World Bank and IMF Policies in Developing Countries - Essay Example

World Bank and IMF Policies in Developing Countries The IMF policy of macroeconomic stabilization and the World Bank policies of structural adjustment are very unpopular in developing countries. Critically discuss the economic rationale for the dislike of these policies in these countries. Introduction In the post world war two years, the capitalist world in particular and the western world at large have been faced with several important economic problems like inflation, currency crises and third world debt. These problems are simply magnified in nature when their application is made to developing nations of the world. While some economists think that bodies like the World Bank and the IMF serve the cause of global harmony by bringing development and growth for developing countries, others suggest that the situation is quite the opposite. In fact, some developing countries attribute their economic problems directly to the policies of the World Bank and IMF as well as the policies resulting from the Washington Consensus. In extreme cases, even the rise of terrorism in recent years has been linked with the policies created by global entities who are supposed to work for the economic benefit of the developing world. The difference in viewpoint makes for an interesting debate which should be clearly understood by anyone who wishes to take a part in the economic, social or political arenas. The Washington Consensus In economic literature, the term ‘Washington Consensus’ is a name given to the policies which were suggested by Washington based institutes (World Bank, IMF, etc.) to several Latin American countries in order to bring up and improve their economic conditions. The term was crafted by Williamson and it has been a part of economic terminology ever since. The defenders of the economic policies of the Washington Consensus call it a boon and a path to economic independence for less developed and developing countries of the world. Those who oppose it call it a cruel implementation of neo-liberalism and a tool for the global domination of America (Williamson, 2000). Economists like Williamson are well aware of the detractions and say that people misunderstand the need to establish the policies of the World Bank and IMF. Williamson (2000) says that analysts around the world think that the policies are forced upon various weaker countries by international financial and economic organisations. This line of thought further suggests that it is the policies which have taken those countries towards a state of crisis and created misery for their people (Harvard University, 2003). Economic Suggestions The policies were overviewed by Williamson (2000) as the implementation of monetary regulations in terms of trade, redirection of government spending towards development plans that could give elevated returns to the people as well as alleviate the poverty situation by investing in things like healthcare, education etc., creating a wider tax base, having a free floating interest rate, liberalising trade policies, creating foreign investment prospects, privatization of national companies, deregulation of the economy as well as the establishment of correct currency exchange rates. In broad terms, the policies mentioned above might be seen as helpful and useful for an economy that is undergoing expansion and development. At the same time, in some cases such policies can be harmful if the implementation is weak or uncontrolled (Robinson, 2005). Because these policies have been used in quite a few countries for a number of years, their triumph has been mixed with failure and they have shown uneven results. In some places, the policies have been totally disastrous while other countries have managed to improve their economic state by careful application of the methods prescribed. Given the criticism on the policies, Held (2005) created a more pertinent definition for the policies and suggests that the policies advocate free trade, liberal markets, property rights, deregulation which have been suggested by a group of rich countries to poor countries without qualification in the past. In present times, a country must qualify for certain conditions and certain policies need to be avoided. By qualification, the economic need for the policy must be established first before World Bank or the IMF lends support for the policies. Rodrik (2001) is in complete agreement with Held and further adds that the IMF and World Bank policies for the developing countries of the world should be expanded to include other things like company accountability, social and personal responsibility, corruption mitigation, WTO agreements, control of quality standards, a free banking system, welfare systems and a focus on social security as well as poverty reduction measures for the country. It can be difficult to say that these are bad policies in economic terms, but the detractors show that the new policies and the renewed focus is an idea which is too late in coming. It seems that the policies recommended by the IMF and the World Bank are sometimes at odds with each other which leads Akbar (2005) to ask