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Is IMF illiterate in economics?

S. Venkitaramanan

YES, SAYS Prof. Joseph Stiglitz of Stanford University. Over the last few years, there has been a war of ideas and words literally across the street, so to say, between IMF, whose majestic offices on 18th Street NW face the World Bank's on 19 th Street NW in Washington DC. When there is such a sharp division of opinion between the two top multilateral organisations of the world, confusion is inevitable among those who receive counsel from them. Prof. Stiglitz, former Chief Economist of the Bank, has been, however, quite frank, and sometime extreme, in his views on the IMF. It was rumoured at one time that Mr. Michael Camdessus wanted his removal from the Bank. Mr. Camdessus won and Prof. Stiglitz did move out, though Camdessu s also quit later.

Recently, there was a new and strong attack by Prof. Stiglitz on the IMF. When I mentioned this to a respected editorial writer in a business paper, I had the standard response, `What else do you expect from Stiglitz? It is news only if he is friendly to IMF'. The particular piece referred to by me appeared in a prestigious magazine, The Banker of London of June 20. Its tone is even stronger than that of Prof. Stiglitz's usual attacks. It is worth taking notice if only because the substance of the attac k that the IMF is itself economically illiterate. Coming from an eminent Professor of Economics, like Stiglitz, the critique is like questioning the Vatican on its knowledge of the Catholic religion.

The news in the latest attack is that Prof. Stiglitz accuses IMF's economists of ignorance of the basic principles of macroeconomics. IMF economists, led as they are by Dr. Stanley Fischer, former Professor of MIT and author of one of the world's standar d textbooks on macroeconomics, must have one of the best grounding in economics. It is interesting to let Prof. Stiglitz himself speak on the subject:

``The IMF claimed all it was asking of the East Asian countries was that they balance their budgets at a time of recession. All? Had not the Clinton administration just fought a major battle with Congress to stave off a balanced budget amendment in the c ountry? And was not the administration's key argument that, in the face of recession, a little deficit spending might be necessary? This is what I and most other economists had been teaching our graduate students for 60 years. Quite frankly, a student wh o turned in the IMF's answer to the test question: `What should be the fiscal stance of Thailand, facing an economic downturn?' would have been awarded an `F' (F: Fail grade).''

At this stage, readers will recall that IMF economists had prescribed a fiscal tightening for Thailand, though it was running a surplus on its budget. Even for the IMF, it was quite an unrealistic recommendation and stood self-condemned. Thailand could j ust not accept such irrational advice. If it had, the crisis would have worsened.

Turning to earlier cases of IMF bounty, Prof. Stiglitz goes on to point out that there is a wrong impression that Mexico itself had recovered under IMF guidance. Prof. Stiglitz argues that Mexico had recovered not because the IMF forced it to strengthen its weak financial system, which incidentally remained weak even years after the crisis. Mexico recovered, he says, because of a surge of exports to the US, which took off, as a result of NAFTA (North American Free Trade Agreement). In contrast, Indonesi a could not recover after the IMF's treatment because its main trading partner was Japan -- which was then, and still remains, mired in the doldrums.

Prof. Stiglitz also assails the common impression that South East Asian countries have emerged stronger after the IMF-led reforms and the crisis of the 1990s. He takes a contrary view. In fact, he has many strong reservations. He says:

``Today, East Asia is better off, though it still struggles. Close to 40 per cent of Thailand's loans is still not performing. Indonesia remains deeply mired in recession. Unemployment rates are far higher than they were before the crisis, even in East A sia's best-performing country, South Korea. IMF boosters suggest that the recession's end is a testament to the effectiveness of the agency's policies''. But, this says Prof Stiglitz, is ``Nonsense. Every recession ends eventually. All the IMF did was ma ke East Asia's recessions deeper, longer and harder. Thailand, which followed the IMF's prescriptions the closest, has performed worse than Malaysia and South Korea, which followed more independent courses.''

Prof. Stiglitz generalises from this to point out the danger of closed minds in high places, especially in the IMF itself. ``Bad economics was only a symptom of the real problem in IMF. Smart people are more likely to do stupid things when they close the mselves off from outside criticism and advice. If there is one thing I have learned in government, it is that openness is most essential in those realms where expertise seems to matter most. If the IMF and Treasury had invited greater scrutiny, their fol ly might have become much clearer, much earlier.'' Advice, which our top policy-makers should listen to.

One last thought. It is easy to discuss in abstract terms whether the IMF's economics was right or wrong. For the people of Indonesia, Thailand, Mexico and Malaysia, it meant much more in terms of lives ravaged and whole societies subject to devastation. The world needs to look into how such a disaster was allowed to happen.

What about the Executive Directors who supposedly run the Fund? IMF Executive Directors are representatives of member-governments and have almost all held high office in Ministry of Finance/central banks. Let us hear Prof. Stiglitz on their role:

``The board's inclination was to be even more severe (than the staff's). Stiglitz says that his friends who were executive directors said they were the ones getting pressured. He does not make clear who pressured whom. His suggestion is that the staff pr essure the EDs! It was maddening, not just because the IMF's inertia was so hard to stop but because, with everything going on behind closed doors, it was impossible to know who was the real obstacle to change. Were the staff pushing the executive direct ors, or were the executive directors pushing the staff? I still do not know for certain.''

It is a fact that the IMF has had a difficult mission in a chaotic global financial system without a central bank at the global level. To reform a country, which is losing forex, is easier said than done, unless the IMF has to play the role of a lender o f last resort, which it is not authorised to be. Austerity is always unpopular. Prof. Stiglitz does not come up with a complete answer to this dilemma, faced by the IMF, which has often to rescue countries, which have ruined their BoP by unwise policies.

But one lesson from Prof. Stiglitz's critique is, however, well worth remembering, especially by those who support the IMF message of austerity at all times. Compression of an economy during recession will, says Prof. Stiglitz, do more harm than good. Th is appears obvious to us, though IMF advisers went on insisting on this course during the South-East Asian crisis. Coming from a veteran economist, who as Chairman of the US' Council of Economic Advisers, was himself an architect of the President, Mr. Bi ll Clinton's successful turnaround of the US economy, his words of advice on policies during a recession are worth heeding. He rhetorically asks the question:

``Most importantly, did the US and the IMF push policies because we, or they, believed the policies would help East Asia or because we believed they would benefit financial interests in the US and the advanced industrial world? And, if we Americans, says Stiglitz, believed our policies were helping East Asia, where was the evidence? As a participant in these debates, I got to see the evidence yet. There was none. Economic policy is today perhaps the most important part of the US's interaction with the r est of the world. And yet the culture of international economic policy in the world's most powerful democracy is not democratic.''

He accuses the economic policy-makers of the US Administration as not being responsive to the changing situation.

It is important for India's policy-makers to ensure that we do not fall victims to the illusion that whatever the IMF economists say is the best solution to our problems. At the same time, our policy-makers have a role in moulding IMF's own role. They sh ould try to ensure that IMF's own economic analysis becomes responsive to reality in the developing world.