The IMF’s impact in developing countries

Published: September 17, 2012
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The writer is a political economist at the University of California, Berkeley

The writer is a political economist at the University of California, Berkeley

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 18th, 2012.

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Reader Comments (10)

  • meekal a ahmed
    Sep 18, 2012 - 12:49AM

    I am not going to get into a slug-fest with my good friend who I had the pleasure of meeting in Islamabad recently. I would rather keep his friendship than score points.

    But I would like to say that his suggestion that the World Bank and other multilateral donor’s take over “conditionality” since they have a longer-term perspective, cannot work.

    The multi-lateral agencies mentioned will not give us any quick-disbursing money to support the budget and the BOP unless we have an IMF-supported program, or there is a Letter of Comfort from the IMF.

    The reason is simple: the IMF has the macroeconomic expertise. The others don’t.

    That is the agreed division of work between the IMF and the others and is unlikely to change anytime soon.

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  • Falcon
    Sep 18, 2012 - 4:35AM

    @meekal a ahmed:
    Thanks for highlighting the other side. I have 2 follow-up questions: Does it mean that IMF in general assumes that political environment affects macro-economic performance in the long run rather than short term (and consequently they have agreed to not develop that expertise)? Secondly, the idea of mandating long-term loan approval based on short-term macro-economic stabilization implies that IMF assumes that most of the time short-term goals and long-term objectives will not be at odds with each other (or don’t require trade-offs), is that assumption correct based on your experience?

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  • Rashid
    Sep 18, 2012 - 5:53AM

    Really sensible and balanced article. we cannot just blame one side–both are really to be blamed–the IMF for giving bad advice and the countries for accepting it and not developing alternativesRecommend

  • Ali
    Sep 18, 2012 - 5:55AM

    @meekal a ahmed:
    Dear Dr. what you mention are just procedural issues which can be overcome. the main focus should be on giving developing countries sound advice–and if that involves changing the current divisioon of labor, that should not be outrigthly rejected. these IFIs are in need of a long overdue shake-up

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  • Zalim Singh
    Sep 18, 2012 - 7:36AM

    Pakistan has a choice. Dont take the loan.

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  • Ahmed
    Sep 18, 2012 - 8:31AM

    P:akistan certainly has a choice as the article says. but for other weaker countries with more limited choices, there should be a public lender of last resort in crisis that lends without all these conditionalities. that was the original purpose of the IMF. these conditionalities became so formalized under the Reagan-Thatcher era unfortunatelyRecommend

  • bball
    Sep 18, 2012 - 10:05AM

    The discussion about IMF having the technical expertise or not is really a hogwash. There is no shortage of macroeconomists internationally – in fact, a quick google search will tell you that there’s a significant surplus. The question more importantly is what are the external forces exerting pressure on the IMF and how much is IMF influanced by those pressures. If IMF can pay at a competitive rate, they can have there pick. I think some of these notions are forwarded by some Macro economists themselves thereby assigning a higher valuation to themselves.

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  • Raza Khan
    Sep 18, 2012 - 11:31AM

    Why blame IMF? If you cannot met IMF conditions than go else where or simply reduce your expenses!Recommend

  • What the..........?
    Sep 18, 2012 - 4:16PM

    Excellent, thought-provoking article which raises valid questions about the efficacy of the IMF and its policy prescriptions. By transferring short-term balance of payments financing to a development institution like the World Bank, there would be better chances of an alignment of short and longer-term economic goals.

    The developed countries will not, however, allow this as the Fund is deployed primarily as a tool for the imposition of free-market economic policies that ultimately benefit those countries through more favourable terms of trade through currency depreciation and greater market access by the removal of tariff barriers etc

    Not for nothing has the IMF been referred to as the Imperialist Monetary Force!

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  • meekal a ahmed
    Sep 18, 2012 - 11:05PM

    @Falcon:

    I don’t know why my reply to you has not been published.

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