I often make the point in talks that the fictional world that mainstream economists promote…
During the – 1997 Asian financial crisis – when the IMF intervened and imposed harsh structural adjustment packages on the impacted countries (cuts in spending and interest rate hikes), we learned that IMF officials would swan in from Washington to, for example, Seoul, for a weekend, hole up in expensive hotels and by the end of the weekend profess to know everything about the country and what was good for it. Austerity followed. This is the way the IMF work. They apply mainstream New Keynesian macro theory on a one-size fits all basis ignoring history, culture, institutional specificity and all the rest of the nuances and complications that should be taken into account when appraising a situation in some nation. So for them, spending a day or so in some expensive hotel was the perfect place for them to ‘know the country’ – good food, good wine, air conditioning – what more is required. The problem is that besides the specifics that always need to be considered, the overriding theory is not fit for purpose, which is why the application of the IMF-model with the SAPs has been a uniform disaster for nations. The IMF though continues to operate in this vein. I read a report yesterday about sub-Saharan Africa written by a series of IMF officials most of whom seem to be French citizens who have gone to the best universities, who advocate harsh fiscal policy shifts in the poorest nations. I am sure none of their jobs or wages are at stake.
The IMF article – Navigating Fiscal Challenges in Sub-Saharan Africa (released September 26, 2023) – tells me that 13 years after the GFC and several decades in the SAP era, the IMF hasn’t evolved much at all in its way of thinking and the tools and approaches it uses.
The paper proposes a “rethink” of “fiscal policy” in – Sub-Saharan Africa – which encompasses all the nations south of the Sahara including Central Africa, East Africa, Southern Africa, and West Africa.
Much of this broad region was brutally exploited by the French colonial regimes and the on-going use of the West Africa CFA (Communauté Financière Africaine) franc and the Central Africa CFA franc in many countries demonstrates the on-going colonial repression.
As an aside, I am going to present a series of posts on South Africa in the coming weeks as part of some work I plan to do for the South African trade union movement which is struggling against the very thinking that this IMF article exemplifies.
The context is the fact that the region:
… has been hit by a cascading series of shocks, including the COVID-19 pandemic, Russia’s invasion of Ukraine, and increasingly frequent weather events. These shocks have amplified longstanding economic and social challenges and exacerbated fiscal vulnerabilities.
The IMF claim that unless there is a significant shift in current fiscal policy settings – towards austerity – then debt-to-GDP rations will rise.
They claim the nations must “rebuild buffers” – which is one of those meaningless concepts from mainstream economics that purports to claim that by running fiscal surpluses, the nation ‘saves up’ and allows more flexible fiscal responses down the track.
A currency-issuing nation doesn’t save in its own currency when it runs a fiscal surplus – it just destroys non-government financial wealth.
Saving is applicable to non-government entities, which are financially constrained.
Hence, by forgoing current consumption expenditure, saving allows the entities to accumulate financial wealth (and earn yields), which, in turn, expands future consumption possibilities.
But for a government – their current and future consumption possibilities are only limited by what is for sale in the currency it issues.
The past or current fiscal position does not alter the future spending capacity, except in the sense that if the government has done its job properly, the need for deficit expansion to deal with unemployment, infrastructure deterioration etc will be low.
The IMF identities “four areas of concern”:
– Fiscal balances are relatively unresponsive to rising debt.
– Deviations from fiscal plans tend to be significant, especially at longer time horizons.
– Countries in sub-Saharan Africa have difficulty sustaining elevated primary surpluses.
– Compared to other regions, fiscal deficit ceilings are breached more frequently and by a larger margin.
Which apparently they consider to reflect deviations from the ‘purpose’ of fiscal policy.
For example, they think that “elevated primary surpluses” are the goal that should guide government fiscal policy.
A primary fiscal balance is the difference between government spending and tax revenue net of interest payments on outstanding public debt.
Why that balance should be in surplus or, for that matter, elevated, is just asserted without context.
And that is the problem.
If we reflected on their opening salvo – the “cascading series of shocks” (noted in the quote above) it is little surprise that the nations involved would be finding it difficult achieve “elevated primary surpluses”.
Because in that context, if they had tried to actually achieve that goal, there would be mass starvation and the future of their nations would be in jeopardy.
Which brings me to the main problem.
The IMF answer the question = What is the purpose of fiscal policy – by listing a number of financial goals relating to how large the overall and primary surplus is, the dynamics of the debt-to-GDP ratio, and aggregates such as those.
When I answer that question, I list a number of socio-environmental-economic goals such as full employment, adequate public transport, health and education systems, sufficient quality housing, high quality public services, well designed and effective social safety nets, and things of that nature.
Significantly, I see the financial ratios adjusting up and down to how well the government is achieving those socio-environmental-economic goals.
Whereas the IMF sees what I call the ‘socio-environmental-economic goals’ adjusting to satisfy their fixed financial goals, which means, usually, that the deviation between achieving my goals and the reality imposed by government austerity increases as the IMF urges governments (under coercion from the SAPs) to tighten fiscal spending and increase taxes and privatise everything it can.
That is a major difference that an understanding of Modern Monetary Theory (MMT) allows one to reach.
For me, the fiscal balance is a relatively uninteresting outcome of pursuing the legitimate goals of fiscal policy.
For the IMF, the fiscal balance is the goal and what I consider the ‘legitimate goals’ are tools that can be compromised to pursue the IMF targets.
