April 2011 - Centre for Civil Society - University of KwaZulu-Natal

how much the IMF has changed. IMF Managing Director Dominique Strauss-
Kahn quoted John Maynard Keynes in his speech on Wednesday at the
Brookings Institution:
The outstanding faults of the economic society in which we live are its
failure to provide for full employment and its arbitrary and inequitable
distribution of wealth and incomes.
In his Opening Address to the Fall Meetings last year he went further,
making a point about the increase in public debt in the high-income
countries that should be required reading for U.S. business journalists:
But make no mistake: this increase of 35 percentage points [in the public
debt of the high-income countries ] is mostly due to low growth, to
expenditure linked to the rescue of the financial sector, to lack of revenue
because of the economic downturn. Only about one-tenth comes directly
from the stimulus. So the lesson is clear: the biggest threat to fiscal
sustainability is low growth.
Of course, there have been some significant changes in the IMF in recent
years, mostly in the area of research, where the Fund has acknowledged
that controls on capital inflows are a legitimate tool for governments to
use. There has been some limited lending without conditions. And although
the IMF included “pro-cyclical” conditions – i.e. macroeconomic policies
that worsened the downturn – in most of its agreements during the world
recession, on the optimistic side, it reversed course in many cases as the
downturn deepened.
But unfortunately the IMF’s practice still does not match its rhetoric or
even, increasingly, its own research. In Greece, Ireland, Spain, Portugal,
Latvia and other countries, the Fund isstill involved in the implementation
of “pro-cyclical” policies that will keep these countries from recovering for
a long time. For Greece, Ireland, and Latvia, for example, it will be 9-10
years before they reach their pre-crisis levels of GDP.
There is absolutely no excuse for this, from an economic point of view.
Any policies that require this kind of extended period of unemployment
and stagnation are by definition wrong. If this is what they need to ensure
debt repayment, then the country is better off defaulting on its debt.
Argentina was faced with an unsustainable debt burden and defaulted at
the end of 2001. The economy shrank for just one quarter and then grew
63 percent over the next six years, recovering its pre-crisis level of GDP in
less than three years.
Rhetoric aside, the Fund’s policies still reflect the creditors’ point of view.
And from the creditors’ point of view, a country like Greece – which even
the financial markets recognize will have to restructure its debt at some
point – must first go through hell. The European authorities and IMF
together have so much money now ($750 billion for the IMF, $635 billion
for the European Financial Stability Facility, $87 billion for the European
Financial Stabilization Fund) that it would be quite simple to rescue the
relatively small economies of Greece, Ireland, Portugal, or Latvia – or even
the much larger Spanish economy -- in a painless manner. In other words,
to restore growth and employment first, and worry about the debt after
the economy is on track.
But from a creditors’ point of view, this would be rewarding “bad
behavior.” So the people of these countries must suffer through years of
high unemployment (20 percent in Spain, 15 percent in Ireland, 11 percent
in Portugal, 14 percent in Greece, 17 percent in Latvia).