1. I.M.F
Imf’s Main Faults

3. Aim and Objectives
We would be looking at the IMF’s blunders in the
following aspects/situations :
1. Its support of Dictatorship regimes
2. Its role in Neocolonialism
3. Its involvement in the Argentina crisis (1991-
2002)
4. The East Asian Crisis
5. Housing Bubble Crisis
In the end we will try to see what reforms are
necessary in the IMF’s functioning.

4. International Monetary Fund
• The International Monetary Fund (IMF) is
an organization of 187 countries, working
to:
• Foster global monetary cooperation
• Facilitate international trade
• Promote high employment and
sustainable economic growth
• Reduce poverty around the world.

5. History
• IMF was conceived in July 1944 at the
Bretton Woods conference
• It came into existence on 29th
December 1945.
• Objective - stabilize exchange rates and
assist the reconstruction of the world's
international payment system.

6. IMF-Basis For Lending
• Nations with severe budget deficits, rampant
inflation, strict price controls, or significantly over-
valued or under-valued currencies run the risk of
facing balance of payment crises. Such member
states may request loans
• In return, countries are usually required to launch
certain reforms, which have often been dubbed the
"Washington Consensus".
• These reforms are thought to be beneficial to
countries with fixed exchange rate policies that
may engage in fiscal, monetary, and political
practices which may lead to the crisis itself.
• Thus, the structural adjustment programs are at
least ostensibly intended to ensure that the IMF is
actually helping to prevent financial crises rather
than merely funding financial recklessness.

7. Uncle Sam’s Dominance
• Major decisions require an 85% supermajority
• The United States has always been the only
country able to block a supermajority on its
own.
• With a quota of 17.09% the United States can
veto any major decision.

8. Source : Wikipedia

9. SUPPORT TO DICTATORSHIP

10. What happened
• According to IMF principles it shall not interfere in the political
affairs of any member; nor shall they be influenced in their
decisions by the political character of the member concerned.
• Only economic considerations shall be relevant to their
decisions.
• The IMF has repeatedly contravened this policy. In truth, it has
made many choices based on political considerations.
• The IMF has often lent money to the authorities in countries
despite the dismal quality of their economic policies and a
great degree of corruption: Indonesia and Zaire are two cases
in point

11. Source : Wikipedia

12. Downside
• It shows IMF is generally apathetic or hostile to their
views of human rights, and labour rights.
• In case of dictatorship regimes most of the money goes
into making a group of persons faboulously rich while
the rest of nation is grappling with poverty.
• In case of military regimes most of the money is spent
on purchasing military equipment and virtually no
amount is used for the intended purposes.

13. Reasons
• The examples given in this study show that political
and strategic interests of major capitalist powers are
determining factors.
• Regimes with the backing of major capitalist powers
have received financial aid even though their
economic policies did not meet official International
Financial Institution (IFI) criteria or they failed to
respect human rights.

15. What it means?
• It is defined as the control of a developed country or
International bodies (such as the IMF or World Bank) over
developing countries through economic pressures. A kind of
Modern day Imperialism.
• It is usually practised in the premise of aid to the poorer crisis
ridden countries in the form of money or goods in return for
control over their economic policies and other domestic
affairs which in turn prove advantageous to the stronger
developed countries

16. IMF’s role in Neocolonialism
• The choice to grant or to refuse granting loans, especially by
international financial institutions such as the IMF, WB and
other powerful countries, is perceived as a decisive form of
control over Third World countries.
• In order to qualify for these loans, and other forms of
economic aid, weaker nations are forced to take certain steps
favourable to the financial interests of the IMF and World Bank
but detrimental to their own economies. These structural
adjustments have the effect of increasing rather than
alleviating poverty within the nation.
• In the end, the loans pile up so much that it becomes
impossible for the countries to ever pay back the debt. Many
African countries still have their annual debt greater than their
annual loan.

17. No wonder they’re unpopular there….
Similar banner from Zimbabwe
Protests against the World Bank

18. For Example……
• 1991 to 1993, Kenya had its worst economic performance since
independence :
a) GDP stagnated
b) Inflation increased – 100%
c) Budget deficit reached about 10% of GDP
• The reason for this meltdown was partly due to the Goldenberg crisis –
where millions of shillings were siphoned off the country through illegal
means.
•This was again a consequence of Kenya implementing the IMF’s
recommendations and opening up its economy to encourage free trade.
To renew its economy, it needed funds from the IMF and the World Bank –
but they came at a price. The IMF put conditions on Kenya’s economy in
return for the loan – like the lifting of trade barriers on imported
agricultural staples among other things.

