A poor country with a weak government is suffering from shortages in terms of financial resources. Most of its population lives below poverty levels, there is high unemployment, low literacy rate, food shortages, no clean water and due to a combination of drought and lack of technology, no crops to export. As if it didn’t have enough problems, the country has debts to pay back to foreign governments, investors and agencies. This is where the IMF, which Easterly calls ‘the world’s most powerful creditor’, steps into the picture. It was originally set up by the West in order to prevent large trade imbalances and unstable currencies. However, it shifted focus and started bailing out poor countries in financial crises. It has had success in helping countries out on a short-term basis. Most of the countries that have benefited from IMF loans are countries that need temporary assistance, do not qualify as ‘emerging markets’ and face difficulties in attracting foreign investors and lenders. For example, the IMF successfully helped South Korea and Thailand during their financial squeezes in the 1980’s .
However, there are problems in terms of the long-term development of countries which rely on the IMF. Easterly begins his article by describing a meeting between the IMF and the minister of finance and economic development of Ethiopia. At the meeting, the IMF set out several conditions that the government of Ethiopia would have to satisfy in order to receive assistance and most importantly, pay back their loans. The problem with the conditions was that they were at times contradictory and unrealistic. For example, while stating that it supported the government’s food security program, the IMF also told the finance minister that he would have to be careful that the program did not endanger ‘macroeconomic stability’. How macroeconomic stability could be achieved in a country where most of the people are starving is a mystery.
Other conditions that the IMF places on countries include getting them to agree to financial programs which reduce government spending and inflation, limit excessive money printing, increase taxes and put in place austerity measures. Through such strict conditions, the IMF has therefore accomplished very little when it comes to promoting long-term development. The conditions have been too intrusive into government policies. Easterly argues therefore that there is an association between “IMF involvement and the most extreme political event: state collapse”. This is caused by the involvement of the fund in domestic politics. By ‘forcing’ governments to carry out social cuts such as reducing subsidies on basic goods, the proposed IMF measures create riots and political and social instability.
The article demonstrates that out of 8 countries that collapsed or failed, 7 had spent a high share of time ranging from 46 to 74 % of the decade before the collapse on IMF programs. This shows that the IMF measures are often too difficult to comply with and their ultimate success is limited. The author therefore suggests that the countries that ultimately collapsed would have probably been better off without IMF involvement. This is because such countries have far greater problems than the IMF can fix.
However, despite this, the IMF never turns a country down even if it fails its programs several times. The author gives the example of Sierra Leone which went into civil war after participating in an IMF program and then returned into the program and failed again, this time requiring UN intervention to protect its population from genocide. He suggests therefore that the IMF should have left it alone in the first place and not intervened. Trying to help was according to Easterly, clear evidence of the ’Planner’s mentality’.
However, one might ask what would happen if the IMF did not intervene in such a case? Easterly´s suggestion of leaving the country alone would lead to the struggles of the people being ignored, genocide would occur and the country would sink into further poverty. The result would be over-reliance on aid, more refugees escaping to struggling neighbouring countries and a low literacy rate which would affect future generations. Perhaps therefore the solution is not for the IMF to turn a blind eye to countries that fail despite decades of following IMF programs. Perhaps the solution is for it to change its strategy and program in order to tailor it to the unique needs of each country.
Easterly mentions this as well. He states that not only do the staff at the IMF operate a ´one size fits all´ model to all countries, their accounting relies on shaky numbers as evidenced in page 22 of the article. Thus Easterly argues that it is better for a country’s balance to bounce than for it to rely on shaky statistics by the IMF which do not reflect reality. Very little can be achieved if unrealistic goals are set for countries and if their achievements or failings are not measured accurately.
Thus IMF loans do not work in the majority of cases. They may only work where a country has some form of reliable government and does not already have many loans to pay back. Getting an IMF loan in such a case is just a temporary measure and the country can pay back without great consequences. In relation to the most poor however, their problems persist so they renew their loans from one change of government to another with little or no prospect of being able to pay back.
The IMF stipulates in all its agreements with countries that they need to pay it back before they pay other creditors. However, Easterly argues that by making such a condition, the IMF is actually bailing itself out. It ends up in a situation where it provides new loans to countries so that they can pay it back for old loans. It also drafts the World Bank in to make an adjustment loan as part of the bailout package. This is to no benefit to the country which sinks deeper into the debt to the IMF and still has other loans from other investors to pay back.
The IMF calls countries that are dependent on its loans ‘prolonged users’. The definition of a prolonged user is a country which spent 7 out of a 10 year period under an IMF program. The addiction to IMF loans is evidenced by the fact that 44 countries qualify for the definition of prolonged user and half of IMF lending goes to such countries. However, repeated debts do nothing to solve the problem. In1996, the IMF and World Bank decided to forgive part of their loans to the poorest nations. These nations had accumulated loans from not only these organisations but also loans from western countries and other agencies.
There was very little chance of them being able to repay the loans and the interest that had accumulated. Such countries were named heavily indebted poor countries (HIPCs). 17 out of 18 of the HIPCs were among the countries receiving above average amounts of IMF and World Bank loans. They had no growth of income or resources. They continued to sink into debt with interest still growing. The forgiving of the debts over a period according to Easterly, only encouraged borrowers to keep borrowing. For example Bolivia and other countries got 100 percent debt relief, but they still made no recovery. Another example is offered by the Argentina disaster set out in the article.
Argentina was a star pupil from 1991 to 1999. It had gone through several IMF programs and in 1991, it achieved financial stability. After almost a decade of financial stability, the president who was faced with elections led the wave of public spending and loans from private foreign investors. Financial crisis ensued and the IMF put together a rescue loan plan that included loans from the World Bank, Inter-American development Bank and Spain. In 2001 lenders demanded interest rates from Argentina that were 10 percent higher than elsewhere. The IMF continued to give loans worth several billions to support Argentina so that it could pay its private creditors. However, despite this, Argentina failed to pay any of its creditors back their full amount. Its debt reached 81 billion dollars and it eventually had to make ’take it or leave it offers’ to its creditors who had to accept not getting most of their money back.
This supports the argument that loans on their own are not the solution to the poor countries’ problem. They need help to resolve their unique political and social problems. Putting them in debt is not going to assist them as whatever progress they make, they will have to give the money back. Easterly concludes therefore that the world bank which is an aid agency should give countries grants not loans. And the IMF should get out of the business of bailing countries out. It has inadequate knowledge of what is happening at ground level and it was not designed to offer the kind of assistance that poor countries need and the long-term planning their needs require. Thus it would be better for aid agencies to continue their work at grass-root level and to contribute to long-term change.