IMF: Back from the Dead
by Jayati Ghosh
The International Monetary Fund (IMF) has definitely had a very good crisis. Just over a year ago, it was an institution on life support: ignored by most developing countries; derided for its failure to predict most crises in emerging markets and its often counterproductive responses to such crises; even called to book by its auditors for poor management of its own funds!
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 They were also completely outdated even in theoretical terms, based on economic models and principles that have been refuted not only by more sophisticated heterodox analyses but also by further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.
The 1990s and early 2000s were particularly bad for the organization: Its 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 had been caused by private profligacy, they called for larger fiscal surpluses; faced with crisis-induced asset deflation, they emphasized 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 IMF’s advice or, in several cases, because they actively pursued different policies. IMF loans were seen as “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.
More recently, an even more terrible fate has befallen IMF: that of increasing irrelevance. From 2002 onwards, 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, as China, South-East Asia and even India to a limited extent began investing in other developing countries.
In this sorry situation, the global financial and economic crisis has come as real manna from heaven for IMF. Suddenly, its own pathetic record at predicting, assessing and intervening in crises was forgotten in the general financial pandemonium that was unleashed after the collapse of Lehman Brothers in September 2008.
Subsequently, the G-20 (which set itself up as the guardian of the global economy, bypassing more potentially democratic structures such as the United Nations) decided to give IMF an extraordinary tonic in the form of additional pledges of funds, with the mandate to provide funds to developing and emerging markets that had been hit by an international crisis not of their own making. This gift of additional resources and power did not even require any democratization of the fund’s governance structure, which is still controlled by the US (and to a lesser extent, Europe) to a degree unwarranted by the current composition of world trade, or any change in its policy conditionalities.
So IMF is now back in business, with a slew of supposedly new schemes to deal with countries in crisis. It is amazing that the multiple failures of IMF are being thus rewarded. This is, after all, the organization that failed to predict the collapse of the US subprime market, announced that the medium-term financial outlook for Iceland was exceptionally healthy just months before the country was declared effectively bankrupt, and succeeded in making things much worse in most of the countries where it forced its austerity measures in return for paltry loans.
What is even more disastrous is that IMF seems to have learnt only partially from the current crisis — and what it has learnt is applied only through blatant double standards. 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.
Thus, IMF, in its flagship publication World Economic Outlook, argues for countercyclical macroeconomic policies to counter the recession in the US and Western Europe. Developing countries and transition economies in distress, however, apparently cannot afford such luxury. They must follow the standard prescriptions of monetary tightening and fiscal contraction to deal with a crisis created by the fall in exports and flight of capital caused by the crisis in the US.
So the countries that have been unfortunate enough to require IMF support in the current crisis have found that they have to cut public spending and generate negative multiplier effects in economies in which output and employment have already been ravaged. Ukraine, Pakistan and Latvia, for example, have all been told to cut government spending and raise interest rates and user charges for government services in the middle of the downswing, in return for IMF loans.
Even when IMF accepts that this is a heavily procyclical policy that causes a financial crisis to spread to the real economy and create a sharp downswing, that is seen as just too bad; this is, after all, the “right” medicine for such countries and the necessary pain must be gone through for eventual recovery.
The problem is that this argument was wrong before and is still wrong. These IMF conditionalities do more than inflict major pain on the people of the countries they are applied in; they also do not result in economic recovery. If only a little bit of IMF’s restructuring medicine could be applied to the institution itself.
Jayati Ghosh is professor of economics at the Centre for Economic Studies and Planning, School of Social Sciences, at Jawaharlal Nehru University, New Delhi. This article was first published by Livemint on 23 November 2009; it is reproduced here for non-profit educational purposes.