19. End effects
• This led to heavy dumping of the US/EU grain surpluses onto the local
market spearheading local agricultural producers into bankruptcy.
• Apart from Kenya, Zimbabwe and Malawi were also heavily affected as
they were once self-sufficient grain producing countries until 1990 when
the IMF ordered dumping of EU/USA grain surpluses, precipitating local
farmers to bankruptcy.
• Tightly regulated and controlled by the international agro-business, this
oversupply ultimately leads to stagnation of both production and
consumption of essential food staples and the impoverishment of farmers
throughout the world.

20. In a nutshell….
• ‘The time has come to end this charade. Africa should
say: 'thank you very much but we need this money to
meet the needs of children who are dying right now
so we will put the debt servicing payments into
urgent social investment in health, education,
drinking water, control of AIDS and other needs.'
(Professor Jeffrey Sachs, Director of The Earth Institute
at Columbia University and Special Economic Advisor to
ex-UN Secretary General Kofi Annan).

22. What happened?
1. Argentina was plunged into a devastating economic crisis in
December 2001/January 2002, when a partial deposit freeze,
a partial default on public debt, and an abandonment of the
fixed exchange rate led to a major collapse in the output and
high levels of unemployment leading to political and social
turmoil.
2. This has raised questions regarding the country’s relationship
with the IMF because they happened while its economic
policies were under the close scrutiny of an IMF-supported
program.
3. Furthermore, the IMF had been almost continuously
engaged in Argentina since 1991, when the “Convertibility
Plan” fixed the Argentine peso at parity with the U.S. dollar in
a currency board-like arrangement. While Argentina
experienced strong growth and very low inflation for much of
the 1990s.

23. What the IMF did?
1. IMF backed the “Convertibility Plan” of Argentina by
providing it with various aids It arranged massive amounts of
loans -- including $40 billion a year ago -- to support the
Argentine peso.
2. The IMF also provided extensive technical assistance (TA)
during the period, dispatching some 50 missions between
1991 and 2002, mainly in the fiscal, monetary and banking
areas.
3. Argentina being a member nation of IMF, had to agree to its
policy of free trade. With peso at par with the dollar, people
could buy virtually everything they could have thought of.
Thus, foreign exchange reserve drastically decreased and the
local companies and factories couldn’t survive the invasion
foreign superior goods. All this led to unemployment in
Argentina.

24. Culmination
1. It became clear that they could hardly pay back the loans
granted by IMF and under such a chaos, government
changed its policy from fixed exchange rate to floating
exchange rate. The outcome of the change was that the
value of peso deteriorated from 1$=1 peso to 1$=3.18peso.
2. Almost every company in Argentina dealt its transaction in
dollars. With the loans taken in dollars it had to repay them
in dollars.
For Example:
A company having a debt of 1000$ would have had to pay it back
with 1000 peso, but with the new exchange rate it had to pay
almost three times as much.
3. With this bleak scenario, Argentina was declared Bankrupt in
in December 2001.

26. Questions to ponder
• Why did IMF back the “Convertibility Plan”?
• Why IMF provided Argentina with too much financing
without requiring sufficient policy adjustment?
In either case, the eventual collapse of the convertibility
regime and the associated adverse economic and social
consequences for the country has, rightly or wrongly, had a
reputational cost for the IMF.

27. EAST ASIAN CRISIS

28. Why It Happened
• Flood of short-term capital.
• The regional economies experienced high
growth rates of nearly 8–12% GDP.
• But in the late 90’s these countries had large
private current account deficits due to
overinvestment of money in real estate and
other unnecessary ventures.

29. Contd..
• Many southeast countries came under
speculative attack.
• When it became apparent that private
enterprises in these nations would not be able
to meet their payment obligations,
international currency markets panicked.
• Currency traders sought to convert their Asian
money into dollars, and the Asian currencies
plummeted.

30. IMF’s Role
• IMF asked the governments of the affected
nations to reduce their expenditure and to
implement tighter monetary policies .
• This proved to be a disaster as the governments
in these countries were not running budget
deficits unlike the Latin American countries
involved in the 80’s crisis.
• IMF was also not able to properly roll over short-
term loans to long-term loans which was much
needed.

