IMF programs: Who is chosen and what are the effects?

This research journal has been written by Barro, Robert J. & Lee, Jong-Wha and published by Journal of Monetary Economics in 2005. It studies the impact of IMF (International Monetary Finance) loans on the economic conditions and political economy variables such as investment, inflation, government consumption, international openness, democracy and rule of law of the borrowing state. The purpose of their research is to derive a relationship between IMF loan programs and political economic performance of the country whether it is negative or positive. Moreover to analyze are the countries better off after taking the IMF loans or not? This paper also point out what are the variables which will increase the size and probability of loan approval. IMF is the universal financial institution and 184 states are the members of it. The primary role of IMF is to provide funds to a members country that has difficulty in balance of payment. Every member does not have equal power of vote; the voting power is determined by the amount of quota the member has. Quota is an amount of money that a country has to deposit in the IMF fund to lend the countries those are in difficult situation. The United States (US) is the biggest shareholder of it with 17.5% of the total IMF quotas and important members are Japan (6.3%), Germany (6.1%), France (5.1%), United Kingdom (5.1%), Saudi Arabia (3.3%), China (3.0%), and Russia (2.8%). Major shareholders have the power to veto or influence decisions, major decision requires 85 % majority in favor or against of it. The US has a strong tie with three major European countries i.e. Germany, France and United Kingdom to influence any decision to its favor. Krueger (1998) study explains that in 1994 a $17.8 Billion loan given to Mexico by US influence. It is clearly claims that US has a strong influence on IMF decisions. Kahler (1992) and Stone (2002) have argued that the US and western countries have strong influence on the decisions of IMF. The main programs of IMF are Stand-by Arrangements (SBA) and the Extended Fund Facility (EFF) to provide short term balance-of-payments support to member countries. Structural Adjustment Facility (SAF) and the Enhanced Structural Adjustment Facility (ESAF) were developed by IMF to support poor countries because SBA and EFF did not provide to the countries with low income. The SBA and EFF are analyzed in this study.

The previous studies of Knight and Santaella (1997) and Bird and Rowlands (2001) describes that the approval of fund from IMF is depend on the economic and political condition of a member state. The Barro and Lee (2005) extend the previous literature and include two more institutional and political variables which are important in size and approval of loan, countrys voting power and number of countrys economist working in the professional staff of IMF. Authors argued that greater trade intensity with the United States and the European countries and higher country quota raises the probability and size of IMF loan programs.

Tobit model is used to for the analysis of the observation, a sample of 5 year frequency data is taken from 1975 to 2000 and the results shows that the probability of loan approval and size of IMF is directly proportional to the bigger quota, number of nationals working in the IMF and more close economic and political relationship with US and major western countries. The political proximity is measured by voting patterns in the United Nation, General Assembly and economic proximity by analyzing the bilateral trading volume with US and western countries.

Moreover it is derived from the results there is significant negative relationship between IMF loan participation and economic growth of a country. It is also pragmatic that East Asian countries have fewer representatives in IMF Quota and Staff and they are less interested to participate in IMF loan programs and they have positive economic growth rate. IMF loan participation has an indirect negative impact on the countrys rule of law condition in other political and economic variables.

In the end it is conclude that the IMF loan programs are not good for the economy, especially for the economic growth. A questioned arise that if it not good than why the countries participate in it? It can be suggest that it may be bad for economy but good for governments and individuals, it decrease GDP growth but may be increase national income or it can raise economic growth in the long run. This research is not answering these questions; there may be some other important political and economic variables those are better off by IMF loan programs.

Criticism The author mainly focus on the negative relationship between IMF loan programs

Political Situation, Quota, other research reference