There is a tendency in Pakistan's official circles
to accept the IMF policy prescription without question. Indeed IMF approval
of the government's economic policies is regarded as a measure of its
economic health. This attitude persists inspite of the fact that after
more than a decade of diligent adoption of the IMF policy package Pakistan's
economy faces deepening recession, growing poverty and continued vulnerability
of the exchange rate. It may be time now to conduct a comprehensive, analytical
and empirical study of the feasibility of IMF policy advice in terms of
its conceptual basis as well as international empirical evidence.
Such a study is particularly called for in view of
the fact that an increasing number of countries in Latin America which
had been celebrated as success stories of IMF policy have now entered
into a major economic crisis. Consider, Argentina has recently defaulted
on its external debt that has induced the deepest economic depression
since the 1930s. (The GDP growth rate of Argentina was a disastrous minus
15% last year). Similarly Uruguay, which had long enjoyed a prestigious
economic rating faced a banking crisis and had to be bailed out a couple
of months ago through U.S. and IMF financial support, and is now once
again on the verge of default. Brazil, one of the largest countries in
Latin America avoided financial collapse through a $30 billion IMF loan
last August, while Paraguay, Ecuador and Colombia are all in serious economic
The defence by the IMF bureaucracy of the widespread
failure of its stabilization program is the argument that while the policy
package was right its implementation was inadequate. Such an argument
does not hold: If the conceptual framework within which the IMF conditionalities
are constituted is to be credible, then it must address the institutional
constraints to implementation on recipient governments before placing
the conditionalities. (For an elaboration of this point see my paper:
Poverty, Growth and Governance in the book titled: Problems of Governance
in South Asia). An illustration of the flaw in the IMF argument is provided
by an analogy given by Joseph Stiglitz (Vice President and Chief Economist,
World Bank): "When a single car has an accident on the road, one
is inclined to blame the driver or his car. When there are dozens of accidents
at the same spot however, then the presumption changes. It is likely that
something is wrong with the design of the road". Stiglitz goes on
to argue that the fact that there have been financial crises in 100 countries
in the past 25 years suggests that there are "systematic problems"
with the IMF policy package. He further points out that the IMF management
would have an "incentive to argue that any apparent failures are
the fault not of the policies, but those who implement them ------ these
perverse incentives suggest that the policy framework generally, and the
policy prescriptions individually, may be maintained longer than the 'evidence'
would suggest is reasonable".
What is the stabilization package? What are its weaknesses?
And what is the perspective within which Pakistan can evaluate IMF policy
advice? The stabilization policies that the IMF seeks to enforce across
countries, regardless of their institutions of governance or the specific
structure and dynamics of their economies are: Cutting down of government
expenditure to reduce budget deficits, controlling inflation rates, tightening
the money supply and thereby achieving exchange rate stability. If such
policies achieve their aim of establishing stable, market based exchange
rates then they would certainly facilitate the international flow of capital,
goods and services across international borders. However it is equally
certain that such policies are in theory and have proven to be in practice,
contractionary. i.e. they constrict aggregate demand, lower domestic investment,
reduce GDP growth and increase unemployment. Even in those countries where
large foreign portfolio investment does take place through such a prescription,
it does not necessarily result in economic stability. The Southeast Asian
and Latin American experience has shown that such economies are subject
to a sudden economic crisis as private foreign capital gets withdrawn
due to speculative fears.
Moreover, recent research (reported in the IMF's own
World Economic Outlook) shows that in countries of Latin America which
have a high degree of financial market integration with the world but
an inadequate export capability, are highly vulnerable to currency collapse
and debt crisis. Pakistan is also under IMF advice moving towards increasing
financial market integration with the world economy and yet its export
capability continues to stagnate. Therefore Pakistan's currency too is
vulnerable to exogenous shocks, even as its real economy remains in recession.
The theoretical basis of the IMF's policy prescription
is the neo classical postulate that the free market mechanism, both at
the global and national levels is the most efficient framework of resource
allocation. (The question of the distribution of income, both between
countries, as well as within a country, is of course excluded from this
formulation). Hence the IMF's stabilization package, which aims at market
based exchange rates is accompanied by its broader 'Economic Reform Program',
which aims at deregulation, economic liberalization and privatization,
to bring resource allocation within the framework of the market. The question
is, are markets really free? If they are not, then does the outcome within
the framework of demonstrably distorted markets, even approach 'efficiency'
let alone social welfare, that the theory claims?
It is perhaps because of such doubts that the world
community in the post war period established multi lateral institutions
such as the IMF, for cooperative economic action. Indeed the modern theory
of collective action is premised on the recognition of market failure.
There is equally the recognition of the limitations of government. Therefore
markets and governments have to work in tandem, with one providing a check
on the other.
In the context of the issue of public intervention
in the market let us take the example of contemporary international trade.
Neo classical theory would argue that it is in the interests of each country
to adopt a policy of free trade. Yet it was precisely their failure to
do so that led to the establishment of the World Trade Organization (WTO).
It can be argued in fact that the WTO is playing a major role in moving
the world towards a freer trade regime. At the same time it is significant
that there has been greater success in reducing the tariffs on manufactured
goods, (which has helped advanced industrial countries), than in reducing
trade barriers on agricultural goods (which constrain exports from the
developing countries). Thus the very existence and performance of multi
lateral institutions is suggestive of two propositions: (i) Markets as
they stand, do not necessarily work towards an efficient outcome. (ii)
Public intervention through multi lateral institutions is not always equitable
or effective. It is crucial therefore to systematically examine the logic
and performance of the IMF, to see whether its advice is suitable for
the national goals of development.
In view of the failure of the IMF's stabilization program in a large number
of countries, it would be prudent for Pakistan's government to conduct
an independent evaluation of whether even at a technical level such policies
have worked in the past in Pakistan or are likely to do so in the future.
Beyond this there is a need to broaden the aim of development policy.
The aim should be not merely to achieve lower budget deficits and exchange
rate stability. Nor can the aim of development be seen in terms of overcoming
the technical problems for achieving a more efficient resource allocation.
The aim should be the development of a more humane society. A society
that is characterized by enlightenment, equity, participation in the democratic
process, the availability of public services and equal opportunities to
all citizens to actualize their creative potential. It is in the context
of these national goals that a broad based policy for economic, institutional
and social change has to be undertaken. It is in this context that the
IMF prescription needs to be evaluated.