The IMF: Help Or Hurt Essay, Research Paper
?If you owe your bank a hundred pounds, you have a problem; but if you owe it a million, it has.(1)?
In the year of 1327, Kind Edward III of England defaulted on his Italian debts. This caused the banks of Bardi and Peruzzi in Florence to collapse. Who would know that over 650 years later, the world would still have these types of problems? After World War II, the need for an organization like the IMF was finally realized. After the war, politicians and economists began to work on blue prints for a postwar world. They envisioned a liberal international economic order, based on stable world currencies and revived world trade. The International Monetary Fund (IMF) finally came into existence on December 27, 1945. On this date, twenty-nine countries signed its charter when meeting at Bretton Woods, New Hampshire. On March 1, 1947 the IMF came into financial operations.
The IMF was established to promote internal monetary cooperation through a permanent institution, which provides the machinery for consultation and collaboration on international monetary problems. Also, it provides temporary financial assistance to countries under adequate safeguards to help ease balance of payments adjustments. In addition, it facilitates the expansion and balanced growth of internal trade.
Many critics and even followers of the IMF do not even know what the IMF really is. It is not a development or even a central bank. It is a credit union. It pays interests on deposits it receives from member nations. The IMF lends money to members having trouble meeting financial obligations to other members, but only the condition that they undertake economics reforms to eliminate these difficulties for their own good and that of the entire membership. Some people believe that if the IMF tells a country to do something, they must do it. This statement is false. The IMF has no authority over the domestic economic policies of its members. The IMF is a cooperative institution that 182 countries voluntarily joined because they see the advantage of consulting with one another to maintain a stable system of buying and selling their currencies.
All 182 members of the IMF contribute to a pool of funds that the agency then taps to aid troubled countries. The IMF currently has around 200 billion dollars. The U.S., Germany, Japan, Britain, France, and Saudi Arabia make up over 35 percent of this fund. Some see the IMF as the agent that won?t allow the international monetary system to be disrupted by large-scale failures, particularly by governments. International banks have made risky loans all over the world because they knew that if trouble arose, the fund would step in to resolve the situation ? as it has done in the past. The IMF has played a critical role in many of the epochal events in the 1990?s. The IMF lent 18 billion dollars to Mexico in 1994, after the peso collapsed. It gave Russia over 10 billion dollars in 1999. The IMF has helped drive inflation from 1,000 percent a year down to a tolerable 10 percent a year, thanks to Russia listening to what the IMF said and doing as they suggested. It has given Indonesia 10 billion dollars, and has helped Indonesia demonopolize industries. It gave 4 billion to Thailand, which was the epicenter of the East Asian Crisis. The IMF helped closed dozens of reckless banks. True, the IMF did many little things wrong, however, it did the important ones right. The Philippines is a prime example on how effectively the IMF can work. For years, Filipinos suffered the weaknesses of economic and business policies. Under the tutelage of the International Monetary Fund for nearly 30 years, and especially during the past decade, they faced up to their problems. Many sectors of their society suffered greatly, and some complained loudly. However, they persisted and, with the help of the IMF and the courage of the Philippine people, they exited from the IMF program. How did they do this? They assembled one of the best economic management teams in Asia. They worked with the fund to enact 165 reformist laws. They now have a policy framework that rewards economic merit instead of political access. Their banking system is sound; Morgan Stanley puts it in the same league with Hong Kong and Singapore. They have avoided the bankruptcies that have engulfed the region. Inward investment is surging, with this year’s level five times that of 1996’s. And inflation is under control at just about 5 percent. As a result of all that, they graduated from the IMF’s program at the end of 1997. Many of the Philippine economy’s new strengths are the result of policy reforms that the IMF has recommended. There are four reforms that they adopted and feel other countries should too: ?1) more cooperation to upgrade domestic financial systems, 2) more surveillance of domestic markets to avoid a buildup of external debt, 3) cooperative regional financing in keeping with the IMF’s oversight authority and 4) a bigger role, and greater resources, for the IMF.(2)? The U.S. and other countries must act now to be sure that the IMF has the resources to fulfill the purpose it was established. There is a growing sense, however, that this fund is more important to lesser-developed countries (LCDs) than to the Group of Seven (G-7) nations. LCD?s are countries that have very high debt and very low poverty levels. The G-7 countries consist of Canada, France, Germany, Italy, Japan, Russia, the United Kingdom, and the United States. The G-7 must be convinced by the IMF to continue helping the LCDs and other countries in debt.
In April of 2000, the G7 agreed to cancel $70 billion of the $214 billion debt owed by the world?s 41 poorest nations. This is good news for everyone, right? Well, not exactly. To finance the move, they sold off 10 million ounces of gold from the IMF?s reserve. This drove down the price of gold – which at $260 an ounce is already at a 20- year low – and means pink slips for many of the South Africa?s miners.
