How Much has the IMF Changed in Response to the Global Crisis?

Matías Vernengo

Following the 2008 Global Crisis the notion that the International Monetary Fund (IMF) has moved away from orthodox views on a range of issues, but particularly regarding the need for austerity, has been pervasive. For example, Paul Krugman has argued, in his influential blog, that Olivier Blanchard, IMF’s director of research (or economic counselor) is “helping make at least one international institution less austerity-mad than the others.”

So what is this new view, exposed by Blanchard? For example, in the preface to the last World Economic Outlook, Blanchard tells us that:

Potential growth in many advanced economies is very low. This is bad on its own, but it also makes fiscal adjustment more difficult. In this context, measures to increase potential growth are becoming more important—from rethinking the shape of labor market institutions, to increasing competition and productivity in a number of nontradables sectors, to rethinking the size of the government, to examining the role of public investment.

Note that in neoclassical (or mainstream) economics speak, potential growth is supply-side determined. That’s why the reforms would be less regulation of labor markets (to allow firms to hire workers for a lower wage), reduced regulation (to generate incentives for firm entry to increase competition), and reduced size of the public sector (that’s what “rethinking” means; nudge, nudge, wink, wink). These policies are needed to boost the supply capacity of the economy, its “potential” or “natural” output. Demand expansion, in the form of more spending and fiscal deficits cannot be pursued, since the growth of potential output is “very low.”

These are, in fact, the same neoliberal reforms that the IMF has always supported, and that since the 1990s have been referred to as the Washington Consensus.

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Ask Mark Blyth: “Austerity Doesn’t Work, Period”

Kevin Gallagher

“Austerity doesn’t work. Period.” This quote is the punch line of Mark Blyth’s Austerity: The History of a Dangerous Idea, second edition just out. If that quote was made into bumper stickers and t-shirts it would have been icing on the cake for what was an amazingly well placed and marketed book. As just about every review in the popular press has noted, Blyth’s book is well researched, accessible to a broad array of readers, and right.

For academics and critical thinkers however, there is more to it than that. This is not only a book where an established academic engages with a broader audience and “gives” that audience the tools to understand a contemporary problem. Blyth should be praised for that in and of itself. During this crisis and many others most academics have not been bold enough or too dis-incentivized to enter the fray beyond the water cooler. But Blyth also makes key contributions to the academic literature in international political economy as well. Blyth shows how and why the idea of austerity keeps on living in our politics.

The book starts with an accessible discussion of how the crises in the U.S. and EU were banking crises, not the sovereign debt crises (especially in the European case) that they and their aftermath have been described of in the financial press and media. In two crisp chapters, he shows how banks created the messes in the United States and in Europe—and how government debt became a big issue only after governments bailed out and propped up banks.

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Ask Mark Blyth: "Austerity Doesn’t Work, Period"

Kevin Gallagher

“Austerity doesn’t work. Period.” This quote is the punch line of Mark Blyth’s Austerity: The History of a Dangerous Idea, second edition just out. If that quote was made into bumper stickers and t-shirts it would have been icing on the cake for what was an amazingly well placed and marketed book. As just about every review in the popular press has noted, Blyth’s book is well researched, accessible to a broad array of readers, and right.

For academics and critical thinkers however, there is more to it than that. This is not only a book where an established academic engages with a broader audience and “gives” that audience the tools to understand a contemporary problem. Blyth should be praised for that in and of itself. During this crisis and many others most academics have not been bold enough or too dis-incentivized to enter the fray beyond the water cooler. But Blyth also makes key contributions to the academic literature in international political economy as well. Blyth shows how and why the idea of austerity keeps on living in our politics.

The book starts with an accessible discussion of how the crises in the U.S. and EU were banking crises, not the sovereign debt crises (especially in the European case) that they and their aftermath have been described of in the financial press and media. In two crisp chapters, he shows how banks created the messes in the United States and in Europe—and how government debt became a big issue only after governments bailed out and propped up banks.

Read the rest of this entry »

Battling to Curb “Vulture Funds”

Martin Khor

External debt is rearing its ugly head again. Many developing countries are facing reduced export earnings and foreign reserves.

No country would like to have to seek the help of the International Monetary Fund to avoid default.

That could lead to years of austerity and high unemployment, and at the end of it, the debt stock might even get worse.

Low growth, recession, social and political turmoil are probable. This has been experienced by many African and Latin American countries in the past, and by several European countries presently.

When no solution is found, some countries then restructure their debts. Since there is no international system for an orderly debt workout, the country would have to take its own initiative.

The results are usually messy, as it faces a loss of market reputation and the creditors’ anger. But the country swallows the pill, rather than have more turmoil at home.

Read the rest of this entry »

Battling to Curb "Vulture Funds"

Martin Khor

External debt is rearing its ugly head again. Many developing countries are facing reduced export earnings and foreign reserves.

No country would like to have to seek the help of the International Monetary Fund to avoid default.

That could lead to years of austerity and high unemployment, and at the end of it, the debt stock might even get worse.

