In response to economic crises, countries seek financial assistance from the IMF. The Fund’s loans come with conditions aimed at stabilizing the economy and restoring debt sustainability. The Fund’s conditions may include devaluing the country’s currency, lowering its tariffs and other taxes, increasing foreign investment, privatizing state-owned enterprises, and reducing spending on government operations. These policies are intended to promote a free-market economy.
However, critics have doubted the effectiveness of IMF bailouts. Some, like Carnegie Mellon University professor Allan Meltzer, argue that IMF bailouts inherently encourage moral hazard among creditors and investors. They also reduce incentives for governments to reform their economies, and thus, lead to recurring financial crises in the future.
Other criticisms of IMF-backed bailouts revolve around the IMF’s ability to effectively enforce its loan conditionality. Stone (2004) argued that the IMF never seriously punishes political allies for non-compliance with its bailout conditions. Dreher, Sturm and Vreel (2015) also found that a country’s temporary membership on the UN Security Council is associated with a softer treatment by the IMF when it negotiates its loan terms.
Regardless of the cause of the financial crisis, a country’s IMF-backed bailout can only help its economy in the short run by providing the needed breathing room to adjust policies. But, in the long run, a country facing financial crises should focus on its domestic policy and root causes of such problems as over-government intervention in the economy, close economic relationships between government and business and corruption involving both family-owned conglomerates and public officials.