Stiglitz Views on IMF (Essay Sample)

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Economics
STIGLITZ VIEWS ON IMF
Stiglitz believes that IMF’s liberalization economic policies were to blame for the East Asian crises and exacerbating it. The liberalization policies given by the IMF and the Washington crises gave too much in the hands of the investors and speculators to manipulate the market for their own gains. The consensus reduced the government powers and intervention in the market. This created a situation where investors and speculators used the market to their own benefit. The national interest was forgotten and as a result there was a massive volatility in the foreign exchange market. Speculators kept on changing their money into dollars and as a result baht fell down to unprecedented low levels. This resulted in a lot of problem for the government and middle class section of the society. The rich enjoyed tidy return on their money at the expense of the working class in the economy.
For example, if a speculator thinks that the exchange rate is going to fall he can borrow the currency and convert it into US dollars. When the exchange rate falls he can convert it back to the home currency and can enjoy a tidy profit. This results in aggravating the situation. The local currency is used into buying more dollars. As a result the demand for dollar rises, and the value of dollar goes up. Since the supply of local currency is increasing due to loans and other tools of credit creation, the value of local currency falls. This is what happened in the fall of Thai bah case. There was no government in the market to support the local currency, and as a result it continued to fall and investors kept on churning huge return on their investment. The best part about it was it was tidy no-risk profit. Therefore investors and speculators saw a benefit in making sure that the currency keeps on falling and the kept on enjoying making risk free profit. Similarly, IMF also laid out a plan for industrial growth of East Asian currencies. It called for liberalization and market economy. Another reason why IMF policies failed to work was that the fiscal and monetary policies were not aligned well. At one place IMF liberalized the economies to open up the gate for foreign investment, at the others it failed to provide monetary and fiscal support to the capital that was coming into these countries. On a second thought, IMF decided to increase the interest rates in East Asian currency. This again benefited the speculators as they started saving in baht and local currencies. This created a recession in the economy as the investors were happy in keeping the money in the bank accounts rather than utilizing it in productive uses such as building of infrastructure, factories etc. All of these productive activities create employment and increase the GDP of an economy. However, in the case of East Asian countries, the economic activity slowed down with the increase in the interest rates. This resulted in massive problems for the East Asian economies. All of these countries in the past had an enviable growth rate, but due to wrong policies of IMF and the World Bank their exchange rate started to fall very quickly. IMF then advised them to sell their sovereign assets to recover the lost exchange rate. However, this lead to another debacle as these companies had to liberalize the state institutions as well. This liberalization did not work in the first place, and by IMF ordering them to increase the magnitude of privatization was a recipe for a disaster. The crises continued to increase in magnitude and its quantum. In the end, these policies only brought disaster for the affected countries, and Stiglitz is right in point out the fact that Global Financial institutions have failed to bring any relief to the LDC or developing countries, and instead it has furthered their problems by trying to create a system which cannot work in most of the world’s economies. Therefore, many countries are focusing on self sustainability rather than allowing IMF to intervene. This has helped them become bigger and more sustainable economies. It has also reduced the role of speculators in the market which leads to a market failure.
2) Due to continuous failure of IMF in the East Asian case and most of the cases around the world, its role has become suspicious. There is a lot of skepticism about the agenda on which IMF is working. Some people believe that it is working on the agenda of Washing DC while others believe that it is playing an extremely unpleasant role of increasing public debt. In both cases, IMF is believed not to be what it appears to be. Critics have questioned IMF long since it has started its operations. It has increased the foreign debt of countries it has worked with and has not improved their conditions. As a result a lot of debate surrounds IMF and its operations. IMF has drifted away from its original agenda. Keynes is believed to be the founding father of IMF. He believed that all the countries should work in unison in order to achieve global economic equilibrium.IMF also believes that. However, IMF also believes that markets work and the governments of all the countries work badly. This is where the problem lies. IMF tries to improve a country’s economic position by giving too much power to the private sector. It tr