IMF’s Policy Involvement 1

Running head: IMF POLICY INVOLVEMENT IN THE DEVELOPING COUNTRIES

International Monetary Fund’s (IMF) Policy Involvement in the Developing Countries Should be

Immediately Revised.

Maas Riyaz Malik

International Islamic University

Malaysia
 IMF’s Policy Involvement 2

Abstract

During the last two decades, the focus of IMF involvement in the developing world, and

especially in the low income countries, has shifted. IMF involvement became more long term,

but also oriented toward policy reform, rather only assisting with a macroeconomic crisis. This

paper explores the deficiencies in IMF policy prescription and implementation in the developing

countries. The information were collected using a library research where books, journals, articles

and online resources were used. The paper further clarifies reasons behind the failure of

structural adjustment programs and the danger of neo liberal based economic policies imposed

on low-income countries. The research concludes IMF’s enormous financial and political power

should be used in the betterment of people in the developing nations.

 IMF’s Policy Involvement 3

Contents

1. Title page 1

2. Abstract 2

3. Contents 3

4. Introduction 4-5

5. Argumentation

5.1. Mismanaged lending and debt crisis in the developing countries 6-7

5.2. Undemocratic bureaucracy and lack of transparency in the administration 8 -10

5.3. Counter Argument and Refutation 11-13

5.4. Violation of Islamic economic principles 14

6. Conclusion 15-16

7. References 17-18
 IMF’s Policy Involvement 4

4. Introduction

Capitalism has been international in scope since the man went out to discover the world

500 years ago. Since then, this economic system has gained the confidence of people and rose

upon suppressing other economic models. The latest model of capitalism subscribes to the notion

of globalism enabling long distance interchange among economies. What is this thing called

globalization? Definition of the term is still being contested. Scholars have given number of

definitions to the globalization and yet a common explanation is to be reached. Writer Peet

(2003) outlines two consistently related themes of globalization “global space is effectively

getting smaller (‘compressed’) in terms, for instance, of the time taken for people, objects and

images to traverse physical distance; as a result, social interactions are increasing across spaces

that once confined economies and cultures”(p.1).

However, behind this optimistic statement lurks the possibility of something different. It

is basically a manipulated process that forced on the countries around the globe. The perpetrators

or engineers of the globalization have dominated and ultimately manipulated a world of

consumers (Peet, 2003). Allegedly, International Monetary Fund (IMF) and World Bank are the

two dominant governance institutions and prominent advocates of globalization. The activities of

these organizations around the world, particularly in the developing world should be closely

monitored in order to comprehend the adverse effects of their policies.

The history of these organizations runs back to the post world war era where the United

States (U.S) and United Kingdom (U.K) met to discuss the economic plans for the post war

peace (Tabb & William, 2005). At the Bretton Woods Conference in New Hampshire in 1944,

U.S and U.K along with other countries successfully created the IMF and World Bank. As
 IMF’s Policy Involvement 5

decided in Bretton Woods IMF was assigned two tasks: it would assist the countries with balance

of payment difficulties and reduce foreign currency restrictions. Although its mission statement

remains same, IMF has undergone major changes in the past few decades to become a

powerhouse in the global economy. According to Peet (2003):

Today IMF policies directly affect the economies of 184 countries and influence,

sometimes drastically and often disastrously, the lives of the vast majority of the worlds

people. Today the IMF is probably the single most powerful non-state (governance)

institution in the world. Publicly, governments have to praise the IMF, while complaining

privately about the policies imposed on them. By contrast, workers and students

demonstrate against the IMF, in many cases losing their lives in the process (p.56).

Many claim that IMF economic policies produce poverty, hardship and starvation in the

Developing World. Policy prescriptions to the Third World are attached as the “conditions” for

lending (IMF, 2007). Loan conditionality, together with economic policies imposed is a way for

the IMF to regulate the country’s entire economic policy. Therefore, IMF as one of the largest

international financial institutions should be revised because of decades of mismanaged

lending, undemocratic bureaucracy in administration and failed structural adjustment

programs.
 IMF’s Policy Involvement 6

5.1 Mismanaged lending and debt crisis in the developing countries

Over the past five decades, IMF and the World Bank have steadily gained the power and

influence, becoming the key players determining which countries will receive the big chunk of

loan. Most importantly, these loans are attached to IMF’s so called conditionality which binds the

lending country on a number of policies. Conditionality is viewed as a central feature of IMF

lending, which is essential to IMF’s success:

Conditionality is seen as central to IMF lending, meant to assure a borrowing country that

if it takes certain well-specified actions, continued financing will be forthcoming. It is thus

seen as following the country to invest in longer term policy adjustment by assuring them

that if they do so, IMF financing will not cut off. (Ranis et al., 2006, p. 53)

Conditionality is essentially a US policy for the operation of IMF, opposed to the

position of Developing World (Peet, 2003). In the view of other member states, these conditions

infringe with country’s national sovereignty to use loans independently.

