IMF Archives

Is the new progressive IMF just an illusion?

“The Funeral of Austerity”– that’s how the FT referred to the IMF’s last round of annual meetings. In a radical departure from past approaches, the fund’s glossy publications encouraged countries to increase spending during the pandemic. Managing Director Kristalina Georgieva even talked about the need to ramp up public investment in service of greener and more inclusive economies. It was a big shift in rhetoric, and it earned the IMF stellar press coverage. But was it just rhetoric, or have things actually changed? To know whether austerity really died, we have to look at what the IMF said to its members states, not to the press.

To give credit where credit is due, the IMF did step up to offer emergency loans during the pandemic. Unlike usual IMF lending, they did not carry conditions; countries were not forced to adopt any particular economic policies to get access. By the end of 2020, over 70 countries had taken out such loans, and they provided a lifeline. As uncertainty around the pandemic triggered a massive capital outflow from the developing world, these loans helped alleviate some of the most immediate needs.

But although conditionality was absent, the emergency loans did come with advice. And despite the novel rhetoric at the IMF annual meetings, the advice was business as usual: regressive taxation, “structural reforms” (deregulation, liberalization, and privatizations), and fiscal consolidation. These are the same policies that the IMF has imposed for decades and that have had disastrous results for borrowing countries. Does the Fund really believe they can be relied upon to provide the inclusive and sustainable growth they’ve come to emphasize?

Answering this question required me to better understand the way the IMF justifies its recommendations. In a report for the ITUC, I was able to unpack just that.

This recent IMF research paper gives some clues by tracing the evolution of the Fund’s growth narratives over time. What becomes apparent is that IMF’s narratives have changed response to politics more so than in response to results. The paper asserts that industrialization, manufacturing, and innovation were considered as drivers of growth by the IMF, until the 1980s. The shift in narrative coincides with a push from the Reagan administration to adopt trickle-down economics and make neoliberal ideology go global.

It was then that the IMF’s narrative on what are the main drivers of growth morphed into the “Washington Consensus”, blaming poor economic performance on government intervention and encouraging states to get out of the way. From that premise, privatizing, deregulating, and liberalizing seem like the path to growth. And the now ubiquitous Dynamic Stochastic General Equilibrium (DSGE) models have helped the cause along. With market superiority built into the assumptions of the model, a lot of mathematics can “demonstrate” the justifiability of the policies proposed.

The Washington Consensus policies are what the IMF refers to as structural reforms. The 1980s marked the start of “Structural Adjustment Programs” that had disastrous consequences for the developing world, while the benefits never materialized. Over the last decades, none of the countries that followed the IMF’s advice were able to industrialize and move up the income ladder. The countries that did move up (such as the Asian Tigers) relied on industrial policy.

After a series of high profile failures and a loss of credibility, the IMF officially discontinued Structural Adjustment Programs. However, while additional language was added to its advice, terms such as inequality, inclusive growth, corruption, and human capital started to appear alongside elements of the Washington Consensus. The structural reforms at the core of those programs are still prevalent.

Those shaping IMF policy advice continue to tell a different story, one where structural reforms work, even if they are unpopular. Their work continues to find creative ways to group countries together to claim that its approach works and blame abysmal growth performance in some of their top “reformers” on their own failures.

For example, a 2019 publication that aimed to defend the benefits of such reforms scored countries based on their adoption of structural reforms. While the paper groups countries in a way that allows reporting better growth from more reforms, a look at the entire sample paints a different picture. The best per capita growth in the sample is from China, which is not a top reformer and certainly not a follower of IMF advice, while top scorers such as Ukraine, Russia, and Egypt have amongst the worse growth performances in the sample.

In general, it is well documented, including in the IMF’s own internal review of programs, that the IMF in its programs and projections continues to underestimate the negative impacts of austerity, while overestimating the growth grains from the reforms it pushes.

