IMF Bailouts: Roads to Stability or Recipes for Disaster/Essay on Pakistan Economy / CSS 2023 Essay and Current Affairs

Outline

Introduction

The emergence of the IMF

IMF bailouts are the recipes for disasters, evidenced by the history

Contemporary evidence of disastrous recipes of the IMF for stability

To what extent is it true that the IMF bailouts are recipes for disaster? Yes, it is true because:

It favors developed countries

Its stabilization policy leads to destabilization

It increases the balance of payment crisis

IMF provides a "one shoe fits all" policy 

It devalues the local currency

It compels countries for more borrowing

Causes of disastrous recipes of the IMF for stability

Economic Causes

Political Causes

Ideological Causes

Cultural Causes

Social Causes

Impacts of IMF bailouts

Decreases Public Private Investment

Increases Unemployment

Open new ways for corruption

Creates monopoly in private business owners

Open ways for money laundering

Already taken steps to counter the IMF bailout 

Measures need to be taken to reduce the risks of the IMF bailouts

Self-reliant economic policies

Increase ease of doing business policies

Governments must encourage domestic investors to invest in the country

Governments need to spend more on public sector development

Conclusion

Essay

IMF Bailouts: Roads to Stability or Recipes for Disaster/Essay on Pakistan Economy / CSS 2023 Essay and Current Affairs  

International Monetary Fund (IMF) is the lender of last resort. It has always provided disastrous bailouts to the countries to cope with the balance of payment crisis. At the global level, Greece is facing a balance of payment crisis despite getting IMF bailouts. Sri Lanka is also on the brink of collapse at the regional level. Pakistan has gone to the IMF 22 times at the national level, but the situation is the same. IMF bailouts have been proved as recipes for disaster. The core issue is IMF's "one shoe fits all" policy. Therefore, it is the need of the hour to discourage IMF bailouts.

Before discussing the IMF bailouts, here is a brief overview of the emergence of the IMF. IMF is an international monetary system that provides financial assistance to countries facing a balance of payment crises. It emerged after World War II. The purpose of its creation was to assist war-torn countries – especially Europe. In Bretton Wood, 44 countries collectively introduced the system. They met with increasing collaboration to increase global trade through collective efforts. 

Looking at history, it is evident that the IMF bailout recipes have been a proven road to the instability of the countries. First, in the 1990s, Pakistan went to the IMF, but it failed to overcome the balance of payment crisis. Second, the Philippines went to the IMF and failed in the 2000s. However, when she adopted policies against the IMF bailouts, it recovered and never went to the IMF again, according to Reza Baqir, former Governor of the State Bank of Pakistan. Moreover, in the 2010s, Greece also could not make up. However, it would not be wrong to say that IMF bailouts provide disaster recipes.

In contemporary times, the IMF is providing the same medicine which fails to cure the disease. First, in 2019, Pakistan went for the 22nd time for IMF bailouts instead of decreasing its crisis is increasing ferociously. Second, Sri Lanka is also facing a severe economic crisis. Moreover, Eurozone countries are also burdened by the balance of payment crisis. To sum up, the IMF has only one medicine for different countries' problems. The following arguments have proved that IMF bailouts have always been roads to the instability of developing countries. 

It is a fact that IMF bailouts have always favored developed nations. First, developed countries are significant shareholders of the IMF. The United States is a shareholder of 17% of the voting rights. Thus, it holds a position accordingly. Second, the will of major shareholders is also worth mentioning. It is because, without their will, countries cannot avail the assistance of the IMF. For instance, countries require 85% of the total voting rights, and it is impossible to sanction a loan without the consensus of the United States, as it is earlier mentioned that it alone holds 17% of the share.

Moreover, developed countries use it as a tool to convince other countries. For example, if any developing country does not oblige to the demands of the United States, it makes the IMF recommends harsh policies. Thus, it is imperative to say that the IMF prioritizes developed countries. 

Another fact that has proved stabilization policy of the IMF destabilizes the countries is the evidence of the disastrous recipes of the IMF bailouts. First, it emphasizes cutting in developments. It can be witnessed in the shape of low investment in the countries. Second, it discourages the creation of new jobs. For example, new avenues for jobs will not be entertained when infrastructure is not developed.

Moreover, it enhances total expenditure. According to the State Bank of Pakistan, Pakistan's debt had jumped from over $17 billion to $95 billion between the 1990s and 2007-18. Therefore, it would not be wrong to say that the stabilization of the IMF policy is a destabilization policy. 

Another fact that has proved the IMF bailouts increase the balance of payment crisis. Firstly, it increases the interest rate. For instance, the United States increases loan payments by 1%, ballooning the loan payments of developing countries as a liability. Second, it decreases Labour Force Participation Rate (LFPR). According to Pakistan's Ministry of Finance, Pakistan's LFPR has decreased from 85.9% to 84.3% due to IMF bailouts. Thus, it is pertinent to say that the IMF has failed to help countries overcome the payments crisis. 

Another fact proved that the bailouts are roads to instability due to their "one shoe fits all" policy. First, the IMF does not consider the reasons for the increasing balance of payments crisis. For example, if one country has reserves of 4 days of imports, its reserves are depleted owing to a rise in oil markets. At the same time, the other country is failed to manage its economic crisis. Does the same medicine for two will work?

Nevertheless, the IMF prescribes the same policy for them. Second, the policy disturbs the balance of imports and exports. For instance, when IMF gives the same policy for two different structural problems, eventually, it increases the dependency on imports. Thus, it would not be wrong to say that IMF bailouts are recipes for disasters. 