Since the creation of both the IMF and the World Bank over 63 years ago, both have

provided trillions of dollars in loans to poor countries. The Third World sits on debts of over

$1.3 trillion, which has seriously hindered the third worlds abilities to provide for the basic

needs of their citizens (IMF, 2007). In addition, third world debt has long been recognized as a

major obstacle to human development. Rising debts in the third world has led many economies

to a crisis, where they have no salvation. The debt crisis in early 1990 is a reflection of massive

lending and failure to service these debts.

Debt crisis was first triggered in August 1982 when Mexico announced that it could no

longer make loan payments (Peet 2003). The latest crisis in Latin America has attracted the
 IMF’s Policy Involvement 7

criticism on IMF lending arrangements for Developing World. It is important to examine the

factors that have been contributed towards the recent debt crisis around the world. One of the

major reasons that triggered the debt crisis is increasing odious debt, where debt has been

incurred without the informed consent of the people. In detail, “Odious debt is an established

legal principle. Legally, odious debt is debt that resulted from loans to an illegitimate or

dictatorial government that used the money to oppress the people or for personal purposes”

(Shah, 2003, p.1)

IMF has engaged in numerous odious debts lending where it financed dictatorial

governments with a hidden agenda. South Africa as an example, has found it now has to pay for

its own past oppression (Shah, 2003). These loans are to be repaid by new generation of South

Africa which had nothing to do with racial discrimination in the past. As one of the report

outlines problem has a far more reaching impact on the region as a whole. According to his

report, Albeit (1998):

Apartheid -caused debt at £28 billion [about $46 billion at the time the report was written].

That is the £11 billion [$18 billion] that South Africa borrowed to maintain apartheid, and

the £17 billion [$28 billion] that the neighbouring states borrowed because of apartheid

destabilization and aggression. This is 74% of the present regional debt of £38 billion

[$62.5 billion] (p.1).

Among other countries Tanzania, Indonesia and Argentina have been repaying

illegitimate debts that accumulated over the years. In response to rising criticism, IMF in 1996

introduced Highly Indebted Poor Countries (HIPC) initiative, another prototype for existing

agenda. In reality, the HIPC process is aimed not at canceling debts, but at ensuring that they can
 IMF’s Policy Involvement 8

be repaid (Transfer, 2000, p.4). The program has not been designed in a way that reduces the

burden of Third World but steady cash flows to the rich nations in the west.

5.2 Undemocratic bureaucracy and lack of transparency in the administration

The IMF’s transformation has been rapid since the 1970s when it turned the attention to

Latin American debt problems. Today in the poorest regions, it is engaged in establishing

macroeconomic policies. However, since the client base has changed considerably, the

mechanisms by which decisions are taken have not revised accordingly (Carin & Wood, 2005).

Heavy criticism has directed towards IMF’s accountability and transparency in operations as it is

strictly closed to outside scrutiny.

One of the central problems of the IMF operations is that developing nations are

marginally represented in the administration level. Today, the IMF’s programs are entirely

executed in the developing countries, making them the largest stakeholders of IMF’s client base

(Carin & Wood, 2005). However, little opportunity is provided for the developing countries to

put their concerns on the board’s agenda. In other words, priorities of the IMF do not necessarily

reflect the view of those developing nations.

In the administration level these countries ability to participate in the policy making has

been severely obstructed. Many of the poorest countries, which are most regularly in discussion

with the IMF about debt relief and structural adjustments programs, are barely represented in the

IMF’s decision making structures (Carin & Wood, 2005). A larger part of board seats are held by

developed countries than developing countries. In order to reduce poverty it is highly essential to

enhance the representation of developing countries, where poor are concentrated (Carin &

Wood, 2005; Ranis et al., 2006).

