Tuesday, 28 September 2010

The IMF – inconsistent, ideological and wrong

Yesterday the International Monetary Fund stated that the UK economy was ‘on the mend’. Apparently ignoring a wide range of surveys which show confidence collapsing around the time of Osborne’s June Budget, they myopically declared that there is ‘no evidence of a double-dip recession’. The ConDems were understandingly gleeful over this ringing endorsement of their Budget strategy.

And yet, only a fortnight ago, in a joint report with the ILO, the IMF stated that the one thing necessary to tackle low growth and high unemployment was for Governments to ‘maintain aggregate demand’. Reconcile these positions if you can.

At the start of the month, the IMF found that the UK could borrow an additional £700bn before the public finances entered crisis territory. The UK has significantly more ‘fiscal space’ than genuine crisis countries such as Ireland and Greece. Markets bear out the IMF's position with current prices confirming that the UK’s debt challenge is nothing like the scale of that facing Ireland, Greece and Portugal. But yesterday the IMF argued that ‘the government's strong and credible multi-year fiscal deficit reduction plan is essential to ensure debt sustainability’. Evidence please?

So despite some welcome signs that a long overdue challenge to dominant orthodoxy may be underway within some IMF departments, its default position still appears to be the Washington Consensus.

It is certainly true that large swathes of the media (the execrable Nick Robinson in particular) continue to invoke the IMF as the ultimate authority on economic affairs. Does its record warrant such esteem? Well, here are some chestnuts from the IMF’s 2006 annual report; published less than a year before the credit crunch started in earnest:

  • ‘Directors noted that the rapid growth in recent years of credit derivative and structured credit markets had facilitated the dispersion of credit risk by banks to a broader, more diverse group of investors, making the financial system more resilient and stable’.

Resilient and stable? Just how wrong can you be?!

  • ‘While cyclical changes could well expose weaker segments and pockets of financial markets, the Board considered that these were unlikely to pose systemic risks….regulators should place greater reliance on the self-correcting forces of financial markets’.

Self-correcting? With the help of a multi-trillion public bailout perhaps.

  • ‘In March 2006, an IMF team visited Dublin to update the 2000 Financial sector Assessment Program (FSAP). The team found that Ireland’s financial system remained robust but recommended some improvements to the supervisory framework, including upgrading stress testing, strengthening on-site supervision of insurers, and enhancing public disclosure requirements for insurers’.

Robust? Some improvements? Irish workers are now paying a very heavy price for the IMF’s ideological bias.

Of course, the IMF’s historic failures have been well documented by Joe Stiglitz and others. The IMF was pivotal in establishing a model of globalisation that led to pervasive instability, moderate GDP and productivity growth, greater inequality between rich and poor nations, greater inequality within rich nations and lower social mobility across the developed world. Its lamentable failure in dealing with the Latin American and East Asian financial crises of the 1990s led directly to the global reserve system of today; a primary cause of the 2008/09 crisis and an ongoing source of poverty and instability. You could write a book on the IMF’s failures but thankfully Stiglitz got there first.

But its ok – the IMF thinks the ConDems are doing a good job. I guess we can all relax.

Stephen Boyd

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