The IMFs Approach to Economic Stabilization - Essay Example

Economic Stabilization: The IMF's Approach and the Controversy Over it (Fill in with your information etc EconomicStabilization: The IMF's Approach and the Controversy Over it Economic stabilization in developing countries primarily concerns attempts to correct excessive or unsustainable balance-of-payments deficits, reduce the rate of domestic inflation, or both. "Frequently, stabilization efforts also involved exchange rate reform and changes in the systems of import protection and export incentives. A country may make these efforts on its ownorin conjunction with a supporting financial program from the International Monetary Fund" (Cline & Weintraub, 1981:1). The IMF has been around since the earlier part of the 1900s, and has gone through much controversy and trials and tribulations in its time, and its new approach to economic stabilization has stirred up a whole new pot of opinions and critical observations. In order to truly diagnose the situation, and properly understand the IMF and its current position in the world, we must ask the following questions: 1. What is the IMF 2. What are the main components of the IMF's approach to economic stabilization 3. What controversy subsequently followed the IMF's decision and how has the IMF dealt with this controversy By discussing these three questions, we can come to a clearer and more understanding view on this subject matter: this is what will be dissertated in the following. What is the IMF Founded in the turbulent era of the 1940s to stabilize the world economy, and based in Washington, D.C., the IMF (International Monetary Fund) is "an organization of 184 countries, working to foster global monetary cooperation, secure financial security, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty." ("IMF", 2006). The IMF's original purpose was "to establish a code of conduct that would enhance economic cooperation, and avoid the 'beggar-thy-neighbor' policies that led to the economic turbulence of the thirties." (Babb & Buira, 2005). In short, the IMF is a multilateral institution that lends money to governments in order to stabilize currencies and maintain order in international markets. Since the IMF was established its purposes have remained unchanged, but its surveillance, financial assistance and technical assistance operations have developed regularly in order to "meet the changing needs of its member countries in an evolving world economy." ("IMF", 2006). The IMF "plays a key role in defining how much governments can spendThe Fund's view of what defines the macro economic stability of a country is the authoritative one for all development partners." ("Eurodad", 2003). What are the Main Components of the IMF's Approach to Economic Stabilization Particularly so in recent years, the IMF's quantitative approach to economic stabilization "has been the subject of considerable controversy." ("Survey", 1999). Considered as "the creator of the 'moral hazard'," (Monsod, 1998), the IMF consists of many programs which are often characterized as being "unnecessarily damaging to growth, harmful to the poor, unduly inflexible and unresponsive to the differing needs and circumstances of member countries, and based on rigid application of outmoded and discredited economic principles." (Mussa & Savastano, 1999). In order to understand the IMF's approach to economic stabilization and how it functions in all aspects, one must first understand the process of an IMF supported program: typically an IMF supported program is not permanent or 'set in stone' at the beginning of operations, but rather begins with the seemingly simple a request of a member. It is only then that the IMF staff prepares a blueprint of a program that is used for the actual basis of negotiations. After this, when an agreement is reached, the arrangement is cleared by IMF management and then approved by the IMF Executive Board. Disbursements proceed immediately after this if all performance clauses are met. For many decades, the IMF has "imposed stringent loan conditions that often lead to worsening conditions for the majority of citizens in the affected countriesmore than its partner, the World Bank, the Fund is known for its rigid orthodoxy and its high-handed approach to poor countries." ("Global", n.d.). The IMF's approach has so often been negative than many have criticized that its' 'medicine was worse than the disease." Both