 IMF’s Policy Involvement 9

The representation in executive board and IMF finance committees is decided on the

country’s strength in the global economy. The structure at IMF is naturally designed to favor the

rich nations who act as the lenders to the fund. The fact that 24 African nations are represented

by only two Board members in the IMF and World Bank reflects the undemocratic

administration in these multilateral organizations (Ranis et al., 2006). This means that the

developed countries can naturally dominate board decisions and it is virtually impossible for the

developing countries to put their priorities on the agenda (Carin & Wood, 2005). It is largely

agreed that policies made without adequate reference to developing nations are less than optimal.

These policies have failed to recognize the microscopic issues of a particular country that need

to be addressed with careful attention.

A good global governance system is essential to reduce poverty and inequality

worldwide, based on a just market economic system (Ranis et al., 2006). Power without

responsibility proves to be inadequate, where the living conditions in some countries are badly

deteriorating. Calls for IMF accountability have amplified in recent years; it has failed to

consider negative consequences of its policy prescription on the developing world (Carin &

Wood, 2005). As the former World Bank director sitgtliz (2002) outlines:

One of the important distinctions between ideology and science is that science recognizes

the limitations on what one knows. There is always uncertainty. By, contrast, the IMF never

likes to discuss the uncertainties associated with the policies that it recommends, but rather,

likes to project an image of being infallible. This posture and mind-set makes it difficult for

it to learn from past mistakes – how can it learn from those mistakes if it can’t admit them

(p.67).
 IMF’s Policy Involvement 10

Critics hold IMF responsible for the policies imposed on weaker governments; most of

these policies have failed to accomplish the intended objectives. Thus, “despite a growing body

of evidence, the IMF appears to continue to pursue a set of policies apparently inappropriate to

many developing countries needs, priorities and capacity” (Carin & Wood, 2005, p.68). IMF in

its policy implementation bears nor responsibility upon any failure. Indeed IMF has not properly

reconsidered its policies in the light of growing attention as a massive lender to the Third World.

As a multilateral organization, whose principal function is to provide advice, the IMF should be

accountable for the quality of decision.

 IMF’s Policy Involvement 11

5.3 Counter Argument and Refutation

Nevertheless, proponents of the IMF policy prescription argue that the best way a country

could rally towards the economic growth is through embracement of economic liberalization.

Economic liberalization has been defined by Nonneman (2002) as:

A reduction in the direct involvement of the state in economic activity and a reduction of

state control of economic processes like prices and production in order to pave the way

for private sector and liberalizing the foreign trade (p.3).

Nonneman (2002) further stated that, liberalization of the economy was argued to be helpful in

three ways. First, it would allow the input of new resources from foreign investment and from

domestic liquidity that had so far remained untapped. Second, it would allow economic

dynamics to emerge because more accurate signals, responsive and flexible reaction from the

market. Third, the opening up for domestic and international competition would sharpen

competitive skills, thus reinforce the entire process, and eventually promote economic growth.

As mentioned by Nonneman (2002) and Goldman (2005) most significant effects of the

debt crisis were the dramatic shift in power that took place between borrowing states and the

IMF and World Bank. Their Structural Adjustment Programs (SAP) have liberalized the markets

in less developed countries to push production for export rather than to produce for domestic

needs, to reduce trade barriers and tariffs, and to open up public sectors for international
 IMF’s Policy Involvement 12

competition. This is mainly to reduce the debt burden and open the markets of the less developed

counties.

However, there has been much controversy over the lending practices of IMF and World

Bank over the fairness of structural adjustment programs. Structural adjustment program (SAP)

is a policy package in line with what is often called "neo liberalism," a far-reaching version of

the "free trade" agenda. According to Shah (2007), Key structural adjustment measures include:

privatizing government-owned enterprises and government-provided services, slashing

government spending, orienting economies to promote exports, trade and investment

liberalization. The basic idea of these policies is to shrink the size and role of government, rely

on market forces to distribute resources and integrate poor countries into the global economy.

For poorer countries, these changes can be devastating as structural adjustments have

failed to address the social, cultural and environmental impacts of the projects (Peet, 2003). For

example, Kevin Watkins of Oxfam reveals (as cited in Peet, 2003) the effects of SAP in sub-

Saharan African as follows:

Contrary to World Bank and IMF claims, the position of the poor and most vulnerable

sections of society has all too often been undermined by the deregulation of labor markets

and erosion of social welfare provisions, and by declining expenditures on health and

education. Women have suffered in extreme form. The erosion of health expenditure has

increased the burdens they carry as care-takers, while falling real wages and rising

unemployment have forced women into multiple low wage employment (p.140).
 IMF’s Policy Involvement 13

African scenario shows that IMF had undermined the health of Africans through the

policies imposed by SAP. The key issue here as outlined by Peet (2003) is whether they build the

capacity to recover and whether they promote the long-term development. It is crystal clear that

African countries need essential investment in Health and other social services before they can

compete globally. Astonishingly IMF required countries to reduce state support and protection

for many social and economic activities and forced African nations into markets where they are

unable to compete (Peet, 2003).

