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IMF Shakes Austerity Orthodoxy for New Pragmatism
Five years ago, the International Monetary Fund was looking for a role. Thanks to the global recession and its aftermath, it has one.
Today, if the IMF didn’t exist, governments would have to invent it. At a time of global economic peril, the agency serves not just as an emergency lender to distressed governments but also as an indispensable forum for economic collaboration and accountability.
At the IMF’s annual meeting, which takes place this week in Tokyo, finance ministers and central bankers will again explain their policies to one another and discuss cooperating more effectively. Just a talking shop, a skeptic might say.
True, real policy coordination is still an ambition more than a reality, and much more needs to be done (especially in cross-border financial regulation, to name just one area). Yet don’t dismiss the value of the IMF as a global economic secretariat and font of collective knowledge.
Changes in its worldview can shift the terms of the discussion among governments and exert a subtle pressure on policy. If investors and opposition politicians paid closer attention and helped to press the case at the national level, governments would find the IMF’s advice even harder to ignore, which would be a good thing.
The IMF used to demand a severely conservative orthodoxy in fiscal and financial affairs. Its officials never saw a budget deficit that wasn’t too big or a financial restriction that wasn’t choking growth. As a dispenser of aid to governments under financial duress, the IMF could insist on its way or else, and rarely flinched from doing so.
That made the IMF controversial, and in some quarters detested. It was attacked, including by economists with Nobel prizes, for acting as an instrument of capitalist oppression, concerned only with the repayment of odious debts and to hell with the human consequences. Almost always, in fact, the IMF’s role was merely to explain the facts to government officials who would prefer not to hear them.
That much, at least, hasn’t changed. But the facts have, and so has the IMF’s thinking. In the past few years, through public statements and its many publications, the IMF has moved a great distance.
On fiscal affairs, its watchword is no longer “austerity now” but cautious pragmatism. It used to be more fiscally conservative than the average government. For the moment, it’s arguably less so, often emphasizing the dangers of too much fiscal tightening too soon.
On international capital flows, where it once deplored any and all restrictions, it’s coming around to judicious use of controls under certain circumstances.
Inflation was previously the spawn of the devil; the new view says it’s bad, but there can be worse things. When demand is deficient and fiscal restraint unavoidable, says the IMF’s new World Economic Outlook, adequate and possibly unorthodox “monetary accommodation” (which it might once have called gambling with inflation) is vital.
On all these points, we agree. The recession has thrown doubt on a lot of supposed certainties -- or should have. With interest rates pinned at zero, fiscal policy must shoulder a bigger role in countries where public debt isn’t so high as to rule out stimulus. In today’s accelerated financial markets, cross-border capital flows can be so disruptive (especially in developing or undiversified economies) that mild controls, intelligently applied, might sometimes be better for growth and stability than laissez faire.
Digging out from a balance-sheet recession -- one brought on by excessive debt and prolonged by sustained deleveraging -- may require a bit more tolerance of inflation risk than usual, if the alternative threatens to be endless recession and outright repudiation of debt. That trade-off ought to at least be calmly examined, not ruled out of bounds.
As a member of the “troika” (along with the European Commission and the European Central Bank) policing fiscal reform in the euro area, the IMF is the one sounding the alarm about self-reinforcing cycles of austerity and recession.
While insisting, as it should, that plans for better, medium-term fiscal control in countries with bailout programs are real, it’s warning against doing too much, too soon -- in marked contrast to statements from Berlin and other European capitals.
Addressing the U.S., the IMF implores Congress and the Barack Obama administration to deal as quickly as possible with the fiscal cliff of abrupt spending cuts and tax increases that will take effect in January unless legislation is passed.
In each of these debates, the new pragmatic IMF is the voice of reason. It’s impressive to see such a culturally conservative institution leading this change, rather than being reluctantly dragged along. We’ll be even more impressed when governments start acting on its advice.
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