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

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Yves here. For US readers, the posture of the IMF may not seem like a terribly important topic. But most countries in the world face decent prospects of being subject at some point to its tender ministrations. And even those that would seem to be exempt, like Germany, nevertheless also are subject to its impact through how IMF programs affect its export markets and Eurozone arrangements.

The IMF’s policies received a great deal of attention last year as its chief economist, Olivier Blanchard, effectively admitted that austerity did not work. The formulation was that in most cases, fiscal multipliers are greater than one. That means that cutting government deficits, in an effort to lower government debt, is ultimately counterproductive because the economy shrinks even more than the reduction in spending. The result is that the debt to GDP ratio actually gets worse. This outcome is no surprise to anyone who has been paying attention, since the neoliberal experiment has produced the same bad results when administered in Greece, Latvia, Ireland, and Portugal, to name a few.

But what did this rare bout of empiricism mean for the IMF? This post gives that question a hard look.

By Matías Vernengo, Associate Professor, Department of Economics, University of Utah. Originally published at Triple Crisis.

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.

And there is no doubt that there was no conceptual change in the IMF’s view of how the economy works, and the role of the “natural rate.” As I noted, in a recently published paper, Blanchard said back in 2010:

It is important to start by stating the obvious, namely, that the baby should not be thrown out with the bathwater. Most of the elements of the pre-crisis consensus, including the major conclusions from macroeconomic theory, still hold. Among them, the ultimate targets remain output and inflation stability. The natural rate hypothesis still holds, at least to a good enough approximation…  Stable inflation must remain one of the major goals of monetary policy. Fiscal sustainability is of the essence.” [Emphasis added]

The natural rate hypothesis holds up, meaning only deregulation and proper incentives to rational profit-maximizing agents can boost growth, and demand expansion beyond that limit is futile. Demand cannot, as in heterodox demand-led growth models, change the capacity limit of the economy. Of course, as Krugman would make you believe, the IMF has revolutionized macroeconomics by accepting that in a “liquidity trap” (that’s it, in Krugman’s view, when the rate of interest is close to zero), there is room both for some additional fiscal policy, and for an inflation target above 2 percent (Blanchard has outrageously asked for 4 percent). Paradigm shifting stuff indeed.

But seriously, you may very well ask, whether the IMF has been cautious (to the point of being imperceptible) on the theoretical front, only to provide more space for more relevant change in their policy advice to countries facing external crises.

However, one would be hard pressed to find these policy changes too. Here is what the Greek government has said in their last letter of intent:

We registered a significant primary fiscal surplus in 2013 in program terms, well above target and ahead of schedule. The external position has also improved, with the current account showing a surplus for the first time in decades.

The plan is to intensify the fiscal surpluses, increasing taxes and “reforming the public administration,” the latter being code word for cutting spending. That is, fiscal austerity. By the way, the letter of intent basically reports on policies that have been agreed upon with the IMF.

The idea is that austerity and internal devaluation (lower wages) would restore competitiveness, and eliminate the current account deficits. In reality, it is the recession, and the collapse in imports, that has produced the external rebalancing. So, as I concluded with my late colleague Kirsten Ford, the IMF remains fundamentally an instrument of advanced and creditor countries to force contractionary adjustments on poor, indebted countries. It’s the same old IMF.

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  1. John

    IMF is an instrument for big banks. It explains when they address ‘reforms’ in Europe it is country specific versus the eurozone. Take Spain for instance. IMF has been on them about ‘reforms, reforms. reforms.’ Labor and financial sector reforms to be specific. One area where the IMF applauds their efforts is the QE from the ECB. The ECB has been handing over all sorts of cash — not towards the government — but to the banks — at near zero interest. The bailed out banks in turn are extracting high interests from the Spanish central government with that lent money so teacher pension trusts can be raided. Debtor prison.

    This is the kind of ‘reform’ the IMF is for. Banks win, you lose.

  2. YankeeFrank

    And perhaps when Blanchard retires comfortably into some cozy sinecure he’ll come out “forcefully” in favor of fiscal stimulus once again, performing, like so many before him, the flaccid ritual of the inconsequential comfortable.

  3. just bill

    I have been watching the IMF for forty odd years and have never noticed any purpose other than undermining democratic governments which somehow managed to surface around the world. Making things safe for entrenched private property isn’t a job for the faint of heart.

  4. Jim Haygood

    What’s concentrating the minds of iMFers is the trainwreck in Ukraine. Another tranche of the wholly inadequate $17 billion program is due in December. Ukies seem confident that the check’s in the mail:

    KYIV, October 2 /Ukrinform/. The International Monetary Fund (IMF) will disburse the next tranche to Ukraine in December 2014. This issue was discussed at a meeting between Ukrainian Justice Ministry representatives and a delegation of the IMF.

    “This time IMF experts were interested in judicial reform before the next review of the tranche, which will be provided to Ukraine in December 2014,” the Justice Ministry’s press service reported.

