The IMF’s impact in developing countries

IMF loans are usually short term, given when countries are in distress thus ill-equipped to afford belt-tightening.

The IMF is often depicted as a heartless moneylender which forces poor countries to adopt bad policies and takes its ‘pound of flesh’ back while the countries sink further into poverty. Pakistan’s long IMF clientship provides some insights into this accuracy. Pakistan is among the most frequent users of IMF loans, having borrowed IMF money 12 times since 1980. However, 10 of these programmes were abandoned midway due to Pakistan’s failure to fully adopt the IMF’s policy recommendations. There is debate on whether this failure was due to Pakistan’s poor implementation or the IMF’s poor programme design. A 2002 evaluation by the IMF’s own Independent Evaluation Office (IEO) helps in disentangling this Gordian knot.

The report identifies several problems with Pakistan’s implementation, eg, inadequate political will and mismanagement. Thus, there is little doubt that Pakistan’s economic malaise today is primarily due to its own failure to undertake appropriate economic reforms. However, the IEO also identifies serious problems with the IMF’s programme designs, which echo the opinions of external IMF critics, eg, undue US interference, inadequate political analysis capacities within the IMF, inappropriate sequencing and over-ambitious agendas given the short loan durations. For example, Pakistan was advised to reduce import duties before it developed alternative taxation measures to cover the ensuing tax revenue shortfalls. This increased Pakistan’s public debt significantly as it had to borrow to cover the resulting fiscal deficits.

However, Pakistan must partly share the blame since it accepted the loan conditions. True, distressed borrowers often have little choice. If an illiterate village widow signs unfair borrowing conditions with a landlord while her child is sick, one would largely blame the landlord. While this analogy holds for some African countries, which lack both the technical capacities to analyse the IMF conditions and alternative financing options, Pakistan is no illiterate village widow. It has sufficient technical analytical capacities and can easily generate the additional tax and export revenues needed to eliminate the IMF loans.

Having assigned primary responsibility to the patient though, one must also analyse the quality of advice of the IMF’s doctors. Although the IMF-IEO evaluations for several other countries have also raised similar criticisms as in the Pakistan evaluation and have led to some limited flexibility in the IMF loan conditions, deep-seated problems still exist. While IMF loans are essentially aimed at resolving short-term balance-of-payments problems, the attached conditions covering fiscal, monetary, exchange rate, privatisation, deregulation and financial liberalisation issues restructure the whole economy and affect its long-term development potential.

Although most developing countries are in need of fundamental reform along the general economic principles advocated by the IMF, the problem lies with the specifics of the IMF reform agenda. Most successful East Asian countries have adopted these general principles but have utilised very different specific tools which preserve long-term development, unlike IMF-recommended tools. Instead of widespread immediate privatisation, China initially introduced managerial incentive systems in agriculture and industry. This boosted Chinese productivity without the massive economic ruin that the IMF-advised mass-scale privatisation caused in Russia in the 1990s. In fact, no developing country sticking entirely to the IMF approaches has achieved the type of success achieved by East Asian countries.

The problem lies in the fact that the IMF is filled almost entirely with macro-economists who specialise in short-term macroeconomic stabilisation issues but have little background in long-term development issues. Moreover, IMF loans are usually short term and given when countries are already in distress and thus ill-equipped to afford belt-tightening or major reforms. It would be best to drop conditions entirely from IMF loans and attach them with the funding given by the World Bank, the Asian Development Bank and bilateral donors, since these give longer duration funding during normal times and also have staff with broader specialisations.

Published in The Express Tribune, September 18^th, 2012.