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They were also completely outdated even in theoretical terms, based on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.