Question

Countries such as Malaysia, who refused to work with the IMF, were able to recover from the crisis as quickly as countries such as South Korea which accepted the IMF advices and conditions. Given this fact and the potential moral hazard problem the IMF creates, some question the importance of such an institution. The IMF was also criticized for taking the responsibilities that were better left to the World Bank and other regional development banks. As a result, several proposals are suggested to reform and reduce the role of the IMF.

Define 'moral hazard' and give one example of moral hazard.

Is IMF necessary today? And if so, what should its functions include? Take position, discuss, cite sources.

Answer 1

Moral Hazard refers to the behavior where entities are get involved in risky activities when risky is borne by other party.

IMF is supreme example of Moral Hazard, financial help by IMF to crisis ridden countries get involved them in more risky activities where they do not care about reducing their overall debts.

IMF has been entrusted with responsibilities to carry out the work of financial stability in international arena. It offers help through BOP crisis. Numerous crisis have been averted owing to timely actions of IMF.

There must be few changes in working of IMF. While extending financial assistance, IMF must impose various conditionalities so that benefitted parties do not get involved in risky activities.

Recent conditionalies on Greece by IMF acted in right direction to stop the act of moral hazard.

Sources:

http://www.imf.org/external/pubs/ft/fandd/2002/09/rogoff.htm

https://www.wilsoncenter.org/article/the-impact-the-imf-economic-stability-or-moral-hazard