Requiring Accounting as a Condition for IMF/World Bank Support by Way of Loans - Case Study Example

The arguments for and against requiring accounting and economic reform as a condition for IMF/World Bank support by way of loans/aid Table of Contents 1. Introduction : Page 3 2. The arguments for requiring accounting and economic reform as a condition for IMF/World Bank support by way of loans/aid : Page 4 3. The arguments against requiring accounting and economic reform as a condition for IMF/World Bank support by way of loans/aid : Page 7 4. Conclusions : Page 10 5. References : Page 11 6. Appendix : Page 13 Introduction World Bank and International Monetary Fund (IMF) are supposed to be two financial institutions which extend support to poor countries for their economic developments. But, the highly politicized way of functioning and strict rules and regulations for allotting grants have made these institutions highly controversial. In 1996, these financial institutions agreed to provide debt relief to approximately 40 of the world’s poorest and most indebted nations (RESPONSIBLE REFORM OF THE WORLD BANK, 2002, p.1). Battaile (2005) has pointed out that at the end of 1999, these financial institutions launched the PRS (Poverty Reduction Strategy) initiatives to help low income countries to develop and implement better strategies to fight poverty (Battaile, 2005, p.1). Mozambique, Nicaragua etc are examples of poor countries who sought the assistance of World Bank and IMF for their economic developments during this period. But IMF and World Bank have insisted the governments of these countries to undertake heavy economic reformation processes in order to get the assistances. Woods (2000) has mentioned that IMF and World Bank advocated good governance as the major criteria for providing help to the poor countries (Woods, 2000, p.1) The norms put forward by IMF and World Bank for providing aids to the poor countries, have been criticized by many economists because of the suspected hidden agenda and lack of transparency in their operations and norms. Being the wealthiest member in these institutions, U. S. believed to be playing a major role in the functioning of these institutions. Woods (2000) has pointed out that both IMF and World Bank are created within U.S., mainly by US and their allies. Moreover, these institutions are headquartered in U.S. which clearly indicates the U.S, supremacy over the functioning of these financial institutions (Woods, 2006, p.15). The voting structure of IMF and World Bank underlines the concerns about the over involvement of U.S. in the internal matters of these institutions. Because of the supremacy of United States in the policy matters of IMF and World Bank, many countries, especially the socialist countries have lot of apprehensions about the norms put forward by these financial institutions in extending helps to other countries. Accounting, economic reforms and good governance are the major criteria for the poor countries for getting aids from IMF and World Bank. This paper analyses the arguments for and against requiring accounting and economic reform as a condition for IMF/World Bank support by way of loans/aid. The arguments for requiring accounting and economic reform as a condition for IMF/World Bank support by way of loans/aid Battaile (2005) has mentioned the two major conditions set forth by World Bank and IMF for assisting poor countries; the countries which seek the aid should diagnose the causes of their poverty and sources of their growth after the consultation with the key groups of stakeholders. Moreover all the external aids should be spent for the PRS (Poverty Reduction Strategy) initiatives (Battaile, 2005, p.52). The above requirements seem to be logical as poor countries will definitely try to spend the money/aid received from external sources for the immediate gains in the absence of any controlling measures. World Bank and IMF never advocate policies for the short term. They always encourage poor countries to make policies for the long term. For that purpose, they should identify the reasons for the poverty in their countries and the immobile resources in their countries. World Bank and IMF policies are aimed at addressing the needs of economic growth in two ways. First of all, identify the reasons for poverty and eliminate it. Next, mobilize the idle resources for the economic growth. Privatisation has been encouraged by World Bank and IMF because of the fact that no countries irrespective of poor, developing or developed, might be able to find funds for the public utility services single handily. For example, transportation, healthcare, banking and energy sectors are some of the areas in which many countries now encourage private participation. For example, India is a country which depend IMF and World Bank aids for their future development. India has implemented lot of economic reform strategies insisted by IMF and World Bank. Indian banking sector was previously almost closed to private participation. But at present, India has opened its economy slightly for the private institutions so that lots private banks, like HSBC, CITI Bank, ICICI, HDFC etc are working in Indian banking sector. At the same time the public sector banks are still dominating in India which helped them to escape from the current financial crisis without much damage. India is following a mixed economy in which private and public participation welcomed judiciously. Andhra Pradesh is an Indian state which