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Criticism Of The International Monetary Fund Economics Essay

The IMF has not always been complemented about its way of working it also has been subject to a series of criticisms. These disapprovals were mostly concentrated on the conditions of the loans, but also on the lack of accountability and the will to lend to countries with bad human right records.
The first criticism is about the conditions of the loans. The IMF makes the loan conditional on following specific economic policies. A country has to fulfill certain conditions before the IMF loans the money. These conditions are:
Higher taxes and lower spending by reducing the government borrowing
Higher interest rates to stabilize the currency
permission for failing firms to go bankrupt
Structural adjustment like privatization, deregulation, reducing corruption and bureaucracy.
the problem with these economic policies is that they make the situation worse instead of better. Some examples are the Asian crisis in 1997, were the IMF forced countries to a tight monetary and fiscal policy to reduce the budget deficit and reinforce exchange rates. The result of this policy was a serious recession and mass unemployment. The same policy was ordered in Argentina in 2001, the outcome was a decline in investments in public services that damaged the whole economy.
The IMF have also been criticized that they allow inflationary devaluations. A devaluation is a decline in the value of a currency. This leads to a more competitive export and a more expensive import. Inflation is an increase in the general price level. A devaluation could cause inflation for three reasons [2] .
The first reason is a possible increase in the aggregate demand (AD). When the currency devaluates, export becomes cheaper so more exports will be sold and the number of imports will decrease. A higher AD will cause demand pull inflation when an economy is close to full capacity.
Secondly there will be an augmentation in the price of imported goods. Imports have an essential share in the Retail Price Index, this means there will be cost push inflation.
The last reason makes the assumption that when there is a devaluation exports become less competitive because firms don’t have to do much effort to sell their products. The effect of this is that they don’t have the incentive to cut costs and as a result long term costs will increase. This has as a consequence that inflation will rise as well
The economist Joseph Stiglitz has critiqued the IMF on its exchange rate reforms. He criticizes the monetarist approach of the IMF. He claims that the organization is failing to take the best policy to improve the welfare of developing countries. Due to Stiglitz the IMF is reflecting the interests and system of the western financial community. The IMF fails to adapt and understand the dynamics of the countries they are dealing with.
An example of this criticism can we find in the 1990’s when the IMF intervened in Kenya. Before the IMF intervened in this country, the Kenyan Central Bank managed all currency movements in and out of the country. The association made a bad decision by removing the control over flows by the Central bank. They told the bank to allow easier currency movement. This decision resulted in almost no foreign investments but made it possible for corrupt politicians to transfer money out of the economy. Think about the Goldenberg scandal where the Kenyan government subsidized exports of gold outside the usual arrangements.
The next criticism that concerns the IMF are the neo liberal policies.
“Neo-liberalism” is a set of economic policies that have become widespread during the last 25 years. The effects of neo-liberalism stands as the rich grow richer and the poor grow poorer [3] .
The key ideas of neo liberalism [4] are:
The rule of the market
This means that unions try to liberate enterprises from any rules imposed by the government, more international trade and investments reduced wages and less workers’ rights, no more price controls and total freedom of movement for capital, goods and services.
Cutting public expenses for social services
This means less money for healthcare and education, less maintenance of roads, bridges, water supply,…
Decrease government regulation of everything that can reduce profits
State-owned enterprises selling to private investors. The effect is that the customers have to pay more for their needs while there are a few people who get all the money.
No more “community” or “public good”
Eliminate this concept and replace it with “individual responsibility”.
These policies are not always suitable for the situation of the country. An example here is privatization that can lead to the creation of monopolies who abuse costumers.
The fifth criticism follows the previous one. In addition to the critics about implementation of free market reforms others criticize the IMF for being to interventionist. Advocates of the free markets say that it is better to let capital markets operate without intervention. They also believe that trying to influence exchange rates make things worse instead of better because it’s better that currencies reach the market level on their own.
There is also a criticism that countries with large debts creates moral hazard. People are encouraged to borrow more because of the possibility to get bailed out.
Lack of transparency and involvement is the next criticism that the IMF has to stand. The criticasters argue that the IMF makes policy decisions without consultation of the affected countries.
