The IMF’s false con­fes­sion

Financial Mirror (Cyprus) - - FRONT PAGE -

“Do I have to go on my knees?” the In­ter­na­tional Mon­e­tary Fund’s man­ag­ing di­rec­tor, Chris­tine La­garde, asked the BBC’s Andrew Marr. La­garde was apol­o­gis­ing for the IMF’s poor fore­cast­ing of the United King­dom’s re­cent eco­nomic per­for­mance, and, more se­ri­ously, for the Fund’s longer-stand­ing crit­i­cism of the fis­cal aus­ter­ity pur­sued by Prime Min­is­ter David Cameron’s govern­ment. Now en­dors­ing Bri­tish aus­ter­ity, La­garde said that it had in­creased con­fi­dence in the UK’s eco­nomic prospects, thereby spurring the re­cent re­cov­ery.

La­garde’s apol­ogy was un­prece­dented, coura­geous, and wrong. By is­su­ing it, the IMF com­pro­mised on an eco­nomic prin­ci­ple that en­joys overwhelming aca­demic sup­port: The con­fi­dence “fairy” does not ex­ist. And, by bow­ing to the UK’s pres­sure, the Fund un­der­mined its only real as­set – its in­de­pen­dence.

The IMF has dodged re­spon­si­bil­ity for far more se­ri­ous fore­cast­ing er­rors, in­clud­ing its fail­ure to an­tic­i­pate ev­ery ma­jor cri­sis of the last gen­er­a­tion, from Mex­ico in 1994-1995 to the near-col­lapse of the global fi­nan­cial sys­tem in 2008. In­deed, in the 6-12 months prior to ev­ery cri­sis, the IMF’s fore­casts im­plied busi­ness as usual.

Some claim that the Fund coun­sels coun­tries in pri­vate, lest pub­lic warn­ings trig­ger the very cri­sis that is to be avoided. But, with the pos­si­ble ex­cep­tion of Thai­land in 1997, the IMF’s long-time res­i­dent his­to­rian, James Boughton, finds lit­tle ev­i­dence for that view in in­ter­nal documents. The IMF’s In­ter­nal Eval­u­a­tion Of­fice is more di­rectly scathing in its as­sess­ment of the Fund’s sub­prime cri­sis as it emerged.

Given that the IMF is the world’s anointed guardian of fi­nan­cial sta­bil­ity, its fail­ure to warn and pre­empt con­sti­tutes a far more griev­ous lapse than its po­si­tion on Bri­tish aus­ter­ity, with huge costs borne by many, es­pe­cially the most vul­ner­a­ble. For these fail­ures, the Fund has never of­fered any apol­ogy, cer­tainly not in the ab­ject man­ner of La­garde’s re­cent state­ment.

The Fund does well to re­flect on its er­rors. In a Septem­ber 2003 speech in Kuala Lumpur, then-Man­ag­ing Di­rec­tor Horst Köh­ler con­ceded that tem­po­rary cap­i­tal con­trols can pro­vide re­lief against volatile in­flows from the rest of the world. He was pre­sum­ably ac­knowl­edg­ing that the Fund had it wrong when it crit­i­cised Malaysia for im­pos­ing such con­trols at the height of the Asian cri­sis. Among the coun­tries hurt by that cri­sis, Malaysia chose not to ask for the Fund’s help and emerged at least as well as oth­ers that did seek IMF as­sis­tance.

Malaysia’s im­po­si­tion of cap­i­tal con­trols was a con­tro­ver­sial pol­icy de­ci­sion. And even as the Fund op­posed them, prom­i­nent econ­o­mists – among them Paul Krug­man – en­dorsed their use. In his speech, Köh­ler re­ported that the Fund had taken the ev­i­dence on board and would in­cor­po­rate it in its fu­ture ad­vice.

But in the cur­rent cri­sis, the aca­demic ev­i­dence has over­whelm­ingly shown that fis­cal aus­ter­ity does what text­book eco­nom­ics says it will do: the more se­vere the aus­ter­ity, the greater the drag on growth. A va­ri­ety of stud­ies con­firm­ing this propo­si­tion, in­clud­ing one by the IMF’s chief econ­o­mist, Olivier Blan­chard, have with­stood con­sid­er­able scru­tiny and leave lit­tle room for am­bi­gu­ity.

The two pub­lic voices ar­gu­ing for the mag­i­cal prop­er­ties of aus­ter­ity are of­fi­cial agencies based in Europe: the OECD and the Euro­pean Com­mis­sion. The Com­mis­sion’s stance, in par­tic­u­lar, is an­i­mated by an in­sti­tu­tional com­mit­ment to a fis­cal view­point that leaves no room for ev­i­dence.

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Among the G-7 economies, only Italy has done worse than the UK since the Great Re­ces­sion be­gan. In­deed, the UK’s GDP has only just re­gained its 2008 level, lag­ging be­hind even France.

This is all the more re­mark­able given that the cri­sis in the UK was com­par­a­tively mild. The fall in property prices was mod­est rel­a­tive to Ire­land and Spain, and, be­cause there was no con­struc­tion boom, there was no con­struc­tion bust. Hav­ing missed the warn­ing signs about the bank North­ern Rock, which needed to be bailed out by the UK govern­ment af­ter a run on its de­posits in Septem­ber 2007, the Bri­tish au­thor­i­ties, un­like their eu­ro­zone coun­ter­parts, quickly dealt with the econ­omy’s dis­tressed banks. For these rea­sons, the UK should have had a quick re­cov­ery; in­stead, the Cameron govern­ment’s gra­tu­itous aus­ter­ity sti­fled it.

The IMF’s apol­ogy was a mis­take for two rea­sons. Thumb­ing one’s nose at schol­arly ev­i­dence is al­ways a bad idea, but it is es­pe­cially dam­ag­ing to an in­sti­tu­tion that re­lies so heav­ily on the cred­i­bil­ity of its tech­ni­cal com­pe­tence and neu­tral­ity. If the Fund em­braces mud­dled eco­nom­ics, on what ba­sis will it de­fend its pol­icy ad­vice?

More­over, in choos­ing to flat­ter the UK’s mis­guided pol­icy, the Fund has con­firmed its def­er­ence to its ma­jor share­hold­ers. For years, the view has been that the IMF is a for­eign-pol­icy in­stru­ment of the United States. The soft­ness in its an­nual sur­veil­lance of UK eco­nomic pol­icy has also been well known.

But in tak­ing this lat­est step, the Fund has un­der­mined – per­haps fa­tally – its abil­ity to speak “truth to power.” If so, a fun­da­men­tal ques­tion may well be­come un­avoid­able: Why does the IMF ex­ist, and for whom?

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