Pros:
Though, it is important to note that the IMF’s main goal and purpose is to create a simple international trade by the exchange of foreign currencies. Currencies have a value in terms of other currencies and what others are willing to pay for it. The IMF has effectively eliminated the restrictions on buying and selling national currencies by keeping members informed of each nation’s current value of it’s monetary unit. The IMF is also a research guide that calculates national outputs and how large or small a nation’s economy is for all members to view. Many countries that lack personal finance and central banking turn to the IMF for assistance in solving financial and domestic as well as, international economic problems.
By promoting trade between foreign nations, the IMF intensely increases the ever-expanding global economy. All nations depend on trade because they are all faced with the economic problem of scarcity which is the concept of unlimited wants and limited resources. For the most part, people’s desires for things are greater than their ability to make them. This is basically what the study of economics is all about, to diminish the scarcity citizens are faced with on a daily basis. For instance, because of North America’s climate, the United States cannot naturally produce coffee beans. Therefore, Americans must trade with foreign countries, such as Columbia, to gain this product. This is where the IMF comes in. By simplifying the conditions of trade and minimizing the exchange risk, the U.S. and Columbia can now trade at a faster flow and with larger quantities. Thus, it reduces the scarcity of coffee beans, which will lower the prices for the consumers and enables the economies in both countries to expand.
The other aspect of the IMF is to help its member countries with payment problems. If a member cannot take in enough currency from what it buys from other nations, the IMF supplies, helps stabilize and helps control the exchange value of the member’s currency. This country borrows the fund’s money at a below-the-market interest rate, which goes to the nation whose currency is being used. This is very important because the world is so intertwined that if one region crumbles, everyone seems to suffer. This part of the IMF is essentially a global rescue package.
Cons:
Although the IMF is debt relief organization it seems that its procedures are flawed and its genuine characteristics are mediocre at best. In the time period the IMF has operated in, it has had amble time to grow and learn from its mistakes. One could make the argument that the IMF helps alleviate debt, return prosperity, and keep economies from collapsing. Further yet, it has placed emphasis on the old, yet often played, theme of economic prosperity equals prosperity for the whole. Unfortunately, time has come to tell a different story which showcases the IMF as a staunch hypocrite not only to its governing policies but also, in it’s outwardly dealings.
One of the problems of the IMF, is the conditionalities it places on the governments who wish to acquire the loan they are seeking (Conditionality). Conditionality in terms of the IMF is essentially conditions attached in order for the country to receive the loan. An example of these ‘conditions’ would be the Structural Adjustment Programs (SAP), which are loans the IMF gives on the condition certain criteria are met. These call for changes in expenditures, devaluation, eliminating price controls, removing certain subsidies, and deregulation and privatization (International Monetary Fund). Although it is well noted on the IMF for trying to conjure change in these nations, there are issues on whether they have the right as an external institution to basically enact changes as if they were a global government.
The idea of another country telling a country what to do is usually seen as bullying and at times has a negative tone to it. In 2005, the Nigerian government was pressured by the IMF to do add a 19 percent value added tax. This tax was also to be leveraged on items which were food (Engler, 2005). Obviously, the IMF was trying to implement some of its good-hearted policies unfortunately, food prices had already risen about 75 percent in one of the poorest countries in world. This lead to there being ample food supply but, when the consumer cannot afford the supply then the basic principle of economics fails. People were lead into starvation because they simply could not afford food, and what little they had was already devalued enough (Engler, 2005).
Another nasty side effect of these SAP’s, is the call for lower subsidies in these nations. Of course there is nothing wrong in asking for the lowering of subsidies, the problem is that most of these nations are poor and have no other means of competing with the rest of the world. When a country has an absolute advantage in harvesting grain over other countries, instead of trying to eliminate this market the IMF should look into making it grow. For example in Ethiopia, the Government was asked, or pressured, to change their government policies and remove subsidies in their agricultural market. This lead to a free market approach which had high yields for several years and seemed to work, yet since the government was not able to act as price stabilizer, it eventually made farmers produce less since the saturation of the market made prices fall sharply. At first glance this was good, but when the activity produced no net gain or broke even, there was no incentive for farmers to produce. When production halted, the opposite problem occurred; there was not enough supply to meet the demand (Engler, 2005).
It is very ironic that these countries are being asked to lower their subsidies when the United States and the EU are usually heavy hitters in subsidies themselves. It seems the issue is elimination of competition instead of trying to really help these countries. When another country can produce what the United States can at half the price, then it makes obvious economic sense to cut subsidies in the United States, train and then allocate this work force elsewhere.
An example of how catastrophic the IMF and its policies can be was the financial collapse of Argentina in 2002. In 2000, the government sought out the IMF for assistance in repaying the debt it had. The IMF agreed to loan Argentina 48 billion dollars, but they had to agree to certain conditions. Among these, they asked for cuts in expenditures, which the IMF would specify, and also the elimination of subsidies for food for low income families. In a campaign to keep the trust of investors in Argentina and its currency, interest rates climbed and individuals rioted because they had no food and the banks had no funds to give those who had put away in their savings (Engdahl). Obviously, the conditionalities had a negative effect on Argentina and it finally fell in financial collapse.
Position and Justification:
As a group, we came to the conclusion that the IMF should not have the right to impose their conditionalities and its lifespan seems to have been exhausted. We came to this position for several reasons. First, the initial goal of the IMF was to oversee financial systems and aid Allied Countries after WWII to get them back on their feet so they could rebuild. By providing short term loans based on dollars they insured the promotion of the US dollar as a stable global currency and provided quick assistance to those countries. WWII was over sixty-one years ago; furthermore, the IMF actually had to change its goal from what it was originally into an institution which would help lesser developed countries by providing loans as well as advice. In other words, the IMF has essentially stopped being what it was originally supposed to be, and become something it should not be.
Second, the conditionalities which the IMF dishes out can be rather demanding on the countries as well as have secondary effects not only on the economic welfare of these countries but also the social welfare. Recalling from the earlier examples such as the 19 percent tax hike levied on food, or the retraction of subsidies which lead to saturation and then scarcity in the market, these policies seem to have one common objective in mind. The objective being opening up the country on a global scale which is not always the right thing to do, because it means it now must compete with the rest of the world. It may sound counter-productive, but in this case the IMF seems to work, but who it works for more often is the countries who are already developed and not those it claims to be helping. When a country, such as Ethiopia, has a set of subsidies which stabilize the price for grain then the IMF should have no power to remove them, and the fact they did ask for their removal once again highlights the real danger inherent in these dealings.
Finally, there are too many ethical issues surrounding the IMF which make it more of a juggling act. Countries, such as Argentina, view the IMF as a degenerative policy maker which caters to those who control it. The fact Argentina’s collapse was due in large part to the inappropriate management of this fund says a lot. There are those who say economic hope and reform change is the way to political and social reform, but those reasons do nothing to alleviate suffering these people have had either by direct or indirect influence of the IMF. Also, if it were so true, then Latin America should be a very rich and capitalistic region. The IMF’s original goals, for which it was created, have been met and it is time for true reform and not just the change of a name or policy.
Work Cited
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Conditionality. (n.d.). Retrieved Nov. 22, 2005, from Conditionality Web site: .
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Engdahl, W. (n.d.). How the imf props up the bankrupt dollar system. Retrieved Nov. 22, 2005, from How the IMF Props Up the Bankrupt Dollar System - EES Info Report Web site: .
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Engler, Y. (2005). Market famines. Retrieved Nov. 22, 2005, from Znet Africa Web site: .
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International monetary fund. (n.d.). Retrieved Nov. 22, 2005, from .