in addition to financing of balance of payments, provide the rationale for official financing. Without financing, many countries could only manage the imbalances of large external payment through measures that could result to adverse effects on economic prosperity. The organization can give other financing sources to nations that have needs that would not exist in the nonexistence of a stabilization program which is supported by the Fund. When IMF was formed, its main roles were to oversee an exchange rate that was fixed between countries. The decision was to help governments handle exchange rates and allow governments to prioritize economic growth. It was also meant to offer short-term capital to help balance-of-payments. The assistance was to prevent the increase of economic crises. The IMF Fund was intended to assist the international economy after World War II.
Evaluation of the role of IMF in poverty reduction
Poverty Reduction Strategy
The Poverty Reduction Strategy (PRS) consists of a number of innovations intended to encourage a broad participation in the improvement of long-term strategies for poverty reduction and growth that may also be a framework for donor support coordination. In addition, there was a change of the IMF’s lending facility into Growth Facility (PRGF) and poverty reduction. It may be too early to appraise the success of the approach in the achievement of its long-term objectives since the extent of poverty reduction will become clear only after a long period of time. The evaluation in this paper focuses on intermediate outcomes, which are the quality of the policy formulation process, the strategy nature and policy framework which has evolved, the framework and the PRGF interaction, and the IMF’s role effectiveness (Weaver and Park 7).
According to Weaver and Park (8), the PRS approach has ability to promote the development of long-term strategy for poverty reduction and growth, which may provide a good framework for linking the efforts of international financial institutions and other donors that include the IMF. Actual achievements so far fall significantly short of potential. The result is somewhat because it is impractical to expect immediate gains given the primary conditions where the process started in many developing countries. There were also weaknesses in the planning of the initiative which has reduced its efficiency, including lack of clarity concerning the role played by the IMF.
Poverty Reduction Strategy Papers (PRSPs) formulation involved many stakeholders than the previous approaches; this was a crucial improvement. Despite the participation of many stakeholders, the participatory processes were not designed to reinforce institutional processes to formulate policy and accountability (for example, through parliament). In some cases, arrangements to maintain the process have begun to develop in budgets. The PRS process has resulted to a limited effect in generating discussions of alternative policy options regarding the macroeconomic framework and macro-structural reforms. It shows in part the lack of mechanism to guarantee that main issues were raised and the large debate well-informed. Absence of clarity concerning the function of the IMF contributed to the outcome. In the comparatively few cases where a consultative debate did materialize, there was an affirmative impact on the outcomes of policy.
Strategies that are outlined in PRSPs constitute a progress over former development strategies, in the process of providing a great focus on poverty, a long-term perspective, and results orientation. Despite of this, most PRSPs fail to provide a calculated road map for making policy, particularly in macroeconomic area and related structural policies. Most PRSPs focus on the composition of the expenditures of the public, mainly social sector expenditure, with less stress on some aspects of a broad strategy to support poverty-reducing growth. In the field of public expenditure, the value of PRSPs is limited due to the rudimentary nature of most prioritization costing. In some cases, PRSPs avoid to address primary strategic choices that involve “controversial” structural reforms. Due to these weaknesses, it implies that PRSPs do not give a policy framework where programs supported by PRGF can be anchored.
Critical perspective of the role of IMF in poverty alleviation
In democratic systems, every member of the organization would similar vote. In the IMF, the rich countries control decision-making since voting power is based on the amount of funds that every country contributes to the quota system of IMF. It is a system of one voter, one dollar. The U.S. boasts of being the largest shareholder of the organization with a quota of 18%. Germany, France, Japan, the US and the Great Britain control a combined 38%. The unbalanced amount of power in the hands of wealthy countries implies that bankers’ interests, investors and companies from developed countries are considered first before the needs of the poor countries. The organization is funded with the money of taxpayers, yet its operation is very secretive. Members of begging communities do not get an opportunity to be involved in designing packages of loan. The organization works with finance ministers and a few numbers of central bankers to make polices that lacks input from government bodies such as education, health, and environment departments. IMF has declined calls for open scrutiny and evaluation that is independent (Global Exchange 3).
Many countries have debts and poverty because of the policies institutions such as the IMF and the World Bank. The international institutions’ programs have been criticized for many years for causing poverty. Additionally, for third world countries, an increased dependency on the wealthier nations has been witnessed. Despite the World Bank and IMF assertion that they will reduce poverty, this is not the case. Following a philosophy called neoliberalism, and led by the IMF and World Bank other institutions called the “Washington Consensus” (since it was based in Washington), Structural Adjustment Policies have been compelled to guarantee debt repayment and restructuring of the economy. The policies have required third world countries to reduce spending on issues such as education, health, and development, while repayment of debt and other policies of the economy were made the priority. Effectively, the IMF and World Bank demanded that developing countries should lower their people’s standard of living.
As shown below, the World Bank and IMF offer financial assistance to nations seeking it, but affect a neoliberal economic philosophy or agenda as a qualification to getting the money. For instance: (Global Exchange 3)
- Additional adjustment policies include devaluation of currency, interest rates increase, labor market flexibility, and subsidies elimination, for example food subsidies.
- To be eye-catching to foreign investors some regulations and principles are removed or reduced.
- They recommend cutbacks, economy liberalization and resource extraction as part of structural adjustment.
- The state’s role is minimized.
- Privatization is encouraged. In addition, there is also a reduced protection of home industries.
