Meaning of Economic Development - Research Paper Example

?Economic Development The International Monetary Fund (IMF) is an organization providing advices and financial supports to the member nations at the time of situations of economic instability. The programs initiated by the organization have led to the growth of many developing as well as the developed countries of the world. The main focus of the organization is on the macroeconomic policies of the country and also helps in correcting discrepancies in the balance of payment of the country. The support provided by IMF through the issue of Special Drawing Rights to the member nations have helped in achieving economic development of countries through the maintenance of stability in the economy. However not every policy makers and academicians have the same opinion regarding the contribution of the organization in the achievement of economic development. Thus this paper aims in studying the relation between the economic development and economic stability of a nation and the contribution of the IMF in achieving so. Meaning of economic development Economic development of a country means the process of increasing the per capita income as well as per capita output of a nation accompanied by the increase in the overall productivity and improvements in the techniques of production that will ultimately result in the increase in the well being of the overall society. There is considerable difference between economic growth and economic development of a nation though sometimes they are used synonymously. Growth of the economy of a country must precede as well as prompt the economic development of a particular nation. Therefore it can be said that economic growth accompanied by the structural transformation of a nation results in the economic development of the overall nation. Thus for the overall economic development of a nation, growth of the country’s economy is the necessary condition and the structural transformation forms the condition of sufficiency. The difference between the two concepts of economic growth and economic development lies in the fact that the improvement or increase in the per capita income of a country does not always indicate the development of the country based on the factors of well being like the life expectancy rate, mortality rate of a country, the literacy rate and also the measure of the existence of income inequality in the society. These factors in simple words differentiate growth of an economy from the overall development of the same. Therefore for a proper definition of economic development it can be said that the structural, institutional and the qualitative changes that are needed in an society for expanding the capability and the potential of the same in the proper utilization of the scare economic resources of the country is reflected in the economic development of the country. The structural transformation if an economy imply the overall growth of the Gross Domestic Product of an economy contributed by the productive increase of the primary , the secondary and the tertiary sector of the economy and the relative contribution of each sector in the country’s total GDP. Moreover the degree of openness of an economy and the country’s dependence on foreign trade also encompasses the economic structure of the country. Therefore for development of an economy there is the requirement of a positive change in each of these variables with a long term impact on the economy that is fundamental. These changes in the structure of the economy is in need of changing, more specifically improving the poverty level of the country for the achievement of economic development. In case of economic development the increase in the economic well being of an individual as well as the society as a whole gets reflected in the changes in the living conditions of the society people with improved nutrition, improved health, improved housing facilities along with betterment in the education structure of the society that will impact on an overall upliftment of the society with flavors of metropolis. (Harrison, 1996, pp 3- 15) The concept of Economic stability The attempt of stabilizing the economic fluctuations in the system of a society is what is called the stability policy or in other words the policy of stabilization of an economy. Preventing situations of imbalances in the economic system of a society to arise or to persist is the main aim of the policies of stabilization of the economy. The traditional theory of economic stability considers the fluctuations of the price level of the economy. (Fischer, 2002, p 69) In the world of the Classical Equilibrium theory the prices of the factors of production namely capital, land, as well as labor resembles the availability or the relative scarcity of those products. The changes in the supply and the demand of these factors of production implied the fluctuations in their prices. Thus the strong price fluctuation in the economy is the reflector of the economic instability for the nation according to this traditional economic theory. According to the Game Theory approach the instability in the economy persists mainly because of the asymmetry of the information as well as presence of incomplete information between the different participants of the market. (Fischer, 2002, p 70) According to the New institutional Economics the stability of the economy of a country depends on the institutional arrangements of the economy and the stability of those institutions. The rules as well as the norms created by the people of the society to serve for the social uncertainty are said to be the institutions of the society. Dampening of the relative fluctuations in the prices and its effects for the providence of the economic stability is the main function of the social institutions. Thus according to this theory the problems associated with the proper designing of the social institutions are necessary to be handled properly for maintaining development and stability in an economy. Thus the factors that may result in instability in the economy of a nation are the fluctuations in the price level of the country, asymmetry of information in the market of the economy and also certain mistakes in the policy considerations of the institutional organizations of the economy. (Fischer, 2002, p 71) Apart from these domestic factors the other factor that may result in the instability in an economy is the disequilibrium in the balance of payments condition of the country. The balance of payments records the transaction of a particular country with the rest of the world for a specific period of time. This balance of payments helps in projecting the status of the development of the economy of the country in terms of the national income of the country, the nature of industrialization and the industrial growth of the nation along with the economic stability of the country concerned. In the period of increasing globalization and increased volume of international trade , balance of payment have been emerging as an important feature of the international trade of the modern period as well as in the determination of the economic stability of a nation. Continuous