The resurgence of economic orthodoxy is a great example of how declining schools of thought…
I have discussed the work of the IMF Evaluation Office before. The IEO “provides objective and independent evaluation” of the IMF performance and operates “independently of IMF management” and reports to the Executive Board of the organisation. It is an independent as one could imagine in this milieu. I have just finished reading the 474-page Background Papers that the IEO released in 2016 and which formed the basis of its June 2016 Evaluation Report – The IMF and the Crises in Greece, Ireland, and Portugal. It is not a pretty story. It seems that the incompetence driven by the blind adherence to Groupthink that the earlier Reports had highlighted went a step further in the case of Greece into what I would consider to be criminality. The scale of the professional incompetence notwithstanding, the IEO found that IMF officials and economists violated the written and constitutional rules of their own organisation and failed to supply relevant documents for audit. So why are all these economists and officials still walking free, given the scale of the disaster they created?
In 2011, the IEO released a scathing assessment of the IMF’s performance in the lead up to the GFC – IMF Performance in the Run-Up to the Financial and Economic Crisis.
I wrote about it in this blog – IMF groupthink and sociopaths – among others.
The Report identified neo-liberal ideological biases at the IMF and determined that the IMF failed to give adequate warning of the impending GFC because it was “hindered by a high degree of groupthink” (p.17), which, among other things suppressed “contrarian views” where an “insular culture also played a big role’ (p.17).
The report said (p.17):
Analytical weaknesses were at the core of some of the IMF’s most evident shortcomings in surveillance … [as a result of] … the tendency among homogeneous, cohesive groups to consider issues only within a certain paradigm and not challenge its basic premises.
It said that (p.17):
The prevailing view among IMF staff – a cohesive group of macroeconomists – was that market discipline and self-regulation would be sufficient to stave off serious problems in financial institutions. They also believed that crises were unlikely to happen in advanced economies, where ‘sophisticated’ financial markets could thrive safely with minimal regulation of a large and growing portion of the financial system.
Groupthink meant, according to the report that the “IMF economists tended to hold in highest regard macro models that proved inadequate for analyzing macro-financial linkages” (p.18).
It said the IMF economists were “operating in silo … tended not to share information nor to seek advice outside of their units” (p.18).
The “silo behaviour is a long-standing problem” which prevented the IMF from being able to “connect the dots”. Further, the “IMF reports rarely referred to work by external analysts pointing at the mounting risks in financial markets” (p.19).
This reflected “the IMF insular culture” (p.19).
And, “IMF macroeconomists, particularly in area departments, did not sufficiently appreciate the skills and experience of financial sector experts” (p.19).
It concluded that the Fund was poorly managed, was full of like-minded ideologues and employed poorly conceived models.
In a previous report the IEO had demonstrated how inaccurate the IMF modelling has been.
So an all round shocking assessment.
But not much changed it seems.
In this blog – The culpability lies elsewhere … always! – from January 7, 2013, I discussed the admission by the IMF that they had made disastrous errors in their estimates of the impact of fiscal austerity in Greece on growth and employment.
The IMF admitted that “Our results suggest that actual fiscal multipliers have been larger than forecasters assumed.” Not just larger but diametrically opposite in impact to what the IMF claimed would be the case when it was bullying Greece, along with its Troika partners into imposing destructive austerity.
The mistake was so large that if the correct estimates of the multipliers were used at the time the Troika was pushing austerity onto Greece then it would have known the policy shift would lead to the cumulative decline in growth of around 13 per cent over two years (2011 and 2012).
Instead, based on the false estimates the IMF claimed that the contraction would be 3 per cent in 2011 and by 2012, Greece would grow by 1 per cent. The reality is that it contracted by 7 per cent in 2011 and a further 6 per cent in 2012.
The mistakes occurred because the underlying economic approach that the IMF use is deeply flawed. Millions of people were made unemployed by these sort of mistakes. No IMF official or economist was imprisoned for professional incompetence and malpractice.
And so we get to more recent times.
I have just finished reading the 474-page Background Papers that the IEO released in 2016 and which formed the basis of its June 2016 Evaluation Report – The IMF and the Crises in Greece, Ireland, and Portugal.
It is not a pretty story. It seems that the incompetence driven by the blind adherence to Groupthink that the earlier Reports had highlighted went a step further into what I would consider to be criminality plain and simple.
The IEO found that IMF officials and economists violated the rules of their own organisation, hid documents, presumably to hide their chicanery and generally displayed a high level of incompetence including failing to under the implications of a common currency – pretty basic errors, in other words.
The IEO Report sought to evaluate:
… the IMF’s engagement with the euro area during these crises in order to draw lessons and to enhance transparency
The period under review was 2010 to 2013, which covered the “2010 Stand-By Arrangement with Greece, the 2010 Extended Arrangement with Ireland, and the 2011 Extended Arrangement with Portugal.”