relied on the assistance of World Bank for its economic development. As per the World Bank website Andhra Pradesh (AP) is likely to achieve some of the Millennium Development Goals (MDG) targets by 2015 if AP is able to sustain the achievements of the 1990s (Andhra Pradesh Economic Reform Program II, 2004). AP’s economic progress statistics compared to India’s economic progress is given in the Appendix. World Bank and IMF encourage accountability and control over spending on public utility areas. Accountability is a key figure in economics. In simple economic terms, the expenditure should be in line with the income. But in many countries, the balances between income and expenditure are poor which creates immense economic problems or crisis. For example, in countries like America or India, the public is getting subsidized healthcare services, electric power, water, cooking gas etc. Moreover, in many countries, retired employees are getting a substantial amount of money as pensions or retirement benefits. All these expenditures are from the pocket of the government whereas the income or revenue obtained as taxes from the public might be far less than the expenditure. No governments can sustain their economic activities in this manner for a longer period. World Bank and IMF urge the governments to decrease their spending on non-productive sectors. Woods (2006) has argued that World Bank and IMF can encourage sensible public sector development programs. He has cited Mexico as the example to prove his arguments (Woods, 2006, p. 44&56) Mexico has developed a lot steadily under the economic reformations proposed by the World Bank and IMF in the last couple of decades. Mexico was previously an underdeveloped country which struggled to mobilize its resources because of the absence of infrastructure developments. But, the systematic and comprehensive planning and implementation of economic reformation strategies helped Mexico to develop a lot under the supervision of World Bank and IMF The arguments against requiring accounting and economic reform as a condition for IMF/World Bank support by way of loans/aid It is difficult for a democratic government to enforce the tight IMF/World Bank norms across the country. A government cannot behave like a business group. In business, the entrepreneurs are interested in making profits even though nowadays, the term corporate social responsibility is extensively used in business circuits. Business groups can keep their social responsibilities on papers alone whereas a democratic government cannot stay away from servicing the public. A government, irrespective of democratic or socialistic, is functioning for the people. It cannot function like give money, take money basis. For example, in most of the countries, rural and urban areas are there. Rural people might not be as rich as the urban people. An elected Government cannot ensure social justice if it provides luxuries to the urban/rich people by taking money from them as taxes and neglecting the needs of the rural population because of the less chances of collecting heavy taxes from them. Kofas and Kofas, (2002) have argued that IMF policies have weakened under developed countries and increased their foreign debt (Kofas and Kofas, 2002, p.6). Because of the tight monetary conditions of IMF/World Bank loans poor countries were unable to fiscal and economic reforms to attract foreign direct investment. Moreover, because of the tight conditions, most of the countries who sought the aid of IMF/World Bank had lost their credibility as a sovereign state. Kofas and Kofas have cited Latin America and Columbia as examples to establish their arguments. Latin America’s manufacturing sector fell increasingly under U.S. European and Japanese ownership after 1960 because of IMF/World Bank assistance instead of self reliance and better living standards. Agricultural projects, mining, infrastructural development and petroleum operations projects mostly linked with foreign IMF/World Bank aids in Latin America (Kofas and Kofas, 2002, p.6) The increased dependence of foreign aid in these critical sectors forced Latin America to obey whatever the instructions given to them by IMF/World Bank. Most of these instructions were aimed at ensuring the participations of American, European and Japanese companies in the critical sectors of Latin America in the name of foreign direct investment. Speculators and foreign companies took more capital out of Latin America and Columbia than they invested in this region. Moreover, the strategies instructed by the IMF/World Bank for the development of agricultural sector have not addressed the needs of the agricultural labours which resulted in the displacement of labours geographically and sectorally in Latin America. Privatization of public sector companies in the name of economic reforms, proposed by IMF/World Bank often created problems in many countries who sought the monetary aids from these institutions. For example, Nicaragua was forced to privatize the electric supply in their country as per the instructions of IMF/World Bank (Are IMF and World Bank Economic Policy Conditions Undermining the Impact of Debt Cancellation?, n. d.,p.3). Privatization neither improved the service, nor the economy. But it resulted in power cuts and increased bills. At the same time, the foreign companies which invested in Nicaragua’s power sector have reaped lot of profits at the expense of the interests of the Nicaraguan people. Zambia is another