IMF Forecasts Global Slowdown, But Policies Remain Pro-Cyclical in Many Countries

The International Monetary Fund (IMF) released its World Economic Outlook today, forecasting a global slowdown of world GDP growth from 4.8 percent in 2010 to 4.2 percent for 2011.

"The IMF should make its policies more consistent with its economic research," said Mark Weisbrot, economist and Co-Director of the Center for Economic and Policy Research. "It should not be signing off on agreements that require fiscal or monetary tightening in a recession or weak economy."

The IMF has agreements with a number of countries, including Greece, Latvia, Jamaica, El Salvador, Romania and others that require the government to shrink their budget deficits while in recession or very weak recovery. In Greece, which is facing its worst recession in decades, the government is expected to cut its budget deficit from 13.6 percent in 2009 to 8.1 percent this year. In April, the IMF projected that the Greek economy would shrink by 2 percent this year; today's WEO projections put that number at 3.9 percent.

The IMF is also advising countries such as Spain and Ireland, that are also slowing their very weak economies through fiscal tightening. Ireland is projected to shrink by 3 percent this year. According to a UNICEF report in April, in two-thirds of the countries reviewed, "the IMF is advising or supporting curtailing public expenditures for 2010. For 2011 and beyond, fiscal tightening is advised in all but a few countries."

Chapter 3 of the IMF's World Economic Outlook finds that "fiscal consolidation typically reduces output and raises unemployment in the short term."

"The whole purpose of raising the IMF's resources to $750 billion dollars was so that it could help the weaker economies, and especially the poorer countries, to pursue expansionary macroeconomic policies as necessary," said Weisbrot. "But in many cases they are doing the opposite."

Weisbrot also noted that with inflation extremely low in the world's biggest economies, and with high unemployment and excess capacity, the IMF could encourage central banks to finance increased stimulus spending with quantitative easing - but has not done so.

"The IMF created $283 billion of its reserve currency, Special Drawing Rights (SDR's), in 2009 and distributed them to its member countries to increase their reserves," noted Weisbrot. "These are the kinds of policies that the Fund should be considering as the world economy slows."

Weisbrot will discuss the IMF's policy advice for countries in recession with Petya Koeva, division chief of the World Economic Studies Division at the IMF, at an event Saturday at 2:00pm in room MC C1-100 of the World Bank.