[stop-imf] Lessons for the IMF: Sometimes efficiency is not the best measure

[robert weissman]

http://www.iht.com/articles/541085.html

Lessons for the IMF: Sometimes efficiency is not the best measure
John Schmitt IHT
Wednesday, September 29, 2004

Rodrigo de Rato, the managing director of the International Monetary
Fund, can't seem to step off an airplane without urging the local
government to introduce more flexibility into labor markets.

In a visit to Johannesburg in early September, for example, de Rato told
the government of South Africa that its national economic priority
should be "more flexibility in your labor market." A few days earlier,
in Chile, which has one of the most liberal economies in the developing
world, he expressed concerns that "the Chilean labor market is too rigid."

The Chilean labor minister deflected the criticism by noting that "the
IMF has reiterated this position to Chile and other Latin American
countries for years." He could also have listed Africa and Asia, or even
high-performing South Korea - another recent recipient of the IMF's
one-size-fits-all labor-market advice.

  From its inception, the IMF has had a mandate to advise countries
facing macro-economic imbalances. The fund, however, has no mandate, and
little in-house expertise, on labor-market policies. If the IMF insists
on trying to shape labor markets in developing countries, it should at
least consult recent research by the Organization for Economic
Cooperation and Development, which has significant expertise analyzing
national labor-markets regulations in rich economies.

The IMF could learn at least four key lessons from the most recent issue
of the OECD's annual Employment Outlook, which includes a review of the
theoretical and empirical effects of national employment protection
legislation (EPL).

First, countries generally adopt institutions that reduce labor-market
flexibility for good reasons - to shield workers from economic
uncertainty and hardship.

Therefore, the OECD notes, "any overall assessment of EPL has to weigh
costs against benefits." So far, IMF pronouncements on labor-market
institutions have been long on efficiency costs and short on social
benefits.

IMF advice for developing countries should spend as much time measuring
the social benefits of EPL as measuring any efficiency costs.

Second, in addition to social benefits, the labor-market institutions
out of favor at the IMF may actually increase the efficiency of national
labor markets.

According to the OECD report, "the social value of a job may be higher
than its private value. ... A job may thus become unproductive for an
employer, while still generating some resources for society. Therefore,
without government intervention, there would be too many layoffs
compared to what would be socially and economically desirable."Third,
much of the case against labor-market institutions rests on empirical
evidence that is not sufficiently conclusive to inform policy. In the
case of EPL, for example, the OECD cautions that "more tests for the
robustness of the results should be carried out before drawing policy
conclusions."

Fourth, the IMF should resist old habits and not try to shoehorn every
national economy into an identical set of policies.

The OECD's analysis concluded, for example, that Denmark's "flexicurity"
system - which includes generous unemployment benefits, moderate
employment protection, and "active labor market policies" to help the
unemployed get back to work - produced outcomes at least as good as
those obtained in the less-protective United States.

The IMF might also benefit from one final piece of advice that does not
flow directly from the OECD. To the extent that decisions about
labor-market institutions involve tradeoffs between efficiency and
equity, economists at the IMF should spell out the terms of the tradeoff
as precisely as possible while noting the range of economic uncertainty.
Their findings, together with national values and preferences, could
then be used to decide where along the efficiency-equity tradeoff to
locate national institutions.

A nuanced understanding of local labor markets and a truly democratic
approach to economic policy would require some changes at the IMF,
including a readiness to deplane long enough to understand that
different countries require different kinds of economic policies.

John Schmitt is a senior research associate at the Center for Economic
and Policy Research in Washington.