deficit in the balance of payment position of a country for a considerable period of time results in a situation of disequilibrium in the balance of payment position of the country. Disequilibrium in the balance of payment position of a country can occur because of the deterioration in the productivity capacity of the country, fluctuations in the economic activity of the country and also because of the poor growth rate of the economy. The macroeconomic as well as structural imbalances in the domestic economy also results in deterioration of the position of the external front of the country Lack of proper mechanism in correcting the disequilibrium off the economy makes the problem more chronic and it affects the sustainability of the economic development of a country by affecting the value of the domestic currency, reducing the foreign exchange reserves of the country and thus in turn reducing the productive capacity of the country. The process is a cyclical one. The domestic instability affects the stability at the external front and vice versa. Thus in order to come out of the vicious circle of disequilibrium and hence instability the government of the country opts for monetary and non monetary policies for correcting the disequilibrium position of the balance of payments. If these domestic policies failed in restoring the equilibrium the country approaches to the international organizations for re-ensuring the economic stability of the country and hence to sustain the economic development of the nation. (Rangasai, n.d) The approach of the International Monetary Fund for economic stabilization The International Monetary fund provides its member nations with resources and financial help when they are in need of that and approach the international organization. Nations often are in need of extra fund so as to adjust to the situations of deficit or disequilibrium in the balance of payment in the country. The borrowings from the international monetary fund contains with it notifications of agreement that clearly specifies the conditions behind and governing the support. The agreement provided by the international organization to the member country is known as the conditionality of the international Monetary Fund. The member nations are in the need of following certain policies before the arrangements were approved by the executive board of the IMF. There are also certain policies undertakings that are needed to be met by the member nation at the time of the disbursement of the support at the initial period and also for the subsequent support that are paid throughout the lifetime of the arrangement. The total life period of an arrangement generally varies from one to three years. The approach of the International Monetary Fund in restoring stabilization in the economy of the member nations posses quantitative features that are vital it itself. The policies that are needed to be adopted by the member nations as per the program of the international organization consists of certain projections that are needed to be made for the key macroeconomic variables of the national output of the country, the Gross domestic product, the price level prevailing in the country at that particular period of time, the inflation rate of the country as well as the current account balance of the approached nation. The agreements and the policies pay particular attention to the availability of financing from external sources so as to ensure that the condition and position of external payment of the country is viable and that it is properly restored. Performance criteria of the key microeconomic variables of the country that are specifically quantitative and related to the macroeconomic policies of the country constitute a central element of the IMF conditionality. The fiscal deficit of the country and the net domestic credit of the central bank of the country have been imposed ceiling as per the requirement of the macroeconomic policies undertaken by the government of the country. The macroeconomic policy also includes flooring of the net international reserve of the country. All these macroeconomic policies are contained in the ‘quantitative performance criteria’ of the program of the International Monetary Fund. Financial programming that consists of the use of the framework of ‘flows of funds’ are generally required for the calculation of the performance criteria of those key macroeconomic variables. Thus the merit of the quantitative approach employed by the International Monetary fund for the achievement of economic stabilization in a country is the particular inspection of the macroeconomic variables particularly involved in it. However the IMF conditionality and the approach of the international organization in the attainment of economic stabilization in the country have been subjected to huge controversies for many years as well as in recent period. The programs initiated by the international monetary are often under complaining of damaging the economic growth of the nation unnecessarily. They are also supposed to be harmful to the poor population of the country as well as for the poor nations as a whole. Moreover the programs have also been criticized as being inflexible and rigid with the applications of certain economic principles that are discredited and outmoded. Moreover the conditionality and policies of the programs often do not response to the needs and the circumstances that are different for different member nations. Though some of the criticisms are inaccurate as can be proved through facts and hence can be dismissed, however certain other criticisms are in the need of substantive consideration. According to some economists and policy maker there can be certain substantial consideration to the policies of the International Monetary fund. Moreover often the policymakers argue that the countries with huge deficit in their balance of payments should be provided with the choices of unlimited grants or concessional financing. Since the official support provided by the organization is limited there sometimes arises the difficulty of undertaking the adjustments of correcting the external imbalances. It is mainly because of the fact that there always remain a debate regarding the extent of tightening of the macroeconomic policies and also regarding the balance between financing and adjustments. (International Monetary Fund, 1999, pp 3-4) The process behind the supportive program of the International Monetary Fund generally involves two parties. The first party is the country that requires the assistance for problem in the external front of the economy that arises because of the structural or the macroeconomic imbalances in the country. The second party of involvement is the organization itself that is offering the assistance in the form of both financial as well as technical support to the member nation for undertaking economic adjustments. International Monetary Fund acts as the lender of the last resort for the nations in their aim in correcting the disequilibrium in the balance of payments position of the country and hence there lies the necessity of a rapid response on the part of the organization to drive out the approached nation