country which suffered a lot because of the World Bank instructions. They forced to restrict public sector spending through a wage and hiring freeze, leaving it unable to employ 9,000 desperately needed teach­ers (Are IMF and World Bank Economic Policy Conditions Undermining the Impact of Debt Cancellation?, n. d.,p.2). Some of the most crucial requirements needed for IMF/World Bank assistance were; adhere to strict IMF fiscal and monetary targets, privatize key industries, liberalize markets, and remove subsidies for sensitive commodities like gasoline and cooking oil etc (Are IMF and World Bank Economic Policy Conditions Undermining the Impact of Debt Cancellation?, n. d.,p.2). Removal of subsidies will definitely affect the family budgets of the poor people whereas the liberalization and privatization of markets create opportunities for private companies to exploit the wealth of poor countries. The requirement that the countries seeking debt relief stay on track with a Poverty Reduction and Growth Facility (PRGF) loan from the IMF is of particular concern. PRGF loans include macroeconomic policy conditions such as maximum inflation targets and public spending limits, specific levels of currency reserves that must be attained, and caps on public wages. These conditions give the IMF the power to dictate spending levels in a number of sensitive sectors. growing number of analysts have criticized the IMF for being overly stringent by requiring impoverished countries to maintain low inflation, limit public spending, and accumulate high currency reserves (Are IMF and World Bank Economic Policy Conditions Undermining the Impact of Debt Cancellation?, n. d.,p.3) Paloni & Zanardi (2006) has argued that the loans from international financial institutions are the fastest growing debts for developing countries for the last 20 years (Paloni & Zanardi, 2006 p.1). In other words, many countries failed to achieve the objectives even though they obeyed the instructions from IMF and World Bank. The net outcome of IMF and World Bank assistance for most of the countries were increased foreign debt and unfulfilled dreams. IMF and World Bank have argued that poverty reduction is only possible if the poor countries themselves take initiatives and appropriate policies and they have limitations in guaranteeing development. World Bank and IMF operate in the marketplace just as an entrepreneur. Even though, their declared aims are good on paper, it is not so in the practical canvas. Conclusions Dr. Nurul Islam, Emeritus Research Fellow at the International Food Policy Research Institute (IFPRI) has once said that three factors stood out in the successful implementation of economic reforms; Conviction, consensus and commitment, and competence (Montek Ahluwalia, Some Lessons from Economic Reforms in India, 2004). The IMF/World Bank aid seeking countries should have the conviction that these aids are essential for their economic developments and the norms of these financial institutions can be met without damaging the interests of the country. Moreover, the aid seekers should have the competence to spend the money for constructive purposes which may boost the economic progress. In short, World Bank/IMF aids should be sought only after careful evaluation or comparison of the norms prescribed by these agencies against the country’s long term interests. References 1. Are IMF and World Bank Economic Policy Conditions Undermining the Impact of Debt Cancellation?,(n. d.), Retrieved on 14 February 2010 from http://www.jubileeusa.org/fileadmin/user_upload/Resources/Policy_Archive/208briefnoteconditionality.pdf 2. Andhra Pradesh Economic Reform Program II, (2004), Retrieved on 14 February 2010 from http://web.worldbank.org/external/projects/main?Projectid=P075191&theSitePK=40941&piPK=73230&pagePK=64283627&menuPK=228424 3. Battaile William G. (2005), The Poverty Reduction Strategy Initiative: Findings from Ten Country Case Studies of World Bank and IMF Support Publisher: World Bank Publications (June 2005) 4. Document of The World Bank Report No: 30927(2005), THE SECOND ANDHRA PRADESH ECONOMIC REFORM, Retrieved on 14 February 2010 from http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2005/03/29/000012009_20050329105516/Rendered/PDF/30927.pdf 5. Kofas Jon and Kofas Jon V (2002), The Sword of Damocles: The IMF, the World Bank, and U.S. Foreign Policy in Colombia and Chile, 1950-1970, Publisher: Praeger (July 30, 2002) 6. Montek Ahluwalia, Some Lessons from Economic Reforms in India, (2004), Retrieved on 14 February 2010 from http://info.worldbank.org/etools/BSPAN/PresentationView.asp?PID=1069&EID=328 7. Paloni Alberto & Zanardi Maurizio (2006), The IMF, World Bank and Policy Reform Publisher: Routledge; 1 edition (January 13, 2006) 8. RESPONSIBLE REFORM OF THE WORLD BANK, (2002), THE ROLE OF THE UNITED STATES IN IMPROVING THE DEVELOPMENT EFFECTIVENESS OF WORLD BANK OPERATIONS, Retrieved on 14 February 2010 from http://www.essentialaction.org/imf/worldbank_report/IDA_FINAL_REPORT.pdf 9. Woods Ngaire (2006)The Globalizers: The IMF, the World Bank, And Their Borrowers Publisher: Cornell University Press; 1 edition (March 29, 2006) 10. Woods Ngaire (2000), The challenge for good governance for the IMF and the World Bank themselves, World Development, vol. 28, No. 5, Retrieved on 14 February 2010 from http://www.globaleconomicgovernance.org/wp-content/uploads/Challenge%20of%20Good%20Governance.pdf Appendix (Document of The World Bank Report No: 30927, 2005, p.2) Read More