IMF’s strange recession cure
May.04 : When the Group of Twenty (G20) meeting in the midst of global economic crisis led to a substantially expanded role for the International Monetary Fund (IMF), there were many heads shaking in response. After all, the IMF was not exactly celebrated for either its ability to warn of impending crisis or its effective response to crisis.
From the early 1990s, its ham-handed and heavily pro-cyclical approach to economic adjustment in developing countries had generally failed in achieving adjustment or recovery. In the few countries where the balance of payments had improved with the IMF programme, it was usually associated with deep cuts in incomes and living standards.
This was one of the reasons why, before the global crisis, the IMF was not just pilloried by its critics but became increasingly irrelevant as developing countries in the midst of a liquidity crisis sought all other possible options before approaching it. It had been a net recipient of funds from the developing world for at least five years; it was no longer consulted on a regular basis by major developing countries; its annual publications had an uncanny knack of following policies and economic trends rather than anticipating them. This lack of prescience would have caused mortification in any less thick-skinned institution: for example, the IMF declared the banking system of Iceland to be sound and with good future prospects just months before its spectacular and inevitable collapse.
But the G20 in its wisdom decided to make the IMF the main channel for the disbursement of emergency financial relief to countries affected by the global crisis. In return, the IMF promised to become more flexible and counter-cyclical in its approach, and to avoid asking countries to make public spending cuts that would affect living standards and damage future growth prospects.
According to its own assessment, the IMF has succeeded in learning from the past, and changing its conditionalities and attitudes to policy adjustment. Its internal review of its own post-crisis lending, in late September 2009, points to more flexibility and congratulates itself on allowing developing countries to weather this crisis effectively. Several features are said to mark the new IMF approach: large and timely financing to affected economies; fewer and more focused conditionalities associated with the loans; accommodative fiscal policy; monetary policies designed to avoid abrupt monetary tightening; and commitments to sustain or expand social safety nets. If these are all indeed true, then the IMF has been reconstructed, and countries need no longer fear having to approach it for relief in the face of intense payment problems.
But if this seems too good to be true, you could be forgiven for being sceptical. As it happens, genuinely independent assessments of recent and current IMF lending are far less complimentary about the IMF’s lending practices and its imposition of undesirable policies on economies in distress.
Thus, a review by the Centre for Economic and Policy Research in Washington found that (contrary to the Fund’s own perception) of the 41 countries that currently have agreements with the IMF, 31 have had to implement pro-cyclical fiscal and monetary policies that would be expected to exacerbate the economic downturn. In fact, in many cases, even the “automatic stabilisers” (the full spending increases that would have occurred in the downturn, such as unemployment benefits or social protection measures already instituted) were not allowed to operate fully, because of “underlying concerns about debt sustainability and weak structural fiscal positions”.
Now, an excellent new study conducted by United Nations International Children’s Fund (“Prioritising Expenditures for a Recovery with a Human Face: Results from a Rapid Desk Review of 86 Recent IMF Country Reports” by Isabel Ortiz, Gabriel Venggara and Jinqin Chai, Social and Economic Policy Working Brief, Unicef) has provided even more damning evidence of the lack of real change in the IMF’s approach to adjustment and to desirable macroeconomic policies during a recession.
This study examines the fiscal trends in 2010-11 compared to 2008-09, summarises the IMF’s advice to governments on the appropriate expenditure stance in the midst of crisis and analyses the IMF’s recommendations on social spending, based on a rapid desk review of the latest IMF country reports dated between March 3, 2009 and March 16, 2010, which include 86 countries (28 low income, 37 lower-to-middle income, and 21 upper-to-middle income).
The authors find that fiscal tightening is planned or already under way in nearly 40 per cent of the countries. This reflects several factors, such as the fact that fiscal balances anyway worsened during the recession as tax revenues declined, the measures to deal with high oil and food prices in 2007-08, and so on. This actual or planned cutback in fiscal stance is worrying given that the global economic recovery is fragile at best, and may even reverse in the near future.
But what is more telling is that for more than two-thirds of the countries the IMF is advising or supporting the curtailment of public expenditures in 2010. Indeed, for 2011 and beyond, such reduction is advised for almost all countries! Officially, the IMF’s position is that public expenditure should be reduced while “pro-poor” social spending should be maintained or even increased. However, it turns out that in most of the 86 countries, governments are being advised by the IMF to remove fuel or food subsidies, cap or even cut wages, and rationalise or reform social services. These are policies that will directly affect aggregate demand (and thereby add to the recessionary influences on the economy) and affect the poor and vulnerable groups. Furthermore, in most countries a large part of the government wage bill consists of salaries for education and health personnel and support staff, and cuts here are bound to affect these important social services.
It is only in a small minority of countries that the IMF supports expanding subsidies, social services, wages and investments in agriculture, and even these are to be carried out in an overall context of deflationary fiscal stance. This combination — early withdrawal of fiscal stimulus, cutbacks in public spending, and so on — is all too familiar. It is tragic that once again, the IMF is being encouraged to promote the very policies that have already caused so much damage and material hardship in the developing world.
