Monday, 6 June 2011

More IMF'in nonsense

I really can’t be bothered running through all the reasons why the only reasonable response to the IMF’s endorsement of the coalition’s economic strategy is unconcealed derision. Anyway, already did it here last September.
But I would add that all is not what it seems...Understandably, the instinctive reaction of the IMF’s critics is to do what I did in the linked blog above: describe the ideological nature of the Fund, its risible record as a forecaster, the times events have revealed its assessments to have been stupidly, incredibly wrong and list the many occasions on which its prescriptions have led to disaster.
Thing is though, the IMF has published a lot of good stuff in recent months; honest, it really has. And its current wonkish policy work is incredibly hard to reconcile with country reports like the one it has issued today on the UK.
Examples? Take the IMF World Economic Outlook published in October 2010. Chapter 3 poses the question Will it hurt? The macroeconomic effects of fiscal consolidation. There is little in here to console the Osborne’s of this world. Among the conclusions:

  •  Fiscal consolidation typically has a contractionary effect on output. Quite.
  • Reductions in interest rates usually support output during episodes of fiscal consolidation – can’t happen in the UK in 2011 with interest rates already up against the zero bound.
  • A decline in the real value of the domestic currency typically plays an important cushioning role by spurring net exports and is usually due to nominal depreciation or currency devaluation – very unlikely to happen here; Sterling depreciated by 25% prior to the fiscal contraction with vefry limited benefits.
  • Fiscal retrenchment in countries that face a higher perceived sovereign default risk tends to be less contractionary. However, even among such high-risk countries, expansionary effects are unusual. Well, the UK was always a low default risk and the second sentence says it all.

The IMF has also produced a number of excellent ‘working papers’; papers which are not yet full IMF policy but which are informing its policy development. Have a look at this on Inequality, leverage and crises if you don’t believe me. Olivier Blanchard, the Fund’s chief economist has worked with Joe Stiglitz and others to try to shed some light on the failures of macroeconomics as a discipline. The IMF even organised a joint event in the summer of last year with the ILO on the Challenges of Growth, Employment and Social Cohesion which resulted in this excellent report.

So why does the Fund continue to toe the orthodox line in its assessment of UK Government policy? Stephanie Flanders hints at the truth in a blog responding to today’s events:

“Impeccable sources have told me there was considerable concern among senior IMF economists last year at the pace of the coalition's plans to cut the deficit. However, political negotiations at the highest level meant that these concerns did not get expressed in public”.
When the IMF will adapt its political interventions to align with its current policy work is anybody’s guess. But its record suggests that we could be in for a very long wait.
Stephen Boyd - STUC

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