    But in fact, conditions are imposed with each disbursement; conditions which Ukraine hasn’t a hope of meeting.

    Best guess is that iMFers muddle on until the scope of the disaster becomes too big to conceal. Then they pull the plug, as they did on Argentina in 2001. Hey, at least some oligarchs will get their money out before the hryvnia collapses.

    1. Alejandro

      “But in fact, conditions are imposed with each disbursement; conditions which Ukraine hasn’t a hope of meeting.”
      This is a theorem of neoliberalism.

      “Best guess is that iMFers muddle on until the scope of the disaster becomes too big to conceal. Then they pull the plug, as they did on Argentina in 2001.”
      This follows from the neoliberal axiom “inflate to in-debt, then deflate to confiscate or subjugate (austerity)”. Notice how it never synchronizes with the ‘natural’ cycles of “sowing and reaping” and the “risk” is never ‘shared’?

      “Hey, at least some oligarchs will get their money out before the hryvnia collapses.”
      If somebody’s “money” is somebody else’s “debt”, then this by definition is ODIOUS (debt). Notice how confiscation and subjugation NEVER applies to oligarchs?

      1. Peter Pan

        Actually, I’m looking forward to the economic collapse of Ukraine. Perhaps, under such circumstances, we may witness the Right Sector neo-nazi’s and Svoboda neo-fascists rounding up members of the IMF within Ukraine and subjecting them to cruel and unusual punishment. Oh, if only they could get hold of Christine Legarde.

      2. OpenThePodBayDoorsHAL

        Just occurred to me that Silicon Valley VCs operate exactly the same way as the IMF. They lend liberally, but attach unreachable performance milestones. Then, when the targets are not met, they confiscate the collateral (the company). Banking 101, really.

  5. ohmyheck

    Honest question. Who funds the IMF? Where do they get the money to loan to these countries?

    Even if its large global banks that do the lending, my guess is that in no way do those banks take a hit when a country defaults on its loans. Do they just “restructure” the loans, so no country ever “defaults”?

    1. diptherio

      It’s national governments that fund the IMF. Mostly the US. Banks don’t take a hit when countries default on IMF loans. Technically, I guess, you could say the nations who are funders take the losses, but that would be to misunderstand the system.

      The purpose of an IMF loan is to go into default. During my undergrad career I did a paper on the IMF’s loan programs and, looking at historical data, I found that IMF loans as a group had a default rate north of 95% (this was in ’03 or ’04, iirc). Why would supposedly sophisticated int’l bankers continue to make such bad loans?

      The answer is the IMF’s Enhanced Structural Adjustment Programs (ESAPs). When a country goes into default on their loan, the IMF loan agreements stipulate that the country engage in austerity measures, such as privatizing government services and resources, that are known as ESAPs. So (the leadership of) Country A takes a loan, defaults on it like everyone does, and then sells off everything of value in the country to the highest bidder. And that, my friend, is the point of the IMF. They are a loan-sharking scam, pure and simple.

      The fact that they suggest the exact same strategy for every single country should be enough to prove that they don’t give a wet fart about what they say they care about (saving national economies). They are smart enough to understand the fallacy of composition. It’s mathematically impossible for all countries to run current account surpluses simultaneously, but that’s what the IMFers encourage everyone to shoot for. They’re either being purposely obtuse, or they’re just dumb…you be the judge.

      1. susan the other

        As one panelist on the France24 debate recently pointed out: We can’t all trade our way out of this mess.

      2. Jim Haygood

        ‘Looking at historical data, I found that IMF loans as a group had a default rate north of 95%.’

        This is very hard to believe. Ken Rogoff, writing in 2002:

        ‘IMF loans have had a stubborn habit of being repaid in full. Although some countries have gone into arrears, almost all have eventually repaid the IMF: the actual realized historical default rate is virtually nil.’

        While the IMF doesn’t currently borrow, as an international agency it enjoys the same de facto super-senior status that supports the World Bank’s AAA rating:

        ‘Debt issuance [by the IMF] could take some time because of internal policy approvals and the need for the IMF to acquire a credit rating and comply with securities disclosure laws. But the IMF’s sister institution, the World Bank, has been issuing debt since 1947 and has had a triple-A credit rating for more than 50 years.’

        Argentina, currently in default after failing to fully resolve its previous 2001 default, paid off its IMF debt in full in 2005. As the chief international usurer and leg-breaker, the IMF is not to be trifled with.

        1. diptherio

          “Eventually” is the key word here. Eventually being after ESAPs have been put into place. Can you name a country that has gotten an IMF loan and NOT gotten a little “structural adjustment” action as well? I can’t think of one, off hand. That seems to be the name of the game.

          To clarify a little, my paper was on the ESAP programs (because I hated them). My finding was that almost all IMF loans had some sort of default that triggered ESAPs, which means that almost no country was able to meet the terms of their loan obligations, since ESAPs were only put in place after a country failed to meet it’s payments.

