Policy Of Imf And World Bank Programs example essay topic

An avid viewer of television has seen the commercials portraying shortages of food and mass starvation in Africa. Yet in these times of relative prosperity, little is heard of Africa's debt problem. Although the total debt of all African countries combined is small in comparison to that of the United States, millions of people suffer as a result. However, it is not until these countries have difficulty repaying their loans that the international community begins to take notice. Many African countries are currently in such debt that all new loans are used to repay old loans in a attempt to salvage any credit rating a country might have (George, 13). Because many banks, particularly in the United states, have invested as much as 100 percent of their shareholder's equity in these less developed countries (LDCs), the chances of a country defaulting on a loan sends tremors through the economic world (George, 39).

Eventually the countries are recognized as a poor credit risk and can no longer get loans. This is where the International Monetary Fund (IMF) and the World Bank come into the picture. The structural adjustment programs of the International Monetary Fund (IMF) and the World Bank have had greater negative effects than positive on the African countries that have adopted them. This essay will examine the adjustment programs themselves and the political, social and economic effects adjustment programs have had on the countries that have accepted them.

The IMF began as an organization whose purpose was to encourage international trade and discourage protectionism while assisting in the "correction of balance payments dis equilibria" for those countries who required short-term assistance (World Bank, 7). The World Bank's sister organization, the IMF, attempts to promote economic growth in certain countries through loans granted for specific development projects. Membership in the World Bank requires membership in the IMF. Recently the two organizations have been acting in concert and often institute very similar policies. Members of the IMF are designated a yearly quota according to their economic standing, and are required to put down an initial percentage in gold, the remainder of which is payable in domestic currency. The LDC is allowed to draw on this quota and even surpass it providing that it agrees to certain governments budget deficits, the correction of an overvalued currency, and the encouragement of export production.

These policies become increasingly strict as more Special Drawing Rights (as they are called) are requested. These conditions, when implemented, are called structural adjustment programs. Since these programs seriously infringe upon the sovereignty of the borrowing nation, the IMF is usually turned to as a last report. This occurs when international development banks and private banks, especially fear that a country might default on its loans. As a result, most sources of financing are lost until the debtor country agrees to a structural adjustment program implemented by the IMF. Acceptance of this conditionally suggests to private lenders a willingness to cooperate with the financial community.

When this takes place "private bank loans and development assistance, of magnitude far larger that the fund's largess, are likely to flow" (Will, 54). Since the IMF is the last institution a LDC will turn to, the economy of the country involved is usually in extremely poor condition. When the structural adjustment programs of the IMF are more difficult to institute in the borrowing country and as a result causes much of the blame to be directed towards the Fund. "Some 30 African countries have adopted formal structural adjustment programs supported by the IMF and World Bank" (Harsch, 47). Although many studies have been done on the effectiveness of the program, no one is quite sure of the effect the measures have had (NowZad, 196). There are several reasons for this.

First as was mentioned previously, the IMF step of approval acts as a signal for financial institutions to begin lending again. Those countries that instituted strict recovery plans usually did not experience a decline on average of 4.7 percent a year in the African growth rates was the result of IMF policies or the infusion of foreign capital. Furthermore, other external factors outside the countries such as famine, war, and population growth rates, which experienced as increase in 1989, could be the results of good weather which shows just how vulnerable these LDC's are (Harsch, 46). Most critics agree that the IMF policies are economically sound; it is the IMF's narrow line of vision and its negligence in examining the entire situation that draws fire (Hodd, 335). Theoretically, "the IMF is politically and ideologically neutral, its mission being the broadly stated maintenance of international financial stability" (Carvounis, 70). However, critics of the IMF claim that it institutes the current economic thought of western Industrial Nations in regards to the political and economic positions of the country in question (Kronsten, 149).

To a certain extent this is reflected in the IMF's attempts to promote international trade and the policies aimed at a free market system that ignores any social consequences (Carvounis, 70). Since the International Monetary Fund and the World Bank are basically run through the use of funds from the major industrial nations, their interests tend to become obvious not only in policies but, also in the borrowing countries that the institutions deal with. The World Bank admits the facts that the industrial nations, the United states in particular, heavily influence the policies of the bank for several reasons. The industrial nations have invested the most capital in the Bank.

Most of the experts have been educated in Western thought and the location of its headquarters in Washington D. C, all have some affect on the decisions and policies it produces (World Bank, 4). The bias is reflected in the case of Sudan. It appeared the World Bank and the IMF let certain aspects of the structural adjustment program slide while the U. S was on friendly terms with the government in power. The United stated had a serious interest in Sudan because of its strategic position near the Red Sea and the Gulf of Aden (Prendergast, 50). For seven years the IMF allowed Sudan to reschedule its payments and twice the United Stated Agency for International Development paid Sudan's debt owed to the Fund (Prendergast, 50).

