“Imf Programs: Who Is Chosen And What Are The Effects?” By Robert J. Barro, Jong Wha Lee

1463 words - 6 pages

Introduction:
The current article “IMF programs: Who is chosen and what are the effects?” by Robert J. Barro, Jong-Wha Lee talks about the lending policies and practices of IMF which responds to economic conditions but are also sensitive to political-economy variables. Paper says that all developing countries have received IMF financial support at least once since 1970 with few exceptions including Botswana, Iraq, Malaysia, and Kuwait (Robert J. Barro, Jong-Wha, 2005) but the real question is why so many countries are sorting out financial assistance from IMF? and are these loans are really helpful for their economy? It further explains the determination and effects of IMF program on the ...view middle of the document...

It has certain rules to provide the financial loan to its member countries which mainly depend on the quota subscription brings a voting power to the country which was initially developed on the basis of economic size, national income and external trade value but the major shareholder has a strong impact on the decision to provide loans which is United states of America having a huge quota subscription of 17.5% (Robert J. Barro, Jong-Wha, 2005).
Participation in an IMF program is a joint decision between member countries. IMF programs are really good for the countries having huge economic size but for the developing countries this will make many difficulties like increase in the taxes , lower growth for the private sector, lower the spending of social and environmental activities for example development of schools, development of gardens, subsidies on different products like electricity. According to the current paper, IMF program has three major areas of expertise i) SBA (stand-by Arrangements) and EFF (extended fund facility), SAF (Structural Adjustment Facility) and ESAF (Enhanced Structural Adjustment Facility) but this paper focus on the short-term stabilization programs (SBA and EFF) which are 5 and 10 years respectively. Basic results of these loans are the decrease in economic growth because it is clearly explained through table – 6 and 7 from the paper that participation in IMF loan will result in the decrease in economic growth specially for the poor countries because with the help of instrumental variable we saw a strong inverse relation between economic growth and the contemporaneous IMF loan–GDP ratio. Thus, the negative effect of IMF lending programs on growth seems to involve the fact, rather than the amount, of IMF lending (Robert J. Barro, Jong-Wha, 2005). Researchers got failed to find out the higher long-run growth at least over a 5-year horizon (Robert J. Barro, Jong-Wha, 2005) which indeed is a massive point of ponder for those countries who can be better off without taking these loans if they have good production or have low inflation but if they they don’t have such yields then it would be better if they take loans because according to the International Monetary Fund's Chief Economist Olivier Blanchard The world economy will take at least 10 years to emerge from the financial crisis that began in 2oo8(The Economic times, 2012). So, it will help them to groom their plants and make their processes more specialize or gain some competitive advantage to overcome the need of loans and become self-sufficient.
Questions mentioned in the start can be answered through these results like IMF lending may be bad for the economy but good for the governments and individual politicians who arrange the lending that’s why countries take these loans. Second, the IMF lending may lower real GDP but raise a country’s income, which is augmented by the subsidy element of an IMF program. Third, IMF lending may lower growth in the short run but...

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