Another fact, IMF bailouts are roads to instability. It is its policy of devaluation of the currency. First, it emphasizes devaluing the currency. When the local currency is devalued, it increases debt payments. Second, it increases inflation in the countries. Owing to the devaluation of the currency, everything becomes expensive; people hardly earn to live hand to mouth. Thus, it is imperative to say that the IMF bailout packages are disastrous recipes for stability.

Lastly, IMF's Structural Adjustment Policies (SAPs) compel the countries for more borrowing. Primarily, the SAPs emphasize privatization. Privatization leads results in a reduction in public sector development. Eventually, it leads to more borrowing because the countries fail to address the imbalance between expenses and incomes. Secondly, SAPs also emphasize a free-floating economy. Due to flexible economic policies, the country's budget deficit increased. Thus, it is pertinent to say that the SAPs of the IMF lead to more borrowing. Several causes, including economic, political, ideological, cultural, and social, have made IMF bailouts a recipe for disaster. These causes have been discussed in the following paragraphs of the essay. 

The economic disparity between developed and developing countries is one of the significant causes behind IMF's disastrous recipe for stability. Primary, it is due to the prioritization of the countries by the IMF and its significant shareholders. Second, major shareholders of the IMF use it as a tool for their economic sustainability. Moreover, IMF's SAPs are also evident in this regard. Thus, it is proved that IMF's bailouts are the road to instability. 

Another major cause behind IMF's recipe for disaster is the vested political interests of the developed countries. Firstly, it is due to their hegemonic desires over the world. Second, the political blocs of the countries do not question the validity of the political actions of the developed ones. Thus, vested political interests make IMF bailouts vulnerable to developing countries. 

Conflicts over the ideologies between the countries are also a cause that makes IMF bailouts recipes for disasters. Primary, Washington Consensus versus Beijing Consensus are evidence in this regard. Secondly, these conflicts create hindrances to withdrawing bailout packages. Moreover, ideological blocs also play their part. Therefore, IMF bailouts have become roads to instability. 

Several causes of the disastrous recipes of the IMF have negatively impacted the country's economic growth. One of the significant impacts is that it has decreased public-private investment in the countries. First, it has resulted in less development of infrastructure. Second, it has decreased foreign direct investment. Moreover, it also has halted the credibility of the governments. Thereby, it would not be wrong to say that the IMF bailouts have severely affected the investment sector. 

Another significant impact of IMF bailouts is the increased unemployed threshold. It has reduced job creation opportunities. First, the development sector has been de-prioritized. Second, economic growth has been slower due to IMF bailout packages. Moreover, there are no opportunities for young entrants in the job market. Thus, it is imperative to say that the IMF bailouts have negatively impacted the job creation threshold. 

The stabilization policy of the IMF has impacted the expenditures. It has increased the expenditure of the countries. Firstly, it has increased the loan payments. Secondly, it has affected demand and supply. Moreover, it also has adversely impacted government expenditure. Thenceforth, it would not be wrong to say that IMF bailouts have increased the total expenditure of the countries.

Although the IMF bailouts are disastrous for stability, the countries have gotten rid of their debt trap by taking robust measures against it. First, the Philippines 2004 decided not to go to the IMF for bailouts and preferred to establish robust policies to overcome the balance of payments. After five years of harsh policies, the Philippines got out of the debt trap and never went to the IMF again till yet. Similarly, Malaysia, in 2010, discouraged IMF bailout packages and introduced its homegrown policy. Eventually, it worked, and the country became independent after then. Thus, other countries that cannot keep themselves from the disastrous recipe of the IMF must opt for such policies.

Several measures discourage IMF bailouts, but the self-reliant economy is the foremost. First, countries must rationalize their government spending to balance expenses and incomes. Second, states also need to create governmental entrepreneurship and revenue-building resources to encourage the participation of young talent in the economy. Moreover, increasing the tax-to-GDP ratio may bring stability to the ailing economies of the countries. Therefore, a self-sufficient economy is essential to get rid of IMF bailouts.

One of the several measures to cope with the IMF's disastrous recipes of stability is friendly ease of doing business policies. First, countries must develop infrastructure to attract Foreign Direct Investment (FDI). Second, Countries also need to create Special Economic Zones (SEZs). Moreover, Countries must adopt policies of the countries which have successfully combated IMF bailouts and its recipes for disaster. Thus, the ease of business policies is the prerequisite to enhancing the business.

Another robust measure to deal with disastrous IMF bailouts is that countries must strengthen their Public Sector Development programs (PSDP). First, PSDPs must be given priority to overcoming trade deficits and increasing employment opportunities. Second, governments need to encourage domestic investors to invest in the PSDPs. Moreover, Countries also need to subsidize the imports of the development machinery to enhance productivity. Henceforth, it is the need of the hour to spend in the PSDPs.

To sum up the whole discussion, it would not be wrong to say that the IMF bailout packages have been proved as roads to instability. The significant rationale behind this is the one shoe fits all policy of the IMF and its nature as a lender of the last resort. Among several causes, the economic disparity between developed and developing countries is the primary cause. As a result, it has decreased the development of the infrastructure. Therefore, it calls for self-reliant economic policies. Nevertheless, despite several hindrances, countries are striving to get out of the debt trap of the IMF because many countries have survived it.

More insight detailed article : https://www.imf.org/en/Countries/PAK