Thursday, May 24, 2007

Why have IMF and World Bank not Reduced Poverty?

Discuss 3 Factors that can explain the persistence of poverty, despite the efforts of the IMF and the World bank.

The IMF and World Bank are focused on giving loans to countries. Usually with conditions of free market deregulations.

1. These loans are not Targeted to development.

Often they are to meet government deficits and / or lack of foreign exchange. Therefore, may not be used for development. However, the injection of foreign funds can make a difference, through a trickle down effect. Also, some economists argue the conditions that the IMF impose, can help significantly in reducing corruption and economic mismanagement, therefore this is most effective kind of AID, because it makes them reform inefficient economies.

2. Rural Areas need AID most.

AID improved economic development most when it is targeted in certain ways: for example, investment in better technology, education and training for certain workers. AID targetted at rural areas. AID from the world bank is a relatively small % of GDP.

3. Domestic Savings

Harod Domar model considers domestic savings to be the key to economic development. This domestic savings enable higher levels of investment. Higher investment is crucial to economic development (take off period), also domestic investment is usually more beneficial than investment from outside.

However, the importance of domestic savings is less important than some economists believe. Loans from IMF can have the same effect as domestic savings in stimulating investment. The key is how are the loans used.

Other factors worth considering:

  • IMF impose economic conditions e.g. privatisation and deregulation. However, it is debatable whether these are actually appropriate for developing countries.
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