While those designing policy advice at the IMF might not be fully ready to admit their approach does not deliver on growth, the institution’s own research department published a series of papers on the negative social consequences of many of these policies. There is IMF research that links policies the IMF has imposed for decades to increasing inequality, and higher inequality to lower growth. Furthermore, Argentina and Greece are just two recent examples of huge spikes in poverty caused by the economic collapse that followed IMF-imposed policy approaches.

If the IMF truly means what it says about wanting to support a green and inclusive recovery, it needs to fully revamp its policy toolkit, and reassess all the advice it gives countries. Even if the IMF were to incorporate concerns about inequality and the environment in its current models, they would still be underpinned by the market fundamentalism baked into the DSGE models it uses. The limitations of adding variables to the same old paradigm are already showing when it comes to climate policies. The IMF is suggesting, all based on carbon pricing and the idea that nudging markets can solve the existential climate crisis in a timely manner, an overoptimistic assumption this time with devastating consequences for the entire planet.

As long as trickle-down, supply-side economics continues to shape the core of its advice, the new IMF will be just like the old IMF, now with more gentle rhetoric.

Lara Merling is a policy advisor at the International Trade Union Confederation, which represents over 200 million workers in 163 countries, and is a Senior Research Fellow at the Center for Economic and Policy Research in Washington DC. You can find her on Twitter @LaraMerling

When it comes to sovereign debt, what is the real concern? Level or Liquidity?

“What can be added to the happiness of a man who is in health, out of debt, and has a clear conscience?”
Adam Smith

By Elham Saeidinezhad | The anxieties around the European debt crisis (often also referred to as eurozone crisis) seem to be a thing of the past. Eurozone sovereigns have secured record-high order books for their new government bond issues. However, emerging balance-sheet constraints have limited the primary dealers’ ability to stay in the market and might support the view that sovereign bond liquidity is diminishing. The standard models of sovereign default identify the origins of a sovereign debt crisis to be bad “fundamentals,” such as high debt levels and expectations. These models ignore the critical features of market structures, such as liquidity and primary dealers, that underlie these fundamentals. Primary dealers – the banks appointed by national debt agencies to help them borrow from investors- act as market makers in government bond auctions. These primary dealers provide market liquidity and set the price of government bonds. Most recently, however, primary dealers are leaving Europe’s bond markets due to increased pressure on their balance-sheets. These exits could decrease sovereign bonds’ liquidity and increase the cost of borrowing for the governments. It can sow the seeds of the next financial crisis in the process. Put it differently, primary dealers’ decision to exit from this market might be acting as a warning sign of a new crisis in the making.

Standard economic theories emphasize the role of bad fundamentals such as high debt levels in creating expectations of government default and reaching to a bad-equilibrium. The sentiment is that the sovereign debt crisis is a self-fulfilling catastrophe in nature that is caused by market expectations of default on sovereign debt. In other words, governments can be subjected to the same dynamics of fickle expectations that create run on the banks and destabilize banks. This is particularly true when a government borrows from the capital market over whom it has relatively little influence. Mathematically, this implies that high debt levels lead to “multiple equilibria” in which the debt level might not be sustainable. Therefore, there will not be a crisis as long as the economy reaches a good equilibrium where no default is expected, and the interest rate is the risk-free rate. The problem with these models is that they put so much weight on the role of expectations and fundamentals while entirely abstract from specific market characteristics and constituencies such as market liquidity and dealers.

Primary dealers use their balance-sheets to determine bond prices and the cost of borrowing for the governments. In doing so, they create market liquidity for the bonds. Primary dealers buy government bonds directly from a government’s debt management office and help governments raise money from investors by pricing and selling debt. They typically are also entrusted with maintaining secondary trading activity, which entails holding some of those bonds on their balance sheets for a period. In Europe, several billion euros of European government bonds are sold every week to primary dealers through auctions, which they then sell on. However, tighter regulations, such as MiFID II, since the financial crisis has made primary dealing less profitable because of the extra capital that banks now must hold against possible losses. Also, the European Central Bank’s €2.6tn quantitative easing program has meant national central banks absorbed large volumes of debt and lowered the supply of the bonds. These factors lead the number of primary dealers in 11 EU countries to be the lowest since Afme began collecting data in 2006.