This is further elaborated by Peet (2003) where he stated that IMF policies have long

drawn massive and violent protest from millions of people adversely affected. Until the mid-

1970s, when IMF conditionality took a turn for the austere, controversy over the Fund had taken

from mainly of intergovernmental arguments and the institution. Additionally, Peet (2003) also

pointed out that trade liberalization is not redistributing wealth to non-industrialized countries,

but in fact further widening the huge gap between the rich and poor nations. Lending by IMF

creates more long term dependency than it gives short term assistance, which it has failed to

improve the economies of less developed countries.

Likewise, Danaher (2001a) as well criticized that the Structural Adjustment

Programs (SAP) policies attached to IMF and World Bank loans may help countries make

payments on their old debts. He argues this may create some millionaires but the majority of the

population suffers lower wages, reduced social services, and less democratic access to the policy

making process. Those developing countries that have experienced the greatest economic

successes in recent decades have violated many of the central precepts of structural adjustment.

For instance, millions of Brazilians go hungry on regular basis. Although the government

has been faithfully collaborating with IMF and World Bank officials in making payments on the
 IMF’s Policy Involvement 14

foreign debt, Brazil is more deeply in debt now than it was twenty years ago (Danaher 2001a).

Never before has there been such a stark contrast between the mass of working families waging

daily struggles for survival and pervasive media reports about unprecedented prosperity

(Danaher 2001b).

5.4 Violation of Islamic economic principles

The case against IMF from the Islamic perspective is based on the discussion of morality

and human well being. In the Islamic economic system, Income distribution is regarded as a vital

element in realizing economic goals. This is achieved by elimination of income inequalities to a

level that every individual enjoys a fair share in the economy. In the broader perspective,

equality of economic opportunity is essential to elevate poverty and social distress (Syed, 2008).

The economic policy of Islam has also been explained in the Quran in the most unequivocal

terms “so that this (wealth) may not circulate solely among the rich from among you "(Al-Quran.

59: 7). Therefore, the economic system should ensure to redress social injustice and guarantee

equality of economic condition (Syed, 2003).

In contrast, IMF policy prescription has disregarded the above mentioned Islamic norms

and principles rather nurturing the wealthy. As a result, income disparity in developing countries

has widened and created a social distress in the civil society. IMF adjustment programs have

limited the expansion of agriculture sector where majority of the low income groups depend as

the main source of income (Peet, 2003). Moreover, reduction in government social spending in

health and education means poor no longer can afford these services. Syed (2003) stated, that

Liberalists backed by IMF maintain that poverty as unfortunate or even unfair but not unjust,

even if people die of hunger.

 IMF’s Policy Involvement 15

The Holy Quran unambiguously states that the poor have a due share in the wealth of the

rich. Syed (2003) further explains the Islamic position of economic right of poor “the originality

of the Islamic position stands out; it ordains returning to the poor their rightful share in the rich

man’s wealth”. The IMF policies have completely ignored the share of poor in the economy and

further engaged in exploiting the resources of Muslim nations.

6. Conclusion

Since its establishment in 1947, IMF has undergone numerous changes to become the

pioneer of economic and trade labialization. However, the consequences of IMF policy

prescription have been devastating. Entirely driven by U.S foreign policy, Washington based

IMF has failed to meet the expectations of developing nations (Vaknin, 2005). As pointed in this

essay gigantic IMF has fallen short of the intended objective of poverty reduction. Moreover, the

IMF’s moral integrity in dealing with the developing economies is constantly being questioned

by various groups in the civil society.

Inappropriate and Mismanaged lending have largely contributed towards the current debt

crisis in the developing world. Conditionality is viewed as a central feature of IMF lending

where it infringes with the country’s national sovereignty to use loans independently.

Furthermore, illegitimate debts made to dictatorial governments have further worsened the debt

crisis. As a responsible organization, IMF should evaluate the creditworthiness and legitimacy of

the receivers before making any loan arrangements. In the case of illegitimate debt, the problem

is not necessarily with borrowers, but with lenders (Shah, 2007).

