Rethinking the IMF Road

A lot of the commentary is a reflection that the IMF is a most feared institution. This is mainly based on the opinion that IMF’s staff travel the globe imposing very difficult and harsh adjustment policies on developing countries. The truth can be easily gathered from Ewart Williams, former governor of the Central Bank, as well as the present Governor, Dr Hillaire, who both served at that institution. They should say that this is an incorrect assertion. Indeed, the IMF cannot impose any policy on any country. However, to be more accurate, countries come to the IMF for assistance that can be both of a technical and financial nature. It is the provision of financial help that worries people. To obtain financial support countries have to agree to follow a set of macroeconomic policies. It is this process by which a country agrees to a set of policies which is known as conditionality.

Perhaps we can start seeking to understand the weaknesses of the model the IMF uses to generate its advice and of course whether the advice is eclectic? There has been criticisms of the IMF’s economic model. Economists such as Sabastian Edwards have argued that the IMF’s model for a rudimentary financial sector does not take into consideration the existence of uncertainty nor provides a role for uncertainty. While the IMF’s model does assume real income as exogenous, it does not include a response to policies implemented in the IMF’s program. This is important to note since this can provide a priori understanding of results of the program. In addition the IMF model fails to take into account issues related to the intertemporal nature of the current account, the role of risks and self-insurance in portfolio choices, the role of time consistency and pre-commitments in economic policy, the economics of contract and reputation, the economics of equilibrium real exchange rates, the Lucas critique, and the theory of speculative attacks and devaluation crisis. This is certainly not the full list. One may argue that it is easy to criticize something but honestly the consensus is that the IMF’s model appears to have failed to take into consideration new developments in economic theory.

Does the data suggest that countries that follow the IMF advice fare better than countries that do something else? We need to know whether the policy recommendations of the IMF are based on technical issues or are based on the political views of the larger members.

Has the IMF programs worked? In a narrow sense the answer is yes, but it has come at a price. Data suggests that in countries that followed the IMF’s regime, while on average the external situation improved and inflation generally was lowered, there was less success with achieving growth targets. It has to be admitted that IMF’s programmes have paid little attention to issues related to the supply side and in particular income distribution.

Using the case of Jamaica, the IMF has reported that macroeconomic stability has been restored, marked by historic low inflation, halving of the current account deficit, reduction of public debt, and regained access to international and domestic bond markets. However in June of this year they have admitted that growth and employment have remained weak. There is the need to reduce energy costs, increase access to finance, enhance public sector efficiency, expedite labor market reforms and continue to improve the overall business environment to attract private investment.

It is important to note despite all the comments above, that the IMF as an institution has an important role to play, especially at the global level, to ensure an efficient international financial system as well as to bring an orderly adjustment to the world economy. Their role in the recent debt crisis is a case in point. Certainly countries have gotten assistance when they needed it both in terms of technical expertise as we are getting, as well as funding.

Going forward, the IMF’s operational analytical framework needs to change. There has to be emphasis placed on dealing with debt in particular. Some level of debt forgiveness has to be considered, especially for countries such as those of the Caribbean. We in Trinidad and Tobago cannot see the IMF as a monster but must try to understand the institution and play our part in getting change. Serious bilateral negotiation is required when engaging the IMF. However it must be from an informed position, not one of emotion. The IMF has to be seen as an institution that can be accessed to assist. We simply need to understand the institution which will inform a much better basis for interaction.