Scottish-born economist - Angus Deaton - recently published his new book - An Immigrant Economist…
Most of my blogs are about advanced nations. Many of these nations are being plunged back in time by misguided applications of fiscal austerity and even when growth returns they will take a decade or more to get back to the per capita income levels that prevailed prior to the crisis. Many children and teenagers in these nations will be denied essential education, training and workplace experience by the deliberate choice by their governments to entrench long-term unemployment and to starve their economies of jobs growth. But it remains that these nations are not poor in general and while people are losing houses and other items on credit only a small proportion will starve. Not so the poorer nations that I rarely write about. These are the nations where a high proportion of the citizens live below or around the poverty line. These are the nations that are at the behest of the IMF and suffer the most from their erroneous policy interventions. Today I reflect on how those nations have been going during this crisis. The bottom line is that the way the Fund reinvented itself and reimposed itself on the poorer nations after the collapse of Bretton Woods in 1971 has damaged their growth prospects and ensured that millions of people around the world have remained locked in poverty. Along the way … children have died or have failed to receive the levels of public education that any child anywhere deserves. There is no positive role for the IMF in its current guise.
1. (Law) the act of attempting to obtain money by intimidation, as by threats to disclose discreditable information
2. the exertion of pressure or threats, especially unfairly, in an attempt to influence someone’s actions
1. (Law) to exact or attempt to exact (money or anything of value) from (a person) by threats or intimidation; extort
2. to attempt to influence the actions of (a person), especially by unfair pressure or threats
In yesterday’s blog – The dead cat bounce – Latvian style – I noted that the Latvians are reprising the “old IMF austerity doctrine that failed in the developing world”. In terms of the IMF “internal devaluation” approach I reminded readers that since the late 1970s, the overwhelming evidence is that these programs increase poverty and hardship rather than the other way around. Latin America and Sub-Saharan Africa (which dominates the low income countries) were the regions that bore the brunt of the IMF structural adjustment programs (SAPs) since the 1980s. And low income countries actually became poorer between 1980 and 2006.
In general, the IMF operates by offering financial support to poor nations to bail them out of a crisis as long as the nation “accepts” harsh macroeconomic policies which worsen poverty.
What used to be called SAPs are now marketed by the IMF as a poverty reduction and growth facility (PRGF) – yes, serious. The way the IMF operates fits the definition of blackmail in my view and makes the Fund a criminal organisation.
In October 2010, UNICEF released a report – Prioritizing Expenditures for A Recovery for All – which reviewed public expenditure trends in 126 low and middle income countries.
You can download the UNICEF datasets that were used in the report.
Their aim was to assess “expenditure projections over the near term and their potential implications for children and poor households during the economic recovery”.
UNICEF noted that:
For most low and middle income countries, the incipient revival in economic activity appears to be fragile and uneven, as many remain vulnerable to volatile commodity prices, shortfalls in external finance and investments, and, in some instances, financial system weaknesses. More importantly, according to the United Nations … and the World Bank … the social impacts of the global crisis continue to be felt in terms of rising hunger, unemployment and social unrest. On top of the millions already pushed into poverty in 2008-09, an additional 64 million could fall into extreme poverty during 2010 as a result of the combined, lingering effects of the crisis …
In this context, on November 1, 2010, the Executive Board of the IMF met to discuss “macroeconomic challenges facing low-income countries as they exit from the global crisis”.
They produced this document – Emerging from the Global Crisis: Macroeconomic Challenges Facing Low-Income Countries which restated the organisation’s neo-liberal mantra.
The IMF paper perpetuated the myth that the previous policies which emphasised fiscal consolidation (austerity) had provided the poor countries with more room” to respond to the crisis and allowed them to “let their fiscal automatic stabilizers operate”. In other words, the IMF was applauding the fact that many poor countries didn’t engage in discretionary cuts in spending and just allowed the cycle push the budget outcomes into small deficits.
Meanwhile unemployment and poverty rates rose and could have been attenuated by a more vigorous discretionary fiscal response, which the IMF discouraged.
But the overall lie that the IMF promotes is that a nation with budget surpluses (or very small deficits) have more fiscal space to meet a cyclical downturn. For a truly sovereign nation that is a total fabrication. Whether they have been running deficits or surpluses does not influence the capacity of such a government to increase its net spending in response to a private spending collapse.
In the case of the poorer nations that had been bullied by the IMF into adopting flawed export-led growth strategies, the global financial crisis led to “a sharp contraction in export demand, foreign direct investment, and remittances” as recognised by the IMF itself. In that situation, discretionary expansion of net public spending was required.
Merely relying on the automatic stabilisers to put a “floor” into the downturn is not the same thing as aggressively combatting the job loss with discretionary public spending increases.
The IMF didn’t waste any time considering the huge increase in poverty that the GFC wrought on the poor nations. It claimed that among the key challenges facing the poor nations is the need:
… to rebuild the policy buffers … strengthen domestic revenues beyond the cyclical rebound to help create fiscal space while preserving debt sustainability …[and to] … advance structural reforms … [read: further deregulation, privatisation and concessional benefits to private sector firms]
So will these nations meet their Millennium Development Goals? Not likely. The crisis has set them back and even before the downturn the austere anti-growth policies that these nations were being forced by lending agencies to follow were already undermining their capacity to meet the goals.