the IMF and the World Bank have been openly blamed for the situation of many developing nations, who are in debt and poverty partly due to the policies of international institutions such as these. "Their (IMF) programs have been heavily criticized for many years in resulting in poverty." (Shah, 2005). The IMF's 'new' approach to economic stabilization includes that of: adding social conditions to its list of demands on debtor nations, and the stressing of the need to increase trade as a means of boosting economic growth in poor countries. Noting that it will be changing its embattled 'Enhanced Structural Adjustment Facility' (ESAF) a new name - the 'Poverty Reduction and Growth Facility', the IMF presently has a rather bad reputation with the majority of businesses, organizations, and general people around the world. "This name change symbolizes the IMF's newly stated commitment to poverty alleviation in the poorest countries." (Weissman, 2000). Alejandro Bendana, president of Nicaragua's Center for International Studies said rather bluntly, "When the IMF speaks of poverty relief it's like telling someone who is beating their wife, 'We're going to provide transport for your wife to the hospital;'." Bendana is one of many critics who opinionate that the IMF is "not seeking to replace its traditional fiscal and monetary nostrums but to add social conditionalities to its list of demands on debtor nations." (Aslam, 1999). There are those who are publicly on the IMF's side however, including one of their own - IMF Managing Director Michel Camdessus, who in a speech to world finance ministers and central bank chiefs quoted, "The Fund is now well-equipped to give a new impulse to the fight against poverty, and will work closely with the World Bank to vanquish the problem." In response to this, Ann Pettifor, director of Britain's Jubilee 2000 coalition, replied: "It's a lot of baloney, franklyThis seems to me to be the IMF desperately seeking to reinvent itself, to retrieve its reputationThis is not the moment to be rescuing the IMF. There are other institutions that can perform these roles far more adequately than the IMF can." What Controversy Subsequently Followed the IMF's Decision and how has the IMF Dealt With This Controversy The primary explanation for so much controversy surrounding this matter is due to the IMF's previous experiences. A vast and widespread opinion is that the IMF (along with other institutions) has left developing countries in (more) poverty; they have been blamed for making many situations far worse than they already were. Statements which have been made by IMF staff have also added fuel to their already heavily burning fire, such as when World Bank President James Wolfensohn argued that a major breakthrough had been achieved (in regards to the 'fight against poverty'), and that he and other policy-makers deserved "a couple of months off to recover from intense negotiations and to ponder next steps." (Aslam, 1999). Njoki Njoroge Njehu, Director of the U.S. '50 Years is Enough' network of grassroots groups responded that, "By UNICEF's count, if he takes two months off, 120 000 children will die in indebted countries. What's his beauty sleep compared to that" It is clear that the IMF itself has been thoroughly controversial in its endeavors and opinions, and seems to have more than its share of negative critics. With the promotion of financial stability as its primary task, the IMF answers to the mass controversy by connoting that debt relief is the only way to fight poverty. They stand by their opinions and beliefs, despite an overwhelming amount of disapproval from the public. Some U.S. critics of the IMF argued that it should "return to its core job of assisting financial stability and leave helping the poorest countries to the World Bank." (Rose, 2000). Horst Koehler, the new IMF managing director, disagrees; he believes that the IMF should continue to have a role in helping all countries. The IMF's approach to economic development and stabilization has been called by some "a colossal failure." (Johnson, 1997). Critics aver that "the IMF's economic 'remedies' often make things worse - turning slowdowns into recessions and recessions into depressions." (Hutchinson, 2001). With far more cavilers than allies - it has been considered by many to be "outdated, ineffective, and unnecessary" (Johnson, 1997) - and with even some of those few allies left having second thoughts due