Conditionality And The International Monetary Fund Mandate Finance Essay

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In the primary Articles of the Agreement of the International Monetary Fund (IMF) which set up the Fund in July 1944 neither the term structural adjustment nor the term conditionality can be found [1] . Conditionality was explicitly incorporated into the IMF when the Articles of Agreement were amended in 1968 [2] . Henceforward Article V Section 3 states that "The Fund shall adopt policies on the use of its general resources, including policies on stand-by or similar arrangements, and may adopt special policies for special balance of payments problems, that will assist members to solve their balance of payments problems…"

However, even before conditionality was explicit in the IMF mandate the Fund used to practice a sort of conditionality from its beginning. For instance, after the IMF made its first loan to France in 1947, they refused another loan for France in 1948 because the Fund did not accept the French exchange rate policies [3] . But also in the early years conditionality was officially announced and "Stand-by Arrangements" were introduced by the Fund [4] . On February 13th 1952 the Executive Board decided that Fund resources should be used to help members provided "the policies the members will pursue will be adequate to overcome the problem" [5] . However, in the early years conditions were fewer in number and less detailed whereby this policy has come to be called "macro-conditionality". Usually these conditions included cutting the government budget deficit, reducing the money supply and sometimes the devaluation of the national currency [6] . Although the Fund configured the essential policy, governments had a lot of room in how they could achieve the macro-economic targets of IMF arrangements [7] . The rationality of conditionality is to prevent the possibility of what economists call a "moral hazard" [8] . Moral hazard occurs when a party insulated from risk may behave differently than it would behave if it were fully exposed to the risk. Because IMF loans can be seen as a sort of insurance against the risk of a balance of payments crisis a moral hazard could occur when governments know that the insurance entity – here the IMF – will pay in any event, even if they operate an irresponsible economic policy.

As in 1982 a deep financial crisis arose in Latin America due to excessive public sector borrowing the IMF was faced with considerable critics because countries of this region had participated in more IMF programmes than any other in the world [9] . The official IMF response was that not the general policy was wrong but that the programs had not gone deep enough. Thus, the IMF began to enforce more detailed policies which not only include fiscal and monetary targets, but also targets for international reserves, limitations of foreign debt, a prohibition against import restrictions, further provisions for trade liberalization, as well as conditions calling for privatization and deregulation of labour laws [10] .

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