According to the official website of International Monetary Fund, It is is an “organization that works to foster global monetary cooperation, secure the financial stability of the world, promote high employment and sustainable economic growth, and reduce poverty around the world.” International Monetary Fund is an organization that is responsible for the stability of international exchange rates through neo-liberalism, and assistance of the reconstruction of payment system in the world. International Monetary Fund runs the financial system globally. It manages it by participating in policies of its members, with an impact on the exchange rate and payment balances in a macroeconomic perspective. It offers aid, loans, relief, and debt mainly to poorer countries. International Monetary Fund has received heavy criticisms despite its huge influence in international development and affairs. It has received criticisms for their handling of the financial contagion globally and the proposals they have provided that would defend the world from future crises.
“When the International Monetary Fund arrives in a country, they are interested in only one thing. How do we make sure the banks and financial institutions are paid?... It is the International Monetary Fund that keeps the financial speculators in business. They’re not interested in development, or what helps a country to get out of poverty.” (Stiglitz, 2002)
Conditionalities have become the basis of international financial institutions in giving financial aids, and the International Monetary Fund practices this. Conditioanalities have been claimed to be a precondition for loans given by the International Monetary Fund by looking at the economic performances of countries. Structural Adjustment Programs is also linked to giving financial aids, but this does not lead to development but rather it increases the poverty in beneficiary countries. The conditionalities on where the countries have to follow in order to receive loans involve: Reduced government borrowing, where taxes are high and spending is low; Higher interest rates, that would help stabilize the country; Allow firms that are failing to experience bankruptcy; Structural adjustment programs, such as privatization, deregulation, reduction of bureaucracy, which make the situations worse.
International Monetary Fund also practices the act of decreasing public spending while increasing taxes even when there is a weak economy, because the increase in taxes and decrease in spending would bring balanced budgets and reduced budget deficits, even if lower corporate taxes are recommended to countries. But according to Joseph Stigitz, he does no approve of this because the purpose of the fund will no longer be effective. Since the funds were designed to increase the supply of money and credit for countries. Also Stiglitz also argued that the IMF was “not participating in a conspiracy, but it was reflecting the interests and ideology of the Western financial community.”
International Monetary Fund has failed to understand the countries’ dynamics when they removed the controls of the Central bank over the capital flows. Because this resolution made it easier for politicians to abuse their power in the office by getting the resources for personal gain and also to transfer money out of the system to their personal bank accounts. Privatization was also a wrong move for International monetary Fund, because these free market policies do not fit to all of the country. Privatization can generate private monopolies, which manipulates consumers. Privatization was not the only problem, but also International Monetary Fund’s being too interventionist. They think that efforts to change exchange rates would just lead to bigger problems, so they suggested to let the capital markets operate freely without intervention from the government. And International Monetary Fund has been imposing policies without consulting the countries affected. International Monetary Fund was failing to improve the welfare of developing countries. It does not give the best policy suitable for these countries.
Stiglitz argues that developing economies are not at all developing, and it is the International Monetary Fund’s fault because IMF has provided nothing but the lack of information for people who should make the decisions, inadequate or missing markets for important transactions, and absent or flawed institutions. Advances in economic theory are now in existence; these have proven that in developing countries, even if there is imperfection in information and there is an incomplete market, invisible hands work perfectly. Well-chosen interventions by the government can improve the output. When companies and individuals buy products that are less than what the country’s economy can provide or produce, it is possible for the government to fight recessions and depressions by spurring the demand for goods and services through the expansion of monetary and fiscal policies and regulating banks and other financial institutions. It is also possible to use tax policies to transforms investments into more productive industries and produce new policies regarding trade that would allow industries to improve and compete at an international level.
International Monetary Fund has done great damage to the policies in terms of economics by commending that countries must follow what they want in order to receive and qualify for loans from banks, private-sector, and the International Monetary Fund itself. Its government and officials have disregarded the effects of information that are incomplete, markets that are insufficient, and institutions that are impractical. These are characteristic of a newly developing country but the International Monetary Fund’s official are not minding it because they focus more on policies that imitate economic textbooks instead of making their own sense for these developing countries. These policies followed by International Monetary Fund have not been successful and have given drastic results for developing countries that followed them.
