The Role of the IMF in supporting local Economies

Critical discussion of the role of the IMF in supporting local economies and whether the IMF support has always been positive to local economies

According to Kuditshini (2008), the international monetary fund or IMF is an international organisation that comprises of 184 members incorporating emerging, industrial, and the low-income economies. In the multilateral organisation, the United Nations has more countries who are IMF members. In reality, IMF activities are global and they are implemented for the benefits of all the members (Dreher, 2006). From the political economy standpoint, IMF hold the rationale of engaging with the local economies with targets of offering significant information to the donors and investors while providing commitment technology to the members. Regarding the issue of information, the aspect covers the economic environment of the local economies which may be considered as pubic good beneficial to actual and potential investors. Mainly, IMF is an institution that is well equipped than individual investors with ideas of internalising the externalities. According to Kuditshini (2008) individual investors can source and retain information associated with the profitability aspect of a defined investment initiative and associated benefits but they have access to insufficient incentives for undertaking expensive information-sourcing process to have data related to the investment environment (Stone, 2004). Despite this, a multinational institution is well positioned in acquiring such information efficiently and sharing of the information for public goods. Practically, multinational organisations such as the IMF tend to engage in dialogues with the local economy governments with targets of ascertaining the states of the economies as well as quality of the policies adopted (Dreher, 2006).  

However, Kuditshini (2008) argued that the information role assumed by the multilateral organisations such as IMF are beneficial to all nations but the low-income economies are considered to be in a better position of enjoying greatly from the information gathering. In reality, some of the information gathering activities are performed by investors in the local economies especially those holding sizeable investment flows. However, considering the paucity of the private international capital flow to the low-income nations, such countries have lesser chances of attracting investor fostered activities (Kuditshini, 2008). Moreover, while local economies are members of the multilateral organisations, they have the will of cooperating and engaging in successful dialogue with the IMF than in the case of private investors. Also, the local economies willingness to engage may cause the process of gathering this information to be accurate and easier. Donor economies providing bulk development flows are as well capable of enjoying the benefits associated with informational activities in connection to the low-income economies. Instead of gathering information bilaterally, donor members can consider polling up their resources together and depend upon the multilateral sources (Kuditshini, 2008).   

From the standpoint of the donor members, Stone (2004) highlighted that multilateral organisations offer excellent commitment device to their governments since they allow the donor members to commit their resources towards development and humanitarian ends. Theoretically, the donor members are in a position of pursuing the lending bilaterally, it is clear that the capacity is overtaken by strategic and political issues. IMF plays an informational role which is mainly related to lending activities that are considered as synergic to the institution’s core roles. Dreher (2006) asserted that the IMF lending role is associated with the aspect of providing the borrowing local economies with incentives of engaging efficiently and effectively with the organisation. For the donors and investors, the aspect of lending is considered as a boost of the IMF’s credibility since it holds strong incentives of monitoring the quality of policies that are implemented in the local economies (Gürgen & Wolf, 2000).  

The IMF assumes a multilateral nature of lending as an aspect that allows the institution to exercise the role of conditionality which affects the policies nature undertaken by the local economies instead of monitoring the quality. From the standpoint of the borrowing local economies, conditionality role tends to offer commitment technology for undertaking decisions (Dreher, 2006). Another important role and feature of IMF conditionality is the aspect of providing ways for further resources that are mobilised via the provision of other lenders with great confidence where relevant reform programs are implemented where sturdy policies return local economies to sustainable growth path. Stone (2004) indicated that IMF lending to the local economies has a positive relation to capital flows.

Also, lending by the IMF ensures that local economies are supported to develop capacity of formulating and effectively implementing policies that are specifically valuable for the low-income economies, whose institution quality and rule of law are considered weaker (Dreher, 2006). The IMF has positively contributed towards the local economies through highlighting the importance of the capacity building as well as development of sturdy institutions that are core to strong sustainable growth. In fact, the process strengthens the issue of IMF engaging in the process and supporting capacity building in the low income economies as core strategies that assists the country exit poverty (Gürgen & Wolf, 2000). Multilateral nature of the IMF offer remarkable institution comparative merits due to the role it plays as information provider offering distinctive advantage in crafting and pooling information for enhanced capacity-building activities for support of the members (Dreher, 2006). Also, the multilateral nature of the IMF has allowed the institution to ease in cooperating with the local economies and collecting relevant information as well as experience. The IMF’s superior capacity of interconnection with various local economies has allowed the institution to widely share relevant facts, experiences, and events for pooling of information and elaborating this accordingly (Dreher, 2006).  

Conversely, upon discharging the surveillance role, the IMF fund may be concluded that local economies may be beneficial to the provision of technical aid directed towards certain areas. The knowledge sourced from the aspect of providing services tend to assists in reinforcing the policy capabilities of the IMF (Stone, 2004). In pursuing the financial arrangements, the IMF has been offering technical help to the local economies to ensure that there is strengthening of capability and attaining certain policy metric where the success of the arrangement are dependent upon. On the other hand, the capacity to gather better knowledge and understanding of the institution strength as well as political-economic circumstances, the local economies via the capacity building assists the IMF in sharpening its policies under the lending and surveillance activities. It is worth to note that the activities are collected together which allows the IMF to meet the informational role efficiently (Kuditshini, 2008). As a multilateral organisation, the IMF is well positioned in assessing the local economies’ macro policies across which include the low-income members. The knowledge is made possible due to wider policy advices that are offered in the research activities which in turn are underpinned upon the policy advisory capacities.

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