It is interesting that the IMF noted – without much emphasis – that the poorer nations were helped by the fact that they:
… reacted to downward exchange rate pressures mostly by letting the exchange rate depreciate rather than allowing losses in reserves as in the past …
This is a crucial aspect of the way these nations moderated the severity of the crisis. In the past, the IMF has insisted on maintenance of various peg arrangements which have caused the relevant nations considerable hardship as they run out of reserves and have to borrow funds to just maintain imports.
In the current crisis, there has been more evidence that nations have allowed the flexibility provided by nominal exchange rate movements to work in their favour and free up domestic policy to target better domestic outcomes.
Compare this to the discussion in yesterday’s blog – The dead cat bounce – Latvian style – where I noted that the ECB and the EU bosses had pressured Estonia and Latvia to maintain the Euro-peg as a pre-condition for entering the EMU in the coming years (Estonia in 2011). Those nations have been pilloried by this sort of policy failure.
Then compare that to the nations now trapped in the Eurozone austerity prison! They cannot enjoy the benefits of nominal exchange rate depreciation.
The other problem with the IMF approach is that they argue that maintenance of real public spending levels is appropriate whereas there is a urgent need for the poorer nations to expand the public share of spending – that is, increase the real levels.
But the main problem is that a significant number of poorer nations were pressured into cutting public spending during the crisis. Please read my blog – IMF agreements pro-cyclical in low income countries – for more discussion on this point.
The October 2010 UNICEF report (noted above) found:
… that nearly half of the sample (44 percent) is expected to reduce aggregate government spending in 2010-11 when compared to 2008-09. This is of concern both in terms of GDP – where the average reduction is 2.7 percent of GDP – as well as in the real value of total government expenditures-where about 25 percent of the sampled countries is expected to make reductions of an average of 6.9 percent of expenditures.
So a substantial number of poor nations were proposing pro-cyclical fiscal contractions. Further, spending cuts are often targetted in terms of “pro-poor” areas of social expenditure which reinforces poverty.
Please read my blog – The absurdity of procylical fiscal policy – for more discussion on this point.
UNICEF concludes that:
… a significant number of low and middle income countries is tightening or planning to tighten public expenditures in 2010-11. Common adjustment measures considered by policymakers during the period 2009-10 include wage bill cuts or caps, limiting subsidies (e.g. on food) and further targeting social protection. Fiscal consolidation is now being pursued in a greater number of countries when the recovery is still fragile and uneven, and vulnerable populations continue to suffer from the cumulative effects of the food/fuel price increases and the global economic slowdown…. Many of those likely to be hardest hit are poor, marginalized children and their families. The limited window of intervention for fetal development and growth among young children means that their deprivations today, if not addressed promptly, will have largely irreversible impacts on their physical and intellectual capacities, which will in turn lower their productivity in adulthood-this is a high price for a country to pay.
Why would any national government be doing that given that when an economy is contracting fiscal support should be adding to aggregate demand rather making it worse?
Why would this fiscal purge also be concentrated on areas of spending that most benefit the poor and the long-term growth prospects of the nation?
Why would a poor nation deliberately cut public spending that was supporting employment when such employment is often the difference between the relevant family living above the poverty line (with work) or being in abject poverty (with unemployment)?
Answer to all questions: the domination of neo-liberal budget myths which are continually pushed by our friends the IMF.
A related problem is that so-called “progressive” agencies like UNICEF seemed to be buying these fiscal myths. In accounting for why nations would endanger growth and poverty reduction by cutting public spending in a recession, the UNICEF report says:
Developing countries’ ability to apply fiscal stimulus or sustain expenditure patterns depends on a number of factors, such as revenue generation capacity, initial debt burden, access to capital markets and/or macroeconomic fundamentals.
None of these things constrain the ability of a nation (poor or rich) which is sovereign in its own currency, floats it on international markets and has a central bank which sets its own interest rate (independent of any currency board arrangements).
There is no such thing as fiscal policy being constrained by a lack of “revenue generation capacity”. A sovereign government is never revenue constrained because it is the monopoly issuer of the currency.
The initial debt burden (as long as it is denominated in local currency) does not constrain current spending. A sovereign government can always service such debt obligations as well as maintaining essential spending growth to ensure employment growth is strong.
Access to capital markets is also not essential because such a government does not need to issue debt in the first place.
The things that constrain poor nations are currency arrangements (pegs, etc); borrowing denominated in foreign currencies; poor resource usage which do not eliminate inflationary bottlenecks; dependence on imports for essentials (such as food etc).
The role of international organisations should be to reduce the impact of these sort of constraints rather than impose mythical constraints which reinforce poverty.
In October, Oxfam wrote to the IMF about the Fund’s lending program in Sierra Leone. The government of Sierra Leone was forced by the IMF as part of their January 2010 intervention to introduce a regressive consumption tax and to abandon plans to increase the salaries of health care salaries (which was part of a new initiative to reduce the child mortality rates by providing free health care to pregnant and nursing mothers).
