Political Economy of the International Monetary Fund (IMF) in Latin America
The International Monetary Fund was created by the Bretton Woods Conference in 1944 by 44 Nations and charged with the responsibility of creating a stable framework necessary to counter the “post-war global economy”. It was particularly mandated to promote full employment and a steady economic growth. The fund was to achieve this by facilitating exchange in finances by stabilizing exchange rates while still advancing unconditional loans to the crisis hit economies (James, 2007).
Hence the Fund has got its primary principal task involving adjustment in the World Economy as well as in reorienting various economic policies and aspects towards realizing sustainable outcomes. In its operation, IMF have been advancing finances while the debtor countries (LDCs) in their effort to restore their creditworthiness, initiated adjustment programs, IMF on the other hand, on satisfaction that these developing nations are adhering to effective economic aspects and policies, provided the needed support to these adjustment programs (National Advisory Council, 1985).
According to Robert (2010), following pressure from US representatives, the Funds’ vision was never born out. IMF instead undertook to advancing loans which were based on conditions such as austerity measures or structural adjustment, some of which were very strict. In Latin America, among other developing nations, the fund has been criticized on the ground that it has exacerbated and devastated the problem of social safety, environmental standards and lax labor as well as in growing debt crisis.
Desmond L (2007) explains, “Stabilization programmes under the Auspices of the IMF in several Latin American countries have had devastating effects on economic activity, without setting a clear path for improvement…” Robert (2010) argues that, these adjustment programs with IMF tend to deteriorate the state of inequitable distribution of income resulting to imbalance in economic level thereby hampering economic growth in both the international economy as well as in individual countries.
The Fund has also been criticized aggressively both by nationalists as well as internationalists on the ground of malpractices, that in its operations the fund has instituted an element of conditionality which is contraction in nature. This is noted in the essence that in a way of macroeconomic adjustments, financing obligations which are excessive in nature have been imposed on creditors while too little have been charged on debtors (Robert, 2010).
Just as the internationalists favor the unconditional transfer of this fund, other non democratic donors are less sympathetic bringing forth the most perplexing discussion on whether the transfer of the fund should be determined by the form and ideologies of country’s government in question or to be grounded on the quality of economic management. Robert for example supports the idea that non democratic governments should not access the fund; nevertheless, it is noted that this can greatly disqualify many developing nations.
Over the last two decades, many countries in Latin America with emerging markets, financing from foreign supply have been affordable and abundant not so long since the global problem in financial transfer crisis (Desmond, 2007). For Latin America, the fund has been facilitating debt management, reduced capital outflows through reduction in payment of interest to foreigners, while still creating investment opportunities.
This has called for the political economy to focus on analyzing the trend and move by which Latin America economies are financially integrated to respond to the “easy external financial conditions”. It is particularly noted that the conditions of easy global financing resulted to increased domestic credit and demand characterized by heightened levels of capital inflow, accumulated risks and deficits in current accounts. Analysis shows that different economies in Latin America have differed in their response to cheap foreign money in preference to the role played by their own policies.
And as Desmond (2007) explains that, Qualitative as well as quantitative analysis of these economic and political policies shows that during the instances of easy foreign financial episodes, these policies can work to enhance or mitigate the accumulation of risks. How has Latin America economies responded to easy conditions? Robert (2010) explains that an empirical analysis of credit and domestic demand macro variables of Latin America and a group of advanced economies, shows that low foreign interest rates stimulates domestic demand at a higher rate in Latin America as compared to other advanced economies of the world.
In both the advanced economies and those in the Latin America, these demand response and credits are mainly from the private sector even though, in Latin America, own expenditure to some degree has deteriorated the situation. Latin America experienced macroeconomic volatility and other financial crisis since 1980s, as seen with the high rate of crisis in the balance of payment in both Ecuador and Brazil ending with Uruguay and Argentina between 2001 and 2002 (Calderon, 2004).
