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Glen Biglaiser: The Effects of IMF Loan Conditions on Poverty in the Developing World

Updated: Oct 12

Dr. Glen Biglaiser is a highly experienced scholar and researcher, currently serving as a a professor in the department of Political Science at the University of North Texas.He holds a Ph.D. in Political Science from the University of California, Los Angeles and has extensive research experience in the areas of specialization include comparative politics, Latin American politics, and economic and political issues in the developing world. His academic works including Guardians of the Nation?: Economists, Generals, and Economic Reform in Latin America (University of Notre Dame Press, 2002) and co-author of Politics and Foreign Direct Investment (University of Michigan Press, 2012).

Dr. Glen Biglaiser has been involved in multiple consulting and seminar projects related to examining foreign direct investment, sovereign bond ratings, the IMF, and democratization. He has received multiple research grants and achieved multiple research results on sovereign bond ratings and economic development in developing countries. In addition, he has also received the 2021 United Nations University Presidential Council Teaching Award, the 2020 U.S. Department of Political Science Outstanding Research Award, etc. multiple awards.

The Effects of IMF Loan Conditions on Poverty in the Developing World

As the most important organization in maintaining the stability of the world monetary system, the IMF together with the World Bank, assumes the responsibility for world economic stability and growth. In recent years, with the rise of emerging developing economies, the IMF has begun to pay attention to aspects other than currency and regarded helping low-income countries reduce poverty and achieve growth as an important task. However, the study found that IMF lending arrangements exacerbated poverty levels, specifically those that included structural reforms. In the work of "The Effects of IMF Loan Conditions on Poverty in the Developing World," SPCIS interviewed Dr.Glen Biglaiser to understand his views on the ramifications of such reforms on the economies of borrowing nations and the trajectory of the poverty cycle as influenced.Besides ,we also invited his to share views on which IMF loan conditions have the most pronounced impact on exacerbating poverty levels in developing countries.

Before responding to the question, I want to state upfront that international financial institutions (IFIs) are likely to face a poverty dilemma. IFIs are in the business of helping countries deal with serious economic problems, and especially in the poorest states. The challenge IFIs, such as the International Monetary Fund (IMF), encounter is moral hazard. IMF officials believe they have the formula to help countries right the economic ship. Whether the IMF officials have the right formula is debatable. However, what we do know is that the IMF will impose loan conditions on borrower states to bring about policy change. The problem is that the IMF is often dealing with the poorest countries who have reasons to avoid implementing loan conditionality policies. Assuming political leaders in poorer borrower countries want to stay in power, as they do elsewhere, they are unlikely to favor IMF recommended reforms. The poorest nations generally have the fewest resources available to back their constituents/supporters and are thus prone to violate IMF loan arrangement terms that intend to cut funding. When the IMF attempts to enforce policy conditions against the poorest borrowers by refusing to release tranches of money, the IMF is liable to receive backlash from borrowers and the development community. As a result, the IMF typically fails to enforce many conditions against the poorest countries, suggesting creeping moral hazard. The economic relationship between IFIs and the poorest borrowers is designed to fail for global financial institutions including the IMF and thus the Fund should not be expressly singled out for its loan conditions and poverty.

That said, however, and directly related to the question about the exacerbating impact of IMF loan arrangements on poverty, we find the IMF’s structural reform conditionality appears to lead to severe challenges for borrower states. Specifically, structural reforms involve deep and comprehensive changes that tend to raise unemployment, lower government revenue (and, by extension, social spending), increase costs of basic services, and restructure tax collection, pensions, and social security programs. The ramifications of such reforms on the economies of borrowing nations are large since they are central for fiscal finances. More importantly, the structural changes carry the highest burden on the poor. Typically, poorer workers are the first laid off, as they tend to have lower skills. The poor also depend most on basic services and government revenue to keep them afloat, as they have little cushion during an economic crisis. Further, restructuring tax collection, pensions, and social security programs often result in the poor receiving a lower share of funds. Consequently, the adoption of structural reforms tends to lead to increasing numbers of the poor on the poverty cycle, a group who can least afford it.

We find structural reforms involving trade and exchange policies, labor reforms, privatization, revenue and tax policies, and institutional reforms all appear to raise poverty. Substantively, we see that institutional reforms have the largest effect on poverty. While this finding may seem counterintuitive, as defense of property rights is intended to bring people in from the informal economy, the implementation of institutional reforms can drive people into the informal economy based on the loss of common lands. We also find labor conditions have a large substantive effect, as labor reforms facilitate a more flexible labor market leading to reduced wages, especially for abundant lower-skilled workers, contributing to increased poverty. We also observe that privatization, revenue, and tax reforms promote increased poverty, since privatization is often associated with job losses and higher commodity prices, while revenue and tax reforms frequently include the adoption of higher consumption-based taxes, which take a higher share of the poor’s disposable income. Similarly, trade and exchange conditions reflect the shift from serving domestic consumers to manufacturing for the global market, as well as competition for subsistence farmers, contributing to worker and farmer economic dislocation and higher poverty levels.

Conversely, when the IMF encourages stabilization reforms, such as cutting government spending, raising interest rates, and repaying debts cause economic pain, they tend to set broad targets on macroeconomic indicators, providing borrowers more policy discretion relative to structural reforms. Recent work has shown that the IMF has experienced an evolution of ideas toward more discretionary fiscal stimulus and gradual fiscal austerity. The fact that the poor represent a significant share of the population, it may encourage governments with greater policy discretion to avoid spending cuts that fall heaviest on those near the poverty line. The bottom line is the IMF should encourage stabilization reforms if for no other reason than to avoid increased poverty rates associated with countries under structural conditions.

Contact: Zhou Tingting/ Ye Jiewen

Interview: Ye Jiewen

Editor: Duan Nengyan

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