Low growth, recession, social and political turmoil are probable. This has been experienced by many African and Latin American countries in the past, and by several European countries presently.

When no solution is found, some countries then restructure their debts. Since there is no international system for an orderly debt workout, the country would have to take its own initiative.

The results are usually messy, as it faces a loss of market reputation and the creditors’ anger. But the country swallows the pill, rather than have more turmoil at home.

Read the rest of this entry »

G20 Finance Ministers Cannot Hide Failure to Tackle Major Issues

By Jesse Griffiths, Guest Blogger

Jesse Griffiths is the director of Eurodad, European Network on Debt and Development.

The communiqué from this weekend’s G20 finance ministers’ meeting in Cairns tried to paper over increasingly evident cracks in the global economy, trumpeted an OECD initiative to reduce tax dodging which is not as good as it seems, continued to focus on privately funded infrastructure, and suggested G20 impotence in tackling big problems including too-big-to-fail banks and global governance reform.

The global economy: fragile and faltering

The G20 cannot hide the continued high levels of fragility, huge unemployment, and glaring inequality that continue to characterise the global economic situation. The finance ministers’ communiqué notes that, “the global economy still faces persistent weaknesses in demand, and supply side constraints hamper growth.” Recent reports that companies are buying their own stocks at record rates, helping stock market bubbles build rather than investing for future growth, is one reason the ministers “are mindful of the potential for a build-up of excessive risk in financial markets,” though they promise no new measures to tackle this.

Instead, their response has been to trumpet the promise they made in Sydney earlier in the year to “develop new measures that aim to lift our collective GDP by more than 2 per cent by 2018.” They get the seal of approval from the IMF and OECD’s “preliminary analysis, ” which, at three pages long, has so little detail it is impossible to assess its accuracy. Interestingly, according to the crystal ball gazing that inevitably characterises such attempts to assess global impacts of national policy changes, “product market reforms aimed at increasing productivity are the largest contributor to raising GDP,” which appears to largely mean changes in trade policies in emerging markets. The next biggest impact comes from public infrastructure investment commitments – highlighting the problems with the G20’s focus on private investments in infrastructure, discussed below.

Brief reference is made to the problem that dominated the G20 Finance Ministers’ meeting in February: developing countries’ concern about how the gradual ending of quantitative easing and possible future rises in interest rates in the developed world will affect capital inflows and outflows, which can create huge problems for them. The rich countries that dominate the G20 cannot offer more than the promise to be “mindful of the impacts on the global economy as [monetary] policy settings are recalibrated.”

Despite the fact that Argentina – currently fighting a rearguard action to prevent a US court ruling from undermining a decade of debt restructuring – has a seat on the G20, the issue of permanent mechanisms to deal with debt crises continues to be off the table. Instead it was picked up by the UN, which passed a resolution in September to negotiate a “multilateral legal framework for sovereign debt restructuring,” which could be a game changer for how sovereign debts are managed, offering the possibility of preventing and resolving debt crises: a consistent plague for many countries and a huge problem for the global economy.

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BRICS: Toward a Rio Consensus

Kevin Gallagher

Conveniently scheduled at the end of the World Cup, leaders of the BRICS countries travel to Brazil in mid-July for a meeting that presents them with a truly historic opportunity. While in Brazil, the BRICS hope to establish a new development bank and reserve currency pool arrangement.

This action could strike a true trifecta — recharge global economic governance and the prospects for development as well as pressure the World Bank and the International Monetary Fund (IMF) — to get back on the right track.

The two Bretton Woods institutions, both headquartered in Washington, with good reason originally put financial stability, employment and development as their core missions.

That focus, however, became derailed in the last quarter of the 20th century. During the 1980s and 1990s, the World Bank and the IMF pushed the “Washington Consensus,” which offered countries financing but conditioned it on a doctrine of deregulation.
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Practicing What They Preach: The IMF and Capital Controls

Kevin P. Gallagher and Yuan Tian

Regular Triple Crisis contributor Kevin P. Gallagher is an associate professor of international relations at Boston University and co-director of the Global Economic Governance Initiative (GEGI) and Global Development Policy Program. Yuan Tian is the CFLP Pre-Doctoral Fellow for GEGI’s Task Force on Regulating Global Capital Flows. She is currently a third-year PhD student in economics at Boston University.

In the wake of the 2008 financial crisis, the International Monetary Fund (IMF) began to publicly express support for ‘capital controls’ in emerging markets.  In addition to public statements, and the endorsement of controls in Iceland, Ukraine, and beyond, the IMF underwent a systematic re-evaluation of Fund policy on the matter, and published an official view on the economics of capital flows in 2012.  To the surprise of many who witnessed the IMF’s scorn for regulating capital flows in the 1990s, in this new ‘view’ the IMF concludes that capital account liberalization is not always the optimal policy and that there are situations where capital controls—rebranded as ‘capital flow management measures (CFMs)’—are appropriate.

It is well known that the IMF claims that it has changed its tune, but has it really changed its ways?

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