The region with no parallel with any other economy has been affected by bouts of debt default, failed currency reforms, turbulence in exchange rates, hyperinflation as well as collapse of banking sectors. Despite the fact that other European countries has been experiencing constant explicit and implicit debt default, the problem has been very striking in Latin American countries. It has been experiencing relatively short periods of strong growth, and only Tobago Chile and Trinidad are currently experiencing spells of growth.
Instability in macroeconomic policies have resulted to increased social inequalities and poverty with the number of person living below one dollar a day increasing to 50 million in 2001 from a low of 49 million in 1990 (Sahay, 2006). External shocks resulting from domestic institutions and policies, overreliance on foreign capital together with volatility in terms of trade have been very detrimental on macroeconomic policy formulations. Many of the Latin American countries have exhibited a state of political instability which has greatly weakened macro economic policies of these nations (James R.
2007). Roberto (1997) explains that unlike other nations like Asia, Latin America economies have not been able to sustain enough investment rates and saving, private sector was not been liquid enough to cater for the government deficits while on the other hand public sectors was climbing on the norms of dissaving resulting in prolonged periods of severe contractions (Figure 1). The volatile fiscal policies in Latin America have particularly resulted to lack of policy predictability and consistency and this has dampened the productivity of any investment.
However, Robert (1997) states that this discretionary government spending increases macroeconomic instability thereby exaggerating economic fluctuations. Volatile fiscal policies together with the lack of fiscal institutions in Latin America eventually resulted to budget structures inflexible in nature, high inflation rates, unemployment, and poverty as well as devastated income inequality (this was especially noted in such Latin America countries like Brazil, Colombia and Argentina).
Jeromin (2006) underscores other factors that have greatly affected Latin America economic downturn as, exchange regime and monetary policy, high public debts, financial intermediations where Latin America nations failed to build liquid and deep financial markets which exacerbated vicious cycle, reversal in policy reforms which have largely been related to macroeconomic volatility thereby hindering growth in productivity and investment. In conclusion, Latin America for some decades has been experiencing devastating bouts in macroeconomic policies with little success in embracing and exploiting influences of democracy and globalization.
The region has experienced over the decades a long spell of policy instability, volatility in macroeconomic and domestic institutions. Despite the efforts to shift on to environments of stable macroeconomic and policy frameworks, the economies of Latin America are still taken a far by both political and social coalitions much essential for onward growth. This would particularly call for the employment of the democracy which has been entrenched over the last two decades in the region as this will facilitate while still reorienting institutions that are market-based to support stability of macroeconomic policies.
Over and above the economic transparency change between IMF and the individual countries in Latin America, IMF has closely collaborated with these economies in policy analysis based on debt sustainability, political policies and in strengthening of the institutions. IMF is further advocating for a trade liberalization move to create more market opportunities in these regions while still advancing the domestic institutions. It has been noted that through Multilateral Debt Relief Initiative (MDRI), initiative on policy support together with the facility on Exogenous Shock, IMF will work towards facilitating growth and macroeconomic stability
? References Anoop, S. (2006) Macroeconomic Volatility: The lessons from Latin America, Western hemisphere department Approach: International Monetary Fund, Washington Desmond, L. (2007). Cry for Latin America; a magazine article on the international Economy, vol. 21 James, R. (2007). The politics of IMF conditional lending, Routledge publishers, New York pg 192 Jeromin, Z. (2006) Growth and reforms in Latin America: a survey of facts and arguments, Western hemisphere department, Working Paper No. 265 (Santiago)
Loayza, N. and Calderon, C. (2004). Economic Growth in Latin America and the Caribbean: Stylized Facts, Explanations, and Forecasts, Central Bank of Chile National Advisory Council, (1985). International Monetary and Financial Policies, Oxford university press Robert, J. M. (2010). The political morality of the International Monetary Fund, transaction Books publisher USA Roberto, P. (1997). Fiscal Policy in Latin America, Cambridge, Massachusetts: MIT Press) Sahay, R. and Rishi, G. (2006). Volatility and Growth inSample Essay of Paperial.com