Falling gold prices have already forced South Africa, the world?s largest producer, to lay off 100,000 miners over the past three years. The IMF sell-off may leave only five of the country?s 19 mines still profitable, which would be bad news for a government elected on promises to tackle an unemployment rate estimated at 50 percent. The irony is that while it may be a struggling economy, South Africa isn?t a significant debtor nation. The G7?s debt-relief program may yet help turn it into one.
The country of Tanzania is considered a success. Tanzania is among the poorest places in the world. In the mid-1980s, Tanzania’s economy was flat lining, with hyperinflation, huge budget and trade deficits, and massive dependence on foreign aid. Today, after 15 years of IMF-imposed structural adjustment, administered most effectively since 1995 under President Benjamin Mkapa, Tanzania has made great progress in getting its economic situation in order. Inflation has fallen below 7 percent, and the GDP is growing 4 percent a year. Imported goods fill the shops and mining and cash crop exports are up.
It would all be rosy were it not for the 15 million — more than half the population, living in dire poverty, with 12.5 million of them unable to afford the most basic needs. Most of these men and women make their living on a small-plot cash crop farm. Most farmers can?t borrow, because short-term interest rates in rural areas hit 100 percent. Yields fell, but thanks to global oversupply and greedy middlemen, farmers were often paid less for what they could grow. Famine remains a persistent threat for 40 percent of the country.
With Tanzania’s loan now at $6.4 billion, the government has been spending 40 percent of its annual revenue on interest payments — more than it spends on health and education combined. Even the poorest families are subjected to “cost sharing” — paying fees for basic health care and even elementary school. School enrollment has fallen from 93 percent in 1993 to 66 percent today. “A small number of people are doing very well indeed, but the vast majority are suffering more than ever. There are wonderful things in the shops now, but who can buy them?(3)” The IMF announced a $2 billion debt- forgiveness package for Tanzania, however, the benefits of debt relief won’t be felt until late 2001.
The IMF admits the problem while insisting that their policies will boost living standards over the long term. But some people have lost patience with such talk. In Bolivia, rioting broke out because the government planned to raise fees for drinking water. Eight people were killed. It was a reminder that the globalization protests in Washington aren’t simply the product of a Web-connected U.S. counterculture but of an anger that’s building around the world because of the IMF?s mistakes.
The annual disbursement of fund assistance rose from an average of 6.8 billion in the first half of the decade, to 15.1 million now. This suggests that the IMF is failing and that even more countries are being forced to go to them now. The IMF?s policies are ?all head and no heart. The IMF is leeching the American capital and should have been exterminated like the parasites they are, decades ago.(4)?
In the African nation of Mozambique, workers used to process the cashews grown in their own country. To protect the thriving nut processing industry, the government put a tax on the export of raw, unprocessed cashews. In the interest of removing trade barriers, the IMF ordered the export tax removed. As a result, processing shifted to India, where children working at home shell the nuts. In Mozambique, 10,000 adults lost their factory jobs.
In Haiti, the IMF blocked the government from raising the minimum wage and then demanded the privatization of profitable public companies, which generated revenue for desperately needed services. The IMF insisted that Haiti should cut government services by half, in spite of a national shortage of teachers and health care workers, a life expectancy of 49 years for men and 53 years for women, 45 percent literacy and infant mortality running at nearly 10 percent.
The IMF’s intervention in Russia has been one devastating failure after another. Within four years of its program entering into effect in 1992, the country’s national income had dropped by about one-half, a disaster worse than the U.S. Great Depression. The number of Russians in poverty rose from 2 million to 60 million. Male life expectancy fell from 65.5 years to 57. A collapse of this magnitude is historically unprecedented in the absence of war or major natural disaster. Having hewed to the IMF’s dictates, Russia has seen most of the collapsed cash economy replaced with barter, making it difficult to collect taxes. IMF demands for rapid privatization of industry led to an explosion of corruption and organized crime
Debt and structural adjustment are robbing the world’s schoolrooms. Debt forces governments to allocate huge sums of money that could be spent on education to debt repayment. Structural adjustment makes the problem worse, as the IMF demand government spending cuts and privatization measures in education. What money remains for education goes to primary schools, with education beyond elementary levels shifting to a fee-for-service basis. In Mexico, the Bank advised the government to abolish constitutionally guaranteed free education at the national university, provoking a lengthy student strike. The rich get an education. The poor get sweatshop jobs.
So, what do I think? Well, the IMF is a good program. It has worked in the past and it will continue to work in the future. It has proven that is has the necessary elements to be a successful worldwide organization. However, small adjustments do need to be made, as no organization is perfect.
The IMF regularly talks about how it is doing things for the future, and not the present. I feel that the IMF should start fixing some of the current problems. This will give those countries confidence in the fund. They?ll feel that they can trust the IMF. In conclusion, the IMF is an organization that can help the world, just with small adjustments.