I.M.F’s Intervention in Third World | Social Issue Essay, Article, Paragraph for Class 12, Graduation and Competitive Examination.

I.M.F’s Intervention in Third World

Scheme of the essay

Exposition: IMF through its structural adjustment programmes has harmed the third world economy.

Rising Action: Some say that the IMF should not advocate unsustainable policies.

Climax:

(1) Austerity measures of IMF result in political unrest.

(2) Structural adjustment produces political unrest.

(3) Successive IMF programmes disenchanted people with their govt.’s profligacy.

Ending: No government can go ahead with economic reforms without risking political unrest.

IMF bashing is a favourite passion of certain economists. There is a huge economic literature on how the IMF through its structural adjustment programmes has created what are called ‘IMF riots’ in the Third World.

The standard argument is that the IMF in its myopic vision has forced countries into adopting policies which are economically, socially and politically unsustainable. By cutting down subsidies, IMF policies raise the price of essential commodities. They argue that these policies hurt the poor and certain other politically active groups.

Major political parties, in turn, resist these policies. In some countries, the resistance has even taken the form of riots. Therefore, some economists advice that the IMF should not waste its time advocating policies which are basically unsustainable.

Recent political protests in several Latin American countries may give the impression that these economists are right. In the eighties too there were serious political protests in several countries experiencing IMF’s high conditionality programmes. During the eighties, countries which faced political unrest when the structural adjustment programme was on include Bolivia, Brazil, Ecuador, Haiti, South Korea, Peru, Nigeria, Jordan, and Central Asian Republics.

Does that mean that there is a link between the IMF and political unrest in the Third World? And that the IMF should not advocate its policies because they can never work over a long period, during which they harm more than benefit.

The answer to both the questions appears to be no if a recent study of 70 developing countries published in the Third World Quarterly is to be believed. Based on the experience of these countries during 1981-89, the study runs what economists call a regression analysis. (Regression analysis is a tool used by economists to measure the relationship between various factors based on empirical evidence.) The regression analysis shows that IMF’s high conditionality adjustment programmes do not cause political protests. On the contrary, it concludes, IMF loans, increase political stability. The study is authored by Juha Auvinen, of the Department of political science in the University of Helsinki.

This is opposite to the conventional viewpoint. Auvinen explains: that by providing additional credit to a country in an economic crisis the IMF makes the pains induced by the crisis less severe. It acts as a balm when the rest of the world refuses to lend any money, and therefore, makes it easy for the country to pass through the crisis.

Austerity at the time of bankruptcy is inevitable irrespective of whether the IMF intervenes or not. In this sense, countries are like households. When a household goes bankrupt, it is forced to reduce consumption. However, if someone gives a small help, the forced cut in consumption is less. Similarly, IMF intervention by ploughing in more funds makes the adjustment process much easier.

But how does one explain political protests in countries undergoing structural adjustment? As the flow chart alongside shows political protests can be induced by several factors, austerity measures of the IMF are just one such factor. Ethnic dominance, rebellion, type of political regime, level of economic development, and tradition of protest in the country and level of economic development are some of the other factors which may cause political inability.

According to Auvinen, in many of the above-mentioned countries IMF riots were induced by economic crisis and not the IMF conditionalities. In several, of course, the riots were largely ethnic or political countries, and economic crises increased their intensity.

The regression exercise shows that the higher the amount of IMF credit the lower the level of political protest. This once again shows that the IMF credit had actually provided breathing space to countries in economic crisis, and reduced the incidence of rebellion.

There is another factor which explains that the so-called IMF riots are not merely à consequence of IMF intervention. The study finds that there is a positive relationship between the history of IMF structural adjustment programmes and political protests. The more the number of structural adjustment programmes a country has undertaken, the higher is the degree of political and social protest.

According to the regression analysis, countries with a history of more than 10 structural adjustment programmes face greater political resistance. In the eighties, countries which suffered IMF riots were those which had several structural adjustment programmes. For instance, Bolivia was implementing its 13th and 14th arrangement when political unrest in the country increased, Brazil its 10th and 11th programme, Chile in 1983-84 it’s 14th; Ecuador its 9th to 12th, Haiti its 20th; Korea its 16th; Peru its 16-17th and the Philippines its 16- 18th.

This shows that with successive IMF programmes people get disenchanted by their government’s fiscal profligacy. They do not wish to suffer under the pain of austerity programmes because they think that the government will use the funds thus saved in a wasteful manner. In other words, countries which use IMF loans for consumption purposes and plunge into one crisis after another find it politically difficult to carry on like that. Every successive structural adjustment programme induces greater protest.

There is a lesson in this for countries like India which have not undertaken many IMF programmes. They should take the reform programmes more seriously to avoid future bankruptcies. As the experience of other countries shows popular protest against IMF conditionalities (or austerity) increases if the government resorts to IMF programmes too often.

Another finding of the study which lends to the same conclusion is that the level of political protest is much lower in countries with low levels of income. Once the per capita income of a country crosses $425, the level of political protest grows.

At present, India’s per capita income is around $300. With seven per cent annual GDP growth (assuming that the annual level of devaluation and the rate of inflation are around the same) India will cross this threshold in the next four to five years. But the sad thing is that the way the government appears to be going, we will face another bankruptcy in another four to five years’ time when the per capita income is above $425, and we may have to beg for another IMF loan. The experience of the countries in the above study, however, suggests that popular protests against IMF’s austerity programmes would be far more, five years later than has been the case in the past two occasions.

The study shows that the level of political unrest is related to urbanisation. The higher the degree of urbanisation, the more than popular the protest. This again points out that in the future structural adjustment would be far more difficult than it is now. Therefore, the government should not miss the opportunity.

The negative relationships between the IMF loan and political unrest remain unaffected whether there are any conditions attached to the programme or not. So, governments should go ahead with economic reforms without fearing any major political unrest. Low economic growth, high inflation, high debt service ratio, and successive bankruptcies may cause more political unrest than any austerity programme.