The accountability of the IMF still remains a big question in the wake of global debt

crisis. One of the central problems of the IMF operations is that developing nations are

marginally represented in the administration level (Carin & Wood, 2005). The developed nations
 IMF’s Policy Involvement 16

who act as lenders are bestowed with enormous power that can easily overturn the proposals of

weaker countries. Scholars have repeatedly stressed that decision making in IMF should be based

on a democratic framework where by developing nations are duly recognized in the funds

hierarchy (Carin & Wood, 2005).

Another major criticism against the IMF is the economic reforms forced on debtor

countries. These structural adjustment programs are a complete failure as declared by the

intellectuals and the owners (World Bank) of the policies. IMF as one of the largest multilateral

organizations should reinvent it self by revising the policy making and implementation. Current

policies are no longer applicable in the developing world as they have largely failed with

disastrous consequences.

Apart from that, the leading policies of the IMF and the World Bank do not provide

development aid to the Third World, but fill the pockets of dictators and western corporations

while threatening local democracies and forcing cuts to social programs. Therefore, Danaher

(2001a) calls out to abolish the World Bank and the IMF that do more to prevent democracy than

to promote it. In order to avoid further crisis its enormous financial and political power should be

used in the betterment of people in the developing nations.

 IMF’s Policy Involvement 17

8. References

Al- Quran, Al-Hashr: 7

Albeit. (1998). Action for Southern Africa. In Third World Debt Undermines Development:

Causes of the Debt Crisis. Retrieved January 10, 2007. from

http://www.globalissues.org/ TradeRelated /Debt/causes.asp

Boughton, J.M. (2001), From Suex to Tequila: the IMF as crisis manager. The Economic

Journal.110(460), 273-291

Carin, B. Woood, A. (1998). Accountability of the International Monetary Fund. Ottawa:

Ashgate.

Danaher, K. (2001a). Democratizing the global economy: The battle against the World Bank

and the IMF. Monroe ME & Philadelphia, PA: Common Courage Press.

Danaher, K. (2001b). 10 reasons to abolish the IMF and World Bank. New York: Seven Stories

Press.

Goldman, M. (2005). Imperial nature: The World Bank and struggles for social justice in the

age of globalization. New Haven, Conn & London: Yale University Press.
 IMF’s Policy Involvement 18

IMF and World Bank: Colonial tools to exploit the world. (2007). Retrieved December 20, 2007.

from http://muslimsinkenya.wordpress.com/2007/12/27 colonial- tools- to- exploit-

the- world.html

Mobekk, E. (2002). Re-evaluating IMF involment in low-income countries: The case of Haiti.

International Journal of Social Economics. 29(7), 527-537. From.

http://www.emeraklingsight.com/0306-8293.htm

Nonneman, G. (2002). Political and economic liberalization: Dynamics & linkages in

comparative perspective. London: Lynne Rienner.

Peet, R. (2003). Unholy trinity: The IMF, World Bank and WTO. London: Zed books.

Ranis, G. Vreeland, J, R. & Kosack, S. (2006). Globalization and the nation state: The impact

of the IMF and World Bank. Oxon: Routledge.

Shah, A. (2007 June 03). Third World Debt Undermines Development: Causes of the Debt

Crisis. Retrieved December 20 2007. from http://www.globalissues.org/ TradeRelated /

Debt/ causes.asp

Stiglitz, J. (2002). Globalization and its Discontents. In Carin, B. Woood, A. (1998).

Accountability of the International Monetary Fund (p.67). Ottawa: Ashgate.

Syed Abul Aala Maududi. (2008). The Economic Principles of Islam. Retrieved January 13

2008. from http://www.islam101.com/economy/economicsPrinciples.htm.

Syed Nawab Haider Naqvi. (2003). Perspectives on Morality and Human Well Being: A

Contribution to Islamic Economics. Leicester: The Islamic foundation.

Tabb, William, K. Globalization. (2005). Microsoft® Encarta® 2006 [DVD]. Redmond, WA:

Microsoft Corporation.
 IMF’s Policy Involvement 19

The Transfer of Wealth: Debt and the making of a Global South (2000). Retrieved January

18, 2007. from http://www.focusweb.org/publications/Books/Transfer% 20of% 20

Wealth.html.

Vaknin, S. (2005). The Washington Consensus :The International Monetary Fund.

Retrieved January 8 2008. from http://samvak.tripod.com/pp152.html.