The effect these preconditions on developing countries can be destructive. The following factors lead to additional misery for the poor countries and make them dependent on wealthy countries. Developing countries need to export more for them to raise additional money to pay debts in a timely manner. Since there are many countries being requested or compelled into the international market place—before they become socially and economically ready and stable—and told to focus on related commodities and cash crops as others, the condition resembling a large-scale cost war. Resources from developing regions become cheap, hence causing favors to purchasers in the West. Authorities need to enhance exports in order to keep currencies stable, and get foreign exchange that will assist pay off their debts.
Governments are compelled to spend less, reduce on consumption, and remove financial regulations. Over time, the labor value will decrease, capital flows happen to be more volatile, a race to the bottom begins generating social unrest, which leads to IMF protests and riots around the world. The nations are then informed to attach their currencies to that of dollar. Managing the exchange rate at stability is expensive due to measures for instance, increased interest rates. Concerned investors, concerning their interests and assets, can easily pull out if things turn tough. In the worst scenario, capital flight may lead to the collapse of the economy, such as one witnessed in the Asian financial crisis of 1997-99, or in Brazil, Mexico, and other places. After a crisis, the media and trade economists blame emerging markets and governments’ inefficient policies or crony capitalism. When donors maintain exchange to their advantage, it means that developing countries remain poor, or even become poorer. The financial crises of 1997-99 may be blamed on structural adjustment and aggressive deregulation for economies that were emerging (Grindle 12).
The IMF and World Bank are owned and controlled by powerful nations such as Germany, USA, Japan, and UK amongst other countries. The US, for instance controls 17%-18% voting power at the IMF. When a majority of 85% is required to make a decision, the US has veto power at the organization. Additionally, the World Bank receives 51% of funds from the US treasury. Under a well devised mechanism, the IMF and the World Bank loan money for the exchange of their economies’ structural adjustment. It implies that economic direction of every country would be monitored and controlled in the US. For example, a World Bank’s decision to support a poor country involves a country’s investigations that include meeting the begging-Finance Minister who is handed an agreement already drafted for deliberate signature (Vines and Christopher 12).
According to a former Sierra Leone’s World Bank Representative, the instructions include trade liberalization, privatizations, and high interest rates among other conditions. Trade liberalization for developing economies has some various serious attendant impacts. Firstly, it may lead to dumping of substandard products from other countries. Such items as shoes, clothes, creams are among other products that flood markets in poor economies. The dumping of cheap products undermines home industries that intend to produce similar products.
Developing countries’ young industries fail to perform under wide trade liberalization. It is very critical concerning imported food which includes rice, milk, and wheat, amongst others. Developed countries having surplus of these foods reduce their prices, and then export them to developing countries as a means of avoiding them. If these situations failed conditioning, developing countries would never produce their own food. Privatization and its impacts on government organizations that do not operate accordingly cannot be challenged. Wholesale privatization of all government enterprises cannot be justified. Moreover, there are some difficulties which include the limited native business to capture government enterprises; the shortages of home private capital to run the cost of privatized organizations and the huge role of the services to persons of some businesses in comparison to being profitable (Bretton Woods 7).
High interest rates raise the motivation to accumulate money, and also support speculative investment which brings quick money profits to some people while adding little to the productive capacity. High credit and interest rates also make it had to get capital to start new business. Therefore, they lead to stagnation. In addition, the cut in the expenditure of the government could be necessary. Nevertheless, the consequences will be that the soft sectors of health, education, and housing among other sectors will suffer from the government’s expenditure. Majority of the governments do not make a reduction on the military or unnecessary areas. It is clear that government expenditure cuts results in harming the people’s welfare.
Another critical factor is the currencies devaluation which is meant to support self sufficiency by allowing imported products to become more expensive and developing countries’ exports cheaper. Due to the fact that many countries do not manufacture these products, it is hard to substitute them with locally manufactured products. Alternatively, many of the nations that buy poor countries’ products have managed to set amounts on how much products can be imported at a given time or have foreign currencies’ fixed currencies to protect their own products (Bretton Woods 6). They protect their products even when they are cheaper in currencies, and do not essentially get new foreign markets or get more foreign exchange. The IMF and World Bank advise nations to attract investors by making weak their labor laws-done by eliminating laws of collective bargaining and suppressing wages. The IMF's labor flexibility permits organizations to sack employees at will and move where labor is cheapest. Employers are using this mantra to sack employees rather than employee more people.
Confirmation of critical perspective
The findings in this paper confirm the critical perspective of the role of IMF. The perspective has looked at the role of IMF and impacts of its activities in developing countries. It is clear from the paper that IMF has brought more poverty than helping poor countries alleviate poverty. IMF has managed to make developing countries rely on foreign help than building their own wealth. Many countries that borrowed money from the IMF have been using their revenues to pay off debts rather than investing in important projects. The IMF directions to the developing countries have led to sacking of many people, something that has led to more poverty in these countries. Some observers have argued that IMF has been used by wealthy nation as a form of neo-colonialism. IMF has been seen as a tool to make developing countries continually rely on rich countries. To make the matter worse, many local industries have died because of cheap products from foreign countries.
IMF needs to reconsider most of its strategies aimed at alleviating poverty around the world. Many of its strategies have failed completely, leading to more poverty in developing countries. The organization needs to be independent and work in harmony with poor countries in order to eradicate poverty. Poverty alleviation may not happen overnight, but with proper strategies acceptable to many counties, poverty will be a thing of the past.
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