The IMF’s self-serving agenda

Published: July 23, 2015
The writer teaches economics at the University of Queensland, Australia

The writer teaches economics at the University of Queensland, Australia

The role that the IMF played leading up to the Greek crisis is drawing criticism from leading economists. The IMF seems to be ignoring the advice of its own macroeconomic research group for political reasons. This particular case of politics trumping economic rationale should be an eye-opener for us, when it comes to following IMF-generated advice.

The IMF has, arguably, the strongest group of macroeconomic policy researchers in the world, and their advice from the start has been that the so called ‘expansionary austerity’ imposed on Greece would not work. Chief Economist Olivier Blanchard, who will soon be retiring, came out against the low-inflation policy as early as 2010 when he argued that the inflation target should be raised to four per cent. The “IMF World Economic Outlook”, published the same year, refuted the notion of “expansionary austerity”. After that, in numerous research papers, IMF economists kept arguing that ‘expansionary austerity’ would make matters worse. Given this advice, one would have expected the IMF to part ways with the European Central Bank (ECB) and the European Commission (EC). Instead, it seems to be standing firmly with them in pushing the repeatedly discredited notion of ‘expansionary austerity’.

As stated above, it seems that politics often trumps economics in the IMF’s policy recommendations. Irrespective of what the Fund’s own economists are saying, the IMF is going to push the same failed policies for its own political reasons. And that should worry us more than anything else when it comes to learning lessons from the Greek crisis. The key lesson for us is not in what Greece did or did not do, but in how the IMF acted. It has been around far longer than the ECB and the EC and has seen numerous crises arising out of public sector excesses. One does not need to go even that far back in time to see that. The straitjacket of ‘expansionary austerity’ did not work after the Asian financial crisis. The only country that did well after the crisis is Malaysia, and it is important to note that it paid no heed to IMF advice.

The IMF has been advising Pakistan to buy dollars from the spot market to increase its dollar reserves. This will push the value of the rupee further down. The rationale given is that a depreciated currency will encourage exports. It is more likely that the impact of falling global commodity prices and power shortages is much larger on our exports than any recent appreciation in the rupee, which is going to be short term anyway. Building reserves by buying dollars from the spot market does more to reassure the IMF that it will get its money back. This move may have a negative impact on the GDP by increasing our import bill as our key imports are inflexible.

Ultimately, we need to remember that in a debt contract, the interests of the lender and the borrower are not properly aligned. Just like any other lender, it is in the IMF’s interest to give advice that protects its interests, even if it is at the expense of the growth prospects of the borrower. According to Nobel Prize winning economist Robert Shiller, countries should borrow money not by issuing debt, but by issuing GDP shares that pay a fraction of nominal GDP to the lender. If the IMF lends money through GDP shares, known as trills, then it will get more money back if the GDP goes up. If the GDP goes down, it will get less money back. Hence, the interests of the IMF and the borrowing country would be aligned with instruments such as Robert Shiller’s trills.

Trills could also prevent the endless blame game that we see in every crisis. In the case of Greece, lenders blame the Greek government for irresponsible borrowing. One can easily blame the lenders too. Excessive loans should not be advanced to profligate governments. The Greek crisis was created as much by irresponsible lending as by irresponsible borrowing. With trills, lenders would only provide funding when they can see a direct impact on growth, so they will act more responsibly.

Until countries start borrowing by issuing trills, and the IMF and other lenders start lending by purchasing trills, we must tread very carefully when it comes to following IMF advice. Perhaps, the single-most important lesson from the Greek crisis is this: the IMF is subject to political pressures, and potentially gives self-serving recommendations.

Published in The Express Tribune, July 23rd, 2015.

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Reader Comments (12)

  • numbersnumbers
    Jul 23, 2015 - 6:39AM

    Curiously absent from this rant against the IMF is the very big FACT that Greece got into this mess in the first place through their “Irresponsible Spending” coupled with flagrant Tax Avoidance!!!
    Greece promised Fat pensions for all, along with very early retirements, coupled with Olympic class tax avoidance and fudging the books that were show to the EU!!!
    All this came along well before the IMF was asked to save the day!Recommend

  • faisal
    Jul 23, 2015 - 9:36AM

    Excellent piece. IMF has been a miserable failure throughout driven by ideology.Recommend

  • asim rafiq
    Jul 23, 2015 - 9:39AM

    I agree completely. We should not be blinding following the duboius advice of IMF.Recommend

  • Jb
    Jul 23, 2015 - 9:56AM

    Dear Author,

    While this is another piece that disparages the IMF’s policies, one has to look at practical realities as well to come to a balanced view. Lets start closer to home. Other than the IMF advising spot FX purchases for its own benefit, were there not any economic benefits of this for Pakistan at all? If we recall correctly, Pakistan faced a severe Balance of Payments issue back in close of 2013 with very low import cover. The implication is that companies wont invest because they have no guarantee of repatriation, existing companies cant repatriate dividends, suppliers of commodities and equipment want LC confirmation and water tight structures for selling to Pakistan because FX reserves are low. Is it not logical for Pakistan to temporarily purchase from spot market to manage perceptions? After all, perception is what mainly froze the global credit market in 2008.

