International Political Economics
Critique of IMF Loan Conditionality
What is Conditionality?
Conditionality is most often associated with aid money. International organizations, such as the International Monetary Fund (IMF) and World Bank, or individual countries can use conditionality when lending money to another country. The donor country requires that the country receiving the funds adhere certain rules directing the use of funds (Investopedia, 2013).
Conditionality in its broad sense covers both the design of IMF-supported programs—that is, the macroeconomic and structural policies—and the specific tools used to monitor progress toward the goals outlined by the ...view middle of the document...
In 2001, Argentina was forced into a similar policy of fiscal restraint. This led to a decline in investment in public services, which arguably damaged the economy.
Exchange Rate Reforms
When the IMF intervened in Kenya in the 1990s (ukessays, 2007), they made the Central bank remove controls over the flows of capital. The consensus was that this decision made it easier for corrupt politicians to transfer money out of the economy (known as the Goldman scandal). Critics argue this is another example of how the IMF failed to understand the dynamics of the country that they were dealing with - insisting on blanket reforms.
The economist Joseph Stieglitz has criticized the more monetarist approach of the IMF in recent years. He argues it is failing to take the best policy to improve the welfare of developing countries saying the IMF "was not participating in a conspiracy, but it was reflecting the interests and ideology of the Western financial community."
Free Market Criticisms of IMF
As well as being criticized for implementing 'free market reforms' others criticize the IMF for being too interventionist. Believers in free markets argue that it is better to let capital markets operate without attempts at intervention. They argue attempts to influence exchange rates only make things worse - it is better to allow currencies to reach their market level (Mutume, 2001).
Lack of Transparency and involvement
The IMF has been criticized for imposing policy with little or no consultation with affected countries.
Jeffrey Sachs, the head of the Harvard Institute for International Development said:
"In Korea the IMF insisted that all presidential candidates immediately "endorse" an agreement which they had no part in drafting or negotiating, and no time to understand. The situation is out of hand...It defies logic to believe the small group of 1,000 economists on 19th Street in Washington should dictate the economic conditions of life to 75 developing countries with around 1.4 billion people. (Khor, 1998)"
Faced with strong criticism for its expansive and erroneous use of conditionality, and in the wake of a financial crisis, the International Monetary Fund (IMF) approved in 2002 a set of guidelines to inform its use of structural conditionality. The Conditionality Guidelines committed the Fund to reduce the overall number of conditions attached to Fund lending and ensure that those attached respected and were drawn from nationally developed poverty plans in recognitions that developing country ownership is instrumental for successful development (Pereira, April 2008).
The IMF’s own Independent Evaluation Office (IEO) issued a study in January 2008, which concluded that the Fund dramatically increased both the number of structural conditions and their intrusiveness in recipient countries’ domestic affairs.
The IMF Conditionality Guidelines and their limited view of ownership are having serious social consequences. The Fund continues to push for...