Emerging Out of the IMF's Shadow

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. Its managing director, Dominique Strauss-Kahn, quoted John Maynard Keynes in his speech 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 which should be required reading for US business journalists:

"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."

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 - ie 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 is still involved in the implementation of pro-cyclical policies that will keep these countries from recovering for a long time. For Greece, Ireland and Latvia, it will be nine to 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, as Argentina did when it 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% 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 - whose debt even the financial markets recognise it will have to restructure at some point - must first go through hell. The European authorities and IMF together have so much money ($750bn for the IMF, $635bn for the European Financial Stability Facility and $87bn for the European Financial Stabilisation Fund) that it would be quite simple to painlessly rescue the relatively small economies of Greece, Ireland, Portugal, or Latvia - or even the much larger Spanish economy, restoring growth and employment first and worrying about the debt after the economy is on track.

But from a creditors' point of view, this would be rewarding "bad behaviour". So these countries' citizens must suffer through years of high unemployment (20% in Spain, 15% in Ireland, 11% in Portugal, 14% in Greece, 17% in Latvia), not to mention the privatisations and anti-labour "reforms" they are also subjected to.

To be fair to Strauss-Kahn as well as some of the economists in the IMF's research department 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 US treasury department and the European authorities (the latter have final say in Europe). And on top of the US treasury department sits Goldman Sachs.

The IMF's newly released "World Economic Outlook" calls for more "implementing fiscal consolidation and entitlement reforms" in the high-income countries, saying that "the need is particularly urgent in the US" 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 healthcare system that is responsible for nearly all of the long-term deficit projections.

The fund projects about 2.5% annual GDP growth for the high-income countries over the next two years, and 6.5% for emerging and developing economies. By calling for fiscal consolidation in the rich countries, the IMF 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 past decade - have been the loss of much of the fund's influence on policy that it had 10 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.