This decision by the dealers to exit the market can increase the cost of borrowing for the governments and decrease sovereign bonds’ liquidity. As a result, regardless of the type of equilibrium the economy is at, and what the debt level is, the dealers’ decision to leave the market could reduce governments’ capacity to repay or refinance their debt without the support of third parties like the European Central Bank (ECB) or the International Monetary Fund (IMF). Economics models that study the sovereign debt crisis abstracts from the role of primary dealers in government bonds. Therefore, it should hardly be surprising to see that these models would not be able to warn us about a future crisis that is rooted in the diminished liquidity in the sovereign debt market.

Elham Saeidinezhad is lecturer in Economics at UCLA. Before joining the Economics Department at UCLA, she was a research economist in International Finance and Macroeconomics research group at Milken Institute, Santa Monica, where she investigated the post-crisis structural changes in the capital market as a result of macroprudential regulations. Before that, she was a postdoctoral fellow at INET, working closely with Prof. Perry Mehrling and studying his “Money View”. Elham obtained her Ph.D. from the University of Sheffield, UK, in empirical Macroeconomics in 2013. You may contact Elham via the Young Scholars Directory

Despite its new rhetoric, the IMF still promotes failed policies

An event titled Income Inequality Matters: How to Ensure Economic Growth Benefits the Many and Not the Few is not exactly what comes to mind when one thinks of the International Monetary Fund (IMF).

Yet, in April, at the latest Spring Meetings, managing director Christine Lagarde, along with the IMF’s chief economist, discussed the urgency of addressing rising income inequality and the need for redistributive policies. While IMF staff in Washington were expressing their concern with inequality, people in Ecuador, Argentina and Tunisia were taking to the streets to protest against anti-worker austerity policies their governments are implementing as part of the IMF programs.

In the 1980s and 1990s, when a series of debt crises plagued the developing world, the IMF lent money to those countries as part of what it called structural adjustment programs (SAPs). These programs, part of what is now referred to as the ‘Washington consensus’, aggressively promoted an agenda of liberalization, deregulation, and privatization, along with sharp cuts to social spending.

SAPs protected creditors and opened the doors for multinational corporations to do business in these countries, while the brunt cost of the adjustments was borne by people.

As the growth and development that was promised as a result of these programs never materialized, the IMF slowly lost some of its influence. The painful memories of the social costs that resulted from SAPs have made the IMF an extremely unpopular institution.

In recent years, the IMF has made substantial efforts to rebrand itself and create the image of an institution concerned with inclusive growth and social indicators. The IMF’s research department has dedicated a significant amount of time and space to the issue of rising inequality. This included research that showed that the fiscal consolidation and liberalization of capital accounts – policies that are at the core of IMF programs – increase income inequality.

The Fund has also examined the effect of the labor market policies it promotes and their contribution to the decline in the share of income captured by labour.

Yet, while its research department tackled questions on how to pursue both growth and inclusion, the Fund’s loan programs have not incorporated these concerns.

In the aftermath of the financial crisis in 2008, the IMF re-emerged as a major player on the global scene. The IMF stopped using the name SAP, but the structure of IMF loan conditions and the policy demands remained very similar, with the failure of previous programs all but forgotten.

To make matters worse, the IMF continues a trend of underestimating the depth of recessions caused by the austerity policies it promotes, which prolongs economic crises and increases debt burdens as economies shrink.

The IMF’s latest loan agreement with Ecuador has the typical features of a structural adjustment program. It demands massive cuts in government spending, which directly target public sector employees, along with a series of neoliberal institutional reforms.