31. Contd..
• All these conditions worsened the economic
breakdown.
• They suffered permanent currency devaluations,
massive numbers of bankruptcies, and collapses
of whole sectors of once-booming economies.
• As the crisis spread to other East Asian nations--
and even as evidence of the policy's failure
mounted--the IMF barely blinked, delivering the
same medicine to each ailing nation that showed
up on its doorstep.
• Malaysia’s relatively faster recovery.

32. Adverse Effects
• South Korea, Indonesia and Thailand were the
countries most affected by the crisis.
• The economic crisis also led to a political
upheaval in these countries.
• There was a general rise in anti-Western
sentiment, with the IMF in particular singled
out as target of criticism.

34. Housing Bubble Crisis
IMF’s role
1. IMF did not take predict the Recession.
2. IMF lending policies were procyclical during the
Recession.

35. Prediction of Recession
• Dean Baker recognized the Housing Bubble in 2002
in his “The Run-up in Home Prices: Is It Real or Is It
Another Bubble?”
• Nouriel Roubini made two infamous speeches in
September 2006 in Washington D.C. predicting the
impact of the bursting of the Housing Bubble, which
earned him the title “Dr. Doom”.
• The World Economic Outlook made no mention of
the Housing Bubble till the Bubble actually burst.

36. What did IMF do, while the Bubble
grew?
IMF defense:
• The Housing Bubble was growing in USA
• USA has refused to be subject to the Financial
Sector Assessment Program (FSAP), which is
IMF’s main supervisory instrument.
• How do you expect IMF to predict anything on
the basis of something that it cannot monitor?

37. Fair Point.
But isn’t it too desperate a defense?
• The publications and public speeches of
various economists from 2002 to 2006 should
have been enough indication.
AND
• Should USA be allowed to refuse subjection to
FSAP?

38. Lending Policy during the Recession
• The lending policy for some low-income nations has
actually proven to be procyclical, i.e. they are
magnifying the economic and financial fluctuations in
these countries.
• Many European nations, (like Greece, Latvia, Hungary,
Ireland, etc.) have gone on record to say that IMF
policies have actually exacerbated the crises in their
countries.*
• These countries are facing a situation similar to the
that of Argentina in 2001.
*Center for International Finance & Development, The University of Iowa College of Law,
The IMF faces post-crisis criticism.

39. Latvia’s World Record
Source: Mark Weisbrot and Rebecca Ray, Latvia’s Recession: The Cost of
Adjustment With An “Internal Devaluation”, February 2010

40. Where the problem lies…
• Latvia has been trapped in a recession in which all of the
major macroeconomic policies – the exchange rate, fiscal
policy, monetary policy – are either going in the wrong
direction or cannot be utilized to help stimulate the economy.
• The problem with pursuing these policies is that they are
attempting to recover from the recession by means of an
internal devaluation.
This means that the economy must contract and
unemployment rise sufficiently in order to push down wages
and other costs to the point where there is significant
devaluation, while keeping the nominal exchange rate fixed.

41. Apprehensions…
• So far, none of the countries that have attempted to do this
have succeeded in moving the real effective exchange rate
very much.
• It is also not clear whether this strategy will succeed in the
long run. We may see a prolonged period of slow growth
and high unemployment and even a relapse into recession
– as may be happening now in Ireland, Romania and
possibly in Spain.
• Greece, which has been subjected to the most severe fiscal
tightening, has had negative growth for seven consecutive
quarters.

42. Over-Optimistic Predictions
Source: Mark Weisbrot and Juan Montecino, The IMF and Economic Recovery: Is
Fund Policy Contributing to Downside Risks?, October 2010.

43. The Final Word
• The lending policy for low-income
nations, formulated on the basis of over-
optimistic estimations, has sent them
down a procyclical downward spiral, the
ends of which cannot be predicted so
easily.

45. Conclusions
1. IMF should rectify its “one size fits all”
mentality.
2. The monopoly of the United States in the
affairs of IMF needs to be reduced
3. Developing countries need to be given a
greater say.

47. References
• www.wikipedia.org
• www.imf.org
• www.cepr.net
• www.sunsonline.org
• Google Images

48. Any Questions?