[stop-imf] FW: CNES Newsletter: July 19, 2004

[robert.weissman@essentialinformation.org]

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CNES "Services for All (SFA)" Newsletter

July 19, 2004.
"Does The IMF Always Prescribe Fiscal Austerity: Are Targets Too Tight?"
  Excerpts from...  Transcript of an IMF Book Forum

"Does The IMF Always Prescribe Fiscal Austerity?
Are Targets Too Tight?"  Washington, DC
June 8, 2004 For the full transcript:
http://www.imf.org/external/np/tr/2004/tr040608.htm Marcelo Selowsky,
Independent Evaluation Office, IMF We found very significant optimism in
projecting private-sector activity and growth, particularly when the program
commences in very adverse situations. The Fund is extremely optimistic in
projecting the recovery of growth, particularly when the country is going
through a very rough period--when the program, for example, is put in place
in the context of negative growth or of stagnant economy, et cetera, which
in some sense was the case in the capital account crises  Let me give you
some data on this; this is interesting. For example, slowdown in output
happened twice as often as projected, and negative growth ten times as often
as projected. And in one-quarter of the cases, investment ratios was 5
percentage points below projections. So there is always an optimism about
the recovery of growth, particularly stemming from an optimism in projecting
private demand or private effective demand. There is an optimism about how
the private sector is responding to the problem. Now, we come to this area
which is a little more subtle. Are fiscal targets unnecessarily
contractionary and, hence, inappropriate? We believe that the overoptimism
regarding the recovery of private demand may, in many situations, prevent
putting on the table the need to discuss possible countercyclical fiscal
policy or impulse.....On the expenditure side, programs have often focused
on short-term quantitative targets to reduce the wage bill rather than a
reorientation of public spending that would be more durable. Hence progress
has been easily reversed. In no reform area was implementation satisfactory
in more than 40 percent of the cases, and many times the reason is that some
reform may take more time than envisaged, extending beyond the program
horizons.....We find no reduction in this social spending, once we correct
for other factors and the endogeneity of the IMF presence... when there was
an adjustment program-specific social programs critical to the most
vulnerable tend to suffer. Many of them are not very expensive: vaccines,
food for the patients in hospitals, recurring costs in the schools. These
types of expenditures get preempted by the wage bill, because usually what
is protected are the doctors' salaries; maintenance of X-ray machines,
buying of vaccines or penicillin, these are what suffers. We found that this
to be case in many countries, particularly with low-income countries. Allan
Meltzer, Carnegie-Mellon University and American Enterprise Institute

Let me add that no study of this kind can settle issues permanently, as the
report notes at several places, we cannot construct the counterfactual to
learn what would have happened without the program. Nevertheless, there is
an obvious alternative that the report did not consider: how did countries
fare if they were faced with similar crises but had no IMF program? A
commonly cited example is Malaysia, following the Asian crisis of the late
1990s. It rejected IMF assistance and introduced exchange controls. Malaysia
is alleged to have recovered as rapidly as countries with IMF programs, for
example, Korea or Thailand, and more rapidly than Indonesia. .......Rising
world demand certainly influenced the speed of recovery in Korea and other
parts of Asia. The only way this shows up in the report is in the country's
growth rate or its current account position. This helps, but it would help
more if world demand were held constant. ...While reading the report and the
response, I asked myself, What would I want to know next? The question that
jumped out at me was: What causes the lack of success in explaining the
difference between the planned or envisaged and actual fiscal adjustment?
The report finds that nearly 80 percent of the variance of this difference
is not explained... The principal change has to be a shift away from current
command-and-control procedures tied to dollops of money conditioned on the
promise to make reforms. The report, and much else, tells us that reforms
are not made in a majority of cases and that most conditional programs do
not survive into the second year. The problem is to decide what should
replace these procedures. My answer is that the IMF must shift to an
incentive system, where payments are made for performance, not for
promises.... The main lesson in the IEO report, for me, is that the IMF is
not very successful. To be more successful in reforming fiscal and other
policies in the client countries, the IMF must reform itself.   Nancy
Birdsall, Center for Growth and Development  My complaint is that the
report, for all its technical excellence and subtlety, is like so much of
the IMF's work -- willfully naive about the difficult politics of
distribution and welfare in so many developing countries... Let me refer you
later to Page 57 of the report, which lays out the details on
conditionalities and benchmarks in an Ecuador program and illustrates
chillingly the fact that some things are recorded, and benchmarked, and
tracked, and other things aren't.
And the things that so far are mostly recorded, and benchmarked and tracked,
although they are politically difficult to do and therefore they are
included as conditionalities, are least likely to help and protect the poor.
And those things that, on the contrary, are not benchmarked are the most
likely at least to protect the poor...  ...all of the tax advice that the
IMF provides, worthy as it is, it has not translated into policy work, into
policy conditions, into reasonable demands on government. It is stunning to
think that in the late 1990s, IMF research staff published a report showing
that in Argentina, where in retrospect the lack of fiscal discipline has
tremendously hurt middle-income people and the poor, the effective tax rate
on the 10-percent richest households in Argentina was -- sit back and think
for a minute what your effective tax rate is, not your marginal rate, but
your total tax rate? -- eight percent. It's just too low.
   Nancy C. Alexander
Director, Citizens' Network on Essential Services (CNES)
9703 Hedin Drive
Silver Spring, MD 20903
301-270-1000 / FAX: 301-445-7321
Email:ncalexander@igc.org
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