When the Great Recession hit the world in 2008, a mountain of economic blows assembled internationally. Governments were left reeling in red ink, banks went bankrupt and spending crawled to a standstill. While some countries were able to create stimulus packages that helped pull them out of the worst possible consequences of the recession, leaders in developing countries had nothing they could do. This is where the International Monetary Fund (IMF) would typically come in to assist. But many people are saying the fund hasn’t helped these desperately poor countries enough. Instead, these critics say, the IMF is pouring funding into rescue operations that deplete much of its funds. These are short-sighted efforts that don’t address the issues in developing countries. While the IMF is responsible for providing loans to countries with an economic crises, the essay will reveal some of the evidence that suggests the IMF response to the Great Recession has been too slow, with poor advice – but IMF and its supporters come to its defense over providing short-term, rather than long-term relief.
The Bretton Woods Committee and the Brookings Institute slammed the IMF, saying it needs to play a greater long-term role in helping developing countries pull themselves out of the economic muck. The research institutes states, “The Fund must clarify its relationship to regional organizations, including those in currency unions, as soon as possible, with the aim of better clarifying respective accountabilities and responsibilities,” (Evaluating IMF, 2012). The report, which includes suggestions from a roundtable meeting also says the Fund needs to get rid of its idea that borrowing is bad, in order to react to the needs of developing countries in a quick manner. The research goes on to state that the role of the IMF should be considered just as important, despite the economic strength of the country needing funding. “The Fund’s conditionality is as critical as its lending for developed countries, emerging markets, and developing economies alike,” (Evaluating IMF, 2012).
The IMF is responsible for preventing a currency crisis, which has become a hot topic since downturn in the world economy. There have been recent cases of currency crises within the world economy, but the short-term stabilization program that is designed to prevent currency crashes hasn’t stopped the current currency crises from taking shape in many recession-riddled countries in the stabilization program. But Bumba Mukherjee, assistant professor of the Department of Political Sciencee and the Department of Economic and Econometrics University of Notre Dame, concludes that participation in the short-run stabilization program, instead of participation in long-term relief efforts, actually helps countries because it prevents currency crashes and economic disasters, and this was proven in the turnaround of countries that participated in the short-run program. Yet critics slam the IMF, saying it isn’t doing enough to pull countries out of the recession and in closer line with other countries, to help prevent such a crisis.
But the questionable actions of the IMF didn’t begin with the global financial crises in 2008 – and many of the actions go unnoticed. According to Jeffrey Sachs essay for Columbia University, many of the mistakes made by the IMF never become public: “When an internal IMF review criticized the IMF’s role in Mexico in 1993 and 1994, it was quickly hushed up and never made public,” (Sachs, 1998). He goes on to say that whenever a mistake is made by IMF, the government of the country in which the blunder is made is blamed for not falling in line with the “wise” words of the IMF.
The paper states that the IMF isn’t doing enough to help the developing countries. In 1985, for example, when Bolivia experienced a 24,000 per cent hyperinflation, an incredible rise in poverty and a 30 per cent decrease in living standards – due largely to dictators mismanaging public funds – the IMF nearly collapsed the efforts made by an elected government that took power that same year, by requiring the country to repay bad debts to the IMF. These debts were inherited from a military government from the past. The United States sided with the Bolivians thanks to the nation’s cooperation with a U.S. antidrug policy. “As a result, Bolivia pioneered debt relief two years before it became official IMF policy,” (Sachs, 1998). But this is just one of many examples of the IMF’s attitude towards developing nations. A more thorough analysis can’t be contained within the limited pages of this essay.
While there are plenty of critics, others say the IMF isn’t able to help developing countries. In fact, the Fund can’t assist the U.S., according to a CRS Report for Congress: “The current financial crisis represents a major challenge for the IMF since the institution is not in financial position to be able to lend to the United States or other Western countries affected by the crisis (with the possible exception of Iceland),” (Weiss. M, 2008). The paper goes on to say the IMF can’t, with its 2008 financial resources at $352 billion, “of which $257 billion were usable,” help pull developed countries out of recession. This would imply that the best course of action is to spend the resources to assist developing countries strengthen their economies.
The IMF is also limited in its ways to interfere with domestic politics, (Wendt, 2012). In fact, Article IV, section 10, of the World Bank’s Charter states that the Bank and its officers, including the IMF, can’t “interfere in the political affairs of any member, nor shall they be influenced in their decisions by the political character of the member… only economic considerations shall be relavant to their decisions, and these considerations shall be weighted impartially,” (Wendt, 2012).
The evidence pointing to a lack of ability on the part of the IMF, and the lack of a reason to spend on long-term funding to help address the currency crisis, are convincing ideas in defense of the IMF. While history tells people IMF has plundered, it appears the critics aren’t as aware of the need to spend on long-term packages to pull developing countries out of red ink.
Evaluating IMF Lending Options in Response to Global Crises. (2012, March 6). The Bretton
Woods Committee in cooperation with Brookings.
Mukherjee, B. (2012) Why IMF Stabilization Programs Fail to Prevent Currency Crises in Some
Financially Distressed Countries But Not Others? Princeton University.
Sachs, J. (1998, March). The IMF and the Asian Flu. Columbia University.
Weiss. M.A. (2008, Oct. 30). The Global Financial Crisis: The Role of the International Monetary
Fund (IMF). CRS Report for Congress.
Wendt. N. (2012) The IMF and the World Bank Respond to Criticism. University of Iowa.