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What kinds of conditions might be imposed on a developing country applying for...

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user839654 | eNotes Newbie

Posted June 24, 2013 at 8:01 AM via web

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What kinds of conditions might be imposed on a developing country applying for financial assistance from the director of a major international lending institution supported by funds from member countries?  Is it likely that a member country would be politically opposed to providing aid in this area?

 

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kipling2448 | (Level 1) Educator Emeritus

Posted June 24, 2013 at 2:41 PM (Answer #1)

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The original wording of the question was extremely unclear in terms of the perspective(s) being sought.  Consequently, the answer will provide three perspectives: lending institution, borrowing government, and third country.  The two main international lending institutions are the International Monetary Fund (IMF) and the World Bank.  

When considering an application by a less-developed country or, increasingly, by developed countries that have encountered major debt problems (Greece, Spain, Portugal), the managing director of the IMF, traditionally a European, and his or her Board of Governors, will develop a set of conditions with which the recipient country must comply before receiving assistance.  Those conditions involve financial management issues including the elimination of any price controls that may be in place, maintenance of a specified level of reserves in a central bank, financial austerity measures, and "responsible" government provisions, for example, elimination of corrupt or financially imprudent lending practices.  The goals, from the IMF's perspective, are to stabilize the borrowing country's currency, to help it balance its budget, and to ensure it can repay the loan.

From the borrowing country's perspective, the terms of the IMF loan are almost always very difficult.  Many less developed countries subsidize basic commodities or staples, like gasoline, wheat and flour, and other everyday necessities for lower-income families.  The IMF conditions require that such subsidies be removed, and that these commodities be allowed to increase in price as a direct reflection of their actual value.  The consequent inflationary pressures on the citizens of the borrowing country frequently leads to political problems, including massive riots by people objecting to the sudden increase in prices.

In addition, the borrowing country often finds it difficult to comply with IMF conditions requiring a more balanced budget and the repayment of loans.  Interest on these loans by itself can be prohibitively expensive for developing countries, which has sparked efforts in some advanced, lending countries to ease that particular burden (the U2 band member Bono is a leader in that movement).   The financial burden of repaying interest on the IMF loan can make it difficult for the borrowing country to fund domestic requirements that are essential for political stability.

From the perspective of a third country opposed to the IMF's methods, the conditions of the IMF loans favor the rich while harming the poor. That is why some developing countries are becoming more vocal in their demands that the IMF and other lending institutions change their lending practices.  The IMF is a product of the post-World War II agreements by the victors of that war and its guiding philosophies reflect the priorities of the wealthy industrialized nations of the West.  Countries that are emerging as major economic actors, like Brazil, India, Russia and China have have sought alternative lending structures that allow them a greater voice in international financial matters.

China has emerged as a major force in international lending.  It's large cash reserves combined with a practice of lending money with few or no conditions attached -- and usually as a means of gaining access to the natural resources possessed by the borrowing country -- has enabled developing countries to use it as an alternative to the Western Europe/United States-dominated IMF and World Bank.

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