International Monetary Fund

The International Monetary Fund, or the IMF, is an international organization made up of 184 member countries. "It was established to promote international monetary cooperation, exchange stability, and orderly exchange arrangements; to foster economic growth and high levels of employment; and to provide temporary financial assistance to countries to help ease balance of payments adjustment." The IMF, according to developing countries, is often viewed as an interfering force that insists on "austere economic policies". The International Monetary Fund, a type of system controlled by the prosperous countries, can often be seen as being used as a scapegoat for the distressing adjustment processes suffered by developing countries. The IMF's economic adjustment formulas are, in theory, correct, and the organization's general goals are positive. However, the IMF's policies do not take into account the economic and social circumstances that currently exist in the countries where it is applied to. This is basically what Joseph E. Stiglitz writes about in his book Globalization and its Discontents.

"The fund believes it is fulfilling the tasks assigned to it: promoting global stability, helping developing countries in transition achieve not only stability but also growth." "I believe, however, that it has failed in its mission, that the failures are not just accidental but the consequences of how it has understood its mission." This is what Stiglitz states in his book, and is also his platform on how he feels about the International Monetary Fund. He believes that the IMF has a narrow view stating that "what the financial community views as good for the global economy is good for the global economy and should be done". Stiglitz criticizes that the IMF has done great damage to the countries wherein they prescribe economic policies that must be followed in order to qualify for an IMF loan, or for loans from banks and other private-sector lenders that look to the IMF to indicate whether a borrower is creditworthy. Stiglitz argues that the International Monetary Fund and its officials have ignored the ramifications of having incomplete information, inadequate markets, and unworkable situations, all of which are particularly present characteristics of newly developing countries. Stiglitz states that the International Monetary Fund called for policies that conform to logical textbook economics, however, they do not make sense to the country that the policies are going towards to provide relief. "Stiglitz seeks to show that the consequences of these misguided policies have been disastrous, not just according to abstract statistical measures but in real human suffering, in the countries that have followed them."

The most traditional and perhaps best-known IMF policy recommendation is for a country to cut government spending or raise taxes. Either one of these actions, or both would be used to balance a country's budget and eliminate the need for government borrowing. Most people believe that a lot of government spending is wasteful anyway. Stiglitz accuses the IMF for reverting to Herbert Hoover's economics in imposing these policies on countries during deep recessions. The deficit, at this time, is mostly the result of a stimulated decline in revenues. Stiglitz argues that cuts in spending or tax hikes only make the downturn worse. He also emphasizes the social cost of cutting back on various kinds of government programs, such as eliminating food subsidies for the poor, which Indonesia did at the IMF's request in 1998, only to be engulfed by food riots. Another standard IMF recommendation is high interest rates, which make deposits and other assets denominated in the currency more attractive to hold. Most countries go to the IMF because they find themselves having trouble maintaining the exchange value of their currencies. Stiglitz argues that the high interest rates imposed on many countries by the IMF have made their economic downward spirals even worse. Countries are intended to battle inflation that was not a serious problem to begin with. "Stiglitz repeatedly claims that the IMF's policies stem not from economic analysis and observation but from ideology--specifically, an ideological commitment to free markets and a concomitant antipathy to government." In part, Stiglitz complaint is that the International Monetary Fund did not understand or even try to understand, his and other economists' theoretical work depicting that markets that are pretty much unregulated do not necessarily deliver positive results when information or market structures are incomplete.

A country that currently has loans from the International Monetary Fund is the country of Venezuela. Venezuela first negotiated an economic program with the International Monetary Fund in the year of 1989. In the mid 1970s, oil prices soared and seemed unstoppable. Venezuela is a country very rich in oil, so at this time, they accumulated a lot of money from oil revenues, but also from loans from international banks. The government then used this money to expand state-owned industries, however, the government ended up supporting the least efficient enterprises, which came to rely on government credits and direct subsidies. Government investments were fruitless from 1974 - 1989. As government expenses continued to increase, the gross domestic product grew very little as a ratio of the government expenditures. The excess amount of money supply, created by government spending, raised the price index by a factor of 15, interest rates 3.7 times and the devaluation of the national currency by a factor of 10, all happening during the same period. In addition to all of this, Venezuela's foreign debt increased to a record level of $33 billion and their payments could not be honored. Venezuela undertook negotiations with the IMF when they were under all of this pressure from the decreasing oil prices and the rapidly rising interest rates on their immense foreign debt. They had tried to borrow money to finance some of their debt, however, the international markets had been apprehensive for Venezuela had refused to work with the IMF. Venezuela had first turned to American banks for proposed financing because it did not want to agree with an economic program with the International Monetary Fund. The International Monetary Fund cleared a loan of about $453 million to the country of Venezuela. Officials declared the loan as a first installment of what is expected to be a credit package that may total as much as $4.6 billion from the international agency to support Venezuela's economic reform program over the next three years. They believe that Venezuela's economic adjustment program should "encourage a substantial reflow of private capital" to the South American

...