In their March 2010 statement after visiting Sierra Leone, the IMF concluded:
The fiscal policy response to the effects of the global economic downturn in 2009 was appropriate. However, the main challenge facing the authorities continues to be the creation of fiscal space to finance investment in basic infrastructure and implement structural reforms to promote higher sustainable private sector-led economic growth. To this end, the authorities are committed to strengthening tax administration in order to raise tax collections.
The Fund was running its usual line as noted above. It also supported the government of Sierra Leone (pressured them?) into negotiating secret (not available for public scrutiny) mining lease deals with a British multinational company that essentially granted them tax relief for 15 years and insured the company against adverse movements in global commodity prices.
The point was that while the IMF was forcing (blackmailing) the government to impose a harsh and regressive consumption tax they were also supporting very beneficial tax treatments for an iron ore mining operation which would repatriate profits to its foreign owners.
Oxfam demanded that the IMF “make a clear public statement that increased revenue collection from the mining sector should account for appropriate levels of revenue effort, and that extractive industries agreements should be available to the public” saying that:
Such as statement would dispel concerns that the Fund is prepared to serve as an aggressive advocate for regressive consumption taxes through application of lending conditionality, while maintaining silence on those issues needed to ensure progressive revenue generation for poverty reduction.
The IMF pressure to resist wage rises for health care workers in Sierra Leone generalise into demands for public wage bill caps in most poor nations that the IMF deals with.
This 2006 Report from the Dutch-based organisation Wemos – IMF Macroeconomic Policies and Health Sector Budgets – is scathing of the way the Fund operates in poor nations.
The Wemos report notes that:
… a government’s overall budget is seriously constrained … by the IMF’s cautious macroeconomic policy stance, which focuses on macroeconomic stabilisation goals rather than growth objectives, and, therefore, favours minimal budget deficits financed by international rather than domestic means, sustainable levels of international and domestic debt, low rates of inflation and so on … The IMF argues that wage spending must be cut to create resources to spend on fighting poverty. However, one of the most effective means to fight poverty is to employ more health workers, but they cannot be employed because IMF wage ceilings inadvertently restrict the hiring of health professionals.
In the world’s poorest countries many children have gone without quality education for far too long, and as a result, the human capital that these countries need to grow and develop sustainably is still in desperately short supply. One reason is that the key ingredient to learning is missing: there are not enough trained teachers. Our research in Malawi, Mozambique and Sierra Leone shows that a major factor behind the chronic and severe shortage of teachers is that International Monetary Fund (IMF) policies have required many poor countries to freeze or curtail teacher recruitment.
The IMF delegations have infused their idea of fiscal sustainability on the governments of these poor nations not via any intellectual process – where the arguments win the day – but by straight bullying blackmail – either do as we say or go without our assistance.
ActionAid reports that the officials said that extra outlays on education in their nations could not be “at the expense of macrostability”.
When quizzed about what what this meant, “it became clear that few government officials had a sense of what macrostability meant, other than meeting” the IMF-imposed targets.
The IMF define this in terms of tight fiscal settings, stable inflation controlled by tight monetary policy and export revenue growth (without regard for natural resource exhaustion).
Quite apart from whether the concept is valid, the IMF focus is short-term and by denying essential public investment in health and education their policy regimes undermine the growth potential for these nations.
Please read my blog – Bad luck if you are poor! – for more discussion on this point.
If you are well-read in terms of the relevant literature covering developing countries you will know the following:
First, there is no convincing evidence that says that countries with low inflation grow more quickly over time than those with higher inflation. The IMF demand that tight monetary policy maintain low inflation in order to grow more quickly is not based on any robust evidence. This is not to say that low inflation is not desirable but if it comes at the expense of real development then questions have to be asked.
In 2005, the World Bank produced a report – Economic Growth in the 1990s: Learning from a Decade of Reform – that concluded:
... the search for macro stability, narrowly defined, may in some cases have actually been inimical to growth. Preoccupation with reducing inflation quickly induced some countries to adopt exchange rate regimes that ultimately conflicted with the goal of outcomes-based stability. Others pursued macro stability at the expense of growth enhancing policies such as adequate provision of public goods, as well as of social investments that might have both increased the growth payoff and made stability more durable.
Second, in general, any observed inflation in these poor nations has usually come from supply-side shortages arising from drought (failure of agricultural output) or oil price rises. The IMF typically insists of public sector wage freezes as part of their demands for fiscal austerity. However, there is very little evidence that public sector wage demands have been instrumental in driving inflation in these nations.
I would close the IMF forthwith. It now functions differently to its original charter which became irrelevant once the Bretton Woods fixed exchange rate system collapsed in 1971. The way the Fund reinvented itself and reimposed itself on the poorer nations has damaged their growth prospects and ensured that millions of people around the world have remained locked in poverty. Along the way … children have died or have failed to receive the levels of public education that any child anywhere deserves.
There is no positive role for the IMF in its current guise.
That is enough for today!