For the past two decades the International monetary Fund has come under intense scrutiny and attack. Its role in stabilizing the economy of a country and dealing with its balance of payment problem has been heavily criticized. The critics have blamed the international organization for its dictatorial and exploitative role and its micro managing and unneeded influence on the economic policies of a country. In this paper I will analyze the role of International Monetary Fund on the economies of the countries and whether its intervention makes the country better off by taking it out of the economic troubles that they are facing or does it further worsen the situation? The paper will further look into the short and long term effects after the intervention of the IMF on the economy of Pakistan.
The International Monetary Fund:
The worst debt crisis in 1980's that mainly hit the developing countries of Latin America, including Brazil, Mexico, Argentina etc, left the debtor countries entirely devastated and their financial institutions ramshackle. It was followed by a complete chaos in the defaulter countries after the uprising of the people against the policies of their government, which contributed to the collapse of some autocratic regimes such as Brazil's military regime and the Argentine bureaucratic-authoritarian regime(). Economic growth stagnated, incomes dropped, unemployment rose to the peak and high inflation eroded the purchasing power of the middle and lower middle classes. The debtor countries were once again on the doorstep of their creditors to seek new loans to prevent the bankruptcy. The international creditors gave new loans to the ravaged economies but with very strict conditions and obliged the debtor countries to accept the intervention of International Monetary Fund (IMF). As a result, the IMF rose up as an economic police to keep check and balance on the disorganized economies. For the first time IMF intervened in the inner economic and financial policies of a country to make it pay its debts. The role of IMF was to keep the economies of these South American countries functioning by imposing certain conditionalities on the countries so that they could return the loans to their creditors. Structural Adjustment Programs (SAPs) were born as a result of this debt crisis.
The International Monetary Fund was established on July 22, 1944 originally with 45 members. Today the organization has 187 member countries. The idea behind its establishment was to help in rebuilding the Europe after the World War II. But with the passage of time as the world progressed, its policies changed. According to the organization’s charter, the IMF promotes international monetary cooperation and exchange rate stability, facilitates the balanced growth of international trade, and provides resources to help members in balance of payments difficulties or to assist with poverty reduction (IMF Objectives).The IMF does it through its economic surveillance that keeps track of the economic health of its member countries, alerting them to risks on the horizon and providing policy advice. It also lends to countries in difficulty, and provides technical assistance and training to help countries improve economic management (ibid). But there are different viewpoints about the actual role and purpose of the IMF. The proponents of the policies of the IMF say that it has a positive impact on the overall economy of a country. For example, in the case of Argentina it did recover from its financial crisis of 1980’s when the IMF intervened and in the following decade it showed a tremendous growth (Cavallo 2004). However, the critics of the IMF say that its policies only benefit the elites and corporate industrialists while the poor and the lower socio economic class get suffered. They heavily criticize the reform programs of the organization like “Structural Adjustment Programs (SAP)” in which the Fund gives loan to the countries on harsh conditionalities. Moreover, they argue these developing countries have long paid back their actual loans but due to high interest rates they are still hugely indebted and are dependent on new loans.
The member country of IMF, having balance of payment problem, can take loan from it, but it is not the only prerequisite for taking loan. Ghana, for example, entered an IMF agreement in 1983 when its foreign reserves reached their strongest position ever: 4.8 times monthly import requirements (Przeworski and Vreeland 2000). For these countries to be eligible for the loan from the IMF has to accept certain conditions. The conditionalities are given the name of Structural Adjustment Programs (SAP). The most frequently imposed elements of an adjustment program include: Devaluation of the currency, cuts in government expenditures, privatization of government, higher taxes and interest rate, and reduction of wages. The critics say that the IMF is only concerned with the return of the loans and the SAP’s only serve this purpose. The IMF determines countries’ macro-economic policies and takes control over central bank policies. It imposes a neo liberal ideology on the debtor countries. Despite the IMF’s claim that the SAP’s have been successful, it is widely acknowledged that they have failed to achieve their goals. The trade liberalization and privatization of government enterprises has allowed the multinational companies to trespass into the borders of developing countries and destroy the domestic industries. The local industries, farmers, businessmen and banks are unable to compete with the large corporate firms and thus go out of the business. Moreover, the adjustment program makes the economy export oriented so that revenues could be generated from the exports. The currency of the country is devalued which makes the exports cheaper in the international market. But it also makes the import goods quite expensive for the host country that raises the import bills and inflicts a huge burden on the country’s economy. In a survey conducted among 1024 countries, the average rate of growth of countries participating in IMF programs grew at the rate of 2.04% while countries not under the programs at 4.39%, a difference of –2.35% (ibid). This can give us a broad and clear picture of the effect of IMF’s policies on the economy of a country.
