Sunday, June 5, 2016

Rethinking IMF's role

Keynes concluded his General Theory with the famous sentence: "Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist". Economic ideas  are  often undervalued but they influence the life of  people  . This helps to understand the last three decades and maybe future ones.

The most important economic institution, the International Monetary Fund (IMF) is now struggling with itself and its intellectual legacy to design strategies for the global economy. Indeed, there is a 'fil rouge' linking the economic policies experimented in the 80sby Thatcher and Reagan, the resurgence of the right ideology and  the so-called 'Washington consensus'. The IMF was instrumental in imposing a package of  structural measures during the 1998 Asian crisis: liberalization, privatization, austerity, balanced budgets, export based competitiveness,  wage cuts, unregulated capital flows . This agenda is also applied, with some variations, in Europe, after the financial crisis, particularly in Greece, Portugal and Spain.

In recent years, the IMF has attempted to review its doctrinal positions, starting with the 'mea culpa' on fiscal multipliers in Greece - which led to unnecessarily harsh austerity measures and its softening stance on debt relief   in the Greek crisis management. 

The IMF has issued an article signed by three senior economists in one of its main journals " Finance and Development" with an appealing title ' Neoliberalism : Oversold" . Although the authors exclude to undertake a comprehensive review of the Washington Consensus, they question two main pillars of neo-liberalism.  

The first one is free movement of capital. Even without market confidence, direct investment is going fine while financial and speculative investments can be harmful, and should be strictly controlled.

Secondly, austerity has not reaped any benefit in terms of growth and have actually increased inequality and social costs which have jeopardized sustainable growth. Maybe austerity would be inevitable for countries with high debt levels but it cannot be the remedy for all. Trying to secure the benevolence of markets in reducing debt and deficits has higher costs relative to benefits. In general, it reduces gross output and increases unemployment on average of  0,6 percentage point. Spending is thus a better solution for those who can.

Germany has probably reacted strongly to this paper forcing the authors to take a more prudent view. But this is what the Greek experience has taught to any reasonable economist. For once, the IMF has behaved with common sense acknowledging its own responsibility in the management of the Greek crisis. But now it calls for responsibility on behalf of the creditors (EU and governments) to agree on cutting the Greek debt as a compensation for the cost of their errors.

Yet, the IMF should demonstrate the same coherence for its own credits vis a vis the Greek government. This would be the best way to reconcile with itself after all these mistakes on austerity policy.

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