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Jayati Ghosh

The more things change, the more they really do stay the same. For a while after the global crisis, we were told that the IMF had changed its position with respect to the strict and generally pro-cyclical measures it had been suggesting to countries in the throes of financial or balance of payments crisis. Their economists openly accepted the need for fiscal stimuli and generally counter-cyclical macroeconomic policies to combat the recession.

According its own internal review in September 2009, the IMF has really changed in this respect: “Internalizing lessons from the past, (IMF) programs have responded to country conditions and adapted to worsening economic circumstances to attenuate contractionary forces…The stance of fiscal policy in most cases has been accommodative and adjusted to evolving conditions. Deficits were allowed to rise in response to falling revenues and, in cases where domestic and external financing was lacking, this was facilitated by channeling Fund resources directly to the budget.”

Other independent assessments have not been so sanguine and have generally found that the emphasis on fiscal retrenchment and excessive austerity in the midst of crisis continues in most Fund programmes. A recent study by UNICEF found that in 57 out of the 86 countries reviewed, the IMF has recommended contractions in total public expenditure, as well as in crucial social expenditure.

The latest sign of the IMF’s actual intransigence in demanding even more stringent austerity measures in the face of extreme economic hardship comes from Hungary. In November 2008, Hungary signed a Stand-By Arrangement with the IMF for SDR 10.5 billion, as part of a joint rescue package worked out with the European Union. Various IMF reviews found that Hungary complied with all the very severely procyclical conditions imposed, including a massive reduction of the fiscal deficit from more than 9 per cent of GDP in the last quarter of 2008 to around 3.8 per cent thereafter. At least partly as a result of this, real GDP declined by 6.2 per cent in 2009. In fact Hungary did not actually take the remaining amount under the SBA of around 725 million.

The very harsh economic conditions led to social and political turmoil, with even policemen going on strike demanding their pay and arrears. The Social Democratic party implementing these measures was thoroughly defeated in the elections, which delivered a resounding majority to the centre-right Fidesz Party that had campaigned on a promise of less austerity. However, once in power, in June this year the new government also announced that the fiscal situation was worse than they expected, and so even more severe fiscal measures would be required.

There were tax cuts for the wealthy, but more pain for workers and users of public services. Public sector wages are to be cut (in nominal terms in an inflationary environment) by around 15 per cent; redundancy payments are limited to two months’ pay, with all other payments subject to a 98 per cent tax; pensions are to be further cut along with an increase in the retirement age. Coming on top of nearly five years of such measures, these policies are likely not only to add to material distress but obviously prevent or delay any recovery in the economy.

It could be thought that all this would be enough even for the IMF to be satisfied, but apparently not! In mid-July, the visiting IMF team actually broke off discussions with the government and returned home, unhappy that more was not being done on the expenditure side to reduce the fiscal deficit, so as to ensure the planned 3.8 per cent of GDP for this year. The IMF demanded privatization of state-owned enterprises and further reductions in spending. They also objected to something that would actually help to reduce the deficit – a proposed tax on the banking sector that is expected to raise nearly $1 billion. The IMF found this to be “high” and likely to “adversely affect lending and growth”.

So it seems that not all deficit-reduction measures are apparently to the taste of the IMF! Anything that affects bankers and other forms of capital is obviously unacceptable, and the belt-tightening should focus on the public at large, especially workers. But this time, even the centre-right party realises that it really cannot afford to risk renewed public anger at even more such measures, at least until the municipal elections to be held in October.

So whose interests are being served by such demands by the IMF? While the pro-cyclical proclivities of the IMF are well known, it could be thought that given the recent past and its own statements, it would at least be slightly shame-faced about insisting upon them. But it may be that it is being pushed further along this road by the EU, which has become increasingly insistent on a combined push towards austerity among all wayward European economies.

The likely devastation on the real economies of Europe is obvious to almost all observers, and so such a policy appears inexplicable. The purpose right now, however, is to somehow save the banking system, which is deeply implicated in the more fragile economies. Thus, banks from just five countries (Austria, Germany, Italy, Belgium and France) hold more than $126 billion of Hungarian public debt. This entire exercise is essentially to save them from any diminution in the value of their assets. Already since the breakdown of IMF talks, the Hungarian forint has slumped to its lowest level in the past two years, and yields on bonds have risen, even though no “fundamentals” have changed.

Of course such a strategy is counter-productive, as will become only too clear in the next few months. Meanwhile, within countries, it will depend on how much more of such macroeconomic nonsense the people are willing to tolerate.

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