The Trouble with the IMF
What is the International Monetary Fund?
Until 1944, international economic policy was determined by individual nations — nations looking out for their own best interests. Nations sought economic advantage through ruthlessly competitive currency devaluation and highly protectionist commercial policy.
In 1944, the International Monetary Fund (IMF) was established at the United Nations Monetary and Financial Conference. The IMF was originally established to aid in economic expansion and attempt to attain full employment of able workers (Bird 2001).
The IMF, as originally established, performed four main functions:
- Offer advice on appropriate macroeconomic policies;
- Provide short-term loans to aid in correcting balance-of-payment problems;
- Help coordinate macroeconomic policy on an international scale;
- Act as a forum on international money problems (Bird 2001:825).
Criticisms surface
It wasn’t until the 1960s that criticisms arose. The criticisms focused mainly on the plight of developing countries (Bird 2001). How much assistance should the IMF provide to struggling economies? What kinds of conditions should the IMF place on receiving this assistance?
The IMF offers several types of assistance to developing countries: larger credits on normal terms, subsidies for IMF charges, and loans to be used in alleviating national debt (Goode 1985:2). Criticism of the IMF concerns “structural adjustments” — demands made on those countries seeking aid. The IMF intended these conditions to be used to restore a viable balance of payments and stabilize a nation’s economy (Goode 1985:4–5). It called on countries to “reduce government spending and bureaucracy, to encourage markets, to export, and to foster entrepreneurship as well as to entice foreign investment and foreign technology” (Sernau 2001:36).
According to Scott Sernau (2001), these “structural adjustments” often mean devaluing currency, removing price controls, privatizing industry and banking, and cutting government spending. These adjustments usually do the most harm to those already living in poverty. Sernau describes some of the worst effects of these adjustments. “Food prices soar, government health and social services are cut way back, and schools and clinics close” (p. 246).
The IMF in Indonesia
In 1997, Indonesia was hit hard by the Southeast Asian Financial Crisis. The prescribed remedies of the World Bank and the IMF worsened the economic situation and brought about social disasters (Toussaint 2019). It is the situation in Indonesia that we’ll look at here.
Unemployment
According to Toussaint, mass unemployment set in.
According to the chart, there was an increase in unemployment after the IMF extended credit. Unemployment peaked in 2007. It wasn’t until 2012 that unemployment rates fell below the 1997 rate. This graph is missing some data. It is important to point out that we can’t make assumptions about what happened in Indonesia during those years.
Real wages fall
Also according to Toussaint, real wages fell. This chart will compare the inflation-adjusted income per person.
Income per person did drop drastically after the IMF loan. However, real wages slowly recovered and rose much higher than they were in 1997.
Prices rise
Prices on basic commodities also increased drastically. (Consumer price index based on 2010 values).
Prices were rising already and likely would have done so even without the IMF’s influence, but the IMF’s conditionality did speed up the process.
The data above, taken in isolation, paints a not-so-pretty picture of the IMF and IMF conditionality. However, it is important to note that an economy has to be in pretty bad shape to begin with if it’s making use of IMF credit.
To see how the graphs were generated, check out my Google Colaboratory notebook here.
Works Cited
Bird, Graham. 2001. “A Suitable Case for Treatment? Understanding the Ungoing Debate About the IMF.” Third World Quarterly 22:823–848.
Gapminder. 2017. Aged 15+ Unemployment Rate. Retrieved on December 23, 2019. (https://www.gapminder.org/data/)
Gapminder. 2017. Consumer Price Index. Retrieved on December 23, 2019. (https://www.gapminder.org/data)
Gapminder. 2017. Income Per Person. Retrieved on December 27, 2019. (https://www.gapminder.org/data)
Goode, Richard. 1985. Economic assistance to Developing Countries Through the IMF. Washington, DC: The Brookings Institution.
Sernau, Scott. 2001. Worlds Apart: Social Inequalities in a New Century. Thousand Oaks, CA: Pine Forge Press.
Toussaint, Eric. 2019. “The World Bank and the IMF in Indonesia: An Emblematic Interference”. https://www.cadtm.org/spip.php?page=imprimer&id_article=10860.
