Wednesday, April 20, 2016

Disadvantages of IMF- The international Monetary Fund (2)

Disadvantages of IMF- The international Monetary Fund (2)

11). Passive approach by IMF

The IMF has been passive in its approach and not been effective in promoting exchange stability and maintaining orderly exchange arrangements. This is considered as one of the major disadvantages of IMF. The original fund agreement permits fluctuations of exchange rate within limits. It can fluctuate within a range of one per cent above or one per cent below the official price. This is called adjustable peg system. The exchange rate of currency was fixed in terms of golden dollar. Over years, U.S gold stock declined and U.S balance of payments suffered. It led to the collapse of Bretton Wood System in August 1971 when U.S refused convertibility of dollars into currency. Member countries were also following diverse exchange policies. These events simply prove that IMF was not able to maintain a uniform international exchange system which is a big disadvantage.

12). Unsound policy for fixation of exchange rate by IMF

The unsound policy for fixation of exchange rate is one of the disadvantages of IMF. Some of the provisions of IMF are unsound. For example, devaluation is justified when international inflation causes fundamental disequilibrium. If inflation persists, devaluation of currency cannot be effective. Appropriate adjustments are desired only through internal economic policy changes. Further, member countries have changed the par value of currencies with impunity. In 1949, about 23 countries devalued their currencies in total disregard to the IMF rule. The IMF could not contain the situation and remained ineffective.

13). Non-removal of foreign exchange restrictions by IMF

One of the important objectives of the IMF has been to remove foreign exchange restrictions which retard the growth of global trade. Still, member countries follow unhealthy practices of exchange controls and multiple exchange rates. Consequently, the international business is adversely affected.

14). Inadequate resources

The resources at the disposal of the IMF are not adequate to cater to the needs of member countries which is a setback of IMF. Uncertain capital inflows into the international financial system necessitates the strengthening of the fund resources. The resources of the fund may be enhanced by raising the quota. But developed countries are reluctant to increase the quota of the fund.

15). High interest rates by IMF

High interest rates charged on its advances are considered one of the major disadvantages of IMF. So, the debt servicing for the less developed countries is difficult. For example, since 1982 the interest charged for loans out of the ordinary resources of the fund is 6.6 per cent. The interest rates payable on the loans made out of borrowed funds is as high as 14.56 per cent. So, developing countries experience a lot of difficulties in redeeming their loans borrowed from the IMF.

16). Stringent conditions by IMF is one of its disadvantages

The stringent conditions imposed by IMF on its member nations are one of the big disadvantages of IMF. The IMF is criticized for its strict conditional clauses while extending credit to member countries. Till 1970, the conditional clauses attached to loans were not stiff. The IMF insisted that the borrowing countries reduce public expenditure in order to tide over BOP deficits. But after 1970, the IMF imposed stiff conditional clauses. Among them are periodic assessment of the performance of the borrowing countries with adjustment programmes, increases in productivity, improvement in resource allocation, reduction in trade barrier, strengthening of the collaboration of the borrowing country with the World Bank, etc.

Conditional clauses imposed by IMF:

The conditional clauses imposed by IMF after 1995 are pretty stiff which are big disadvantages of IMF. To state a few:
  • liberalizing trade by removing exchange and import controls;
  • eliminating all subsidies so that the exporters are not in an advantageous position in relation to other trading countries; and
  • treating foreign lenders on an equal footing with domestic lenders. The fund maintains a close watch on the activities of the borrowing country related to monetary, fiscal, trade and tariff programmes. IMF’s intervention in the domestic economic matters of the borrowing countries places them in a difficult position.

  • 17). Failure to play an effective role in international monetary matters is one of the disadvantages of IMF

One of the disadvantages of IMF is that it has failed to play an effective role in international monetary matters. For example, it does not provide facilities for short term credit arrangements. This has lead to the swap arrangements among the central banks of the Group 10 (Group of 10 leading industrialized countries). This arrangement provides for the exchange of each others currency and also short term credit to correct temporary equilibrium in balance of payments. The swap facility paved way to the growth of Euro-currency market. This has undermined the role of IM as a central monetary institution.