The IEO noted that the IMF involvement with the Troika was quite different to its normal operations.
1. “the euro area programs were the first instances of direct IMF involvement in adjustment programs for advanced, financially developed, and financially open countries within a currency union”.
2. “they involved intense collaboration with regional partners who also were providing conditional financial assistance, and the modality of collaboration evolved in real time.”
3. “the amounts committed by the IMF … were exceptionally large … exceeded the normal limits of 200 percent of quota for any 12-month period or 600 percent cumulatively over the life of the program. In all three countries, access exceeded 2,000 percent of quota.”
So one would think that the IMF would have exercised especial care and been committed to transparency, given that for the “financial years 2011-14, these countries accounted for nearly 80 percent of the total lending provided by the IMF”.
It didn’t turn out that way.
Interestingly, the IEO for all its independence was set upon by “several Executive Directors and other senior IMF officials” at the outset of the evaluation process (when establishing the Terms of Reference), who claimed that the 2012 Bailout was just a “continuation of the 2010 SBA” and so it was not possible to evaluate them separately.
In other words, the IMF was trying to close down assessment of its activities.
The IEO said their were “Three overarching questions” which guided their evaluation:
First, was the IMF’s crisis management appropriate, given the exceptional circumstances? Second, did the IMF compromise its best economic judgment because of the way it engaged the euro area? Third, what could the IMF have done differently to achieve better outcomes?
So to get answers, the IEO interviewed relevant people and sought access to relevant documents.
Not so easy.
1. “The IEO did not have full access to confidential IMF documents in a timely manner.”
2. “many documents were prepared outside the regular, established channels” and were not provided for review.
3. “written documentation on some sensitive matters, even with the help of generous staff resources, could not be located.”
4. “As a result, the IEO in some instances has not been able to determine who made certain decisions or what information was avail- able, nor has it been able to assess the relative roles of management and staff.”
The words cover up come to mind!
On this theme, the IEO also found that the IMF Executive Board had never formally considered “how the IMF would engage with a euro area country in a program relationship” (p.16).
Instead it deployed:
… small, ad hoc staff task forces to explore various contingencies, but the work of these groups was so secret that few within the institution knew of their existence, let alone the content of their deliberations. The IEO has seen some, but not all, of the written reports prepared by these groups.
Where are these reports? Shredded? Why are they not available for audit? Who was in charge of these ‘task forces’? Why haven’t they been made accountable for the damage they caused?
The result was that the IMF failed to appreciate the basics of a common currency. As regular readers will appreciate my rule of thumb is that anyone who conflates say Japan (currency issuer) with France (foreign currency user) discloses their ignorance immediately.
The IEO concluded in this sense that there was a:
Lack of analytical depth, rigor, or specificity and the failure to highlight sufficiently the need for stronger remedial action in a currency union were among the factors that undermined the quality and effectiveness of surveillance.
That sounds like the IMF was very shoddy. Millions were losing their jobs as a result!
Further, the IMF became Fanboys for the Euro and the nonsense that the European Commission and ECB were pumping out at the height of the crisis about the soon to be enjoyed recovery and that the euro had been a spectacular success (remember Trichet’s glowing comments!).
The IEO concluded:
IMF staff’s position was often too close to the official line of European officials, and the IMF lost effectiveness as an independent assessor.
In the lead up to the crisis, the IEO found that the IMF has not warned its membership of the “euro area vulnerabilities”.
Before the launch of the euro in January 1999, the IMF’s public statements tended to emphasize the advantages of the common currency more than the concerns about it that were being expressed in the broader literature … the view supportive of what was perceived to be Europe’s political project ultimately prevailed in guiding the Fund’s public position. Thus, while other observers saw potential vulnerabilities arising from the operation (if not the design) of the Stability and Growth Pact or from the inadequacy of the framework to resolve systemic problems, the IMF World Economic Outlook stated in 1997 that “the emerging policy framework appears to strike a good balance between rules and the necessary scope” for judgment in the monetary and fiscal areas (IMF, 1997).
Groupthink leads to suppression of alternatives and denial.
Despite repeated analyses from outsiders that the failure to create a true federal fiscal capacity and the harsh Stability and Growth Pact rules, which limited Member State fiscal flexibility, would expose the Eurozone to a systemic crisis, the IMF didn’t say a word.
It was gung ho with Brussels all the way.
Further, even in the face of dysfunction, the IMF continued to play the ‘fanboy’ role with respect to the Eurozone:
The IMF, like most other observers, missed the buildup of risks in the euro area’s banking system overall … the IMF remained upbeat about the soundness of the European banking system and the quality of banking supervision in euro area countries until after the start of the global financial crisis in mid-2007. This lapse was largely due to the IMF’s readiness to take the reassurances of national and euro area authorities at face value …
But it was not just a matter of failing to understand the Eurozone issues.
