+ assumption IMF make:

The Fund assumes that the need for Fund intervention comes from deficiencies and barriers that are
internal to the country
It assumes that countries need to come to the Fund because they have mismanaged their resources
The Fund assumes that countries run out of FX reserves due to their own mismanagement for example
they have deliberately over-valued their currency = pricing themselves out of export markets and
encouraging over spending on imports.
They will deal with BOPcrisis
Union push for wages

What are the steps taken to get fundamentals right as part of an IMF stabilization program
To correct the imbalance (XSD) the Fund requires countries to follow a stabilization program
that results in compression of the local economy.
To get the fundamentals right XSD = spending by consumers and the government must b
wrung out of the system requiring a SR economic downturn.
Steps in getting the fundamentals right:
1. Devaluation of the currency to stimulate exports and reduce imports.
2. Control of the rate of growth of the money supply to stem inflationary pressures.
3. Reduction of government spending - -to reduce the fiscal deficit and stem inflationary
pressures.
4. Reduction in real wages to make exports more competitive, to stem inflationary
pressures, the raise the profit rate to attract more FDI and increase the K stock.

What does research suggest about the IMFs diagnosis of the problem and the effectiveness of its
solution?
Research shows that one of the effects of the IMF devaluation condition is to reduce investment
in the LDC while the country is under the IMF program (estimates 1.5% decline in GDP growth
for each year) p. 564.
Diagnose BOP crisis: Behind the BOP crisis is the over-valuation of the currency behind over-
valuation lie excessive inflationary pressures behind inflation lies over spending by
governments on social development and unions pushing up real wages
The Fund imposes limits on the growth of the domestic Ms, tightening of bank credit, wage
ceilings, and cuts to government spending on education, health, infrastructure
Devaluation solved by increase X, decrease M
Effectiveness: the IMFs impact is less than impressive:
1. Compression of wages, social programs, and investment lead to growing income inequality.
2. One of the strongest effects is a decline in the wage share of income.
3. Exports improved strongly initially then export strength weakened.
4. Only about half of countries benefited from additional capital inflows.
5. Only a few countries reduced high inflation rates, many maintained moderately high inflation
and inflation increased in other countries.
6. Few if any countries shifted to more rapid growth rates.
7. Few countries saw an increase in overall investment although private investment
increased as public investment decreased
Bring the economy to a hole (reduce investment , reduce productive capacity of the economy,..)
Expand the poor, inequality, worsen income distribution
Harm growth potential of a country


Why do the IMF, WB and WTO continue to exist when there is so much evidence they are helping
developing countries
Not helping, just serve advanced nations