if the Washington Consensus even exists. Given the recent results, the steps taken by the World Bank, the policies suggested by the IMF and most importantly their application in developing countries leads me to believe that there is little economic reason for undermining these policies. Current Policies The present strategy of the IMF concerning low-income states has been given by Rodrigo de Rato, who is the Managing Director of the Fund. The IMF has set the change of guidelines and social bodies of poor economies as a priority. This would enable these economies to come out of the debt and the poverty cycle on their own rather than with help from outside. The focus of the IMF appears to be on creating relationships with countries rather than an ownership bond. However, the IMF does want to take control of the areas where it has the expertise i.e. macroeconomic growth, debt control, policy advisement and creating financial stability (IMF, 2006). A large part of the policies have to do with debt relief and the IMF has already given a total write off to the 19 poorest countries on the planet of which 13 were in sub-Saharan regions. Plans are being made to reduce or let go of the debts owned by many other poor nations. Policy recommendations from the IMF prevent or restrict additional loans for certain nations until pre-established conditions are met so that the economy has the chance to grow (IMF, 2006). Such policies certainly would have worked in the case of the Central Asian Republics which came into being after the collapse of the former Soviet Union. When they gained their independence, these countries were without any loan payments but after a few years they had heavy debts that caused their economies to slow down and turned them into some of the most indebted countries in the world (IMF, 2006). Akbar (2005) suggest that aid management and handling large sums of money can be problematic for countries who have no experience in these fields. Aid can be given for specific causes or programmes like hunger elimination, poverty reduction, education and disease control. Aid also comes with attached conditions since they goals mentioned above are also a part of the UN millennium goals (UN, 2005). The IMF wants to show countries how money can be used in the country without causing a false appreciation in the currency or rising inflation (IMF, 2006). For the citizens, the IMF creates programmes to improve their lot with micro-lending programs and soft loans for small businesses (IMF, 2006). Although it must be noted that such a plan can have negative influences since financial control and independence might have to be given up to some extent (Stiglitz, 2002). Perhaps the most controversial policy of the IMF is their participation in governance policies where even a partial input or suggestion can be seen as a slight on national sovereignty (Robinson, 2005). Conclusion It seems that the IMF and the World Bank are sincere and they are simply doing what they were created to do i.e. to control and support the international system of fiscal dependency that connects one country to the rest of the world (Rodrik, 2001). Certainly the role has expanded beyond the original and I feel that it will continue to expand since there will always be nations that are relatively poor in comparison to rich ones. With the evidence presented and the results shown, I do not think that the policies of the IMF or the World Bank are cruel or that their rules bring developing countries to their knees. As a matter of fact, with the help of these bodies and the correct application of the policies a country can recover to become a productive member of the international community. As long as the future of a developing country can be secured, a little hardship should be very easy to accept just for the time being. Works Cited Akbar, N. 2005, ‘Scoring the Millennium Goals: Economic Growth Versus the Washington Consensus’, Journal of International Affairs, vol. 58, no. 2, p233-244. Craig, B. 2000, ‘Aid, Policies and Growth’, American Economic Review, vol. 90, no.9, p847-68. Harvard University. 2003, ‘Washington Consensus’, Global Trade Negotiations, [Online] Available at: http://www.cid.harvard.edu/cidtrade/issues/washington.html Held, D. 2005, ‘Washington gets it wrong’, Global Agenda, no. 3, p100-101. IMF (International Monetary Fund). 2006, ‘The IMFs Medium-Term Strategy for Low-Income Countries’, Remarks by Rodrigo de Rato: Managing Director of the International Monetary Fund, [Online] Available at: http://www.imf.org/external/np/speeches/2006/031606.htm Robinson, W. 2005, ‘Global Capitalism: The New Transnationalism and the Folly of Conventional Thinking.’ Science & Society, vol. 69 no. 3, pp316-328. Rodrik, D. 2001, The Global Governance of Trade as if Development Really Mattered, UNDP: New York. Stiglitz, J. 2002, Globalization and Its Discontents, Norton, New York. UN (United Nations). 2005, ‘What are the Millennium Development Goals?’ UN.org, [Online] Available at: http://www.un.org/millenniumgoals/ Williamson, J. 2000, ‘What Should the World Bank Think About the Washington Consensus?’, World Bank Research Observer, vol. 15, no. 2, pp. 251-264. Read More