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Development Economics

1. IMF

   • How is it financed ?
     • financed by member countries who contribute funds on joining. They can also increase this throughout their membership. The IMF can also ask its member countries for more money. IMF financial resources have risen from about $50 billion in 1950 to nearly $300 billion last year, sourced from contributions from its 183 members.This initial amount depends on the size of the countries economy. E.g. the US deposited the largest amount with the IMF. The US currently has 16% of voting rights at the IMF, a reflection of its quotas deposited with IMF. The UK has 4% of IMF Voting rights. Loans are also available to developing countries to ‘deal with poverty reduction.’
     • use Special drawing rights to provide a unit for the amount of foreign currency member states can draw on. SDRs are defined in terms of a basket of major currencies including: Euro, Pound Sterling, Japanese yen and US Dollar.
   • Role
     • International Monetary Fund is a global organisation founded in 1944. Its aims are to help stabilise exchange rates and provide loans to countries in need.
       • International Monetary Cooperation Promote exchange rate stability To help deal with Balance of Payments adjustment Help Deal With Economic Crisis by providing international coordination
         • Economic Surveillance. IMF produces reports on member countries economies and suggest areas of weakness / possible danger. The idea is to work on crisis prevention by highlighting areas of economic imbalance. A list of IMF reports on member countries are available at: IMF Countries 2. Loans to Country’s with financial crisis. The IMF has $300 billion of loanable funds. This comes from member countries who deposit a certain amount on joining. In times of financial / economic crisis, the IMF may be willing to make available loans as part of a financial readjustment. the IMF has arranged more than $180 billion in bailout packages since 1997. 3. Technical assistance and economic training. The IMF produce many reports and publications. They can also offer support for local economies. More on technical assistance
   • Criticisms
     • Lack of Transparency and involvement The IMF have been criticised for imposing policy with little or no consultation with affected countries
     • Free Market Criticisms of IMF As well as being criticised for implementing ‘free market reforms’ Other criticise 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. There is also a criticism that bailout countries with large debt creates moral hazard. Because of the possibility of getting bailed out it encourages people to borrow more.
     • Neo Liberal Criticisms There is also criticism of neo-liberal policies such as privatisation. Arguably these free market policies were not always suitable for the situation of the country. For example, privatisation can create lead to the creation of private monopolies who exploit consumers.
       • Response to critisms : Evaluation
         • Crisis Always lead to some Difficulties. Because the IMF deal with economic crisis, whatever policy they offer, there is likely to be difficulties. It is not possible to deal with a balance of payments without some painful readjustment. 2. IMF have had Some Successes. The Failures of the IMF tend to be widely publicised. But, its successes less so. Also criticism tends to focus on short term problems and ignores longer term view 3. Confidence The fact there is a lender of last resort provides an important confidence boost for investors. This is important during current financial turmoil 4. Countries are not Obliged to take an IMF loan It is countries who approach the IMF for a loan. The fact so many take loans suggest there must be at least some benefits of the IMF. 5. IMF Easy target. Sometimes countries may want to undertake painful short term adjustment but there is a lack of political will. An IMF intervention enables the government to secure a loan .
     • Devaluations In earlier days, the IMF have been criticised for allowing inflationary devaluations.
     • Exchange Rate Reforms. When the IMF intervened in Kenya in the 1990s, they made the Central bank remove controls over 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.
     • On giving loans to countries, the IMF make the loan conditional on the implementation of certain economic policies. These policies tend to involve: Reducing government borrowing – Higher taxes and lower spending Higher interest rates to stabilise the currency. Allow failing firms to go bankrupt. Structural adjustment. Privatisation, deregulation, reducing corruption and bureaucracy.
     • Supporting Military dictatorships. The IMF have been criticised for supporting military dictatorships in Brazil and Argentina, such as Castello Branco in 1960s received IMF funds denied to other countries.

2. washington Consesus

   • set of broadly free market economic ideas, supported by prominent economists and international organisations, such as the IMF, the World Bank, the EU and the US. Essentially, the Washington consensus advocates, free trade, floating exchange rates, free markets and macroeconomic stability.
     • Implications of WC _ Support of free trade through WTO and NAFTA – North Atlantic Free Trade association reduce tariff barriers. IMF bailouts tended to involve free market reforms as a condition of receiving money. Belief in free trade suggests countries, should specialise in goods / services where they have a comparative advantage. This may mean developing economies need to stick with producing primary products.
   • Crticsms
   • Defense and Evaluation

3. Foreign Aid

   • This is increasingly multilateral (between many countries), rather than bilateral (between two countries), which reduces the restrictions under which aid is provided. There are different types of aid, ranging from humanitarian aid (such as food and shelter, in times of emergency), to grants (sums of money that do not need to be repaid) and loans (money that should be repaid). While many in the developed world see aid as a positive thing, critics argue that much of the aid is squandered on projects that will not contribute to development, are duplicated by different aid agencies who do not communicate with each other, or diverted into the private bank accounts of government ministers. Other criticisms suggest that aid is channelled into projects which have captured the global media interest and that, in the long run, the provision of aid can reduce the level of development in an LDC.

4. Debt Relief

   • Many LDCs hit a ‘debt crisis’ in the 1980s and 1990s, as they could not afford to pay the interest on their large debts to international financial institutions. This was a combination of interest rates rising and the value of the dollar rising (and most loans were agreed in terms of US dollars). Latin American countries and many African countries were among the worst hit — Mexico defaulted on its loans first, and others followed suit. This meant that these countries were then unable to borrow. The massive debts that they had to repay meant that governments of these countries were unable to invest in human capital or other infrastructure necessary for growth and development. Initially, the IMF set up Structural Adjustment Programmes, where it would lend the debtors money to pay off their original debts, but on strict conditions with respect to fiscal policy and trade policy terms which hindered development. Also use debt forgiveness and rescheduling

5. Fairer Trade

   • The WTO works towards reducing protectionist policies. Many LDCs argue that they need to protect their economies, however, as they cannot afford to compete with the subsidies provided to the agricultural sectors in developed economies, such as the CAP in the EU. Many LDCs are unable to sell their mainly primarysector products abroad because of protectionism in the developed world. The Fair Trade movement is one way in which farmers in LDCs are supposed to benefit, thus improving development. This guarantees farmers a certain income, so that they are not subject to monopsony purchasing power from developed countries, particularly with respect to coffee, cocoa and cotton. However, there are often a significant number of ‘middle men’ involved, reducing the benefits that fair trade farmers receive. Additionally, not every farmer in every LDC benefits — many are unaware of the scheme, and many are not able to afford the membership fees that are required.

6. Structural Policies