International Monetary Fund let developed countries have control over the developing countries due to the capitalistic form of the world economy, where their professional staffs are being trained according to western beliefs and the effectiveness of policies that are market-oriented due to western bias. The organization also worked on incorrect assumptions like all imbalance payments were triggered internally. They also did not distinguished adequately external causes from internal causes for imbalance payments, which led to the payment shortages because of their changes in terms of trade. They also did not take into consideration that developing countries should be allowed more time in adjusting their monetary policies, and these adjustments are dissimilar from programs related to demand-management. The effects of the policies made by International Monetary Fund were not helping in development, or it is anti-developmental. The effects of their programs led to losses of employment and good output in economies where low income and high unemployment are present. International Monetary Fund has provided harsh policy conditions, where members are refused loans due to the absence of the conditionalities provide and that needed to be followed in order to receive loans. This made the economy of rejected countries worse. And policies regarding funds of International Monetary Funds lack a clear reasoning for its policies. Its policies were unclear due to clashing opinions and rivalries in departments while dealing with countries with different economic situations.
World Bank has two contradictory roles. One is that it is a political organization and the other is that it is a practical organization. In order to achieve its role as a political organization, the World Bank must meet the demands of donor and governments that are borrowing, capital markets, and other organizations, while as a practical organization, the World Bank must be neutral in distributing aid, technical assistance, and loans. The World Bank has adopted policies that would let the organization oblige to the private capital markets and countries that donate, these policies would show that poverty is best improved with the implementation of market policies.
World Bank and International Monetary Fund’s criticisms contains a lot of issues but these issues are generally concerned about the approaches the World Bank and International Monetary Fund have made in preparing their policies and the way they administered. These approaches include their control and their policy implementation, socially and economically and its impact on the beneficiary countries, that avail the financial assistance from these institutions. The conditionalities proposed by these two organizations are the most concerning part of their decisions. They have attached conditionalities based on the Washington Consensus, which focuses on liberalization of financial sector, and trade and investment. These recommendations made by World Bank and International Monetary Fund have not resolve any economic problems in the countries.
These conditionalities may result into the loss of government’s control over its economy, as the International Monetary Fund is controlling policies. Concerns about the types of development projects are being funded by the World Bank are raised. Many infrastructures that have been financed by the World Bank have provided social and environmental problems, and the populations of those areas have become affected. This raised ethical issues against World Bank for funding such projects. The role of World Bank against climate change architecture has been caught in controversy. Others see World Bank as a unit for climate finance because of its conditionalities and advisory attached to its loans. And the partnership of World Bank with private sector may weaken the role of the state to be the primary provider of services and goods, like education and healthcare to the people. This may result in underperformance of services in countries in badly need of those.
Institution in this field is viewed as a formal organization. Formal organizations like bureaucracies, and rules that govern behavior. Institutions help shape interests and influence the goals and outlooks people in a country. It helps us understand why results are more likely than others than this, and how it is possible for such results to happen. Institutions is an important factor for development experts because it shows the paths and the different repercussions of growth.
Institutions create social order and cooperation, which governs the behavior of individuals within a country. Identified with social purpose, institutions surpass individuals and intentions with the enforcing set of governing rules. Institutions are important to consider because it enables to control the economy and persuade millions to cooperate in a specific plan of action. It can make individuals cooperate in production and trade, some in other aspects. And it is able to persuade economists to talk about the money circulating in the system.
Institutions are important because it can be applied to the behavior patterns of the people, which is important in making policies. Institutions are concern for the mechanism for rule-making and enforcement. Whit institutions, situations like what happened to World Bank would be prevented. Like when they provided funds to infrastructures that cause social and environmental problems by affecting the population.
There are different kinds of institutions that can be seen in different type of countries. So International Organizations, especially World Bank and International Monetary Fund cannot use the cookie-cutter approach. Just like what happened in the results of globalization. Globalization was effective in some countries but disastrous in most. This is a sample of cookie-cutter approach where the organizations used the same design, plan, and innovation to these different countries, because it would save time and money, but this approach should not be tolerated because in order to have a significant and effective program and projects different institutions must be studied one by one before making a decision that would change the whole system.
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