Abstract
News reports of the International Monetary Fund's (IMF) activities abound in most countries across the globe yet there is little consensus in the literature as to the effectiveness of the IMF's work. The purpose of this study is to provide a systematic review of the IMF literature that identifies the effects of IMF bailouts from the 1970s to the present. We investigate significant elements and consequences of the IMF's bailout policies and implementation approaches such as bailout effectiveness, moral hazard, conditionality, leadership, governance and the sustainability of IMF policy. Based on our review, we develop the ‘Spiral of Doom’ framework and argue that the effectiveness of the austerity package attached to bailout funds is questionable because the design of the package overlooks the recipient country's unique economic status and cultural background. We then propose financial engineering solutions as an alternative to IMF bailouts which it is envisaged may minimize the moral hazard problem associated with bailouts.
Highlights
The International Monetary Fund (IMF) was established in 1944 to promote international economic cooperation and provide its member countries with short-term loans if they experience a financial crisis or a shortage of liquidity for international trading
Opponents of IMF bailouts argue that they make troubled countries further dependent on the IMF (Bandow & Vasquez, 1994; Corsetti, Guimaraes, & Roubini, 2006), while proponents claim that the liquidity supported by the IMF is crucial in preventing extreme financial consequences
Our findings indicate that the fragmented literature is far from conclusive on the subject of the effectiveness of IMF bailouts
Summary
The International Monetary Fund (IMF) was established in 1944 to promote international economic cooperation and provide its member countries with short-term loans if they experience a financial crisis or a shortage of liquidity for international trading. In 2012, the Governor of the Malaysian Central Bank, Zeti Akhtar Aziz, stated that ‘The adjustment, the austerity and consolidation of the fiscal position has to be done gradually because any drastic prescription or conditionalities would drive the country into a new phase of economic recession and this would increase the cost to the economy and make recovery potentially more remote’ In this regard, indebted countries, such as Greece, should be given more time to implement reforms and clean up their finances; an overly stringent austerity drive could push such countries into a prolonged recession and make recovery even more unlikely (Chua, 2012). To address the research question and four issues raised above, this study undertook an examination of research in the areas of management, finance, social science, government and the media that focused on the IMF’s financial assistance activities between 1970 and 2015. The final section provides a short summary of the research findings and suggestions for future research
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