As the indebted countries got into even more debt, the IMF’s ‘right’ was to intervene into their economies, making structural adjustments with the purpose of actually helping to repay debts. Tragically, very often the effects on the economies have been devastating. ‘Ill’ economies have been treated with IMF’s 3-step help and very often made even more ill, by IMF’s technical assistance policies. Generally, the countries are required to:
- Reduce inflation
- Reduction of Imports
- Increase of Exports
- Restrict flows of capital and goods
- Liberalise Trade
- Privatise government enterprises
- Reduce public spending
These are part of technical assistance policies, which were used in Poland during post-communism crisis and actually brought about healing to the economy. ‘Shock Therapy’ is said to have helped the Polish economy. But Poland already had a market price mechanism unlike the other post-communist countries. So whether IMF actually helped Poland still remains a highly controversial issue. But does the fact that policies were successful once mean that they are always successful? As we shall see with the examples of South Korea, Thailand and Indonesia this is not so. We shall now discuss the possible reasons of these policies’ failure.
Firstly, as said before, IMF encourages countries to increase exports and reduce imports. Generally this is achieved by devaluing their currencies. As might be expected, inflation occurs and the economy as a whole suffers – for example, businesses become under pressure and at risk of collapse. To decrease aggregate demand (which increased after devaluation and resulted in inflation) banks increase interest rates (also, adjusting to an increase in inflation by trying to balance out interest rates and the rate of inflation). Increase in inflation means increase in living costs. Therefore, wages should be adjusted, now that the purchasing power has decreased – i.e. an increase in poverty and inequality. Thus, taxes are cut in an attempt to increase salaries. Businesses collapse. Government runs a budget deficit, since it spends more that it receives through taxation. It might solve the problem by increasing taxation – but this would only get rid of firms and increase cheaper imports. In any case the economy suffers.
Trade liberalisation involves the reduction of government control on the labour market and regressive taxation. This, again, aims to increase exports by promoting international trade. However, multinational corporations enter the economy and in the long run completely overtake them.
This dark scenario may seem rather theoretical, but in actual fact, this is what is happening today.
For example, in Korea, the IMF caused the government to reduce the money supply in order to reduce inflation. However, the interest rates have been greatly increased as well. Speculation of uncertainty surrounding the subject has created instability and panic among the national Korean banks and economy as a whole. IMF, like a medieval doctor, failed to recognise the true needs of the economy and treated it with its usual policies. Critics recognise the failure of IMF as of ignoring Korea’s depreciation and fiscal tightening.
In Thailand, the situation is little different. IMF’s only aim seems to concern balance of payments. This is, again, cured by increasing interest rates, and other fiscal/monetary policies. The main finacial crisis has, as in Korea, been ignored. Investment has decreased and as a result, economy suffers even more. Also, while the baht might have got stronger as a result of increase in interest rates, national corporations and financial structures have been affected since less capital is available.
IMF’s cure for Indonesia, was again, to increase interest rates. This created instability in financial markets. In response, IMF recommended to close 16 banks. As a result, a lot of capital left Indonesia. Businesses suffered as a result of high interest rates and now weakened currency.
In conclusion, it is possible to say that IMF truly is an inexperienced medieval doctor, who treats everything by same policies, creating instability. Although it may have been successful in some past cases, it only worsens the situation. In short run, the economies seem to benefit as they repay commercial debts, but in the long run they end up in more and more debt. Several critics have said that IMF creates instability on purpose, so that during these periods the countries open themselves up to mainly american-owned international corporations and end up enslaved. This is a very controversial issue and my opinion only reflects my views.
Bibliography:
www.twnside.org.sg/
www.imf.org/external/country/POL/
www.globalexchange.org
Dasgupta, B. (1998), Structural Adjustment, Global Trade and the New Political Economy of Development, (London: Zed Books), chapter 3
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These include surveillance, financial and technical assistance. Firstly IMF examines the state of the economies, then gives the medicine (financial) and finally it looks after the patient helping recover. Technical assistance includes implementation of monetary and fiscal policies and establishing ‘controlling’ istitutions such as Central Banks.
