Friday, 26 April 2013

The changing face of the IMF

For decades the IMF has been synonymous with the failed policies of a neo-liberal agenda pushed upon developing countries. Set up with the mandate of fostering global growth and economic security successive interventions into crisis proved counterproductive notably in the 90s East Asia Crisis, for which they were widely criticised. The reason for the controversy is the fact that while the Fund does not require collateral for its loans, they are instead conditional on the imposition of policies that have proved exceedingly unpopular. These policies were aptly described by economist Jeffry Sachs as 'belt tightening to countries who are much too poor to own belts'. Further distrust of the Fund has been caused by the influence held by the US, who receives the greatest share of votes, with ‘Special Drawing Rights’ giving undue weight of voice to the larger economies.  As the fund seemingly moved further and further from its mandate, set out as part of the now extinct Breton-Woods system, questions over its legitimacy were raised, characterised by the former chief economist at the World Bank stating that while the Fund was set up to provide Keynesians reflations it was instead ‘reflecting the interests and ideology of the Western financial community.’

This time around things didn’t look like they would be any different. As the fall-out from the 2008 financial crisis took hold of Governments balance sheets the IMF was one of the first and strongest supporters of the austerity measures pushed forward by many governments in the developed world. In 2010, here in the UK, the Fund praised Chancellor George Osborn’s ‘essential’ deficit reduction plan describing it as ‘strong and credible’ and stating that the plan ‘supports a balanced recovery.” Words described by chief economics commentator at the Financial Times Martin Wolf as ‘a love letter’.

Since then however there has been a change of heart within the IMF, its growth forecasts for the UK have been consistently downgraded as the economy slipped back into recession in 2012 and has just narrowly escaped a ‘triple-dip’, according to the most recent figures. Early signs of this shift in consensus came in the October 2012 World Economic outlook which stated that austerity has caused far more damage than IMF experts had assumed. This was shown by the fact that countries implementing austerity underperformed their growth forecasts while those providing fiscal stimulus grew by more than the Fund had anticipated. As has been well documented this was due to the under-estimation of the multiplier effect. In certain situations, especially in downturns, the multiplier effect is high enough that cutting growth leads to a higher deficit because of the negative effect it has on growth. In a meeting last week between the IMF, World Bank and G20 the Funds managing director Christine Lagarde emphasised this new approach saying "We need growth, first and foremost" and stressing the dangers of overemphasizing deficit reduction with growth still fragile. The IMF's economic report called on both the United States and Britain to scale back there deficit reduction plans in the near-term, calling on both nations as well as Europe, China and Japan to adjust their policies in order to boost struggling global growth.

So as the IMF plans its up-coming visit to the UK its Chancellor may well be apprehensive, once among his strongest allies they now join those calling for plan B, their chief economist saying "it may be time to consider adjustment to the original fiscal plans" and warning that the UK was “playing with fire”.  With the IMF jumping the sinking ship austerities intellectual foundations were eroded further by a student in Massachusetts who discovered ‘miscalculation, data errors and unsupportable statistical techniques’ in a paper by two Harvard economists linking debt and growth rates that was previously praised by George Osborne as well as fellow fiscal conservative Paul Ryan.

With these recent events in mind it may be that austerity has reached the beginning of its end - ‘Austerity has reached its limit’ recently declared the European Commission President. However it is clear that the policy many fought so hard to implement will not go down without a fight, according to an aid of Mr.Osborne “If they recommend we loosen fiscal policy, we won’t do it. We think they are wrong.” However with UK unemployment and growth proving as stubborn as its Chancellor, pressure may grow to heed the Funds advice.    

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