Posts tagged IMF

Relation between Economic Growth and Inflation

Feb 13th

Posted by ibu didin in Development Economics

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What is the theory and empirical evidence on the relationship between economic growth and inflation.

Economic growth and inflation are both positively correlated. This means that inflation is one of the inherent economic growth’s features. Along.  Hamilton (1952) claimed that inflation is an important stimulant for creating growth and Rostow (1960) also argued that inflation is necessary for developing industrial take-offs. The great support of inflationary policy is came from Keynes, compare to deflation Keynes is more tolerable to inflation he described both of inflation and deflation in negative term one is unjust and the other is inexpedient, but to have inflation is preferable because to provoke unemployment is worse than to disappoint the rentier.

Keynes argued that investment can generate its own saving by raising the level of income when the economy is not performed, and inflationary policy can redistribute income from wage earners with low propensity to save to profit earner with high propensity to save when economy perform at full capacity. The second argument of Keynes is, the inflation can encourage investment by raising the nominal rate of return on investment and reduce the real rate of interest.

However, there are some dangers of inflation that need to be considered. Just to mention one of them is that inflation can reduce the purchasing power of money if it is reaching excessive level. And it can put the society in a real resource costs and welfare losses.

Numbers of empirical studies show that inflation has a non-linier relationship with growth. Bruno (1995), at World Bank, who observe annually on 127 countries over the year 1960-1992 shows that inflation and growth are positively related up to 5 per cent inflation and then start to declining to inflation set. And it comes to negative relationship when the inflation rate reaching 30 per cent. The other study by Sarel (1996) at the IMF shows the similar result when he examined 87 countries over the period 1970-1990 and divide the observation into twelve inflation group using inflation of group 6 as reference show that in the inflation take a positive effect on growth for group 7 (averagely 8%) and start toward negative relationship when inflation is very high. The evidence of non-linearity and growth is also found by Stanners (1993) he studied 9 countries over the period of 1948-1986 and 44 countries over 1980-1988 that after divide the 44 countries into four groups the growth is highest for the second group.

The lesson from empirical data is, it is okay to have inflation an moderate level since it is an inherent feature of growth but what is need to be aware is when inflation rate reaches an excessive level which could create hyperinflation.

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The Impact of Tying Loans Aid

Dec 21st

Posted by ibu didin in Development Economics

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The Impact of Tying Loans Aid

Criticism of IMF’s Aid in Indonesia during Financial Crisis1997-1998

Didin Kristinawati

1. Introduction

In early 1990s Indonesia was one of high-performing Asian economies. According to World Bank’s annual report, in 1997 Indonesian economy grew around 8%. The development program emphasized on industrial sectors, and the country emerged as newly industrializing economy under the five times elected incumbent, President Soeharto.  However, by July 1997 Indonesian rupiah suddenly depreciated to Thai baht, the Malaysian ringgit, and the Philippine peso, and other foreign currency as well. And continue to depreciate even after its float, as foreign creditors and investors reduce their investments to Indonesia.

The drastic weakening of rupiah leads speculators to panic and selling rupiahs for US dollars. Drastic drop in direct investment, flight of capital of domestic and foreign entrepreneurs intensified the crisis. Followed by political atmosphere, the demands for changing in Indonesia’s leadership became tremendous.  Students and civilians demonstrated along the road and occupied House of Representatives proclaimed economic and political reforms. Within six months, Indonesia’s economy collapsed to two digits negative growth rate.  The government needed short term aids and had limited choice, loans taken up to finance the budget and overcome acute liquidity crisis, and called International Monetary Fund (IMF) for financial assistance. The government signed Letter of Intent of IMF standby loans which practiced of tying loans conditions.  If balance-of-payments and budget deficits have reached such levels that creditors are alarmed about the repayment of their loans, governments have no choice but to negotiate a stabilization program with the IMF (Körner et al, 1984).

This paper will elaborate the impacts of tying loans by the IMF in Indonesia.  Begin with a brief description of industrialization in section two, depicting the development in Indonesia which considers economy’s growth as main indicator of development achievement. The economic and political crisis section three explains the situation in Indonesia during financial crisis and the movement reforms in 1998, which leads to the financial aid by the IMF to deal with socio-economic and political riots. In section four, the implementation and impact of IMF aid’s prescription to Indonesia will be discussed. Section five try to critic to what extend does IMF contributed to economic recovery during financial crisis or even for long term development and concluding remarks presents in section six.

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