Over the last week, we’ve had the spectacle of the Western media speculating about what is going on in Egypt in the absence of much understanding of the forces at work (this article by Paul Amar is a notable exception).
Needless to say, there has also been a great deal of consternation as to how the West’s supposedly vaunted intelligence apparatus failed to see this one coming. This lapse is as bad as the inability to foresee the collapse of the Soviet Union (it’s arguably worse: a lot of people profited from the Cold War, and they’d have every reason to fan fears and thus look for evidence that would support the idea that the USSR was a formidable threat. By contrast, one would think that conveying word that the domestic situation in Egypt was charged would have led to more intense scrutiny which ought to have served some interests (like various consultants and analysts). That suggests the US was so wedded to Mubarak that anyone who dared say his regime was at risk would get “shoot the messenger” treatment, and thus nary a discouraging word was conveyed).
John Dizard at the Financial Times tells us the IMF, which issued a country report last April based on two weeks of visits in February 2010 (with government officials and “representatives from the private sector, academia, labor organizations, and the parliament”) also failed to see the crisis coming. As he notes:
The first point the report makes is that “Sustained and wide-ranging reforms since 2004 had reduced fiscal, monetary and external vulnerabilities, and improved the investment climate. These bolstered the economy’s durability, and provided breathing space for appropriate policy responses”.
In the previous year, the staff collectively goes on, “economic performance was better than expected, although headline inflation remains elevated . . . as the recovery gains strength, the focus of policies can shift back toward fiscal consolidation and other growth-oriented reforms”.
Not that the all-seeing Fund didn’t anticipate some possible future problems. As the report cautions: “Capital inflows, if continued, will complicate monetary policymaking.” This “real appreciation driven by short-term capital flows could weaken medium-term growth prospects”. Somehow, I think, Egypt is going to avoid the problem of excessive capital inflows in the short term. But thanks for the thought.
These aren’t quibbles about minor inaccuracies, or arguable ideological differences. There were imminent, overwhelming problems that either evaded the IMF’s attention, or that it chose not to report. So European leaders might want to reconsider whether they can depend on the IMF to act as a monitor, let alone arbiter, of good macroeconomic policy for member states.
If this isn’t bad enough, other sections of the report are downright embarrassing. The IMF does acknowledge that poverty is a bit of a problem, and look at the remedies it suggests:
Reforms for Sustained Growth
9. Continuing the reform momentum and reducing fiscal vulnerabilities remain the key medium-term challenges. Rapid growth is crucial to tackling poverty and the high level of unemployment. In this context, reinvigorating the structural reform agenda should help raise productivity and reinforce Egypt’s competitiveness.
Prioritizing reforms that promote macroeconomic stability and improve the investment climate will support the resumption of foreign direct investment. As noted, the planned fiscal adjustment and tax reforms are an important element of generating confidence, improving the business environment, and ensuring space for the private sector. Resumption of privatization and development of public-private partnerships (PPPs) will help mobilize private sector financing and know-how. Contingent liabilities associated with PPPs, however, should be monitored closely.
Reinforcing financial soundness and promoting financial sector deepening will help mobilize savings needed to finance private sector-led growth. The stability of the financial sector during and since the crisis is a testament to reforms since 2004. Staff supports the continuation of reform efforts with the CBE’s Phase II agenda. Introducing Basel II standards and supporting financial sector development will help facilitate intermediation of savings and increase private sector access to credit. Staff supports plans to adopt additional prudential measures to contain vulnerabilities that will arise with greater integration with the global economy and the introduction of new asset classes. Close coordination between the new nonbank supervisory authority and CBE will be a priority, and consideration should be given to introducing forward-looking risk management and developing global standards on liquidity and leverage.
Strengthening data quality and transparency will help improve the policy debate and business environment, and enhance Fund surveillance. The need for greater transparency and higher frequency data was underscored by the global financial crisis, and enhancements would help ensure that data availability is on par with other emerging markets. In particular, there is a need for more robust CPI and GDP deflators, and for publishing higher-frequency aggregate financial soundness indicators (as planned), and encouraging banks to make available detailed performance and soundness indicators.
This is all neoclassical trickle down twattle. People are hungry and can’t find work, and what does the IMF have in its toolkit? “Public private partnerships”. In a country with crony capitalism, that’s a prescription for further looting and redistribution of wealth to the top. Oh, and we’re gonna further liberalize financial markets, if we just give the banks more freedom, a thousand flowers will bloom! Yes Basel II did such a great job of keeping Eurobanks from blowing themselves up, it’s just what the doctor ordered. And the fact that the staffers consider getting the GDP deflator right as a way to fight poverty shows how out of touch with reality they are.
This little snippet illustrates the intellectual bankruptcy that is pervasive in elite organizations. They are so blinded by ideology that they seem unable to connect simple, observable datapoints. Normura, shortly after the Tunisian government fell, published a quick and dirty analysis of the vulnerability of governments to food price inflation. Egypt was admittedly only number 6 on the list, by virtue of having food as 48.1% of household consumption and being a food importer. But at least Noruma fingered Egypt as being at risk ahead of the widespread protests.
By contrast, the IMF based its reading on chats with the officialdom and gave short shrift to basic data like the distribution of income and how many were living below and just above subsistence level. Maybe this embarrassment will serve as a wake up call, but somehow I doubt it. The fact that so many other institutional analysts got this one utterly wrong will give the IMF lots of protective covering.