Why do countries oppose IMF's proposed reforms if those reforms are beneficial?

Why do IMF's reforms occasionally damage the economy (Egypt)?

If reforms have chances of damaging countries, why do IMF propose reforms in their own terms?

  • The question is, beneficial to whom? The country as a whole, or the people in power? – jamesqf Jul 28 '18 at 17:31
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    I think this is a pretty biased sample. A better question would be "do countries almost always oppose IMF's proposed reforms?" If anything in the latest Greece negotiations the IMF has opposed the EU, who was even more pro-austerity. euractiv.com/section/euro-finance/news/… – Fizz Jul 29 '18 at 10:36
  • Also, the question is probably far too broad. Mugabe may have a different reason to oppose the IMF reforms than pensioners in Greece. When you say "countries" you really mean selected groups of people in those countries. If countries as a whole (or their governments) almost always opposed the IMF, it would almost never get any of its conditional loans accepted, which is far from the case. Never mind all the side-questions you ask, e.g. why do IMF's programs fail sometimes etc. – Fizz Jul 29 '18 at 11:18
  • This paper is a pretty decent (and fairly cited) analysis of conditionality: what gets imposed to whom and when, which is far from being uniform in IMF negotiations. From it one can infer who might oppose the measures, although that's left as an exercise to the reader. Whereas regarding Zimbabwe, you should probably read the intro of another paper – Fizz Jul 29 '18 at 11:57
  • And on the [predictable, from the previous papers] counter-examples list consider Pakistan; lots of IMF loans without major opposition to them: herald.dawn.com/news/1153641 – Fizz Jul 29 '18 at 12:09

IMF Conditions Are Often Bad Advice From A Political Economy Perspective

One reason is that IMF reforms are often ill advised and not beneficial, and often the proposed reforms implement policy changes that activists in donor countries desire at home, rather than addressing what is really needed locally. As Wikipedia in the previous link explains:

The IMF has been criticised for being "out of touch" with local economic conditions, cultures, and environments in the countries they are requiring policy reform. The economic advice the IMF gives might not always take into consideration the difference between what spending means on paper and how it is felt by citizens.

Jeffrey Sachs argues that the IMF's "usual prescription is 'budgetary belt tightening to countries who are much too poor to own belts'". Sachs wrote that the IMF's role as a generalist institution specialising in macroeconomic issues needs reform. Conditionality has also been criticised because a country can pledge collateral of "acceptable assets" to obtain waivers—if one assumes that all countries are able to provide "acceptable collateral".

One view is that conditionality undermines domestic political institutions. The recipient governments are sacrificing policy autonomy in exchange for funds, which can lead to public resentment of the local leadership for accepting and enforcing the IMF conditions. Political instability can result from more leadership turnover as political leaders are replaced in electoral backlashes. IMF conditions are often criticised for reducing government services, thus increasing unemployment.

Another criticism is that IMF programs are only designed to address poor governance, excessive government spending, excessive government intervention in markets, and too much state ownership. This assumes that this narrow range of issues represents the only possible problems; everything is standardised and differing contexts are ignored. A country may also be compelled to accept conditions it would not normally accept had they not been in a financial crisis in need of assistance.

On top of that, regardless of what methodologies and data sets used, it comes to same conclusion of exacerbating income inequality. With Gini coefficient, it became clear that countries with IMF programs face increased income inequality.

It is claimed that conditionalities retard social stability and hence inhibit the stated goals of the IMF, while Structural Adjustment Programs lead to an increase in poverty in recipient countries. The IMF sometimes advocates "austerity programmes", cutting public spending and increasing taxes even when the economy is weak, to bring budgets closer to a balance, thus reducing budget deficits. Countries are often advised to lower their corporate tax rate. In Globalization and Its Discontents, Joseph E. Stiglitz, former chief economist and senior vice-president at the World Bank, criticises these policies. He argues that by converting to a more monetarist approach, the purpose of the fund is no longer valid, as it was designed to provide funds for countries to carry out Keynesian reflations, and that the IMF "was not participating in a conspiracy, but it was reflecting the interests and ideology of the Western financial community".

Keep in mind that many of the IMF conditions are justified by macroeconomic theories that are not empirically validated. Macroeconomic theory has only a little bit better track record than non-economic theory based analysis at making accurate predictions and proven reforms.

For example, many economists (not a consensus, but either a plurality or a large minority) argued based upon economic theory that a large share of the incidents of the December 2017 corporate tax cuts in the U.S. would benefit workers and consumers, rather than shareholders, but in practice, that didn't happen.

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Similarly, macroeconomic advise on response to "stagflation" in the 1970s and 1980s was a dismal failure, and lots of the macroeconomic advise given during the Financial Crisis of 2007-2008 and for remedies in its aftermath was proven to be inaccurate.

The IMF has even less of an incentive to carefully get the macroeconomics right than domestic politicians (who often get the macroeconomics wrong) because it isn't accountable to the countries that it serves.

Domestic Politicians and IMF Officials Have Different Political Goals

Another problem is that many countries assisted by the IMF are non-democratic or have seriously flawed democracies in which the political interests and incentives of the people dealing with the IMF on behalf of the government do not have the economic growth of the country as a primary goal.

Still, even in a functioning democracy, the IMF reforms often involve short term sacrifice in exchange for long term growth, and the IMF's time horizon is often longer than that of the people running the government.

In general, every domestic policy gets there historically for an important local reason, and if the "reform" changes a policy without addressing the problem that the reformed policy was meant to address (which is often the case), then the change will be resisted.

But, the IMF is rarely sensitive to this reality, because its goal is to make the people who control the purse-strings of its donor nations happy (people whose views are often themselves removed from general public opinion in donor countries themselves).

  • While I think you have the right idea, this answer could be greatly strengthened by being a bit more neutral. Talking about how these countries perceive the reforms, rather than the inherent economic goodness of them, seems more fit to this site to me. – Eremi Jul 28 '18 at 4:53
  • @Eremi The first part of the answer, about inherent economic goodness is an explanation for why most countries regardless of political opinions that might not favor them for "improper" reasons, the second part of the answer, goes to how perceptions might be involved. Perceptions and reality are two distinct and partially independent reasons. The arguments about inherent economic goodness are well sourced. Neutrality doesn't imply that questions don't sometimes have right and wrong answers. The IMF can and does impose what in hindsight are objectively bad conditions sometimes. – ohwilleke Jul 28 '18 at 5:17
  • Why did Singapore agree to reform according to IMF and benefited? – user21304 Jul 28 '18 at 19:26
  • @anonymous Just because an institution is often wrong doesn't mean that it is always wrong. – ohwilleke Jul 28 '18 at 20:30
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    The question is - are we not confusing cause and effect? You say that IMF intervention is often followed by economic problems. But economic problems are precisely the reason why IMF is called to help. – MikiRaven Jul 29 '18 at 9:42

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