The International Monetary Fund: An Evil Corporation Or Rescuing The Economy In Crisis?

So what is the IMF really? And how are countries that previously used loan programs from the Fund doing? 

What is the IMF?

The International Monetary Fund is an international financial organization within the United Nations, established in 1944. Today, it has 190 member countries, including Ukraine. The Fund is governed by the Board of Governors, represented by all member countries.

The IMF provides loans to countries having a major depreciation of their national currency, i.e. when the outflows of capital (e.g. imports or the “capital flight abroad”) surpass its inflows (exports or investments). This is known as a balance of payments deficit. IMF loans are inexpensive compared to the money that can be raised in the market, e.g. by selling government bonds. Therefore, before granting a loan, the IMF agrees with the Government on a number of conditions. Usually, those conditions have to do with reforms implemented to enable the country to develop steadily and avoid problems in the future.

And it is quite logical for the Fund aiming to maintain economic stability around the world. After all, if a country has a bad economy, it will affect neighboring countries. The World Bank also provides loans-for-reforms packages. Although complementary, the goals of these two organizations are different. The IMF secures macroeconomic stability and economic growth, while the World Bank’s priority is to overcome poverty. 

How has cooperation with the IMF affected Ukraine?

Ukraine became an IMF member in 1992, receiving its first loan in 1995. However, over the 25-year history of cooperation, Ukraine has not succeeded in completing any of the IMF programs, even though Ukraine is the Fund’s second-largest borrower as of 2021.

Ukraine’s cooperation with the IMF intensified considerably after the 2014 events. Ukraine became more active in implementing several economic reforms receiving more financial assistance from the Fund.

By the way, at the time, a significant part of the money was not customarily channeled to support macroeconomic stability in the country, but instead going directly to the budget to mend the “hole” formed in the aftermath of the Yanukovych government.

What do Ukrainian politicians say about the IMF, and what is the situation in other countries?

Ukrainian politicians routinely criticize the Fund, often for no good reason. Despite the disappointing forecasts from some IMF opponents, Ukraine has not become poorer since receiving its first loan from the Fund. On the contrary, its GDP and GDP per capita has grown almost one and half times. This growth was made possible in part by market reforms undertaken by Ukraine in partnership with the IMF. It is likely that if Ukraine had followed the IMF’s advice and pursued reforms more vigorously, the result would have been better than now. At least, this is demonstrated by the experience of other countries that have also cooperated with the Fund.

As we have written many times over, the Memorandum with the IMF does not contain any of these conditions. The IMF lends us money because it is interested in our repaying it and later becoming an equal economic partner globally. That is why it definitely does not need a collapse of our economy. Before granting a loan, the Fund agrees with the Government of Ukraine on the terms by which it can be obtained. Among these conditions are reforms that will set Ukraine to embark on a path of sustainable growth to do without IMF aid in the future. Approving the terms of cooperation is only possible when a consensus is reached between the two parties.

How does this happen in practice? For example, like Ukraine, the Czech Republic had gone through a period of planned economy, beginning market reforms and its cooperation with the IMF in the 1990s. Using Tymoshenko’s logic, it should now be almost like an IMF colony, with the economy in shambles.

However, that is not the case. The Czech Republic started its cooperation with the IMF in 1990 when it was still part of Czechoslovakia. In the early 1990s, IMF loans helped it stabilize the economy. By the mid-1990s, the Czech Republic no longer needed financial assistance from the Fund. The country, however, continued to cooperate with it – this time as a consultant and expert on economic reforms.

During its cooperation with the IMF, the Czech Republic’s GDP and GDP per capita almost doubled. Inflation decreased nearly tenfold. During all the years of partnership, the country never even came close to the economic situation it had before receiving aid from the IMF. During the cooperation with the IMF, the Czechs began to live nearly a decade longer, their education improved, and the overall standard of living (Human Development Index) of the population increased by almost 21%.

Unlike Ukraine, the Czech Republic has a well-ordered land market. Land can be bought by both citizens and foreigners at a transparent market price. And although land prices in the Czech Republic are among the lowest in the EU, they are already fivefold higher than those on the black market in Ukraine today. The price of one hectare is about € 5,000. In recent years, land in the Czech Republic has even been rising in price.

Czech strategic facilities and industry were not sold out against national interests. On the contrary, the Czech Republic is developing high-tech industries, with the industrial sector accounting for over 40% of GDP. 

Of course, the IMF is not the only and exclusive cause of economic growth in both the Czech Republic and other successful countries. High-quality implementation of the proposed changes, stable state institutions, and the situation on both domestic and foreign markets played an important role.

So as we can see, cooperation with the IMF did not ruin the Czech economy but helped this country implement several important reforms, which led to robust development in the country. Its population was not turned into slaves or annihilated. On the contrary, the Czechs now live better than they did 20 years ago.

It is unknown how Kachnyi links economic reforms to losing sovereignty. Furthermore, the IMF does not demand changes from Ukraine. It is the Government of Ukraine that undertakes to adhere to jointly agreed terms of cooperation. The IMF never imposes them unilaterally. 

