AUTHOR: KHUSHI AGARWAL, Contributing Writer at GPC
Avoiding economic and financial crises, huge fluctuations in economic activity, high inflation, and excessive volatility in foreign exchange and financial markets are all ways to promote economic stability. Instability can exacerbate uncertainty, deter investment, stifle economic progress, and wreak havoc on living standards. A dynamic market economy is characterized by a certain amount of volatility as well as steady structural change. Policymakers face a difficult task in minimizing volatility both at home and abroad without jeopardizing the economy’s ability to enhance living standards through increased productivity, employment, and long-term growth.
The IMF has been able to ameliorate the economic conditions of several countries in need. However, in some circumstances, an IMF program may transmit a negative signal about the size and nature of a country’s economic difficulties. In this case, the catalytic effect on other capital flows, especially private ones, may be adverse. This effect could then mean that, because of reduced capital inflows, IMF programs have a negative rather than a positive effect on economic growth.
THE CURRENT SITUATION
Pakistan is currently experiencing significant economic crises and may seek a $1 billion loan from the IMF, even though recent talks between Pakistan and the IMF in October were inconclusive. Last year, Pakistan received a $6 billion loan from the IMF, and the COVID 19 outbreak appears to have spurred them to seek further cash from the IMF. However, to obtain a loan from the IMF, Pakistan had to increase its already high tax rate, which, according to Dr. Arthur Laffer, harmed the country’s fragile economy even more. He has advocated for reduced tax rates, claiming that taxes are harmful to the economy and growth and that increasing taxes harms the country’s prosperity. Does the incident raise questions about the workings of the IMF since if the goal is to enhance countries’ economies, then why are there conditions attached to loans from the IMF? During India’s economic crises in 1991, similar economic constraints were imposed on the country, forcing it to implement Liberalization, Privatization, and Globalization (LPG) reforms. Although these LPG changes were mostly favorable to the Indian economy, each government retains the authority to select which reforms to pursue and when.
ANALYSING THE WORKING OF IMF
With 190 members, the IMF is one of the most influential international economic organizations. It was founded in 1994, shortly after World War II, and has 190 members. The IMF is funded by quota contributions, in which each of its members is assigned a quota based on the strength of its economy, and a member country’s quota even determines its voting rights. Larger economies have more voting rights, which is why a superpower like the US can control the IMF. Additionally, the chief of the IMF has traditionally been from Europe. The IMF’s fundamental goal is to regulate global exchange rates so that international transactions can be managed fairly. However, the fixed exchange rate system failed in 1973, and the IMF’s mission changed dramatically.
For instance, Ecuador signed a $4.2 billion loan agreement with the IMF in 2019, and the IMF, as usual, required some economic measures. These IMF criteria, according to IMF Chief, Christine Lagarde, are a “comprehensive reform agenda” aimed at modernizing the economy and driving it toward strong, sustained, and equitable growth. In practice, however, it resulted in a recession and a rise in poverty. One of the criteria was to reduce Ecuador’s budget by 6% of GDP, which necessitated raising taxes and severely cutting government spending. As a result, tens of thousands of federal employees have lost their jobs. These circumstances had an influence on the local population, and the country entered a mild recession; foreign investment dried up as a result.
Currently, the IMF is meddling in the debt management of member countries by granting them short-term loans. The IMF may help countries resolve their financial crises, but in reality, the IMF intervenes in economic decisions throughout Asia, Latin America, and Africa. It’s not that the IMF’s position has always been negative; for example, it was successful in managing the Asian Financial Crisis, but it’s been less discussed how the IMF’s interventionist strategy has affected some countries.
CONCLUSION
In his book ‘Globalization and Its Discontent,’ Nobel Laureate Joseph Stiglitz claims that the IMF is largely responsible for the failure of development of some poor countries. He claims that when the IMF lends, it does so on the condition of changes such as reduced government spending, privatization, higher interest rates, and open capital markets, thus exporting the Western model of capitalism. This approach of the IMF is also comparable to the practice of ‘neo-colonialism’ where the wealthy countries use the IMF to control and influence the economy of poorer countries. In offering loans, IMF policy does not require privatization or liberalization as a result of a novel motive, but rather the IMF is used by powerful countries to negotiate their private corporations. Rich, powerful countries typically view poor countries as ‘markets’ and ‘sources of raw materials.
These problems highlight the need for fundamental IMF reforms, in which the IMF should not only respect other countries’ sovereignty but also make the voting system more representative so that certain countries do not use their clout for personal advantage. As a global economic forum, the IMF should gain countries’ trust by altering its conditions and reducing rigorous measures that result in higher debt.
*“The views expressed in the article are author’s personal and is not endorsed by the Global Policy Consortium (GPC) or assumed by their members”
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