A new discussion paper from the Center for Economic and Policy Research finds that 31 of 41 of countries with current International Monetary Fund (IMF) agreements have been subjected to pro-cyclical macroeconomic policies that, during the current global recession, would be expected to have exacerbated economic slowdowns. The pro-cyclical conditions noted in the report are either pro-cyclical fiscal or monetary policies.
“More than a decade after the Asian Economic Crisis brought world attention to major IMF policy mistakes, the IMF is still making similar mistakes in many countries,” CEPR Co-Director and lead author of the paper, economist Mark Weisbrot said. “The IMF supports fiscal stimulus and expansionary policies in the rich countries, but has a much different attitude toward low-and-middle income countries.”
The paper shows that in some cases, the IMF had relied on overly optimistic growth forecasts – significantly underestimating the impact of the world recession on borrowing countries. The paper also notes that in some cases the Fund later loosened its policy conditions after the economic performance was much worse than anticipated.
It is time for the Fund to re-examine the criteria, assumptions, and economic analysis that it uses to prescribe macroeconomic policies in developing countries.
The papers’ authors do have praise for the IMF’s actions in one area: making available for borrowing some $283 billion of Special Drawing Rights (SDR’s – IMF reserve assets that can be exchanged for hard currency) to member countries without conditions. The IMF’s unconditional lending and injecting liquidity into the world economy with the SDR’s, in a time of world recession, represents an unprecedented step forward.
In many cases the Fund’s pro-cyclical policies were based on over-optimistic assumptions about economic growth. For example, of the 26 countries that have had at least one review, 11 IMF reports had to lower previous forecasts of real GDP growth by at least 3 percentage points, and three of those had to correct forecasts that were at least 7 percentage points overestimated. Most likely there will be more downward revisions to come.
The Fund might respond that it could not be expected to anticipate the depth of the world recession and its impact on developing countries through exports, capital inflows, remittances, access to trade credits and other channels. But the Fund should have been more careful in its projections and should have anticipated a severe downturn that would have serious effects on low-and-middle- income countries.
Of course the IMF has to be concerned with the borrowing country’s ability to repay the loans, but it is possible that the Fund’s risk aversion in this regard is too extreme, and leads to unnecessary pro-cyclical policies.