Thursday, October 15, 2009

The IMF faces post-crisis criticism

Center for Economic and Policy Research: IMF-Supported Macroeconomic Policies and the World Recession: A Look at Forty-One Borrowing Countries, CEPR press release
International Monetary Fund: Review of Recent Crisis Programs
Inter Press Service: G20: IMF Finds a New Level of Unpopularity

In a recent discussion paper for the Center for Economic and Policy Research (CEPR) economists argue that countries currently involved in loan agreements with the International Monetary Fund (IMF) are subject to “pro-cyclical” macroeconomic policies, which tend to exacerbate economic slowdowns. The CEPR economists argue that the IMF has failed to learn valuable lessons from previous economic crises, and that the Fund continues to rely on overly optimistic growth forecasts for borrowing countries. By mismanaging these policies, the authors argue, the IMF may have intensified, or prolonged the financial crises in many of its borrowing countries.

The CEPR and other analysts have also levied criticism at the IMF for failing to foresee the cause of the initial crisis in the United States. Because the IMF produces regular World Economic Outlooks every six months- purposely to evaluate current economic trends, some economists argue that the Fund should have recognized the growing bubble and anticipated its likely consequences. The critics urge the IMF to reassess the criteria, assumptions and economic analysis it uses to prescribe macroeconomic policy in the developing world.

In many Eastern European countries, both leaders and citizens view IMF lending conditions as elements that have further exacerbated the crises in their countries. In Romania (which negotiated a 20 billion euro loan with the IMF in May) the political opposition party demanded a vote of no-confidence in the elected government over controversial IMF-imposed wage reforms. In Hungary, average citizens are aware of IMF loans and their accompanying conditions, and “the IMF is not very well liked,” according to an analyst at a Budapest-based think tank.

The IMF has reacted negatively to the CEPR paper. The Fund responded with assertions that the CEPR has presented “seriously misleading” conclusions about the pro-cyclicality of IMF programs. According to the IMF, most of their programs allowed for shifting growth targets, and the targets were quickly and substantially relaxed once the extent of the crisis became apparent. The Fund has also deflected criticism of its failure to predict the crisis. Because the United States refuses to be subject to an IMF Financial Sector Assessment Program (FSAP), Managing Director Strauss-Kahn argues, the Fund cannot be responsible for a lack of supervision. The FSAP is one of the IMF’s main supervisory instruments, and it was not employed in the United States during the lead-up to the crisis.

1. Should the United States be allowed to refuse an IMF Financial Sector Assessment Program? Does such a refusal place the health of the international financial system in the hands of U.S. regulators?
2. The IMF’s lending conditions have long been a point of controversy among the world’s policymakers and economists. How will the debate change because of the recent financial crisis?

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