The head of the Harvard Institute for International Development, Jeffrey Sachs, said: “In Korea the IMF insisted that all presidential candidates immediately “endorse” an agreement which they had no part in drafting or negotiating, and no time to understand. The situation is out of hand…It defies logic to believe the small group of 1,000 economists on 19th Street in Washington should dictate the economic conditions of life to 75 developing countries with around 1.4 billion people.” [5] .
The last criticism to discuss is the support of military dictatorships. The controversial role of the IMF was already a fact since the late Cold War period.
In the 1960s, the IMF and the World Bank supported the government of Brazil’s military dictator Castello Branco who received millions of dollars of loans and credit that were denied to other countries.
Because every story has two sides, we will give the weak arguments with which the IMF tried to refute these criticisms [6] .
Their first rebuttal is the fact that a crisis always lead to difficulties. Whatever policy they propose, they always have to deal with economic crises. It’s impossible according to the IMF to handle a balance of payments without readjustments.
Then they focus on the successes IMF have had. Everybody knows their failures, but they also did some good work. IMF says that it works on long term solutions and criticism concentrate on the short term problems.
Thirdly the IMF claims that investors still have confidence in the institution because they are the lender of last resort (an institution prepared to extend credit when no one else will). This is important to know when there is financial chaos.
The fourth refutation is that countries are not obliged to take a loan of the IMF. The countries have to ask the IMF for a loan, they don’t give it in advance. The fact that so many countries take a loan suggest that the IMF can offer some benefits to these countries.
And last but not least, the IMF is an easy target. They provide loans to countries in need who wants short term solutions. When the IMF intervene the government benefits from the loan, but the blame of difficulties is again for the IMF.
Impact of the IMF
there are a lot of organizations that criticize the IMF policies. The IMF programs had a lot of impact on some world issues.
First of all there was some disapproval from civil society organizations who criticized the IMF for their impact on access to food especially in developing countries [7] . The association believes that food is like all other products in the international trade but that’s a mistake. A lot of people died by lack of food or because they suffered hunger. the World Bank President Robert Zoellick, who is warned that high food prices could eliminate improvements against poverty and malnutrition, ignores the fact that some economic and social imbalances have been created by policies of his organization, associated with IMF.
“We need the World Bank, the IMF, all the big foundations, and all the governments to admit that, for 30 years, we all blew it, including me when I was President. We were wrong to believe that food was like some other product in international trade, and we all have to go back to a more responsible and sustainable form of agriculture.” [8] (Bill Clinton, 2008)
Secondly there is a study which reveals the impact of the IMF on public health. The strict conditions on the international loans resulted in thousands of deaths in Eastern Europe by tuberculosis. The reason for this is the fact that the public health care had to be weakened.
Figure 1. Trends in Tuberculosis Mortality Rates in Post-Communist European Countries, By Region
Data sources: authors’ calculations, WHO Global Tuberculosis Database 2007 [20], and World Bank World Development Indicators 2005 edition.
The Deadly Ideas of Neoliberalism: How the IMF has Undermined Public Health and the Fight Against Aids, a book by Rick Rowden(2009), claimed that the IMF’s monetarist approach which was in the first place price stability (low inflation) and fiscal restraint (low budget deficits) prevented developing countries from being able to scale up long-term public investment as a percent of GDP in the underlying public health infrastructure. The book also talk about the consequences. These where underfunded public health systems ,a non-sufficient number of health personnel and the brain drain of nurses from poor countries to rich ones.
The last impact is on the environment. The IMF makes it difficult for countries in debt to avoid damaging projects for the environment. These countries have to generate cash flow with oil, coal and forest destroying wood and agriculture projects.
As a solution for this problem the IMF proposed the IMF Green Fund. This tool would issue Special Drawing Rights directly to pay for climate harm prevention and other ecological protection.