The program continues to impose failed policies that are shown by the IMF’s own research department to increase inequality and have high social costs.

To go along with the IMF’s new image, the program does include a floor on social spending, along with a modest increase in spending on social assistance for the first year. However, the spending floor, which establishes a minimum amount of the budget to be allocated towards social assistance programs is set at a low level, which is unlikely to keep up with the increased needs that will arise from Ecuador’s recession.

The case of Argentina, which entered an agreement with the IMF in the summer of 2018, has already shown the inadequacy of social spending floors. As the economic crisis has continued to worsen throughout the program, poverty in Argentina has skyrocketed, increasing from 25.7 percent in mid-2017, to 32 percent by the end of 2018, a staggering 6.3 percentage points.

Argentina also serves as an example of the failure of IMF austerity programs, where growth projections had to be adjusted downwards by over 3 percent for a single year only 3 months after the initial agreement was signed

An in-depth study of all IMF loans approved in 2016 and 2017 has shown that 23 out of a total of 26 programs imposed austerity measures. The number of conditions attached to loans also continues to increase. Furthermore, the study has shown the inadequacy of social spending floors, which do not provide enough funding, even for the provision of basic healthcare.

The IMF has changed its rhetoric on inequality and social inclusiveness, but its operations continue to impose the same harmful policies of the past. While some symbolic steps have been taken on how to operationalize research on inequality, they have yet to be incorporated into lending agreements.

If the IMF is truly concerned about growth that benefits ‘the many,’ it needs to stop promoting policies that have time and time again hurt working people.

This article originally appeared in Equal Times.

Austerity in the UK: Senseless and Cruel

As the UK recorded its first current budget surplus in 16 years, the IMF was quick to use this development as sufficient proof to declare the austerity measures, imposed by the UK government in the aftermath of the financial crisis, a success. To the IMF, the UK case of eliminating its budget deficit, while avoiding a prolonged recession, and faring better than other European countries, supports the case for further austerity.

However, this overly simplistic interpretation disregards the long-term structural problems that the UK economy is facing, does not acknowledge the active role played by the Bank of England (BoE) in mitigating the crisis, nor does it attempt to understand what is behind the growing voter discontent that led to the Brexit vote. Furthermore, given that the austerity measures have been linked to 120,000 deaths, it seems rather odd to celebrate this approach.

While at a first glance, one might think the UK economy is in pretty good shape, with low unemployment levels and continuous growth for the last 8 and a half years, a closer look at the data reveals a less optimistic picture. As outlined in this report from the Center for Economic and Policy Research (CEPR) that I co-authored with Mark Weisbrot, the UK economy is facing some serious challenges.

The last decade has failed to deliver any improvement in living standards to most households, with real median incomes of working-age households barely returning to their pre-recession levels this year. Retired household have fared somewhat better, yet are under threat as a target for further spending cuts. While increased employment has meant household incomes reached their precession levels, real hourly wages have not. To make matters worse, a widely cited decline in the gender pay gap is due to a larger drop in male wages, rather than female wages increasing.

One of the most striking and unusual aspects of the recovery is that poverty, by some measures, has actually increased for people of working age. After accounting for housing costs, the percentage of people aged 16–64 with income below the poverty threshold has risen to 21 percent in 2015/16, from 20 percent in 2006/07.

In terms of productivity growth, which is the engine of rising living standards, the past decade has been the worst for the UK since the 18th century. The slowdown in productivity growth means that GDP per person is about 20 percent lower than it would have been if the prior growth trend continued. The problem of slow productivity growth is directly linked to low investment levels in the UK, which has the lowest rate of gross capital formation amongst G7 countries.

The UK currently finds itself in an economy where demand is lagging, and the prospects of Brexit bring significant uncertainty over the future. This is an environment that is unlikely to attract major private investment, especially in the areas it is most needed. There is a clear need for public investment and spending that can grow the economy and improve living standards. More austerity might seem to reduce the government’s deficit now but its price will ultimately be paid through lost output and slower growth.