The IEO concluded that:
The weaknesses of IMF surveillance in the euro area echoed the larger problem of IMF surveillance in advanced economies … [there were] … several factors at play … a high degree of groupthink, intellectual capture, a general mindset that a major financial crisis in large advanced economies was unlikely, and incomplete analytical approaches … These factors were compounded in the case of the euro area by a “Europe is different” mindset.
The Groupthink led to denial that the crisis would deepen in the Eurozone.
The IMF decision-making was also deeply flawed.
When the Board approved the massive 2010 bailout for Greece it did so knowing the plan would fail unless there was “preemptive debt restructuring”.
The IEO found that:
… there was no open and early discussion of the pros and cons of all options available to the IMF.
In doing so, the IMF Board breached its own rules and was forced to make changes to its own guidelines in May 2010. The IEO found these changes:
… did not receive the customary careful review and deliberation by the Board … the modification process was not transparent.
The changes were hammered through without proper briefing.
I have already covered the “overly optimistic growth projections” that the IMF used in the bailout design in other blogs and above.
But in this regard, the IEO found that:
Lessons from past crises were not always applied … for Greece, high-risk as it was, included “no Plan B” …
On Accountability and transparency, the IEO concluded that:
… a good fraction of the Executive Board-and more broadly of the IMF’s membership-was not fully kept informed during the crisis undermined the Board’s oversight function …
There were “Delays in completing internal reviews involving euro area programs”.
In other words, they were sailing blind, making changes to programs when they hadn’t fully appreciated the damage that the previous program had caused. And so it went.
Finally, (and I am only touching the surface), in the background paper on Greece, we learn that while:
It is not unusual for IMF programs to disappoint in comparison to ini- tial forecasts, but orders of magnitude are usually much smaller than those in the SBA for Greece … An output shortfall as large as Greece’s is thus exceptional even by IMF program standards. Also, in comparison with IMF forecasts made for other market access countries over the same crisis years (2010-12), the magnitude of Greece’s growth forecast errors looks extraordinary …
The ‘bridge fell down’, who went to prison for professional incompetence.
The Report lists the reasons for this massive error:
1. The IMF “over-relied on the confidence effects, restoration of market access, and improvements in the investment climate that its designers hoped would result from program implementation and completed structural reforms.”
That is, its theoretical models were wrong.
It was obvious to anyone not trapped by the neo-liberal Groupthink that confidence would plummet as a result of the austerity programs.
But the IMF models had Ricardian Equivalence built-in such that it was held that consumers and firms would spend to more than fill the gap left by the public cuts because they no longer feared the high deficits and the need to save to pay the higher taxes necessary to pay back the deficits! That short of mumble jumble that exists on in the land of mainstream economics.
2. They had catastrophic errors in their models:
… the assumed fiscal multipliers were too low, implying a fiscal consolidation less costly than it actually turned out to be.
As a result:
… real GDP in 2012 was 17 percent lower than in 2009, compared to the 51⁄2 percent decline that was projected in the SBA-supported program. Over the same period, nominal GDP was almost one-fifth lower, compared to the 2 percent decline initially forecasted. The original growth projections were largely maintained until the fifth review (December 2011) but were then marked down, with the expected recovery delayed until 2014. Projections for unemployment were raised in line with the severity of the contraction. The unemployment rate in 2012 was 25 percent, compared to the original program projection of 15 percent.
3. The IMF failed to understand the structure of the Greek economy despite demanding massive structural adjustments including privatisations, cost cutting etc:
… only a small part of Greek exports could be expected to depend on competitiveness; a more substantial part (food, commodities, and maritime services) could not be expected to respond to lower unit labor costs. Awareness of the peculiar structure of exports should have lowered the expectation of the potential contribution that exports could make to growth.
The fly-in, fly-out over a weekend type assessment that the IMF is famous for – where they hole up in some ritzy hotel for a weekend and impose the one-size, fits-all (wrong) model on a nation was in action in Greece.
No deep understanding. Just an arrogance driven by the confidence that Groupthink brings to the most incompetent of operators.
In conclusion, the Greece Case Study highlights what we have known all along.
The mission was not to help Greece but, rather, to save the euro from collapse and preserve the assets of the banks in France and Germany that were exposed to such a collapse.
The Greeks were just the bunnies!
Another disastrous report on the way the IMF operates.
It should motivate governments that contribute their funds to support the IMF to withdraw that support immediately and work to create a new institution that operates to extend the real resource bases for disadvantaged states to ensure their citizens enjoy better material standards of living.
It should ditch mainstream macroeconomics models and commit to a much broader scope of analysis.
And, several IMF staffers and officials should be imprisoned for malfeasance.
That is enough for today!
(c) Copyright 2017 William Mitchell. All Rights Reserved.