In 1986, after the overthrow of Nimeiri government, the IMF decided that Sudan was no longer eligible for loans because it had the "inability to settle its arrears to the Fund" (Prendergast, 51). It seems that those countries that receive U. S political approval, in-so-far as the country serves some purpose to the U.S. are eligible for financial support (Korner, 25). In the early 1980's, the IMF made some of its largest loans ever to the government of South Africa, without the usual conditions attached (Mittleman, 64). Although the "loans are reserved for balance of payments attributable beyond a countries control, it was obviously the apartheid system that limited South Africa's economic growth" (Mittleman, 65). It is difficult to determine the extent to which certain governments influence the Fund and the World Bank. However, these governments risk huge sums of money so some involvement is inevitable since domestic interests are at stake.

In the case of the United States, hundreds of small banks, inexperienced at foreign lending, rely on the U. S government to represent their interests in the World Bank and the IMF. Although the IMF and World Bank intend that their policies be purely economic, in effect, experience has shown that the policies have had sweeping social and environmental effects that have gone far beyond what the two institutions ever intended. In the IMF's dealing with South Africa, it has been suggested that the Fund, along with the help of the U. S, contributed to a "shift in class composition of state" (Mittleman, 65). Basically, the financing the South African government received from the Fund and U.S. government led to a series of events including the Soweto uprising and the eventual placement of the P.W. Botha government representing the Afrika an elite (Mittleman, 65). Although perhaps hard to prove, and possibly hard to believe, the IMF's choice to finance South Africa had some effect on the events that took place there.

"The policies of the IMF are outward looking and therefore cannot satisfy the needs of the local population" (George, 77). Instead, the policies are aimed at the "promotion of a world system of multilateral trade" (Lawrence, 66). As a result, social effects are merely the consequences of increased international trade. There are several elements of the structural adjustment programs that are more damaging than others. One of these policies is the constant push for the export of primary products. Its effects are so counter-productive it would seem impossible for the organizations not to the same exports.

In today's rapidly changing world this makes anything beyond the short term planning impossible. For example, Zambia is 95 percent reliant on the export of copper (George, 88). The early 1970's saw "over ambitious development projects and an unproductive state apparatus" as the main reasons behind the disaster that would occur when the copper price would drop drastically in 1974/75. Following the drop in world copper output under direction of the IMF although it would help the economy very little.

As a result Zambia fell behind in its loan payments. Since 1985, the IMF has refused to reschedule Zambia's debt payments and has suspended credit even though Zambia attempted to conform to the conditionality as best it could (George, 88). Another common aspect of the structural adjustment programs of the World Bank and the IMF is the devaluation of the domestic currency of the country in question. There are several reasons why the IMF believes this is good policy: exports became cheaper, the demand for imports becomes less and it discourages black markets (Prendergast, 46). The current IMF policy of devaluation raises the prices of all imported goods not just luxury items. In Tanzania, as in several other extremely poor African nations, a lack of necessary imports, such as salt, led to an increase in the black market.

This resulted in a further loss of revenue to the country (George, 91). For the past decade the prices of Africa's export commodities have dropped. This factor combined with the strict devaluation policy enforced by the IMF and the World Bank means that many countries earn practically nothing on their exports (Lawrence, 1100). Although most economists agree that devaluation, to some extent would be necessary in most LDC's because of the "grossly over valued currency", some selectivity is necessary depending on the products a country can produce (Korner, 178).

Reducing the budget deficit of the borrowing country is another policy of IMF and World Bank programs. Most Third World countries have huge budget deficits as a result of cleptocracy, huge industrial projects and militarization. Cleptocracy is probably the most common factor among third would countries. Often (times) corrupt regimes will initiate huge industrial projects that require an influx of foreign assistance. Usually a large portion of the foreign aid returns to the banks from whence it came, by corrupt officials, only to be loaned back to the country at a later date (Korner, 37). Third World countries are drawn towards industrialization as if the most modern power station can account for geography and an uneducated and hungry population.

The World Bank supported a mechanized agricultural scheme in Sudan in the early 1980's. Because of land mismanagement "the results have been poverty for displaced farmers, ruined land, profits for the elite... but not much food for the poor" (Prendergast, 45). When the IMF requests budget cuts it does not specify where the cutbacks should come from, for the ironic reason that it would infringe upon the country's sovereignty. As a result social spending, food subsidies and unnecessary government employees are usually the first to go while the defense budget remains untouched. Thus, it is usually the lower class that is economically the hardest hit (George, 86). It is this consequence of IMF and World Bank policy that draws so many critics to condemn structural adjustment program.

Since 1980, African "income, employment, nutrition, and health and education levels have all declined with a fall in average living standards adjustment programs are not working. Experts agree that there is economic sense in the policies that the IMF and World Bank impose on borrowing countries - yet the standard of living still drops. Recently people have begun to understand that the answer to the debt problems is not purely economic. No policy can correct a corrupt regime to compensate for geography or environment.

However, knowing these problems exist in particular cases will enable the respective organizations to allow for some degree of compensation in policy formulation. Although it is probable that there is some bias in the policy decisions made by the IMF and World Bank, as in most decisions, this is unavoidable of the organizations movements. In the past the IMF and World Bank have neglected to consider the social impact of their policies. One can only hope that with the end of the "ME decade" a social awareness, that seems to be growing, will work its way in to the Western thought that has dominated economics for the last twenty years.

Bibliography

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