How The PESTEL Analysis Affects The Cosmetics Industry

According to the Cosmetic Products (safety) Regulations 1996 cosmetics can be defined as any substance/preparation that is used on the skin, teeth, hair, nails, lips or external genital organs, with the intention to cleanse, perfume, change the appearance of, to protect, keep in good condition or to correct body odours. (Cosmetic products (safety) Regulation,2003b) According to the European trade association the European cosmetic industry actually consist more than 4000 manufactures which also includes small and medium manufactures. Cosmetic got a high demand in the society and as a result there have been so many cosmetic firms all over the world. The main purpose of this analysis is to understand how the PESTEL analysis affects the cosmetics industry. In this report I will talk about political, economic ,social, technological, environmental, legal factors in details to have a clear understanding how each of these factors affect the external environment of cosmetics industry. These factors cannot be just ignored as an organisation because these external factors will provide the organisation to have a wider understanding about the business environment and It will help the organisation to anticipate the future obstacles and find precautions for them.
Legal aspects Legal factors include employment regulations, competitive regulations, health and safety regulations, product regulation ant etc. These factors can affect an organization in many ways such as how a company operates, its costs and also the demand for its products. In recent years UK there have been many changes in legal regulation changes that affects the firm’s behaviour.
1.1 consumer law
When it comes to consumer law it includes three main acts, they are
The sale of Goods act which will give you a range of rights when you buy something in the current market. This act includes the right product quality of a product and any product you purchase should fit your purpose of buying.
The consumer protection (distance selling) regulation: This regulation mainly includes the rights regarding purchases via internet or phone. In recent years this kind of sales has been very popular in the world and mainly in European countries. You can buy anything via internet nowadays. Many people tend to use this service in order to reduce the cost and make their life easy. So this act sets clear guideline on how retailers should do the selling which includes explanation about the product, services, product cost and delivery and also order cancellation.
The consumer credit act: Many people tend to buy things on credit, especially when we speak about luxury goods. It may be under hire purchase agreement or anything under credit. So this regulation will take care of the customers who buy things on credit. It clearly mentions how your credit contract should be which includes information regarding the customer agreed amount, payment methods and information and credit chargers. (consumer Law, 2010)
1.2 Employment regulations
Employment regulations are going to affect the workers and the organisations both. There are many regulations regarding this, for example individual labour law, wages and working time, child care and flexible working, Equality act, job security and etc.
Wages and working time is widely described in the “National Minimum Wage Act 1998” which was introduced after the election in 1997. According to the website the current national minimum wage rates are as follows,
£5.93 for workers aged 21 and above
£4.92 for the workers aged between 18-20
£3.64 for the workers aged between 16-17 school leaving age but under 18)
£2.50 for the apprentices under 19 or 19 or over in the first year of their apprenticeship ( The national Minimum wage rates, 2010)
Equality Act 2010 is another regulation in UK which organisations had to follow. This is a framework which exists for the eight major categories of discrimination. For example,
Sex Discrimination act 1975
Equal pay act 1970
Protection from harassment Act 1997
Employment Equality regulations (sex) 2003
Race Relations Act 1976
Disability Discrimination Act 1995
Employment Equality (Age) regulations 2006
Employment Equality (religion) regulations 2003
Political aspects: 2.1 European Cosmetics Regulations 1223/2009 Political aspects can be explained as what degree a particular government intervenes in the economy of a country. In particular this includes areas like:
Political stability
Legal framework for contract enforcement.
Pricing regulations
Taxation and etc.
When we speak about the cosmetic industry in UK the European Cosmetics Regulations 1223/2009 is very important as it contains all the regulations that a cosmetic industry should follow in order to stay active in the current UK market. This was published in the official journal of the European union which was signed on 30 November 2009 by the president of European parliament and the council ministers (journal citing********). This regulations includes the following:
Scope , Definitions
Safety, Responsibility, Free movement of goods
Safety assessment, product information file, Notification
Restrictions for specific substances
Animal testing
Consumer information
In market control
Non-compliance, Safeguard clause
Co-operation between competent authorities
Implementing measure, Final provisions
2.2 Cosmetic products (safety) regulation 1996 All the cosmetic products in the market is governed by the rules as set out in the Cosmetic products (safety) Regulations 1996. It is a must for the cosmetic industries to make sure that the products they sell in the market is safe to be used by customers and no harm caused by them. All cosmetics products should be labelled with the following information according to the Cosmetic products (safety) Regulations 1996. (Cosmetic Products (safety) regulations, 2003)
A List of ingredients
This should appear on the outer packaging of the item, or if there is no outer packaging, on the container itself. In relation to small items such as lipstick and mascara’s, this information can appear on a label attached to the product or in the near vicinity of it.
