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Thursday, October 8, 2009
The IMF meetings in Istanbul are something of a victory lap following what many consider a banner year for the Fund. Faced with questions of relevancy just two years ago, the Fund is now globally lauded for its role in fighting fires from Pakistan to Ukraine. While critical questions remain over funding and governance, the IMF looks certain to assume a central role in the post-crisis global financial regulatory regime.
Which makes a new paper out of the Centre for Economic Policy and Research (CEPR) particularly interesting. The think tank argues that, far from helping 31 borrowing countries avert depression, the Fund may actually have made their crises worse.
"More than a decade after the Asian Economic Crisis brought world attention to major IMF policy mistakes, the IMF is still making similar mistakes in many countries," CEPR Co-Director and lead author of the paper, economist Mark Weisbrot said. "The IMF supports fiscal stimulus and expansionary policies in the rich countries, but has a much different attitude toward low-and-middle income countries."
"The CEPR reaches seriously misleading conclusions about the pro-cyclicality of policies in IMF-supported programmes, relying on faulty analysis and often inaccurate information.
"The main point of this report is that growth forecasts were too optimistic when programs were designed, leading to excessively tight fiscal and monetary policies. Reality is quite the opposite.
"In virtually all programmes, fiscal targets were quickly and substantially relaxed once the extent of the crisis became apparent. Monetary and fiscal policies have deliberately sought to offset the fall in global demand."
I agree with the Fund. For one, the argument that the Fund's performance is overshadowed by its failure to forecast the crisis is intellectually weak. Just about everyone failed to foresee the extent of the crisis. The Fund's GDP forecasts were in many cases optimistic, but it was highlighting the severity of the crisis well before many big governments. And who is to say that government's would have independently acted sooner had the Fund taken an even more pessimistic line. That's a pretty easy answer: they wouldn't have.Second, I can't challenge the CEPRs analysis of 41 different arrangements, but I'm pretty sure the Fund's flexibility and counter-cyclical recommendations during the crisis are widely recognized (and applauded), and not just in developed countries. Dominique Strauss-Kahn was calling for fiscal stimulus in early 2008, well before most government's threw-out the neoclassical handbook. The flexible credit facility is downright revolutionary given the Fund's recent history. And even you identify strict conditionality in certain arrangements, I would argue that governments like Ukraine still need to swallow the bitter pill that the IMF is uniquely positioned to provide. The Fund's historical failures are more the result of its inflexible, dogmatic approach, less in the particular conditions it attaches to loans.
No international institution can walk away from this crisis with clean hands. As a pillar of the prior regime, the Fund should be critiqued for its role in fostering the conditions that led to the great unraveling. But its crisis performance was a net success (for now), and the CEPR misses this by wading too far into the weeds.