The negative feedback from the fiscal tightening was undoubtedly mitigated by the expansionary monetary policy conducted by the BoE, which also explains why the UK was able to withstand austerity without deepening its recession and fared better than countries in the eurozone. The BoE started lowering its Bank Rate in October 2008 until it reached 0.5 percent. The rate was further decreased in the aftermath of Brexit to 0.25 percent, only to be raised again to 0.5 percent at the end of 2017.

The most important step taken by the BoE was its Quantitative Easing program, launched in August 2008, to buy bonds and ensure long-term interest rates for the UK remain low. The European Central Bank (ECB) only took similar steps for euro denominated sovereign bonds in July 2012.

While the IMF portrays the UK net public debt-to-GDP ratio as unsustainable high (it was 80.5 percent in 2017), this assessment is mostly arbitrary, especially given the UK’s specific circumstances. The burden on the public debt is best measured by the interest payments on the debt, relative to the size of the economy since the principal is generally simply rolled over. At present, the net interest payments on the debt are about 1.8 percent of GDP, a number significantly lower than in the 1980s when interest payments on the debt were generally above 3 percent of GDP annually, and in the 1990s when they were between 2 and 3 percent per year.

It is essential to note that financial markets recognize there is little risk to holding UK bonds, and the UK government can currently borrow at negative real interest rates. Given that the UK issues bonds in its own currency, investors understand there is no risk of default.

There are many public investments that have a positive real rate of return by increasing the productivity of the economy. Thus, given the current circumstances, it seems rather absurd to focus on reducing the debt rather than growing the economy.

There is no doubt that Brexit is one of the major challenges that the UK faces. However, particularly in this context of uncertainty, macroeconomic policies play an essential role. Unnecessary fiscal and monetary tightening pose an immediate threat to economic progress and the UK’s ability to improve living standards of its residents.

Imposing austerity on an economy where incomes have not recovered from the last recession, there is a large slowdown in productivity growth, an overall lack of investment, and the government can finance its spending at negative real interest rates is senseless and cruel.

For more details, graphs, and complete sources check out the full report.

Greece has a Private Debt Crisis and We Can Blame the Troika

The Greek public debt debacle and the bailout received by the government from the European Central Bank (ECB), the European Commission (EC), and the International Monetary Fund (IMF) – referred to collectively as the “troika” – has been making headlines for years. However, very little attention has been paid to the debt crisis in the Greek private sector. An alarmingly high portion of private sector borrowers is behind on their debt payments, and the Greek banking system currently has one of the highest ratios of delinquent loans in the European Union.

This collapse of debt prepayments is a direct result the policies imposed by the Troika and threatens the future of Greek economic growth. After the Greek government required financial assistance from international creditors, it was forced to introduce draconic austerity measures to repay its debt. Cutbacks to state services, collapses in incomes, and an increasingly unstable economic environment contracted spending, therefore, eliminating future cash flows that private entities expected to use to repay their debt. The result has been a spiral of collapsing demand and shrinking growth.

Greece’s accession to the Eurozone was followed by a largely ignored, rapid, and unsustainable build-up in private sector debt. Once the Greek government was forced to impose severe austerity measures and the economy collapsed, the private debt crisis followed. Now, the large ratio of delinquent loans held by Greek banks is adding to the factors hampering economic growth. For Greece to recover, its private debt problems need to urgently be addressed with an approach that offers relief to both borrowers and lenders.

This article was originally published by the Private Debt Project. Read the entire article here.

The full article highlights how the mismanagement of the Greek sovereign debt problems triggered the current private debt crisis. We show the rapid growth in private debt, document the macroeconomic context that pushed to Greece into a depression, and explain how these factors created a private debt crisis. Then, we discuss some of the existing proposals for addressing a large number of loan delinquencies and their limitations, and finally, propose other approaches to tackle this pressing problem.