The name and address of the manufacturer/supplier
These details must be of someone within the EEA. If a full postcode is sufficient to identify the address then this is acceptable.
A minimum durability indication
This should appear on both the outer packaging and the container itself. Storage instructions should be given to enable the consumer to keep the product at its best up until this date.
Warning and precautionary statements
These should appear on both the outer packaging and the container itself
.5) Batch number or lot code
This unique number will help a manufacturer to recall a batch of products if need be.
The product function
This may be given, where appropriate, unless the function is clear from the presentation of the product.
Weight marking
This is required under the Weight and Measures Act 1985.
The above 7 safety regulation should be mentioned in any cosmetics product before the cosmetic manufacturers sell their products in the market. Any violation of these regulations may lead the organization for a close down.
2.3 Taxation and the effects on organization When we speak about political aspects, tax rate has a major impact on the industries. For a example an increase in tax will result in a immediate rippling effect and it will affect the cost structure of the business and the cash position. The following image shows a comparison of corporation tax of the year 2008,2009,2010 and 2011.
Image 1, Corporation Tax rate (2010)
Corporation tax be defined as taxation payable by companies. From the above digarm you can see that main rate of corporation tax has been 28% in the years 2008, 2009 and 2010. There hasn’t been any increase or decrees in the rate in those years. In 2011 it is mentioned that the main rate of corporation tax has been dropped to 27% and small profit rate tax also drop to 20% from 21%. This will affect the cosmetic industry positively. This will encourage the current cosmetic manufactures and they will be more stable in the market.
3.0 Economic factors Economic factors mainly affect the purchasing power of customers. The more customer demand for the product the more profit to the organization, at the same time if there is no customers demand it’s going to affect the organization in a negative manner. So economic factors are very important external factor that affect the cosmetic industry. Economic factors include,
Unemployment rate
Economic growth rate
Interest rate and etc.
3.1 Unemployment rate Image 2 United Kingdom unemployment rate,2010)
The above chart clearly shows the un employment rate of UK from 2009-2010. In the beginning of the year 2009 the unemployment was as low as 5.5% compared to the end of 2010. If we focus on the year 2010, there has been a considerable drop from April 2010 to September 2010, but again there is a rise of unemployment rate again in October 2010. Usually a rise in the unemployment rate indicates that a part of customer base has lost their purchasing power. This will mainly affect the luxury goods as people will change from luxury goods to cheaper goods. In other words unemployed people will have to spend less money than the other employed people. So the business wont be able to make money as they used when people were employed. In an economy if there is a large population unemployed there is a high risk of organizations closing down. Especially luxury good manufactures. This affects the cosmetic industry too. As we are speaking of luxury cosmetic products there is a high risk of manufactures losing business.
3.2 economic growth rate Economic growth can be simply defined as the increase of gross domestic product (GDP).GDP is usually calculates on annual basis and GDP is commonly used as an indicator of the economic health of a particular country. The Gross Domestic Product (GDP) in the United Kingdom has expanded at an annual rate of 0.7% ( national and this positive figure will provide a positive outlook for business and organizations. This shows that government of UK in general has done its job very well affecting the business and organizations.
3.3 Interest rate Usually business organizational spending and expansion are tied to the interest rate. The current interest rate in UK is 0.5% and this was unchanged since 5th march 2009. This is actually a very good rate compared to the beginning of 2009. According to the the interest rate on 8th Jan 3009 1.5%. In 7th Feb 2008 the interest rate was 5.25% which is a bigger rate compared to now.(UK Interest Rates,2011) If we analyze the UK interest rate it has been dropping continuously. This means interest rate in low. A high interest rate may prove too costly and this will discourage many organizations from implementing strategic plans. But currently UK interest rate is low, which means it encourage the purchase of items of greater value on credit because of lower interest rate and this is a very good environment for the Cosmetic industry.