18). Failure to tackle East Asian currency crisis is one of the disadvantages of IMF

The failure to tackle East Asian currency crisis is considered one of the disadvantages of IMF. In July 1997, the occurrence of the East Asian currency crisis affected East Asian countries like Thailand, Malaysia, Philippines, South Korea, Singapore, Hong Kong and Indonesia. Depreciation of their currencies led to fall in the prices in the stock markets. The functioning of the financial institutions and flow of foreign capital were badly affected. In this context, the IMF advocated the East Asian countries to adopt high interest rates and cut public expenditure. But this advice proved to be faulty. As a result, in 1998 the whole East Asian region witnessed widespread recession, unemployment and low growth rates. The IMF was expected to follow a debt rescheduling plan. But this scheme was not introduced at the insistence of the United States and other advanced countries. Milton Friedman blamed the IMF for global crisis.

19). Domination by rich countries is one of the disadvantages of IMF

The domination by rich countries is another major disadvantages of IMF. Though the majority of the members of the IMF are from the less developed countries of Asia, Africa and South Africa, the IMF is dominated by the rich countries like USA. It is said that the policies and operations of the IMF are in favor of rich countries. At one stage, the IMF was regarded as “rich countries’ club”. These rich countries are partial towards the issues faced by poor countries.

As reported in The Hindu (May 2, 2007), Venezuela’s president Hugo Chavez announced his country’s decision to leave IMF and the World Bank. He accused them of exploiting small countries. He branded the IMF and the Wold Bank as “mechanisms of American imperialism“. Moreover, the OPEC nation’s leader Mr. Chavez said: “we are going to withdraw…. and let them pay back what they took from us”. He issued an order to his Finance Minister to begin proceedings to withdraw Venezuela from both IMF and World Bank.


Africason is a musician and a die-hard believer in Africa
Twitter: @African_School
Find my songs on iTunes: Artiste name: Africason

Disadvantages of IMF- The International Monetary Fund (1)

Disadvantages of IMF- international monetary fund (1)

What is the IMF? 

The International Monetary Fund and the World Bank were created in 1944 at a conference in Bretton Woods, New Hampshire, and are now based in Washington, DC. The IMF was originally designed to promote international economic cooperation and provide its member countries with short term loans so they could trade with other countries (achieve balance of payments). Since the debt crisis of the 1980’s, the IMF has assumed the role of bailing out countries during financial crises (caused in large part by currency speculation in the global casino economy) with emergency loan packages tied to certain conditions, often referred to as structural adjustment policies (SAPs). The IMF now acts like a global loan shark, exerting enormous leverage over the economies of more than 60 countries. These countries have to follow the IMF’s policies to get loans, international assistance, and even debt relief. Thus, the IMF decides how much debtor countries can spend on education, health care, and environmental protection. The IMF is one of the most powerful institutions on Earth – yet few know how it works.

1) The IMF has created an immoral system of modern day colonialism that SAPs the poor. 

The IMF- along with the WTO and the World Bank- has put the global economy on a path of greater inequality and environmental destruction. The IMF’s and World Bank’s structural adjustment policies (SAPs) ensure debt repayment by requiring countries to cut spending on education and health; eliminate basic food and transportation subsidies; devalue national currencies to make exports cheaper; privatize national assets; and freeze wages. Such belt-tightening measures increase poverty, reduce countries’ ability to develop strong domestic economies and allow multinational corporations to exploit workers and the environment A recent IMF loan package for Argentina, for example, is tied to cuts in doctors’ and teachers’ salaries and decreases in social security payments. The IMF has made elites from the Global South more accountable to First World elites than their own people, thus undermining the democratic process.

2) The IMF serves wealthy countries and Wall Street.

Unlike a democratic system in which each member country would have an equal vote, rich countries dominate decision-making in the IMF because voting power is determined by the amount of money that each country pays into the IMF’s quota system. It’s a system of one dollar, one vote. The U.S. is the largest shareholder with a quota of 18 percent. Germany, Japan, France, Great Britain, and the US combined control about 38 percent. The disproportionate amount of power held by wealthy countries means that the interests of bankers, investors and corporations from industrialized countries are put above the needs of the world’s poor majority.

3) The IMF is imposing a fundamentally flawed development model.

Unlike the path historically followed by the industrialized countries, the IMF forces countries from the Global South to prioritize export production over the development of diversified domestic economies. Nearly 80 percent of all malnourished children in the developing world live in countries where farmers have been forced to shift from food production for local consumption to the production of export crops destined for wealthy countries. The IMF also requires countries to eliminate assistance to domestic industries while providing benefits for multinational corporations – such as forcibly lowering labor costs. Small businesses and farmers can’t compete. Sweatshop workers in free trade zones set up by the IMF and World Bank earn starvation wages, live in deplorable conditions, and are unable to provide for their families. The cycle of poverty is perpetuated, not eliminated, as governments’ debt to the IMF grows. 