to the IMF's ever increasingly dissatisfactory resume, it is no wonder such controversy surrounded their latest actions. However, in a concluding manner it was once said that "In considering this material, it is important to keep in mind evolving patterns of aid, country performance and Fund policy and practice. Indeed, a key part of the evaluation will entail the clear articulation of the time period under consideration in any particular piece of analysis, as a basis for assessing the appropriateness and context of Fund policies and actions." ("Role", 2005). I believe that perhaps if the IMF were to spend more time listening and taking into consideration what others have to say before coming up with new ideas and policies, they would be more widely accepted and certainly more appraised for actions taken. If your aim is proposed to be positive, and the majority of the feedback you are receiving is contradictorily negative, that is surely evidence enough that something is amiss. The IMF's overall goal can and should be one of social and moral ethical agreement, and not until this happens will their approach be taken seriously and with a positive response. Bibliography Aslam, A. (1999). IMF's New Poverty Focus a Hard Sell. Retrieved January 17, 2006, from http://www.thepioneer.com/international/oct9_focus.htm Babb, S., & Buira, A. (2004, March). Mission Creep, Mission Push and Discretion in Sociological Perspectives: The Case of IMF Conditionality. Retrieved January 18, 2006, from http://www.g24.org/012gva04.pdf Chossudovsky, M. (2000, April). The IMF-World Bank's "Economic Medicine". Retrieved January 18, 2006, from http://emperors-clothes.com/articles/chuss/imfworld.htm Cline, William R., & Weintraub, S. (1981). Economic Stabilization in Developing Countries. Washington, D.C.: The Brookings Institution "Eurodad". (2003, July). The IMF and the Millenium Goals Failing to Deliver for low Income Countries. Retrieved January 18, 2006, from http://www.eurodad.org/articles/default.aspxid=494 Fischer, S., Sahay, R., & Vegh, Carlos A. (1996). Stabilization and Growth in Transition Economies: The Early Experience. The Journal of Economic Perspectives, 10, pp. 45-66. "Global". (n.d.). The International Monetary Fund. Retrieved January 18, 2006, from http://www.globalpolicy.org/socecon/bwi-wto/imfind.htm Gomulka, S. (2000). Macroeconomics Policies and Achievements in Transition Economies. Retrieved January 18, 2006, from http://www.unece.org/ead/pub/002/002_3.pdf#search='Inflation%20and%20Stabilization%20in%20Transition%20Economies%3A%20A%20Comparison%20with%20Market%20Economies%20pdf Hutchinson, Michael M. (2001, May). A Cure Worse Than the Disease Currency Crises and the Output Costs of IMF-Supported Stabilization Programs. Retrieved January 18, 2006, from http://econ.ucsc.edu/faculty/hutch/new_nber_w8305.pdf "IMF". (2006). IMF. Retrieved January 18, 2006, from http://www.imf.org/ Johnson, Bryan T. (1997, May). The International Monetary Fund: Outdated, Ineffective, and Unnecessary. Retrieved January 18, 2006, from http://www.heritage.org/Research/InternationalOrganizations/BG1113.cfm Monsod, S. (1998, November). IMF and the sea Financial Crisis. Retrieved January 18, 2006, from http://www.cld.org/WIP%20Flyer%20Latest/wipall4.htm Mussa, M., & Savastano, M. (1999, July). The IMF Approach to Economic Stabilization. Retrieved January 18, 2006, from http://www.imf.org/external/pubs/ft/wp/1999/wp99104.pdf "Role". (2005, December). The IMF's Role in the Determination of the External Resource Envelope in Sub-Saharan African Countries. Retrieved January 18, 2006, from http://64.233.187.104/searchq=cache:wpynC5Ci8ZgJ:www.imf.org/External/NP/ieo/2005/ssa/eng/121305.pdf+IMF's+approach+to+economic+stabilization+and+the+controversy+surrounding+it&hl=en Rose, W. (2000, September). IMF/World Bank Meetings to Focus on Outlook, Reform and Poverty. Retrieved January 18, 2006, from http://www.eurodad.org/articles/default.aspxid=494 Shah, A. (2005, November). Structural Adjustment - A Major Cause of Poverty. Retrieved January 18, 2006, from http://www.globalissues.org/TradeRelated/SAP.asp "Survey". (1999, August). IMF Survey. Retrieved January 18, 2006, from http://www.imf.org/external/pubs/ft/survey/1999/081699.pdf#search='imf Weissman, R. (2000, March). New Friends of the Earth Report on the IMF and Environment - I. Retrieved January 18, 2006, from http://lists.essential.org/pipermail/stop-imf/2000q1/000103.html Read More