[stop-imf] Stiglitz on IMF Accounting Tricks

[Robert Weissman]

http://economictimes.indiatimes.com/cms.dll/articleshow?artid=23797692

The Economic Times (India)

Accounting tricks around the globe

JOSEPH STIGLITZ

TUESDAY, OCTOBER 01, 2002 07:20:34 AM

The Arthur Andersen and Enron scandals in America have focused attention
on the problems of accounting in private businesses. But the scale of this
corruption should not blind us to the problem of public sector accounting,
where many deceitful things are also being done.

Accounting rules are designed to provide standardised frameworks within
which the financial position of a firm, or government, can be assessed.
Bad accounting frameworks always lead to bad information, and bad
information leads to bad decisions, with serious long term consequences.
This is true in the public as well as the private sector.

Enron and others showed how accounting rules can be bent and abused to
provide a misleading picture of what is really happening in a company.

The Bush administration, not to be left behind, has shown how public
accounting rules can be bent so as to provide a misleading picture of what
is really happening in a national economy.

Indeed, last year saw what may be the largest accounting fraud ever
conducted, as a mega-surplus of more than $3 trillion for the years 2002
to 2011 was transformed into a $2 trillion deficit.

Investors in Enron were forced to wait years before discovering that
something was amiss, but sudden and vast changes in America's fiscal
stance already provide the public with a clear indication of the massive
scale of problems to come.

Like Enron, it will be years before the full magnitude of President Bush's
deception is apparent. Meanwhile, the Bush administration will blame the
sinking economy, bad luck, and unintentional miscalculations for the
vanished surplus.

But America is not alone in allowing for official accounting shenanigans.
In Latin America and elsewhere in the developing world, the IMF imposes
accounting frameworks that not only make little sense, but result in
excessive austerity.

In some of the poorest countries in the world - i.e., those most dependent
on aid - the IMF has argued that foreign aid should not be listed as
revenue in a government's budget calculations. But what else is aid if it
is not revenue?

The IMF's argument seems to be this: a country cannot rely on foreign aid
because aid is too unstable. The truth, of course, is that aid is more
stable than tax revenues in poor countries.

By the IMF's logic, neither aid nor tax revenues should be included in
budgets. If that is the case, every country in the world is in deep
trouble.


The absurdity here is the idea that all foreign aid should be added to
reserves. But donor countries want to see the money they give to finance
schools or health clinics spent on schools and health clinics; they don't
want to see it added to a nation's reserves.

Governments in developing countries have the correct answer to the problem
of revenue instability: expenditure flexibility. Build schools when you
have aid; stop building them when you don't. For years, World Bank
economists have tried to convince the IMF to see this logic, with little
progress.

Other IMF accounting practices, including how the capital expenditures of
government-owned enterprises are treated, are also causing outrage.

If a state owned enterprise in Latin America wants to borrow to make an
investment, in Latin America such borrowing is treated as an addition to
the deficit.

Investors, worried about the size of a government deficit, see only the
bottom line. But if a company can buy a $1 billion asset for $500 million,
economic logic says buy the asset. The balance sheet is improved by $500
million.

But by IMF logic, all you see in the accounts is increased expenditure and
borrowing, not the value of the acquired asset. Because of this rule,
investors may only see an apparent worsening of the country's fiscal
position, and so may demand higher interest rates.

Of course, foreign investors like this IMF logic: government corporations
are put at a distinct disadvantage: with their ability to invest
inhibited, these firms cannot compete to make acquisitions.

A second IMF accounting distortion involves stabilisation funds. These are
national funds that, in boom years, receive revenues from sales of natural
resources to be set aside against a rainy day.

This makes sense. But IMF accounting inhibits the use of these funds to
help stabilise an economy through counter-cyclical fiscal spending.

According to Mexican and Chilean officials I have discussed the matter
with, spending from a stabilisation fund is reportedly treated as if the
country is borrowing, thus adding to its deficit.

It is, of course, in times of economic downturn that countries worry most
about their credit rating, so the IMF stance is particularly unhelpful.

IMF accounting frameworks, rather than providing useful signals to the
market, provide distorted information that exacerbates a troubled
country's problems.

Good decisions require accurate information, and this comes only through
good accounting frameworks. Of course, no perfect accounting framework
exists, but some frameworks systematically distort.

Indeed, a hidden agenda often exists in the choice of an accounting
framework. Not including stock options inside the accounting framework
served US corporate interests, and those of individual bosses, well.

The IMF's distorted and unfair accounting frameworks may also serve a
hidden purpose: to force governments to shrink expenditures. But there are
high economic and social costs to this agenda, one that goes far beyond
the IMF's mandate.

(The author, the winner of the 2001 Nobel Prize in Economics, is Professor
of Economics and Finance at Columbia University)

(Copyright: Project Syndicate, September 2002)