Wednesday, July 18, 2007

Q 5. FE 201 IMF (FPA), Intro and Criticism 1

Describe and discuss the major controversies and criticisms associated with the IMF's approach to stabilization.

Most of this question is answered at my other post (International Monetary Fund Assignment), but I will post the texts passages also in some posts.
3.2 Key Shortcomings and Criticisms of the IMF Financial Programming Approach
Almost from the start, the IMF experienced a large number of criticisms of its approach to stabilisation. The range of criticisms has been broad and the intensity of criticism has been varied, sometimes gaining momentum in response to
particular global economic and other developments and sometimes becoming more muted, but overall the criticisms have grown in breadth and intensity since the 1980s. They have become part of a larger public debate and their greater strength has led to more engagement with the issues by the IMF itself. While it is not possible to summarise the full range of criticisms, in this section of Unit 3 I will focus on seven broad themes around which criticisms of the IMF approach to stabilisation can usefully be grouped:

1• overstepping it mandate
2• too little regard for the country’s financial sector
3• a ‘one-size-its-all’ attitude
4• imbalanced representation and policy advice
5• the nature of its conditionality
6• failure to achieve intended objectives
7• excessive social costs.

3.2.1 Criticism 1: Problems arising from overstepping the IMF’s traditional mandate
One of the most frequently cited criticisms of the IMF’s role in stabilisation
policy is that the institution has lost its original focus and entered into activities that go beyond its mandate. This set of arguments focuses on the fact that
Article 1 of the IMF’s Articles of Agreement, which you studied in Unit 1, defines the IMF as a short-term lender of financial resources to correct a member’s temporary balance of payments requirements. Critics of the IMF argue that since the IMF was founded in 1944, the institution has gone well beyond the mandate granted to it by Article 1. As you saw in Unit 1, the lending facilities of the IMF now extend well beyond the Stand-By Arrangement and include very large-scale lending packages, as well as long-term facilities, which explicitly recognise that the funding provided by the IMF is to correct long-term and not short-term balance of payments difficulties.

Commentators who adopt this particular criticism of the IMF tend to recognise that after fifty years it is quite plausible for the IMF to exceed the vision originally
conceived in 1944, for it is important for the institution to keep up with prevailing global economic, financial and other developments.

However, the main thrust of the criticism is that by going beyond its original mandate, the IMF has entered into areas of activity, including lending activity, in which it not only has no mandate, but in which, most importantly, it has no expertise. Whereas the IMF’s core areas of competence are macroeconomic and
exchange rate policy, the Fund’s more recent decisions, to provide long-term lending to its members and to embed in its conditions structural and other longterm objectives, have made it vulnerable to the criticism that it provides advice
and recommendations that other institutions, particularly the World Bank, are
more skilled at providing.

This set of criticisms focus on a variety of shortcomings, including insufficient
numbers of IMF staff who have a grasp of the historical and institutional
obstacles and challenges to economic progress in member countries, poorly
designed financing programmes and lack of sufficient appreciation of the
political processes in countries that borrow from the IMF and subsequently illconsidered
and unrealistic conditionalities.
􀀂 Review Question
Pause for a moment and re-read the first part of Unit 1, in which the role of the IMF and the Articles of Agreement are discussed. Then examine the structural conditionalities in the Republic of Croatia Letter of Intent, in Unit 2. Can the structural conditions in the Croatia LOI be reconciled with the short-term focus specified in the Articles of Agreement? How do you think the IMF responds to critics who argue that the IMF has gone beyond its mandate?



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