Pakistan is a developing country in South Asia that got independence in 1947 and since then its economy has experienced both boom and bust. In 1960’s and 1980’s the economy was quite flourishing attaining the average annual GDP of 6.8% and 6.5% respectively while in 1990’s it fell to 3.5% (Economic). During the difficult times of economic crisis Pakistan mainly approached the International Monetary Fund and other international creditors to borrow loans. After becoming the member of the IMF in 1988, Pakistan has taken eleven loans from the IMF including the recently borrowed loan in 2008 (Upadhyay). Most of these loans were aimed to manage the financial problems of Pakistan such as balance of payment deficits, stabilization of currency, rebuilding international reserves and managing liquidity problems. Ironically, only two of these loans arrangements were made during the military regimes while the rest were made during the civilian and democratic regime. Tough conditions were imposed on Pakistan by the IMF including close monitoring, reduction of government spending, revision in tax collection policies, change in policy/discount rate etc to make sure that high economic growth is achieved so that the loans could be returned in time. In this section we will examine the effect of the IMF and its Structural Adjustment Programs on the economy of Pakistan.
The unemployment rate of Pakistan has increased since 1980’s after its first contact with the IMF. From 1980 to 2001, the unemployment rate increased from 3.5 percent to 5.7 percent (Khan, Nawaz, and Hussain). One of the conditionalities of SAP is to force the government of the debtor country to cut down its expenditures to narrow down the budget deficit. The development projects of the government are the main target of this conditionality. Therefore, the reduction in such projects has affected the employment in Pakistan negatively. Moreover, with the depreciation of Pakistani rupee, the imported goods have become more expensive which has decreased the investment in Pakistan and discouraged the investors to further extend their businesses. This in turn has increased the unemployment rate in Pakistan. Bengali and Masood (2001) analyzed the fiscal and monetary package of IMF which was targeted to slide down the unemployment. They concluded that conditionalities have adversely affected the employment situation in Pakistan. Ali (2003) also concluded that SAP has resulted into decrease in real wages of both male and female labor force as well as employment.
The Structural Adjustment of Program has also increased the income inequality in Pakistan. The policies have made the rich and elites of Pakistan richer while the poor people got suffered and their incomes shrank. Inequality in a country is measured by Gini coefficient which varies between 0 and 1. The close a Gini is to 1, the more unequal is the income distribution. The income distribution in Pakistan has widened in the era of SAP, i.e. since 1980’s. By the measure of Gini-coefficient, it was 34.14 percent in 1981 and it increased to 37.29 and 41.12 percent in the years 1995 and 2001 respectively (Khan, Nawaz, and Hussain). This could be the result of pro rich and anti poor policies of the IMF. One of the policies implemented by the IMF is to increase the taxes mainly sales taxes to generate revenue. As the taxes are levied on such goods that are not consumed by the rich, thus the policy has largely affected the lower income group. Moreover, most of the labor in Pakistan is associated with agriculture. The rise in import bills, which made the agricultural equipments expensive to import, and the withdrawal of agricultural subsidies by the government has greatly affected the income of poor people of Pakistan.
The former managing director of the International Monetary Fund says, “Our primary objective is growth. In my view, there is no longer any ambiguity about this. It is toward growth that our programs and their conditionality are aimed. It is with a view toward growth that we carry out our special responsibility of helping to correct balance of payments disequilibria and, more generally, to eliminate obstructive macroeconomic imbalances”( Przeworski and Vreeland 2000). We agree that the International Monetary Fund has a very important role to play in reviving the economies of the countries. Balance of payment crisis and exchange instability are the facts of life and most of the developing countries have faced these problems at some point in their history. It is beyond the scope of this paper to check whether or not the austerity and structural programs are necessary to restore growth but if the main objective of the IMF is the economic growth then it has failed badly and their programs are badly designed.