    On Trills, in theory this is very good. In practice, is there a market for this yet? If the IMF does this, its return on capital and return of capital will be contingent on GDP swings of frontier markets and EM countries. Will that not have a rating impact on IMF’s ability to borrow from the market and hence its cost of borrowing and hence the cost at which it lends to the same countries? For an instrument like Trills, one is asking lenders to willingly hand over a piece of their pie. Will they not extract greater control over policy as well to ensure that policies agreed are not subject to political dithering lest they suffer a loss? What does that do for developing countries’ sovereignty then?

    Practical matters need to be considered when making assertions and simple facts need to be appreciated that at the end of the day, countries with Balance of Payments issues go to the IMF as a backstop and they themselves propose and agree to a policy reform framework (not talking about Greece where ECB, EU etc are involved) as in the case of Pakistan.Recommend

  • ahsan altaf
    Jul 23, 2015 - 10:21AM

    IMF knew that austerity would not work. Yet it continued to push for it. Made things worse for Greece. Makes me wonder about the credibility of any advice coming from IMF.Recommend

  • Greek
    Jul 23, 2015 - 11:33AM

    I am so glad that someone can speak the truth without holding any punches. History will judge what the troika (IMF, EU, and EC) did to Greece. EU and EC can be excused for not knowing any better, but IMF knew all along that “bleeding the patient” will not cure the patient, and will only make things worse. Recommend

  • Parvez
    Jul 23, 2015 - 3:10PM

    The bottom line with organisations like the IMF and the Word Bank is that they are in the business of making money for themselves……. if they are economical with the truth and resort to working with corrupt leader, people should not be alarmed. They should manage their affairs so that they don’t fall into the clutches of the IMF etc.Recommend

  • Asad
    Jul 23, 2015 - 4:36PM

    Don’t take it personally, but that’s a stupid point. It doesn’t relate to anything in the article, which is about how the flawed way in which the IMF approaches problems in countries that needs its help. As Dr Siddiqi argues, IMF economists recognize that a certain route is the right way to solve a country’s problem, the leadership then proceeds to ignore it completely in favour of a route that has failed repeatedly. The political considerations that makes the IMF make that decision is the main problem, and shouting its “Greece’s fault” doesn’t really help anyone.Recommend

  • Mrs Juicy Gossips
    Jul 23, 2015 - 5:52PM

    @asim rafiq:
    Certainly Dr Mohammed Mahathir PM of Malaysia didn’t during the Asian Financial Crisis of 1997 when loose currency controls, amongst other things, wreaked havoc on various economies via a domino effect… Dr Mahathir simply delinked the Ringgit from the forex market contrary to the advice of the IMF.Recommend

  • deepak
    Jul 24, 2015 - 2:06AM

    Dr Hammad Siddiqi IMF is not coming to you saying please take us our loan. You are in need of loan. So if you don’t like their conditions don’t take the loan simple.Recommend

  • globalobserver
    Jul 24, 2015 - 12:47PM

    The author makes it sound more complicated than it really is.

    A country can’t forever be spending more than it earns and keep borrowing to fill the gap. It doesn’t matter how it spend the money, for peoples’ welfare, defense or other government spending if tho spending doesn’t help grow the economy/GDP.

    Many countries such as Pakistan, Greece, India etc., to different degrees, keep spending borrowed money hoping that ultimately the growth in economic output would increase national GDP and income thereby help reduce the debt load.

    This worked for Malaysia, a country the author quotes, because it spent the money on projects and activities that resulted in true economic growth. This is in contrast to Pakistan that spends a lion’s share on the military that has very little economic growth index. India also keeps spending on too much subsidies and free doles to its citizen using borrowed money. So far, the fiscal hole has been masked by good GDP growth. In the case of Pakistan, due to lack of economic growth the debt problem is getting to a level when serous collapse is just around the corner.

    Moral: Don’t spend money you don’t have unless you are sure the money spent will create wealth and income.Recommend

  • Obaid
    Jul 24, 2015 - 7:14PM

    Spot on Dr. Siddiqui! I wish more people would write freely about IMF and World Bank’s devious agendas. Even some academics (ex-IMF and world bank employees) defend IMF’s tried and failed Structural adjustment programs that bankrupted East Asian, Latin America and other regions of the world. Well written!Recommend

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