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.
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