from the situation of crisis or near crisis, in order to correct the macroeconomic imbalances in the economy and normalize the external front. (International Monetary Fund, 1999, p 8) An article of Agreement had been established by the organization that contains in itself the criteria of eligibility of a country for approaching the IMF in securing the accessibility to the resources. Though the characteristic features of countries vary, there are certain common elements in the blueprints of the adjustments made by the staff of the organization. The international organization has prepared three pronged approach in order to confront the problems of external payment. Firstly at the early stages of the program there is a need of adopting a demand restraining measure. The second approach focuses on the securing of external financing that is sustainable. The third or the last approach focuses on the proper implementation of the reforms in the structure of the economy. The relative importance of each of these three approaches depends on the specific characteristics and circumstances of the economy. However the degree of substitution of one of the three core components by the other should not be exaggerated and needed to be carefully handled because of the fact that these three components are more complimentary to each other. The success of this supportive program of the IMF however depends on the implementation of the policy measures that are contained in the strategy. The IMF ends its role in designing the adjustment strategy, helping the concerned country in securing finances from external sources and monitoring the progress of the economy in overcoming the crisis. (International Monetary Fund, 1999, p 19) Problem of ‘one size fitting all’ The IMF supported program has been hugely significant for many nations; however it have been subjected to various criticisms. The program not only consists of policy recommendations that are of the same type but the policy recommendations contemplate adjustments for each and every countries that are of the same size. These perceptions have wide existence among different academicians and are widespread. However according to some others the perceptions are absolutely of no truth in it. As measured by the staff of the international organization the success of the program reflected in the fall in the inflation rate of the country as projected, decline in a country’s fiscal deficit and the improvement in the current account position of the country is a monotonic function of the extent of the imbalances of the economy of the country. (International Monetary Fund, 1999, p 24-25) The IMF and the other international organization of the World Bank since the period of their establishment have provided the poor or the third world nations with trillions of dollars of loans. According to the IMF data of 2007 the third world nations have a loan amount of about 1.3 trillion dollar. These rising amounts of the debt have proved to be major obstacle to the development of the economy and have often pushed the economy towards crisis. This has been proved by the debt crisis of Mexico in the year 1982 and also of the international debt crisis of 1990. The same have been proved for the Latin American countries and the developing economies of Africa. The Highly Indebted Poor countries agenda was an initiative undertaken by IMF in the year 1996 in order to ensure that the poor nations are able of repaying the loan amount successfully and not for reducing the burden of these third world countries. The developing nations have been executed as the largest stake holder of the organization in the year 2005. (Malik, 2011, pp6- 9) When accused of the “one size fits all” approach, IMF defends itself by stating that the reforms are molded according to the need of circumstances in a country. The programs undertaken for financial support are specific to countries. In a particular study involving 133 countries supported by the fund, it was found that one third of the members followed a program of increase in fiscal deficit and spending marked as a proportion of GDP. In the Hungary program adjusting monetary policy was followed owing to low levels of inflation and high inflation in Ukraine was addressed by tight monetary policy. The fiscal targets for Nicaragua’s programs were also reviewed in 2003-04 so make place for better social and public investment. During the fuel price rise in 2005 at Honduras, the fund provided fuel subsidies and higher levels of spending on securing the social safety framework supported by Poverty Reduction and Growth Facility program (IMF, 2010). Again Liberia has to remove duties on import on rice for a while and adopt welfare measures like provision of food in schools and increased subsidies for public transports. Despite accusations about propagating privatization in poor nations, IMF states that such policies are adopted only when they are deemed to be necessary and can bring financial stability. Information regarding the country’s conditions comes from World Bank and other entities. In order to promote the global recovery process it is important for the Fund to enter the developing economies and enhance its effectiveness. It is important for the fund to alter its governance structure in order to improve its safeguard of the global economic status and bring about stability in its financial system by bringing about a row of reforms. As per IMF reports the developing nations were growing at a faster rate than the developed economies. Yet it is important for the fund to reform itself in order to do its job effectively and address the problems of developing countries individually (China Daily 2010). Thus to conclude the paper it can be said that the organization has undoubtedly helped nations in achieving economic stability and clearing the external imbalances; however there is the serious requirement of alteration of certain of its policies for the betterment of more specifically the developing countries of the world. References 1. China Daily (2010), IMF reform needed, available at: http://www.chinadaily.com.cn/opinion/2010-04/26/content_9772881.htm (accessed on May 21, 2011) 2. Fischer, D, (July 2002), Stability and Commercial Information –An Economic Approach and a Look at China, ASIEN, 84, S. 69-76 , retrieved on 6th May from http://www.asienkunde.de/content/zeitschrift_asien/archiv/pdf/fischer84.pdf 3. Harrison, F, E, (1996), Economic development: theory and policy applications, Greenwood publishing 4. International Monetary Fund, (July, 1999), The IMF approach to economic stabilization, IMF working paper, retrieved on 6th May from http://www.imf.org/external/pubs/ft/wp/1999/wp99104.pdf 5. IMF (2010), IMF-Supported Programs—Frequently Asked Questions, available at: http://www.imf.org/external/np/exr/faq/progfaqs.htm#q8 (accessed on May 21, 2011) 6. Malik, M, R, (2011), IMF policy involvement in the developing countries, IMF’s policy involvement, retrieved on 6th May from http://www.scribd.com/doc/11917948/IMF-Developing-Countries-an-argumentative-essay 7. Rangasai, C, V, S, (n.d), Classical theory of international Trade, retrieved on 6th May from http://www.vazecollege.net/tyeco.html Read More