Why IMF advice finds no takers

At the meeting of the International Monetary and Financing Committee of the IMF in Washington DC two weeks ago, the RBI Governor, Dr D. Subbarao, called for a global “rebalancing” that would enable “deficit economies to save more and consume less, while depending more on external demand relative to domestic demand for sustaining growth”; likewise, surplus economies would “mirror these efforts — save less and spend more, and shift from external to domestic demand”.

The Governor of the RBI, of course, was well aware that the adjustment was easier said than done, for it required nations to act in cohesion, whereas the motivation to do so was largely absent.

He had not said anything new but it is significant that the need for such adjustment should still constitute such an abiding agenda for the IMF; the same concern about the means to an equilibrium between deficit and surplus economies had placed John Maynard Keynes and his US counterpart, Harry Dexter White, in opposite camps in the run-up to the IMF's birth more than 70 years ago.

NO CONSENSUS

History's tendency to repeat itself does not detract from the importance of the RBI Governor's message, given the futile and often feeble attempts in the recent times to arrive at a post-2008 consensus on reordering a more stable currency adjustment mechanism within a broader financial regime.

Perhaps aware of the presumptions needed for a global rebalancing act, Dr Subbarao hastened to add: “The problem we have is that while the adjustment by deficit and surplus economies has to be symmetric, the incentives they face are asymmetric. Managing rebalancing will require a shared understanding on conducting macroeconomic policies to minimise disruptions to macroeconomic stability.” That shared understanding was absent at the Washington meeting in April just as it was missing between Britain and the US, the two parents of the Bretton Woods ‘sisters'.

As if to remind the Fund of its troubled birth, captured vividly in a volume of Robert Skidelsky's epic biography of Keynes ( John Maynard Keynes. The Economist as Saviour 1920-1937 ), representatives of emerging market economies at the April meeting rejected the Fund's plan on the management of capital flows.

UNINSPIRING RECORD

For the IMF, that must have come as a bolt from the blue, especially after it had accepted much against its cherished tradition the necessity for fetters on capital flows. All it wanted was for the delegates to agree on its use after adjustments in interest rates, currencies and budget balancing had failed.

It was a lost cause because Brazil and Thailand had imposed a Tobin tax on portfolio inflows and their economies were none the worse for it. Perhaps volatility hasn't vanished, but at least national governments still retain the additional privilege of fiddling with currency rates to their own advantage. In Washington, the EMEs perhaps rejected the conciliatory compromise because it had come from the IMF.

The Fund has only itself to blame. You don't need Joseph Stiglitz to tell you just how wrong or off-track the IMF and other multilateral institutions can get. Consider the IMF's opinion on Greece in 2003; admittedly the bubble was still building up, it was more than four years from bursting, but it was surprising that an agency like the IMF was hoodwinked into believing the Greek government's fiscal consolidation process in the run-up to EU membership. In its report for 2003, the IMF praised Greece thus: “Following a remarkable fiscal adjustment ahead of monetary union…”

Remarkable it certainly was, as Michael Lewis reports in his story on Greece in Vanity Fair . To meet the fiscal deficit of 3 per cent of GDP, the Greek government simply erased bloated expenses off its budget books. To bring inflation under control, it knocked off high priced items from the price index on the day the inflation index was being tabulated.

In 2003, the IMF smells something wrong: “Overruns on current non-interest expenditures including for new civil service hiring and wages continued to plague budget execution”, yet does not dig deeper to the truth about the lie till it is too late.

POOR DIAGNOSIS

Look at another “miracle” that went horribly wrong. As late as September 2007, a fortnight after the UK-based Northern Rock had collapsed, the IMF was lauding Ireland for its growth and the banks that were “well capitalised, profitable and liquid”. Less than a year later, Irish banks, just three of them collapsed and pulled the country down with them.

The IMF has been pretty consistent in getting things wrong because of its ideological blinkers and limited vision of “‘high quality growth that also fosters human development…”

In November 1996, the then MD of the IMF in Jakarta praised the Indonesian economy for its “high and sustainable rates of growth”. Less than a year later, the “Asian Miracle” had curdled into a nightmare, more so in Indonesia that subsequently followed IMF's advice on floating the rupiah and cancelled food subsidies, with the result that food riots broke out. The Suharto regime collapsed and the country discovered the virtues of low-level labour-intensive manufacturing.

Is it any surprise that the emerging economies, having been scalded by the IMF's disastrous policies, have refused its solution to volatile capital flows? What those countries that seek to retain the right to determine exchange rate and control the excesses of transnational capital flows — want is a return to the nineteenth century notion of the nation-state.

Meanwhile, the latent protectionism that rears its head in the Western economies is a more a petty articulation of national interests. But both render the IMF more redundant in its efforts to cobble together a consensus than it has ever been.

The IMF may soon get an Indian or Chinese heading it. The only task left for the incumbent would be to bail out erstwhile ‘developed' economies on the dole even as a stable exchange rate system and “global rebalancing” elude the world.

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