Question

4) What role has the IMF played in financial crises in developing countries? Specifically, what policies do the IMF typically recommended? What are the positive and negative consequences of these policies (discuss both).

Answer 1

IMF contributed in financial crisis in developing countries:-

• The IMF redesigns its lending framework to improve it suited to nation needs, giving more noteworthy accentuation to emergency counteractive action, and streamlined program contingency. Since the beginning of the emergency, the IMF submitted well finished $700 billion in financing to its part nations.
• The IMF undertook an unprecedented reform of its policies toward low-income countries and quadrupled resources devoted to concessional lending.
• The IMF provided risk analysis and policy advice to help member countries overcome the challenges and spillovers from the global economic crisis.
• To strengthen its legitimacy, in April 2008 and November 2010, the IMF agreed on wide-ranging governance reforms to reflect the increasing importance of emerging market countries.

When giving loans to the countries, the IMF usually insist on certain criteria which include policies to reduce inflation:-

• Reduce inflation (tightening of monetary policy)
• Deficit-reducing policies (higher tax)
• Supply-side policies, such as privatization, deregulation and improved tax collection.
• Removing price controls
• Free trade – removing tariff barriers

IMF policy is not designed to help the majority in troubled economies. It is intended to help international creditors in the short run, and increase returns on global capital in the long run. In the short run, creditors want to be repaid by their third world borrowers. They want to be repaid on schedule, they want to be paid the high returns they were promised when the loans were made, and of course they want to be repaid in dollars. Their chances of getting repaid are better the higher the value of the local currency of their borrowers since profits in that currency must be turned into dollars to repay them.

High local interest rates attract international capital in the short run which increases demand for local currency and boosts its value. Lower levels of production means lower incomes, lower demand for imports, larger trade surpluses, and therefore also upward pressure on the value of the local currency

IMF policies provide a “tide over” loan to avoid defaults, which will supposedly be repaid once the beneficial affects of the austerity measures-that is the effects beneficial to creditors-kick in.