The changed relationship between the IMF and developing countries

(Conclusion)

 

Less tension

Member countries of the International Monetary Fund (IMF) are required to avoid the use of restrictive practices that interfere with or undermine international trade. The particular focus is on the exchange rate arrangements that member countries put in place to meet international financial commitments. In cases where member countries make changes to their exchange rate regime, they must report it to the IMF so that it could evaluate if the change could injure other trading countries. This obligation applies to every member of the organization, even though smaller member-countries feel that they are at a disadvantage. Notwithstanding the concerns, there seems to be less tension between developing countries and the IMF.

 

End of competition

business pageOne of the most important changes has been the end of the Cold War which also saw the end of competition between the capitalist and the communist economic systems. These two systems represented two methods of allocating and distributing resources. One favoured free enterprise and the market as a means of allocating resources while the other favoured state control and distribution of the resources. The IMF itself was a creation of the countries that followed the capitalist system and therefore had a natural affinity towards market-oriented economic systems. Developing countries which pursued socialist or communist policies were often pressured to change their economic systems before they could receive special assistance from the IMF. The demand that governments give up resources to the private sector was therefore part of an ideological struggle which ignored the social goals of the supplicant country. Even countries which pursued economic nationalism to reflect their independent political status were victims of the hard and fast market prescriptions of the IMF. Once the ideological war that gave rise to the two competing economic systems ended, developing countries were left with no other option but to deal with the IMF.

 

Ignored

Despite the demise of the communist economic system and the shift towards free market systems, many countries still had difficulties treating with the IMF. The social impact of adjustment programmes continued to be ignored by the IMF for many years. It was not until the IMF began to see and understand some of the social problems that developing countries faced as a result of poverty that things began to change.   An early attempt to recognize that its traditional lending programmes could not help developing countries led to the establishment of the Enhanced Structural Adjustment Facility (ESAF) in 1987. Guyana was among the first set of countries to benefit from this facility. The ESAF provided low-interest loans to countries that had suffered economic setbacks. They represented a 3-year programme of financial support to member countries. It therefore recognized that poor countries could not achieve rapid macroeconomic changes in a short period and therefore could not necessarily see the positive impact over short periods of time.

 

Tinkering

LUCAS STOCK INDEX The Lucas Stock Index (LSI) declined 0.38 per cent in trading during the fifth period of June 2015.  The stocks of four companies were traded with 320,198 shares changing hands.  There were no Climbers but there was one Tumbler.  The stocks of Republic Bank Limited (RBL) fell 1.64 per cent on the sale of 1,000 shares.  In the meanwhile, the stocks of Banks DIH (DIH), Demerara Bank Limited (DBL) and Demerara Tobacco Company (DTC) remained unchanged on the sale of 80,877; 238,246 and 75 shares respectively.
LUCAS STOCK INDEX
The Lucas Stock Index (LSI) declined 0.38 per cent in trading during the fifth period of June 2015. The stocks of four companies were traded with 320,198 shares changing hands. There were no Climbers but there was one Tumbler. The stocks of Republic Bank Limited (RBL) fell 1.64 per cent on the sale of 1,000 shares. In the meanwhile, the stocks of Banks DIH (DIH), Demerara Bank Limited (DBL) and Demerara Tobacco Company (DTC) remained unchanged on the sale of 80,877; 238,246 and 75 shares respectively.

The IMF continued to tinker with its lending programmes and by 2000 had made an all-out effort to tackle poverty head on. This shift in position, undoubtedly, was influenced by the moves which had begun towards a global commitment to reduce poverty levels across the world that culminated in the formulation of the Millennium Development Goals (MDGs). Anticipating the global push to eradicate poverty, a first attempt to assist developing countries to achieve the millennium goals was the establishment of the Poverty Reduction and Growth Facility (PRGF). This initiative made poverty reduction integral to the work of the IMF. The initiative recognized that the balance-of-payment problems of poor countries could not be solved at the same speed and under the same conditions as countries with structurally stronger and more diversified economies. The distributional effects of its policies were therefore still discriminated against the poor.

