As a long-term lender to low-income countries, the
International Monetary Fund (IMF) also tackles
problems of poverty and growth. Should the IMF
withdraw from development finance leaving it up to
donors and the World Bank, as critics suggest? Is it
appropriate for the Fund to return to its traditional
role? And could the World Bank provide more effective
support for necessary structural adjustment?

Analysis by the Universities of Surrey and Sheffield
suggest that critics have been unduly negative in
their assessments of the IMFs development role. Yet,
empirical evidence suggests that the IMFs long-term
lending has been beneficial to economic growth by
strengthening the underlying fiscal position and
creating social capacity for maintaining sustained
stability.

Further findings suggest that:

* Scant evidence exists to support the view that IMF
lending causes problems of moral hazard, where the
prospect of an IMF bail-out causes excessive private
capital lending to poor countries, which some see
behind the economic crises in Mexico, East Asia,
Russia and Brazil in the 1990s.

* There is no penalty for failing to complete an IMF
sponsored programme, yet frequent failures might mean
a different economic approach is needed rather than an
end to IMF lending.

* There are difficulties in assessing the track record
of IMF conditionality, especially that of the Enhanced
Structural Adjustment Facility (ESAF), now re-named
the Poverty Reduction and Growth Facility (PRGF). Some
evidence does, however, support the view that ESAF has
been effective in encouraging economic growth and
building social capacity to manage change and foster
macroeconomic stability.

* Phasing out IMF long-term lending and increasing the
World Banks role will not necessarily improve the
IMFs balance sheet, while both poor and rich
countries could lose out in the long-term.

* Relying more heavily on aid donors to provide
long-term finance could well prove unsustainable given
declining trends and the political economy of
international aid.

Over the last few years, a number of poor countries
have begun to move into a process of sustained growth
under the tutelage of ESAF/PRGF (namely Bolivia,
Ghana, Lao PDR, Tanzania, Uganda and Mozambique), with
consequent benefits for their trading partners.

As an alternative to phasing out the role of the IMF,
suggestions for policy include:

* continuing efforts to improve IMF conditionality and
to strengthen its role in developing countries
combining aid with IMF involvement which may be more
effective than aid alone

* adopting a more holistic approach that accommodates
the problems faced by poor countries to assist them
and their creditors.

Contributor(s): Graham Bird and Paul Mosley

Source(s):
Should the IMF discontinue its long term lending role
in developing countries? by G. Bird and P. Mosley,
Paper presented at the Development Studies Association
conference, SOAS, (November 2000)

Date: 4 April 2001

Further Information:
Graham Bird
Surrey Centre for International Economic Studies
University of Surrey
Guildford GU2 7XH
UK

Email: [email protected]
Email: [email protected]
Website: http://www.surrey.ac.uk/

Source:
http://www.id21.org/zinter/id21zinter.exe?a=0&i=S8aGB1g1&u=3acb4e6e