Explain why the debt crisis and the role of the IMF in it undermined the ability of LDCs to provide merit goods such as health and education

Essay by natasha325High School, 11th gradeA-, May 2006

download word file, 1 pages 3.0

Downloaded 12 times

The International Monetary Fund is (IMF) is the international organization entrusted with overseeing the global financial system by monitoring exchange rates and balance of payments, as well as offering technical and financial assistance when asked. However, the loans are given on a conditional basis. In order to receive the loan, the country has to accept certain conditions the IMF lays down. IMF lending is usually accompanied by strict and painful conditions such as structural adjustment. The IMF follows the monetarist policy and so its prime goal is to reduce inflation. The IMF argues that low inflation increases stability in a country and economic growth is only possible if there is stability. The IMF focuses on economic growth rather than development. Inflation can be reduced by cutting down government expenditure in the economy as there will be less flow of money in the economy. Therefore, if a loan is taken, the government has to reduce spending.

Education and health are examples of merit goods, which mean that they generate huge positive externalities. Usually health and education are provided by the public sector. This is because the social benefit far exceeds the private benefit of consuming health or education and merit goods are generally underprovided by private firms because it is assumed that private firms are acting with profit being their main motive. If health and education facilities were provided by private firms it is likely that they will only be provided to those who can afford it. Since the government has to reduce spending, they cannot spend the revenue generated on health and education. The IMF also supports a free market economy with little or no government intervention. There will also be less government intervention as goods/ services will be provided by private firms. The debt cycle will also hamper...