While the fact that they turn the purpose of fiscal policy on its head is bad enough, it is also a fact that governments are not even capable of achieving the financial goals as strict targets.
Because the fiscal outcome is what economists call ‘endogenous’, which just means it is determined by the spending decisions made by both government and non-government entities.
Which means that the government can set a primary surplus as a target but if the non-government sector doesn’t spend strongly enough, the economy will head towards or into recession, given the fiscal drag coming from the fiscal settings (aiming for surplus), and tax revenue falls and welfare spending rises automatically, which in all likelihood results in a deficit.
It is far better to pursue the ‘legitimate’ goals of fiscal policy and let the fiscal outcome be whatever it is.
Only MMT economists understand that, which is one of the – differentia specifica of our approach from other schools of thought.
The IMF paper exemplifies their approach by proposing “a novel method tailored to the low-income country context, which relies on a single core principle: the preservation of debt-servicing capacity” to attain what they call an “explicit debt anchor”.
They come up with a “median debt anchor of 55 per cent of GDP in the region” of which more than 50 per cent of the relevant nations are currently beyond that threshold.
They claim that nations will have to adjust of the order of “2 to 3 per cent of GDP over the next five years for the median country, and much larger in a few cases”.
Which means mayhem when one actually details what that seemingly innocuous adjustment figure actual means on the ground in terms of the ‘legitimate’ goals of fiscal policy.
The IMF definition of a “fiscal strategy” comprises:
(1) a trajectory for future fiscal deficits that is grounded in sound economic principles — including the principle of “anchoring” … (2) a targeted composition for revenue and expenditure that reflects equity and efficiency considerations; and (3) supporting institutions that facilitate the implementation of fiscal plans.
This is a hodge-podge of incommensurate components.
The IMF also claim that “Given acute resource constraints, a fiscal strategy constitutes a difficult balancing act between competing and possibly conflicting objectives.”
I recall a meeting in South Africa some years ago when I was doing some field work for a project.
We were discussing expanding the public works employment program (EPWP) and some treasury official there announced the government didn’t have the resources to do that.
I responded by noting that South Africa was one of the richest nations in natural resources (timber, land, water, etc) and, at that time, had something like 15 million people living in poverty and about 30 per cent of its available labour unemployed (around 6 million).
How could they say the nation was scarce in resources?
Which illustrates the point.
The IMF and mainstream economists think in financial terms whereas I think in real resource terms.
Even thinking in financial terms leads one to realise that the South African government, which issues its own currency, has no financial limits on such issuance.
The only question is whether they can mobilise real resources through spending that currency.
And the answer is obvious.
The idea that there are “acute resource constraints” in nations with high unemployment is an absurdity and an indecency.
Further, even the way that mainstream economists use terms such as equity and efficiency is loaded.
For me, efficiency includes ensuring a nation maximises the potential of its citizens.
Mass unemployment is highly inefficient because it wastes productive resources.
But my definition of efficiency which is broader than the mainstream, which tends to concentrate on how resources are utilised to increase private profits, increases equity, whereas in the mainstream framework – equity and efficiency – are seen as trade-offs.
What is “anchoring”?
Pretty simply it is in the IMF words:
… a stock variable, with the debt-to-GDP variable being the most commonly used. In resource-rich countries, the anchor can be extended to net debt … Because fiscal anchors are not meant to provide short-term guidance to policymakers, fiscal frameworks generally include also operational rules or targets that apply to flow variables like the fiscal balance, expenditure, or revenue (in level, growth rate, or GDP ratio).
So simple enough – define some debt-to-GDP ratio as a target.
Each year, get the boffins to run simulations on what spending and revenue will achieve that.
Problem one: the typical forecasts are terrible and systematically biased.
That means that the mainstream models always predict better real outcomes (employment, output, income generation) for a given level of austerity than ever actually occurs.
The corollary is that they predict less worse outcomes when severe austerity is imposed.
The mistakes the IMF made in Greece during the GFC were monumental in terms of unemployment overshoots etc.
In the current IMF paper they actually note the benefits of the Stability and Growth Pact in the Eurozone as an example of the way fiscal anchors should be designed and implemented.
And we all know what that approach led to.
The only reason unemployment is not higher in the Eurozone than it currently is, is because the SGP has been suspended since the pandemic.
Just wait for the European Commission to start reinforcing the Excessive Deficit procedures in the coming year!
Problem two: search the IMF paper if you have downloaded it for reference to full employment (as an example).
You won’t find any reference to it or high quality public education, health, transport etc.
Quite simply, it is nigh on impossible to define some debt-to-GDP threshold in the medium-term that will coincide with the maintenance of full employment and high quality public services.
Quite apart from whether such governments should issue any debt at all – and they should not – the fluctuations in non-government spending will always lead to fiscal outcomes also fluctuating beyond targets set by governments.
Trying to pursue such targets also typically leads to severely compromising the ability of the government to pursue material prosperity on behalf of its citizens.
This IMF paper is a modern statement of everything that is wrong with the mainstream approach and highlights the differences between MMT and the orthodoxy.
For MMT economists, the fiscal aggregates adjust in order to achieve the legitimate goals of fiscal policy.
For orthodox economists, these ‘legitimate’ goals are compromised in a futile attempt to achieve some predetermined fiscal aggregates, which are derived from a flawed understanding of the capacities of currency-issuing governments.
That is enough for today!
(c) Copyright 2023 William Mitchell. All Rights Reserved.