As the International Monetary Fund (IMF) and World Bank gathered in Washington for their annual Spring Meetings, there was more talk about how much the IMF has changed. IMF Managing Director Dominique Strauss-Kahn quoted John Maynard Keynes in his speech on Wednesday at the Brookings Institution:
The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes.
In his Opening Address to the Fall Meetings last year he went further, making a point about the increase in public debt in the high-income countries that should be required reading for U.S. business journalists:
But make no mistake: this increase of 35 percentage points [in the public debt of the high-income countries ] is mostly due to low growth, to expenditure linked to the rescue of the financial sector, to lack of revenue because of the economic downturn. Only about one-tenth comes directly from the stimulus. So the lesson is clear: the biggest threat to fiscal sustainability is low growth.
Of course, there have been some significant changes in the IMF in recent years, mostly in the area of research, where the Fund has acknowledged that controls on capital inflows are a legitimate tool for governments to use. There has been some limited lending without conditions. And although the IMF included “pro-cyclical” conditions – i.e. macroeconomic policies that worsened the downturn – in most of its agreements during the world recession, on the optimistic side, it reversed course in many cases as the downturn deepened.
But unfortunately the IMF’s practice still does not match its rhetoric or even, increasingly, its own research. In Greece, Ireland, Spain, Portugal, Latvia and other countries, the Fund isstill involved in the implementation of “pro-cyclical” policies that will keep these countries from recovering for a long time. For Greece, Ireland, and Latvia, for example, it will be 9-10 years before they reach their pre-crisis levels of GDP.
There is absolutely no excuse for this, from an economic point of view. Any policies that require this kind of extended period of unemployment and stagnation are by definition wrong. If this is what they need to ensure debt repayment, then the country is better off defaulting on its debt. Argentina was faced with an unsustainable debt burden and defaulted at the end of 2001. The economy shrank for just one quarter and then grew 63 percent over the next six years, recovering its pre-crisis level of GDP in less than three years.
Rhetoric aside, the Fund’s policies still reflect the creditors’ point of view. And from the creditors’ point of view, a country like Greece – which even the financial markets recognize will have to restructure its debt at some point – must first go through hell. The European authorities and IMF together have so much money now ($750 billion for the IMF, $635 billion for the European Financial Stability Facility, $87 billion for the European Financial Stabilization Fund) that it would be quite simple to rescue the relatively small economies of Greece, Ireland, Portugal, or Latvia – or even the much larger Spanish economy — in a painless manner. In other words, to restore growth and employment first, and worry about the debt after the economy is on track.
But from a creditors’ point of view, this would be rewarding “bad behavior.” So the people of these countries must suffer through years of high unemployment (20 percent in Spain, 15 percent in Ireland, 11 percent in Portugal, 14 percent in Greece, 17 percent in Latvia).
Not to mention the privatizations and anti-labor “reforms” that these countries are subjected to in order to meet the IMF and EU authorities’ demands.
To be fair to Strauss-Kahn as well as some of the economists in the research department of the IMF who would like to pursue more enlightened policies, they do not run the institution. Final say rests with an Executive Board, which is run primarily by the U.S. Treasury Department and the European authorities (the latter have final say in Europe, including Eastern Europe).
And on top of the U.S. Treasury Department sits Goldman Sachs.
The IMF’s just released “World Economic Outlook” (WEO) calls for more “implementing fiscal consolidation and entitlement reforms” in the high-income countries, saying that “the need is particularly urgent in the United States” where “broader measures such as Social Security and tax reforms” will be essential. The Fund is right about “tax reforms,” since the Bush tax cuts for high-income taxpayers, continued under the Obama administration, are a significant contributor to the long-term deficit problem. But the Social Security system contributes nothing to either the immediate or long-term deficit problem. It can pay all promised benefits for the next 26 years, and would require only minor adjustments to maintain solvency indefinitely. By contrast, it is our broken private health care system that is responsible for nearly all of the long-term deficit projections.
The Fund projects about 2.5 percent annual GDP growth for the high-income countries over the next two years, and 6.5 percent for “emerging and developing economies.” By calling for fiscal consolidation in the rich countries, the IMF’s WEO seems to accept that they are doomed to slow growth and high unemployment for the foreseeable future; they want the faster-growing developing countries to appreciate their currencies and give the high-income countries a boost by importing more. At the same time they are worried that the developing countries are “overheating,” and that many need a “tightening of macroeconomic policies.”
But the real changes – the ones that have contributed to the rebound in the economic growth that has taken place in low- and middle-income countries over the last decade –have been the loss of much of the Fund’s influence on policy that it had ten or 20 years ago. This is especially true for middle-income countries – in Asia, most of Latin America, Russia, and others, although many low-income countries are still dependent on the Fund and its allied lenders. The IMF’s lending fell precipitously from 2003 to 2007, and although it has recently come back to 2003 levels, the Fund does not have nearly as much influence in middle-income countries as it once did. So hopefully fewer countries each year will have to listen to the IMF’s advice – unless they want to focus on Strauss-Kahn’s lofty Keynesian rhetoric.