 

Innovative technique

The PRGF was a particularly innovative technique by the IMF. Public participation and country ownership were distinguishing features of the programme. Lending under the PRGF was based on the demands made by beneficiary countries on the basis of country-specific poverty reduction strategies. The IMF therefore had moved further away from the one-size fit all strategy that was the source of much tension between it and developing countries in the past to a more flexible lending arrangement that took account of the individual circumstances of needy member countries. In addition, the IMF had become more accommodating of a balanced approach to investment in poor developing countries. Whereas in the past the IMF insisted on an almost exclusive production role of the private sector, it came around to the view under the PRGF that public investment had equally positive benefits as private investments. It was therefore willing to tolerate higher levels of public investment as long as that investment did not disturb the macroeconomic stability of the borrowing country.

By participating in the global poverty reduction efforts, the IMF actually submitted itself to an evaluation of its performance that was no longer influenced solely by the narrow dictates of its more powerful members and its governing board. For the first time, it was no longer the final arbiter of the effectiveness of its work. It was now subject to the eyes of the world and if poor countries could not make progress in reducing hunger and poverty, then the entire world could express no confidence in its policies. Developing countries could now use the voting strength of global public opinion to condemn the policies of the IMF. Conscious of this threat to its reputation and even survival, the IMF recognized that flexibility in its lending was critical to its success in the fight against poverty.

With some of the initiatives that it took, one could say that the sensitivity of the IMF has risen. As a reflection of this attitudinal shift, the IMF established in 2010 the Poverty Reduction and Growth Trust. This facility has three lending windows. These are the Extended Credit Facility, the Standby Credit Facility and the Rapid Credit Facility. They provide financing that is suitable to the diverse needs of individual developing countries. In between, there were other special facilities like the Heavily Indebted Poor Countries Initiative (HIPC), the Multilateral Debt Relief Initiative (MDRI), the Policy Support Instrument (PSI), and the Exogenous Shocks Facility (ESF). This latter facility came with a rapid access and a high access component. The creation of these various initiatives pointed to a recognition that there was need for Fund programmes to be relevant and better focused.   They have become better focused.

The IMF has also devised a communications strategy that has aided in the promotion of a better understanding of Fund work and policy advice. Using a combination of traditional and new media, and seeking input from a broader group of stakeholders, communications efforts have supported the spectrum of work undertaken by the world body. In particular, there has been a strong focus on, and coordination of, the Fund’s major surveillance products (World Economic Outlook (WEO), Global Financial Stability Report (GFSR), and the Fiscal Monitor (FM)). At the same time, the IMF implemented an outreach programme that included closer collaboration with local media and beneficiary communities and organizations.

 

Pressure

Despite the changes made by the IMF in the way it conducts business, pressure is on it to continue adjusting its way of doing business with developing countries. The pressure is coming from one of its founder members, China, which perhaps is the best example of how private and public investment could lead to economic improvements in a country. China has emerged as an important lender to many developing countries. While at this moment, its aid does not focus on balance-of-payments support, access to its loans acts as a release valve against IMF pressure. China has cultivated its relationship with developing countries in Africa, Asia and Latin America over the years and feels that it understands how to work with them.

Having acquired the capacity to lend, China now provides preferential loans to many developing countries without demanding the conditions associated with structural adjustment programmes. Among the countries that benefit from these loans are ones that appear to have been forgotten by the IMF as it began to direct greater amounts of financial resources towards poor countries. Evidence of this focus could be gleaned from the size of aid flows to developing countries by China. One report indicates that from 2005 to 2014, China lent about US$119 billion to 15 countries in Latin America and the Caribbean, including Guyana. These loans went to 76 projects in 15 countries. Last year, China indicated that it would create four regional lending arrangements that could see as much as US$35 billion coming to the region. Earlier in 2013, China offered US$3 billion in loans to nine countries in the Caribbean. China has also made countries in Africa a focus of its lending programme.

 

Rival contingency fund

Additional pressure was likely to be felt by the IMF in light of the rival contingency fund set up by the BRICS to meet their short-term balance-of-payments needs. This US$100 billion Fund, led by China’s contribution of US$41 billion, will come into effect in less than 30 days. This financial arrangement among the BRICS represents a major shake-up in global financial relations. It is clear that these countries will no longer have to rely on the dictates of the IMF and other developed countries for balance-of-payments support. Given the independence that it offers member countries to manage their macroeconomic policies as they see fit, it would come as no surprise to anyone to see other developing countries seeking access to this facility through membership.   As such one could envision also a weakening of the control that the IMF has over global financial matters and as a consequence over developing countries.