The Tech - Online EditionMIT's oldest and largest
newspaper & the first
newspaper published
on the web
Boston Weather: 61.0°F | A Few Clouds


A Defense of the IMF

Guest Column
Dan Tortorice

The MIT Undergraduate Economics Association will be presenting a lecture by Professor Rudiger Dornbusch, who is on faculty in the Economics Department, on Tuesday, October 31st at 4:30 PM in room 6-120. The topic of his lecture will be the recent controversies that have emerged concerning the policies of the International Monetary Fund within the global arena.

In preparation for this talk, The Tech published on Tuesday a column by Philippe Larochelle outlining the background of the material Professor Dornbusch will be discussing and explaining the arguments that have emerged opposing the policies taken by the IMF. This article outlines the arguments in favor of the policies taken by the IMF.

Walking home from work this summer, I passed by the IMF World Bank Headquarters in Washington, D.C. Outside, a group of protesters shouted at the building; one banged on the empty blue top of a water-cooler. Why they were protesting was unclear -- perhaps they believed some of the criticisms articulated by Philippe Larochelle in Tuesday’s edition of The Tech, perhaps not. Either way, I believe they were misguided.

The following article discusses the main aspects of an IMF structural adjustment program (the conditions a country must fulfill in order to receive IMF funds) as outlined by Larochelle in his article, and discusses the need for these policies. They are: monetary austerity, fiscal austerity, privatization, and export-oriented growth. In analyzing these policies, it helps to think of the IMF as a doctor treating a cancer patient. At times the treatments, radiation and chemotherapy have extremely harmful effects, but in the end the patient is better for having undergone the treatments.

Monetary Austerity. A policy of monetary austerity requires a country to raise interest rates in order to stabilize the local currency. Clearly, stabilizing the local currency is in the interest of the country that takes out the loan. One only needs to look at the devastating effects the devaluation of the peso had on Mexico to realize this. The average Mexican’s standard of living collapsed because imports from the United States, a major trading partner, became much more costly.

During the Asian crisis, the IMF required South Korea to keep interest rates high to stabilize its currency. In this situation, the South Korean banks had borrowed heavily in German marks but maintained most of their assets in the local currency, the won. When financial panic swept through Asia, the value of the won spiraled downward and South Korea saw a wave of bank failures. If South Korea did not act to stabilize its local currency, its banking system would have totally collapsed. With such a collapse, South Korea would have seen an even more drastic reduction in output and the standard of living of its citizens.

Fiscal Austerity. A policy of fiscal austerity requires a government to raise taxes and cut spending. This policy is the one most often opposed by IMF detractors. Larochelle explains that implementation of this policy in Zaire forced the government to cut 80,000 jobs for health care workers and teachers. On the face of it, this seems like a horrible policy. But when one sees the alternative, we have to ask if we can oppose it in good conscience.

Often, a third-world country receives IMF money because it has debts it cannot pay. These debts were created by spending more money than the government collected in taxes and financing this deficit by borrowing from domestic creditors. If the IMF loaned the money to the county, not asking it to reduce spending, the country would continue to run budget deficits and would not be able to pay back the IMF loan. Furthermore, the country’s domestic debts would continue to mount. Eventually, the country would again need IMF money to pay off its creditors. Because the IMF exists to give loans with the expectation that they will be repaid, and does not exist as the financier of third-world social programs, it will not loan the money.

What happens now? The country, no longer having the assets to pay off its creditors, will turn to its only other option. It will print money. But as it prints money, it increases the supply of money, making it less valuable. The result is inflation. This inflation now makes the money the government is printing worth less, so it is driven to print more and more. The currency soon becomes worthless as the county spirals into hyperinflation.

What happens to the average citizens of this third-world country? Their wage, which used to let them scrape by and put food on the table, now maybe buys a loaf a bread a week. When they are starving and their children are dying, the alternative, fewer teachers and nurses, doesn’t look so bad, does it? At the outset of this article I compared the IMF to a doctor. This may have seemed extreme. But it is the reality in poor countries. Economic decisions do not determine if people can afford to live in the suburbs or not; they determine if people live or die.

Privatization. A policy of privatization requires countries to sell state-controlled industries to the private sector. Privatization has two desirable affects for third-world countries. The first flows from the competitiveness of the private sector. This competition drives down prices and fosters innovation, benefiting consumers. One only needs to read accounts of East Germany to see how government ownership of industries can ravage a county. But privatization helps third-world nations more fundamentally. Private ownership of the means to production provides a check on the power of government, a check badly needed in some third-world countries.

Export-Oriented Growth is a policy of encouraging countries to increase exports, sometimes at the expense of the country’s environment. Countries can grow quickly through exports when they trade with large foreign economies because these big economies have big demands. On the other hand, the domestic economy is small and so is demand. Do countries sometimes sacrifice the environment to grow? Yes. But the environment, no matter how much we may wish to think otherwise, is a good. One can enjoy driving a Porsche as much as seeing the stars. People are willing to trade some environmental destruction for an increase in their standard of living. And when we are talking about poor countries, we are talking about people with very low standards of living. It shouldn’t surprise anyone that these people are willing to sacrifice environmental soundness for an increase in their standard of living. We may care about the forests in Indonesia, but if that forest’s destruction will lead to growth, lifting Indonesians out of poverty, the IMF, Indonesia, and we too should shout Timber!

I would be the last to claim that the IMF is beyond reproach. Some of its policies are difficult to rationalize and some of its interventions were undeniable failures. But in the end, I believe the IMF policies are beneficial to the countries which accept them.

Dan Tortorice is a member of the Class of 2002.