It
has been some time now since the IMF lost its intellectual
credibility, especially in the developing world. Its
policy prescriptions were widely perceived to be rigid
and unimaginative, applying a uniform approach to
very different economies and contexts. They were also
completely outdated even in theoretical terms, based
on economic models and principles that have been refuted
not only by more sophisticated heterodox analyses
but also by further developments within neoclassical
theory.
What may have been more damning was how out of sync
the policies proposed by the IMF have also been with
the reality of economic processes in developing countries.
The 1990s and early 2000s were particularly bad for
the organisation in that respect: their economists
and policy advisers got practically everything wrong
in all the emerging market crises they were called
upon to deal with, from Thailand and South Korea to
Turkey to Argentina. In situations in which the crisis
has been caused by private profligacy they called
for larger fiscal surpluses; faced with crisis-induced
asset deflation they emphasised high interest rates
and tight money policies; to address downward economic
spirals they demanded fiscal contraction through reductions
in public spending.
The countries that recovered clearly did so despite
their advice, or in several cases because they actively
pursued different policies. And the recognition became
widespread among governments in the developing world
that IMF loans were too expensive because of the terrible
policy conditions that came with them. So returning
IMF loans early became something of a fashion, led
by some Latin American countries.
And of course, for the past few years an even more
terrible fate had befallen the IMF: that of increasing
irrelevance. From 2002 onwards, the IMF, along with
the World Bank, became a net recipient of funds from
developing countries, as repayments far exceeded fresh
loans. The developing world turned its attention to
dealing with private debt and bond markets, which
is where the action was. Less developed countries
found new sources of aid finance and private investment
from other sources, as China, Southeast Asia and even
India to a limited extent, began investing in other
developing countries.
So the IMF has not really been a significant player
in the international economic scene in the recent
past, and the reasons for its very existence were
often called into question. Embarrassingly, in this
period the IMF in turn was called to book by its own
auditors, for apparently poor management of its financial
resources!
But what is interesting about IMF economists is how
thick-skinned and impervious they appear to be. Not
only do they simply ignore the devastating criticisms
from outside that completely undermine their own arguments,
they even ignore their own internal research when
it comes up with conclusions that do not fit with
their world view. And they appear to be unconcerned
with the growing evidence that they are both unconnected
to reality and unable to influence it in any productive
way.
Such intellectual autism is certainly deplorable,
but for a while we did not really need to be too bothered
by it any more, since it seemed to matter so little
to the rest of the world what the IMF said or did.
But every crisis is also an opportunity, and the IMF
has been quick to seize on the current global financial
crisis as an opportunity to increase its own influence.
Given its poor record of past incompetence and current
irrelevance, one might imagine that there would be
some justified hesitation on its part, in making grandiose
and generalised policy proposals. But that is too
far from what the IMF is used to doing, and so its
recent pronouncements continue in the same hortatory
fashion, albeit in a slightly more subdued and even
confused manner.
The most recent World Economic Outlook was released
in mid-October this year, to be presented at a meeting
of the IMF that discussed the financial crisis. What
is chiefly remarkable about this report is not just
the continued confidence in its own capacities, but
also the very blatant double standards that the IMF
is now openly using for industrial and developing
countries.
In the industrial countries, threatened by economic
depression, the talk has now turned to going beyond
monetary measures that do not address the liquidity
trap, to fiscal expansion to revive the flagging economies.
This talk is likely to get louder in the run-up to
the Obama administration in the US, since the New
President-Elect has made his own preferences clear
in that respect.
But the record of the IMF in this matter is equally
clear: countries in the midst of financial crisis
are supposed to do fiscal contraction, whether they
like it or not. When the government account is in
deficit, it must be reduced or converted into a surplus:
when it is already in surplus, that surplus must be
increased. If this is pro-cyclical and causes the
crisis to spread to the real economy and create a
sharp downswing, that is just too bad; this is after
all, the “right” medicine and the necessary pain must
be gone through to recover eventually.
In this context, what does the IMF now say about fiscal
policy? “Macroeconomic policies in the advanced economies
should aim at supporting activity, thus helping to
break the negative feedback loop between real and
financial conditions, while not losing sight of inflation
risks...Discretionary fiscal stimulus can provide
support to growth in the event that downside risks
materialize, provided the stimulus is delivered in
a timely manner, is well targeted, and does not undermine
fiscal sustainability.” (IMF, World Economic Outlook
October 2008, page 34, emphasis added.)
So, the IMF completely breaks from all its past practice
to recommend that in this situation the developed
countries should engage in countercyclical fiscal
and monetary policies to get out of the crisis. All
right, then what about the developing countries, who
have this time been caught in a crisis that is not
of their own making? Oh dear, for them the same advice
is not tenable at all.
Consider the following: “While emerging economies
have greater scope than in the past to use countercyclical
fiscal policy should their economic outlook deteriorate
...this is unlikely to be effective unless confidence
in sustainability has been firmly established and
measures are timely and well targeted. More broadly,
general food and fuel subsidies have become increasingly
costly and are inherently inefficient.” In fact, there
is room or tightening on all fronts, both fiscal and
monetary! “Greater restraint on spending growth, including
public sector wage increases, would complement tighter
monetary policy, in the face of rising inflation,
which is particularly important in economies with
inflexible exchange regimes.” (page 38, emphasis added)
So, the cards are now all out on the table, and it
is clear that they have been dealt unevenly. And even
the rules of the game seem to differ for the IMF.
There is one rule for industrial countries in crisis,
no matter how irresponsible the run-up to the crisis;
and another rule for developing countries, even the
most prudent and fiscally “disciplined” of them.
In fact, this partiality of the IMF even extends to
its analysis of the current crisis, where, bizarrely,
the developing countries are held responsible for
some of this mess. “While there is indeed some evidence
that monetary policy may have been too easy at the
global level and that the global economy may have
exceeded its collective speed limit, excessive demand
pressures seem to be concentrated in emerging economies
and do not appear egregious at the global level by
the standards of other recent cycles. It is hard to
explain the intensity of the recent stress in financial,
housing, and commodity markets purely through these
macroeconomic factors, although they have played some
role.” (page 23, emphasis added.)
Once again, all this would not matter too much if
the IMF were to remain as irrelevant as it has been
recently. But now, as the crisis spreads and engulfs
developing countries, and as global credit markets
seize up and create credit crunches, more and more
developing and transition countries are going to need
access to liquidity. Already several countries have
lined up for this: Pakistan, Ukraine, Hungary and
Iceland. And once again the IMF is pushing the same
disastrous conditions that caused economic and financial
collapse in other emerging markets.
In this context, it is terrifying to hear that European
Union governments are calling for a strengthening
of the IMF and even imploring some surplus countries
like China to put more money into the IMF’s coffers.
With its current personnel and ideological framework,
such strengthening of the IMF will only mean that
conditions get much worse for the developing world.
The need to examine alternative and less destructive
sources of emergency finance for crisis-affected developing
countries is therefore urgent.
November
18, 2008.
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