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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outdated even in theoretical terms, based on economic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.
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