Monday, October 25, 2010

Ethics and the International Monetary Fund

Ethics and the International Monetary Fund
The International Monetary Fund is an international organization that oversees the global financial system and aims to help normalize exchange rate volatility and balance of payments.  The primary goal of the IMF is to help foster a competitive, healthy global economy.  One primary way that the IMF helps to foster a healthy global economy is by coming to the aid of counties that are facing major economic challenges.  Developed, industrialized nations never borrow money from the United States.  In fact, the U.S. government has not borrowed from the IMF since World War II.
One of the most common and primary actions of the IMF is to extend financial aid to weak countries.  If a country is facing extremely harsh economic conditions or even the prospect of possible sovereign default, which means it cannot meet its debt obligations, then the IMF will generally step in and help by providing funds to the country in need.  The country can then use these funds to pay back creditors and avoid a sovereign default.  Thus, the IMF helps to stabilize the economy of struggling nations.  It seems like everything is perfect, right?  Struggling countries get the funds they need to stave off creditors and financial markets stabilize.  Unfortunately, the picture is not always so perfect.
There is widespread criticism surrounding the IMF.  In order to understand the criticism, one must understand the process by which a struggling country secures funds from the IMF.  If a country is in need of a bailout, it approaches the IMF and presents a formal request for funds.  The IMF then does an in-depth analysis of fiscal and economic conditions of the country, and then decides how much money the country needs to stabilize the economy.  The IMF then commits to disburse these funds to the struggling country, but there are strings attached.  These strings are the cause of much criticism.
Once the IMF makes a decision to bail out a specific country, it then notifies the country how much financial aid it will be receiving.  However, the entire disbursement is not made at one time.  Instead, the IMF disburses the funds in several stages, typically 3, and at each stage, the struggling country will not receive the next disbursement unless it has taken specific steps that the IMF has demanded.
Typically, if a country is in need of a bailout it is because there are serious problems at the governmental level concerning basic money management.  Therefore, in most cases, the IMF will place very strict contingency requirements on its disbursement of funds.  For example, the most common type of requirement includes an immediate reduction in government spending and deficits.  This requires countries receiving IMF aid to institute what are referred to as austerity measures in hopes that the economy will stabilize and currency rates will stabilize in the forex market.
Austerity measures are specific actions a government takes in order to slash government spending and bring down deficits.  Austerity measures can include a wide array of actions, but common measures would be cutting government spending habits such as pensions, healthcare, education and other publicly funded operations, and austerity measures can also include significantly raising taxes.  These austerity measures are the strings that are attached to an IMF bailout, and these strings are why many critics accuse the IMF of unethical behavior.
The Impact of Austerity Measures
When a government is forced to enact strict austerity measures in its economy, it oftentimes is forced to cut government spending in key areas such as healthcare, education, and pensions.  A drastic spending cut in healthcare often leads to severe problems.  A cut leads to many doctors, nurses, and other healthcare professionals losing jobs, and it is common for entire hospitals and healthcare centers to shut down when austerity measures hit an economy.  Some studies have linked increasing tuberculosis and other preventable deaths to IMF austerity measures in several countries in Africa.
The major critics of the IMF state that decreased spending in these struggling countries may be needed, but should it be in the all-important sectors of education and healthcare?  It is true that every country that approaches the IMF for funds has managed finances and investments very poorly, or else they would not be in the situation they are in.  However, if spending in these areas is cut, sure it may bring the government deficit down and increase the competitiveness of the economy over time, but the ethical debate is—how much are these economic benefits worth as measured by human lives?  If austerity measures are going to result in the death of thousands of people, are they worth it?  This is the ethical debate.
On one side, proponents of the IMF state that a government cannot simply be allowed to continue mismanaging national finances forever, but on the other side, critics argue that it is not worth it to sacrifice thousands of lives in order to bring some economic advancement.  There must be a way to correct the economy without having to sacrifice human lives.