          Does anyone really believe that the point of the IMF is to ease suffering? Here’s a hint: that E in ESAP (“enhanced”) was only added after the first few decades of IMF loan programs–they used to just be called SAPs. But at some point the IMF decided that maybe they should also be concerned with poverty alleviation, not just debt servitude. You see, the original Structural Adjustment Programs never even contemplated helping poor people, they were strictly for the benefit of foreign financiers. But that was bad optics, so they added an E, claimed to care about the poor, and continued to do things exactly as they had before.

          1. Jim Haygood

            ‘SAPs were established as a conditionality for the re-scheduling of existing loans as well as granting further loans to Third World countries. This conditionality is a set of targets or obligations undertaken by developing countries in order to obtain aid or loans.’


            ‘ESAF [is] the facility established in 1987 through which the IMF provides low-interest loans to poor countries.’



            To my understanding, all IMF loans involve conditionality, such as Structural Adjustment Programs. A rescheduling is not necessarily a default, though rating agencies may view it that way.

        2. diptherio

          And my gawd man, quoting Rogoff? A completely reliable source, as we all know…

          And I wonder what percentage of loan sharks “eventually” get paid off by their victims? Probably quite a few. The fact that the IMF can “eventually” bleed a country enough to repay their unconscionable debts is not proof that the loans are not abusive. Look at the outcomes…if it quacks like a duck…

          1. Jim Haygood

            One of Rogoff’s papers was found to have spreadsheet errors which affected the conclusions.

            Nevertheless, Rogoff’s book This Time Is Different: Eight Centuries of Financial Folly (co-authored with Carmen Reinhart) is the most thorough study available on historical global default rates. He plowed through the research, cited his sources, crunched the numbers, and presented his analysis.

            One doesn’t have to agree with all of Rogoff’s conclusions to acknowledge that his study of historical defaults, and the database he’s amassed to support it, is far and away the best available. No other source is even in the same ballpark.

          2. TheCatSaid

            These are great posts. Maybe you & Yves could be persuaded to do a post on ESAPs if you can share your material.

      3. James Dodson JR

        It sounds like the mafia in America in the 20th century. but condoned by the wealth nations and its banksters and the nations militaries to invade the poor nations or the threated of force

  6. susan the other

    Before Prof. Vernengo came to the obvious conclusion about the IMF – it’s the big economic hitman – he gave us an interesting description of supply side economics which included insights nobody has really put too fine a point on in plain language. That the policy of the IMF (and private central banks who run governments) is to create an economic sustainability that is based not on classic theories about demand, but on a new theory about the “capacity limit” of the economy. This is code for keeping inflation from taking off. But I take this to include the capacity limits of the planet. So here is an interesting new discussion. We have recently imposed trickle down economics for some very specific purposes. Yes, the rich get richer, and they are now getting pretty worried about that – but the poor have no chance so it itself (that is supply side economix) is not sustainable. It appears to be bedrock policy simply because it is much easier to control supply side economics.

  7. Jim Haygood

    Just received this in my inbox. Off to claim my funds and then book my round-the-world cruise:


    Attn; Beneficiary!

    Based on our investigation of your payment, we want to find out if you’re still alive or did you sign any deed of assignment with (Mrs.Sophier Brown) to receive your fund,reply to us with:

    Your Names:
    Your Home/Office Address:
    Your Age/Sex:
    Your Phone #none

    This is because $12.5Million has been approved in your favor for payment so get the above information to us fast unfailingly today or your fund will be released to Mrs.Sophier Brown.

    Yours Sincerely,

    Mr. George Osborne

    (Director of Operation) IMF


    Pretty cool, makin’ $12.5 million an hour posting on the internet!

  8. Rosario

    I don’t feel there is much point in attempting to salvage an organization that was created to push an agenda of control and exploitation from the outset. I argue one could link the rampant spread of Ebola in Africa and IMF/World Bank restructuring policies. Undermine public health infrastructure and countless other institutions of the commons through austerity and privatization, this in turn creates an inherently corrupt political order in the respective country and finally the capacity for organized mobilization, education, etc. is severely curtailed by all of the above. Also, I’m aware of West Africa’s many civil wars as an argued potential cause, but here, again, we are not looking at the root causes (IMF, World Bank, colonialism, restructuring) for the wars themselves. If someone can provide me another reason for Africa’s (South America’s, etc.) woes that isn’t bigoted/racist or ignorant of the West/North’s exploitation I’m all ears, but I have not heard anything satisfying yet.

  9. Chauncey Gardiner

    In following the chain of proximate cause, the IMF seems to me to be a few steps short of the true origin of the problem: Sovereign borrowing in currencies outside sovereign control (whether in US dollars or euros) and the corruption of sovereign policy makers that leads to a nation taking on the “Odious debts” in the first place are ex-ante. This is not to excuse IMF policies that appear to me to exacerbate the problem and suffering post-default for the economic benefit of a few.

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