Bailing out the poor chap (6) by William Easterly
ARE IMF LOANS GOOD FOR POOR COUNTRIES?
A poor country with a weak government is suffering from shortages in terms of financial resources. Most of its population lives below poverty levels, there is high unemployment, low literacy rate, food shortages, no clean water and due to a combination of drought and lack of technology, no crops to export. As if it didn’t have enough problems, the country has debts to pay back to foreign governments, investors and agencies. This is where the IMF, which Easterly calls ‘the world’s most powerful creditor’, steps into the picture. It was originally set up by the West in order to prevent large trade imbalances and unstable currencies. However, it shifted focus and started bailing out poor countries in financial crises. It has had success in helping countries out on a short-term basis. Most of the countries that have benefited from IMF loans are countries that need temporary assistance, do not qualify as ‘emerging markets’ and face difficulties in attracting foreign investors and lenders. For example, the IMF successfully helped South Korea and Thailand during their financial squeezes in the 1980’s .
However, there are problems in terms of the long-term development of countries which rely on the IMF. Easterly begins his article by describing a meeting between the IMF and the minister of finance and economic development of Ethiopia. At the meeting, the IMF set out several conditions that the government of Ethiopia would have to satisfy in order to receive assistance and most importantly, pay back their loans. The problem with the conditions was that they were at times contradictory and unrealistic. For example, while stating that it supported the government’s food security program, the IMF also told the finance minister that he would have to be careful that the program did not endanger ‘macroeconomic stability’. How macroeconomic stability could be achieved in a country where most of the people are starving is a mystery.
Other conditions that the IMF places on countries include getting them to agree to financial programs which reduce government spending and inflation, limit excessive money printing, increase taxes and put in place austerity measures. Through such strict conditions, the IMF has therefore accomplished very little when it comes to promoting long-term development. The conditions have been too intrusive into government policies. Easterly argues therefore that there is an association between “IMF involvement and the most extreme political event: state collapse”. This is caused by the involvement of the fund in domestic politics. By ‘forcing’ governments to carry out social cuts such as reducing subsidies on basic goods, the proposed IMF measures create riots and political and social instability.
The article demonstrates that out of 8 countries that collapsed or failed, 7 had spent a high share of time ranging from 46 to 74 % of the decade before the collapse on IMF programs. This shows that the IMF measures are often too difficult to comply with and their ultimate success is limited. The author therefore suggests that the countries that ultimately collapsed would have probably been better off without IMF involvement. This is because such countries have far greater problems than the IMF can fix. However, despite this, the IMF never turns a country down even if it fails its programs several times. The author gives the example of Sierra Leone which went into civil war after participating in an IMF program and then returned into the program and failed again, this time requiring UN intervention to protect its population from genocide. He suggests therefore that the IMF should have left it alone in the first place and not intervened. Trying to help was according to Easterly, clear evidence of the ’Planner’s mentality’....
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