From the early 1990s, its ham-handed and heavily pro-cyclical approach to economic adjustment in developing countries had generally failed in achieving adjustment or recovery. In the few countries where the balance of payments had improved with the IMF programme, it was usually associated with deep cuts in incomes and living standards.
This was one of the reasons why, before the global crisis, the IMF was not just pilloried by its critics but became increasingly irrelevant as developing countries in the midst of a liquidity crisis sought all other possible options before approaching it. It had been a net recipient of funds from the developing world for at least five years; it was no longer consulted on a regular basis by major developing countries; its annual publications had an uncanny knack of following policies and economic trends rather than anticipating them. This lack of prescience would have caused mortification in any less thick-skinned institution: for example, the IMF declared the banking system of Iceland to be sound and with good future prospects just months before its spectacular and inevitable collapse.
But the G20 in its wisdom decided to make the IMF the main channel for the disbursement of emergency financial relief to countries affected by the global crisis. In return, the IMF promised to become more flexible and counter-cyclical in its approach, and to avoid asking countries to make public spending cuts that would affect living standards and damage future growth prospects.
According to its own assessment, the IMF has succeeded in learning from the past, and changing its conditionalities and attitudes to policy adjustment. Its internal review of its own post-crisis lending, in late September 2009, points to more flexibility and congratulates itself on allowing developing countries to weather this crisis effectively. Several features are said to mark the new IMF approach: large and timely financing to affected economies; fewer and more focused conditionalities associated with the loans; accommodative fiscal policy; monetary policies designed to avoid abrupt monetary tightening; and commitments to sustain or expand social safety nets. If these are all indeed true, then the IMF has been reconstructed, and countries need no longer fear having to approach it for relief in the face of intense payment problems.
But if this seems too good to be true, you could be forgiven for being sceptical. As it happens, genuinely independent assessments of recent and current IMF lending are far less complimentary about the IMF’s lending practices and its imposition of undesirable policies on economies in distress.
Thus, a review by the Centre for Economic and Policy Research in Washington found that (contrary to the Fund’s own perception) of the 41 countries that currently have agreements with the IMF, 31 have had to implement pro-cyclical fiscal and monetary policies that would be expected to exacerbate the economic downturn. In fact, in many cases, even the “automatic stabilisers” (the full spending increases that would have occurred in the downturn, such as unemployment benefits or social protection measures already instituted) were not allowed to operate fully, because of “underlying concerns about debt sustainability and weak structural fiscal positions”.
Now, an excellent new study conducted by United Nations International Children’s Fund (“Prioritising Expenditures for a Recovery with a Human Face: Results from a Rapid Desk Review of 86 Recent IMF Country Reports” by Isabel Ortiz, Gabriel Venggara and Jinqin Chai, Social and Economic Policy Working Brief, Unicef) has provided even more damning evidence of the lack of real change in the IMF’s approach to adjustment and to desirable macroeconomic policies during a recession.
This study examines the fiscal trends in 2010-11 compared to 2008-09, summarises the IMF’s advice to governments on the appropriate expenditure stance in the midst of crisis and analyses the IMF’s recommendations on social spending, based on a rapid desk review of the latest IMF country reports dated between March 3, 2009 and March 16, 2010, which include 86 countries (28 low income, 37 lower-to-middle income, and 21 upper-to-middle income).
The authors find that fiscal tightening is planned or already under way in nearly 40 per cent of the countries. This reflects several factors, such as the fact that fiscal balances anyway worsened during the recession as tax revenues declined, the measures to deal with high oil and food prices in 2007-08, and so on. This actual or planned cutback in fiscal stance is worrying given that the global economic recovery is fragile at best, and may even reverse in the near future.
But what is more telling is that for more than two-thirds of the countries the IMF is advising or supporting the curtailment of public expenditures in 2010. Indeed, for 2011 and beyond, such reduction is advised for almost all countries! Officially, the IMF’s position is that public expenditure should be reduced while “pro-poor” social spending should be maintained or even increased. However, it turns out that in most of the 86 countries, governments are being advised by the IMF to remove fuel or food subsidies, cap or even cut wages, and rationalise or reform social services. These are policies that will directly affect aggregate demand (and thereby add to the recessionary influences on the economy) and affect the poor and vulnerable groups. Furthermore, in most countries a large part of the government wage bill consists of salaries for education and health personnel and support staff, and cuts here are bound to affect these important social services.
It is only in a small minority of countries that the IMF supports expanding subsidies, social services, wages and investments in agriculture, and even these are to be carried out in an overall context of deflationary fiscal stance. This combination — early withdrawal of fiscal stimulus, cutbacks in public spending, and so on — is all too familiar. It is tragic that once again, the IMF is being encouraged to promote the very policies that have already caused so much damage and material hardship in the developing world.
Jayati Ghosh
