Wednesday, 3 November 2010
The International Monetary Fund (IMF) was established in December 1945, post great depression in United States. The main purpose of IMF is to manage the international monetary system, including the rules of exchange rates, enabling countries to do the business transactions each other, and to reduce the poverty in under developed countries.
Currently, 189 countries are members of the IMF. Each member has a right to get loans and help from the IMF or to lend their money to the needy countries through the IMF. The amount a country is eligible to borrow depends on its country reserve assets, either in Gold, US dollars or other basket currencies such as the Japanese Yen, Euro and Pound sterling.
The amount of money that a country can draw is called Special Drawing Right (SDR). However, in order to increase their living standard, the countries that live below the poverty line, have special allocations and conditions of SDR.
In practice, it’s often that IMF members sell or buy their SDR to or from one another, since a borrower is limited by direct obligation to the IMF, and a lender is limited to gain profit, from idle money they donate to IMF. Recently, due to some complaints about its lender act, the IMF strictly monitors the mechanisms of such voluntary transactions.
Measurement of success of the IMF program in reducing the poverty in designated countries is dependent on how compatible the application purpose and the utilization of loans are.
Success and Failure of IMF Program
There are four basic conditions that are needed by a receiver country, in order to enhance the success of IMF programs:
Clean government means that there is no corruption tolerated in processing or the proceeds of money from the IMF. The money should go to correct use for which it is approved.
Security, is essential to enhance investor confidence, with security guaranteed by the county’s government. Maximum productivity can’t be reached under fear or uncertainty. The investor invests money to gain reasonable profit, and not to lose it.
Technology, or the lack of high technology, causes a soar of the operational cost in the rural areas in the third world countries where the main IFM projects are.
Discipline and Commitment, refers to a developing country needing to produce at maximum comparative advantage as they can, to attain success. The use of IMF money for projects that are not comparative advantage products, will lead to a failure.
The Countries where IMF Program are success:
Data below shows how India’s rapid economic growth, and its impact of increasing GDP per capita, into buying power. India’s GDP per capita in 1978 was $453, and in 2009 it as $724.
China is a country, that takes the benefit of comparative advantage of the global market. China government utilized all the possibilities of its resources to improve its economy. In the late 1970’s to the 1980’s China was one of the underdeveloped countries. Now, China has become one of the world’s most powerful countries besides, USA, Germany, and Japan. China recently became a donor country instead of borrower.
China’s GDP in 2009 8.7 % and is expected to reaches above 10% in 2010. However, even though China’s GDP is 5% of Global GDP, the increase of GDP is not following equally to GDP per capita. With the largest population of any country in the world, China has also become the highest world consumer of Coal, Iron, Steel and Cement. Statistics below show:
China GDP per Capita compared the other countries in the same continent
The Countries where the IMF Program was / are Failure
|Name of Microlender||Countries Operation||Range Interest % / Year|
|LAPO (Lift Above Poverty Organization)||Mexico, Nicaragua||74 – 126|
Besides the involvement of local banks in micro credit with its privilege, and with volunteer transactions of Special Drawing Right ( SDR) of IMF member added to the scrutiny for lenders, the program is wringing its hands over the direction for which it was designed. Micro lender such LAPO ( Lift Above Poverty Organization) which are backed by well-known investor like Deutsche Bank and The Calvert Foundation, charge in the interest range 74% – 126% per year.
According Mohamad Yunus, a Nobel Prize winner who pioneered micro credit in Bangladesh, “interest rate should be 10 – 15% above the cost of raising money. Beyond that is ‘red zone’ of loan shark”.
The lender argues that operation costs in country such as Nigeria, are high. The institutions have to pay the rent, generate and supply electricity by themselves, and pay the employees. There is no difference of fixed costs to obtain $100 or $10,000. Meanwhile, the borrowers of LAPO, both in Mexico and Nigeria, complain that the minimum amount that is needed to keep in saving account demanded by the lending bank, is unfair practice. As an illustration:
|Amount Borrow||Minimum to keep in Savings Account in Lender Bank||Available to Draw||Base amount for interest charge|
Conclusion: IMF and its member have to establish uniform standards of micro loans, including possibilities of exceptional conditions. Otherwise people who need help in poor countries will be continuing became a prey of finance predator institutions.
Sources: New York Times, April 14, 2010
Title: Many Borrowers of Micro loans Now Find the Price too High