Does the IMF influence the fiscal and monetary policy of Developing Countries?

 

Does the IMF influence the fiscal and monetary policy of developing countries?

The paper will argue that the International Monetary Fund (IMF) has an impact on developing countries through its fiscal and monetary policies, which could be detrimental to their economy.

First Argument:

The United Nations defines a country as a legal or political unit of local administration that exists within a territory’ (‘International Organization of Economic Co-operation and Development’ par. 1). Essentially, it means that there are three types of countries, which include; a state where government authority resides in one nation, which refers to the United States, a state where local governments have autonomy over some public sector functions of the government, and finally, a state where governments have both national and local powers to make decisions on behalf of people (‘International Organization of Economic Cooperation and Development’ par. 1-2). In other words, countries of this type are those with semi-autonomous governments in which the national-level decision-making process is separated from the local levels’ decision-making process, however, they retain overall control over national resources. These countries, which may also be referred to as semi-autonomous nations, are not self-sustaining, meaning the economy cannot support itself. Countries under this category usually experience a slow growth rate, leading to massive inflows of national wealth to pay for expenditures of the central government (‘International Organizations Chamber of Commerce’ par. 9-11). Most national economies only experience modest inflows due to international flows, but this was mainly because of how little the United States had available domestic capital to invest on domestically, especially during periods when the US had excess foreign debt (‘United Nations World Bank’ par. 3). Thus, although these countries may have low GDPs, they are able to afford the consumption of foreign funds for consumption spending in education, health, and infrastructure. When these states lose their ability to produce their own money to sustain their needs, that causes them to seek external finance in order to preserve their economies (‘United Nations World Bank’ par. 5). For example, if the US were to become dependent on exporting goods that would cost money to developing countries (see Table 2), then, their need to pay for imports would rise even more. Although most developed countries have high savings rates, this did not stop them from importing their goods because of these same factors holding back them from borrowing large quantities of money (‘International Finance Corporation’ par. 15). This becomes a major problem as these countries try to balance out what kind of money is best for them and the countries they will export their commodities to. However, developing countries and those that lack sufficient capacity internally are unable to manage such large amounts of money. Consequently, they are forced to borrow money from the IMF and other sources to survive.

As a consequence of borrowing large amounts of money, countries with inadequate financial systems are forced into a situation where they can no longer afford their citizens’ welfare, including food, shelter, education, health care, water, and electricity (‘Oxfam Global Health Programme’ par. 1-5). As a result of this, these countries do not find it possible to spend enough time on important projects for improving their economies, leaving many of them under the pressure of poverty. In order to meet the ever-expanding demands of global trade, developing countries have to keep up with an ever-increasing number of people who want their products. If they are unable to finance important projects, then, they will eventually fall back on loans from the IMF, leading to a collapse in their economies. A good example is given in the case of Bangladesh, a developing country that lost 90% of its assets once it became indebted to the World Bank and developed debt levels of $23 billion (‘UNDP/World Bank Principles document’ par. 4) to $4.8 trillion because of excessive indebtedness levels (‘UNDP/World Bank Principles document’ par. 5). After all, this happens, these countries begin to suffer from severe economic issues of unemployment, hunger, and inequality in access to basic services. Not surprisingly, this situation has led to mass migration to wealthier countries that provide better living conditions for workers in the areas affected by natural disasters (‘UNDP/World Bank principles document’ par. 12). Due to this huge influx of immigrants, poverty levels rise, and the resulting increases in crime, corruption, and violence occur, causing more and more deaths due to starvation. Even though this is currently in decline, economic growth is still stagnant and the poorest of countries continue to be hard hit by diseases (‘UNDP/World Bank Principles document’ par. 14). All of this leads to a very poor future for nations that are now struggling to survive economically, which will lead to a further increase in homelessness on top of the already present conditions that have led to massive death counts, and thus, poverty. This again leads to a situation where these countries’ development agendas do not take hold due to poverty and corruption.

In addition, although economists do agree that the concept of comparative advantage is necessary, it may not always exist. According to Schutz and Schneider, a situation where economic agents can obtain higher returns than others within a given industry by exploiting factors such as barriers of production (par.1). It is obvious that countries that use comparative advantage will be able to reduce the prices they charge for their products so as to compete favorably against rival producers who do not (‘Concept of Comparative Advantage and Competition’ par. 6-9). Unfortunately, in theory, this may not be the case as it is generally known that competition tends to result in lower costs for firms that adopt competition as their business model (‘Concept of Comparative Advantage and Competition’ par. 7-8). It is also clearly understood that competition is often associated with monopoly power where a firm has a strong position over others and is able to set prices on items to undercut them. Such a situation might be a good way to get rid of inflation or wages hikes, or in extreme cases, it would prevent the development of new technologies (Schutz and Schneider par. 1), in turn preventing companies like Apple from entering the market. Thus, countries that use comparative advantage to gain economic advantage are at risk of stagnated development and stagnation where the rich keep rising while the poor stay flat and continue to struggle economically (‘Concept of Comparative Advantage and Competition’ par. 8-10). There are several factors that affect where countries can develop relative advantages, including:

Economic incentives – For instance, countries like China and India benefit from being part of a common market economy, where the government supports high quality manufacturing, and promotes exports rather than importation (‘Concept of Comparative Advantage and Competition’ par. 29). Nevertheless, these countries tend to face problems in competing due to the fact that their respective markets are subject to intense competition and they are under constant threat of price fluctuations from suppliers

Distinctive characteristics – For instance, China’s agricultural land is largely located in the countryside, where farmers focus on maintaining high standards of service to create a good life for their families. Whereas India focuses on high-quality products and manufactures large quantities of goods before final selling them abroad. However, these countries do not earn much compared to their neighbor, where they can enjoy cheap labor since their labor is scarce (‘Concept of Comparative Advantage and Competition’ par. 38-43).

Rising demand – Demand for goods and services depends greatly on income level, as well as changes in purchasing power (‘Concept of Comparative Advantage and Competition’ par. 42-42). Moreover, they can be driven by globalization, which makes it harder for competitors to match their market share through advertising.

Competition within suppliers – The biggest challenge among the players is to produce enough high-quality goods at reasonable costs. However, this is a double-edged sword for any supplier, as they can lose out on supplies when producing too cheaply. While high quality may increase output, it increases the price of the product. Because of this, a lot of research is needed to improve product quality. To some degree, Chinese manufacturers may learn some lessons from Indian companies, who discovered ways of reducing the gap between the two industries (‘Concept of Comparative Advantage and Competition’ par. 46). They are finding cheaper substitutes that allow them to produce cheap goods while keeping the quality that customers expect at acceptable values, like plastic bags versus leather bags. Furthermore, Indian entrepreneurs learned that by combining low prices and good quality with competitive prices and excellent customer service, American consumers prefer them (‘Concept of Comparative Advantage and Competition’ par. 47-48). This is particularly true for Indians who live far away from western culture and have a greater desire to interact with Americans who speak English. Therefore, Indian companies are adapting to compete both against American and Canadian exporters.

Economic crises – Crisis in any industry is difficult to predict and, therefore, it is common that competition collapses in the short term, leading to bankruptcy at the end of the period (‘Concept of Comparative Advantage and Competition’ par. 52-56). Especially in times of economic crises, which usually involve the inability to make payments to creditors, companies cannot get loans, resulting in failure and collapsing of their businesses.