WASHINGTON - The International Monetary Fund (IMF) is on the defensive over a
recent study which charged that a majority of countries with IMF agreements had
been subjected to pro-cyclical fiscal or monetary policies during the global
economic downturn, exacerbating the effects of the recession and harming some
of the world's poorest economies.
The IMF responded to the report by the Washington-based Center for Economic and
Policy Research (CEPR) with a lengthy rebuttal asserting that it "reaches
seriously misleading conclusions about the pro-cyclicality of policies in
IMF-supported programs, relying on faulty analysis and often inaccurate
information".
"The main point of this report is that growth forecasts were too
optimistic when programs were designed, leading to excessively tight fiscal and
monetary policies. Reality is quite the opposite," the IMF rebuttal said.
The CEPR report, released this month, had found that in 31 of the 41 sample
countries with IMF agreements [1], the IMF recommended pro-cyclical monetary or
fiscal policies, and in 15 cases pro-cyclical monetary and fiscal policies were
recommended.
"More than a decade after the Asian economic crisis brought world attention to
major IMF policy mistakes, the IMF is still making similar mistakes in many
countries," said CEPR co-director Mark Weisbrot in a statement. "The IMF
supports fiscal stimulus and expansionary policies in the rich countries, but
has a much different attitude toward low- and middle-income countries."
"They're loaning money which taxpayers from around the world are contributing.
They should be able to really help countries improve their economic situations
and do what rich countries are doing - stimulus packages that work," he told
Inter Press Service.
"Our report is objective and took a look at the countries that have agreements
with the fund and asked if the IMF, some time in the last two years, has
agreements with policies that made the downturn worse in these countries," he
said in an interview. "The answer was 31 out of 41 countries [were made worse]
with a very conservative definition [of 'worse'] which favored the fund."
"I wouldn't blame them for getting a forecast wrong, but when you have a bubble
this size, especially once it's burst in 2007 and 2008, I think that's a major
failure," Weisbrot added.
The CEPR report found that the fund's pro-cyclical policies were often the
result of poor data and overly optimistic assumptions about economic growth and
recovery. The fund was particularly weak at forecasting gross domestic product
(GDP) growth and was forced to revise its forecasts downward for a number of
national economies.
"The fund might respond that it could not be expected to anticipate the depth
of the world recession and its impact on developing countries through exports,
capital inflows, remittances, access to trade credits and other channels,"
wrote the CEPR report. "But the fund should have been more careful in its
projections and should have anticipated a severe downturn that would have
serious effects on low- and middle-income countries."
The CEPR begins its analysis by criticizing the IMF for overlooking reports of
a massive US housing bubble issued as early as 2002.
With the collapse of the US housing market in 2006 and 2007 and the financial
crisis following the bankruptcy of Lehman Brothers in September 2008, the fund
should have predicted a sharp decline in capital flows to developing countries,
as has occurred in previous US recessions, argues the report.
Private capital flows to developing countries dropped from US$1.2 trillion in
2007 to $707 billion in 2008 and are projected to drop further to $363 billion
in 2009, according to World Bank data.
IMF policies are contradictory in that they encourage the use of government
spending in Europe and other developed countries to counter the global
recession, but IMF loan agreements prevent low- and middle-income countries
from implementing the same counter-cyclical, expansionary monetary policies,
says the report.
The report's authors say the IMF justifies this double standard by the fact
that if low- and middle-income countries stimulate their economies during a
downturn, they may expand current account deficits and run low on foreign
exchange while European Union countries, the US and Japan don't face the same
constraints.
The CEPR criticizes the IMF for focusing on the fiscal balance of developing
countries' economies and current account deficits at a time when the fund
should have been providing reserves for borrowing countries to pursue
expansionary economic policies similar to those implemented in the world's
developed economies.
In addition to discouraging fiscal stimulus in developing economies, the report
argued that the fund has contradicted itself by prescribing tight macroeconomic
policies during the downturn as a means of increasing confidence and deterring
capital flight.
While publicly stating its intention to limit capital flight, the fund has
either not recommended or, in the case of Pakistan, discouraged the use of
capital controls, said CEPR.
The center argues that restoring confidence and deterring capital flight can be
best accomplished through the fund's new Flexible Credit Line which provides
large amounts of credit with no conditions - but is only available to Poland,
Colombia and Mexico - instead of by encouraging pro-cyclical policies at a time
of economic crisis.
The IMF has asserted that the CEPR report has numerous factual inaccuracies in
its case studies - particularly those in Hungary, Latvia and Ukraine - and
"[i]n virtually all programs, fiscal targets were quickly and substantially
relaxed once the extent of the crisis became apparent. Monetary and fiscal
policies have deliberately sought to offset the fall in global demand."
"The CEPR study fails to acknowledge that large and upfront financing, together
with a supportive macroeconomic policy mix, has allowed most emerging market
countries under IMF-supported programs to avoid costly currency overshooting
and widespread banking problems - the hallmark of past crises," said the IMF.
Note
1. The CEPR report examines IMF agreements with: Afghanistan, Armenia, Belarus,
Bosnia and Herzegovina, Burkina Faso, Burundi, The Central African Republic,
Republic of the Congo, Costa Rica, Cote d'Ivoire, Djibouti, El Salvador, Gabon,
The Gambia, Georgia, Ghana, Grenada, Guatemala, Haiti, Hungary, Iceland, Kyrgyz
Republic, Latvia, Liberia, Malawi, Mali, Mozambique, Mongolia, Niger, Pakistan,
Romania, Sao Tome and Principe, Senegal, Republic of Serbia, Seychelles, Sierra
Leone, Tajikistan, Tanzania, Togo, Ukraine, and Zambia.
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