Another country from the former socialist bloc – Poland – also sought financial help from the IMF. It, too, carried out several reforms recommended by the Fund that Kachnyi is so much afraid of. Has it lost sovereignty?

Poland started its cooperation with the IMF earlier than the Czech Republic, in 1986. Interestingly, it was even one of the Fund’s founding member countries, joining it in 1945. However, 5 years later, it was forced to leave it under pressure from the USSR. After all, for the Union, the IMF was “a tool of capitalism for the enslavement of free peoples.” This rhetoric is somewhat familiar, isn’t it?

As in the case of the Czech Republic, the 1990s were a period of significant market transformation for the Polish economy. The country received its first loan from the IMF in 1990. Prior to that, the Fund and the Polish government had worked together to agree on market reforms. Compared to the Czech Republic, Poland had much more problems in its relations with the Fund. Some Polish politicians were extremely negative about such cooperation.

Despite this, Poland still succeeded in carrying out the necessary reforms. There were changes to tax policy and accelerated privatization. In 1994, Poland received its last loan from the IMF in the 90s, which marked the stabilization of its economy. IMF tranches also helped Poland overcome the effects of the 2008 global financial crisis and expand its foreign exchange reserves. Once the country’s economy stabilized in 2017, it quit receiving further financial assistance from the Fund.

Poland received even more loans from the IMF than the Czech Republic. Using Kachnyi’s logic, it should definitely now be in shambles. However, during its years of cooperation with the IMF, Poland’s GDP and GDP per capita almost tripled. Inflation significantly decreased and stabilized. The Education Index rose by a third, and the overall quality of life, as measured by the Human Development Index, rose by 22%. Finally, modern Poles live longer than their parents. As we can see, the trend is the same as in the Czech Republic: cooperation with the IMF contributed to Poland’s development.

Poland has not lost sovereignty either. Using the speakers’ logic, governments “under external control” should not work for the benefit of the country’s citizens, and that would disappoint the latter. Therefore, take for example the government effectiveness index. This index measures the quality of public services, the government’s ability to implement its policies, and trust in the government. According to it, Poland currently ranks 49th in the world with 0.60, while the world average is only -0.02. According to this index, Ukraine ranks 113 with -0.30.

In Ukraine, laws are still being passed by the Verkhovna Rada and implemented by the Cabinet of Ministers. The Memorandum with the IMF is not an “instruction for action”, but a package of reforms that the Government promises to implement (that is why it is officially referred to as a “letter of intent”). However, as we reported earlier, Ukraine has never fully implemented its commitments.

Unlike Lithuania, which was also part of the USSR. The country joined the IMF in 1992, as did Ukraine, and got its first loan later the same year. That is, its “starting conditions” were the closest to ours. However, its success is due to the fact that the Government “became the owner” of reforms proposed by the IMF and implemented them wholeheartedly. Thus, during the voucher privatization, Lithuanians were able to exchange their vouchers for shares in enterprises, and privatization tenders were held transparently, with the participation of foreign investors. Monetary and fiscal policy reforms were particularly important. The changes helped Lithuania stabilize its economy in the 1990s. Russia’s 1998 financial crisis, while damaging Lithuania, only accelerated its further cooperation with the West. The country entered the eurozone in 2015. 

The years of its cooperation with the IMF were a period of robust growth for Lithuania: GDP almost tripled, and GDP per capita almost quadrupled. Inflation fell ninefold. The metrics reflecting the standard of living of the population grew.

According to the government effectiveness index, Lithuania ranks 35th in the world with 1.04,  which is even better than Poland. Thus, the Lithuanian government became much stronger over the years of its cooperation with the IMF.

Conclusions

VoxCheck has come across many politicians’ statements warning that cooperation with the IMF will lead to the collapse of Ukraine. However, the example of the countries that were once quite similar to Ukraine, showed that such statements are wrong. None of the countries that we analyzed is in a worse condition now than it was 20 years ago. Quite the opposite: all the three states developed vigorously and are now ahead of Ukraine. 

Of course, the International Monetary Fund was not a panacea or a cure-all solution for any of these countries. Their economic growth was not due only to cooperation with the Fund. The IMF provided the countries with money and a roadmap for development. The end result depended solely on the Government. But in none of the above-cited cases were the countries doing worse after completing the Fund’s program than before cooperating with it.

Ukraine’s problem is, therefore, not the IMF but the fact that Ukraine only recently began to implement market reforms that other countries had undertaken in the 1990s. All this at a time, when politicians and oligarchs close to them have already developed their corrupt interests. Of course, reforms proposed by the IMF are simply disadvantageous to them.

The country’s economy is inextricably linked to its policy, as economists Daron Acemoglu and James Robinson write it in their 2012 book “Why Nations Fail”. Specifically, economic liberalization should eventually lead to political liberalization. The IMF usually proposes a liberalization and, simultaneously, increased transparency and sticking to the rules in everything – from setting interest rates to allocating budgetary funds. Naturally, it is much harder to benefit from corruption schemes in such a country.