4) The IMF is a secretive institution with no accountability.

The IMF is funded with taxpayer money, yet it operates behind a veil of secrecy. Members of affected communities do not participate in designing loan packages. The IMF works with a select group of central bankers and finance ministers to make polices without input from other government agencies such as health, education and environment departments. The institution has resisted calls for public scrutiny and independent evaluation.

5) IMF policies promote corporate welfare 

To increase exports, countries are encouraged to give tax breaks and subsidies to export industries. Public assets such as forestland and government utilities (phone, water and electricity companies) are sold off to foreign investors at rock bottom prices. In Guyana, an Asian owned timber company called Barama received a logging concession that was 1.5 times the total amount of land all the indigenous communities were granted. Barama also received a five year tax holiday. The IMF forced Haiti to open its market to imported, highly subsidized US rice at the same time it prohibited Haiti from subsidizing its own farmers. A US corporation called Early Rice now sells nearly 50 percent of the rice consumed in Haiti.

6) The IMF hurts workers.

The IMF and World Bank frequently advise countries to attract foreign investors by weakening their labor laws- eliminating collective bargaining laws and suppressing wages, for example. The IMF’s mantra of “labor flexibility” permits corporations to fire at whim and move where wages are cheapest. According to the 1995 UN Trade and Development Report, employers are using this extra “flexibility” in labor laws to shed workers rather than create jobs. In Haiti, the government was told to eliminate a statute in their labor code that mandated increases in the minimum wage when inflation exceeded 10 percent. By the end of 1997, Haiti’s minimum wage was only $2.40 a day. Workers in the U.S. are also hurt by IMF policies because they have to compete with cheap, exploited labor. The IMF’s mismanagement of the Asian financial crisis plunged South Korea, Indonesia, Thailand and other countries into deep depression that created 200 million “newly poor.” The IMF advised countries to “export their way out of the crisis.” Consequently, more than US 12,000 steelworkers were laid off when Asian steel was dumped in the US.

7) The IMF’s policies hurt women the most.

SAPs make it much more difficult for women to meet their families’ basic needs. When education costs rise due to IMF-imposed fees for the use of public services (so-called “user fees”) girls are the first to be withdrawn from schools. User fees at public clinics and hospitals make healthcare unaffordable to those who need it most. The shift to export agriculture also makes it harder for women to feed their families. Women have become more exploited as government workplace regulations are rolled back and sweatshops abuses increase.

8) IMF Policies hurt the environment.

IMF loans and bailout packages are paving the way for natural resource exploitation on a staggering scale. The IMF does not consider the environmental impacts of lending policies, and environmental ministries and groups are not included in policy making. The focus on export growth to earn hard currency to pay back loans has led to an unsustainable liquidation of natural resources. For example, the Ivory Coast’s increased reliance on cocoa exports has led to a loss of two-thirds of the country’s forests.

9) The IMF bails out rich bankers, creating a moral hazard and greater instability in the global economy.

The IMF routinely pushes countries to deregulate financial systems. The removal of regulations that might limit speculation has greatly increased capital investment in developing country financial markets. More than $1.5 trillion crosses borders every day. Most of this capital is invested short-term, putting countries at the whim of financial speculators. The Mexican 1995 peso crisis was partly a result of these IMF policies. When the bubble popped, the IMF and US government stepped in to prop up interest and exchange rates, using taxpayer money to bail out Wall Street bankers. Such bailouts encourage investors to continue making risky, speculative bets, thereby increasing the instability of national economies. During the bailout of Asian countries, the IMF required governments to assume the bad debts of private banks, thus making the public pay the costs and draining yet more resources away from social programs.

10) IMF bailouts deepen, rather then solve, economic crisis. 

During financial crises- such as with Mexico in 1995 and South Korea, Indonesia, Thailand, Brazil, and Russia in 1997- the IMF stepped in as the lender of last resort. Yet the IMF bailouts in the Asian financial crisis did not stop the financial panic- rather, the crisis deepened and spread to more countries. The policies imposed as conditions of these loans were bad medicine, causing layoffs in the short run and undermining development in the long run. In South Korea, the IMF sparked a recession by raising interest rates, which led to more bankruptcies and unemployment. Under the IMF imposed economic reforms after the peso bailout in 1995, the number of Mexicans living in extreme poverty increased more than 50 percent and the national average minimum wage fell 20 percent.

Disadvantages of the IMF continues here.


Africason is a musician and a die-hard believer in Africa
Twitter: @African_School
Find my songs on iTunes: Artiste name: Africason