Monday, June 12, 2006

IMF is watching you

by Berly

The Jakarta Post (TJP) published a letter from IMF yesterday (click here). It’s not a new Letter of Intent since Indonesia already out of “intensive care.”

The letter is supposed to be a rebuttal of Stiglitz interview (for transcript click here) published earlier in TJP. The letter was signed by Daniel Citrin, Deputy Director of Asia and Pacific Department, which is higher than country director (see organizational chart here) but not still not count as Senior Officials (see compete list here).

Before we deal with point by point rebuttal to IMF, let’s start by point out that the interview was published on June 5 instead of June 6 editions.

Their first rebuttal is pointing how the regional economy is booming. One of the most common logical fallacy is “post hoc ergo propter hoc.” For non Latin readers, it means assuming that if one event happens after another, then the first must be the cause of the second. So if East Asia countries are booming after being under IMF treatment, then the prosperity must be because of IMF. Too bad that if we include China and Malaysia (which did not gone through IMF and also booming now) the claim loose much of its strength.

Their second response is to claim the Fund's response to the crisis contributed to the region's rebound. IMF claimed (read here) that they resolve the crisis (yup, that is the title of the document) by “ensure that the funds will be used to resolve the borrower's balance of payments problems. They would also help to restore or attract access to financial support from other creditors and donors”.

What about the conditionality? Some of the performance criteria (read the complete list here) are “macroeconomic policy variables such as international reserves, monetary and credit aggregates, fiscal balances, or external borrowing.”

Their third, and the lamest, is to state that the IMF is a constantly evolving institution. “As part of this process of reform, the approach to crisis prevention and crisis resolution has changed over time, reflecting the lessons learned.” To read in plain English, “we f****ed up before but we would not do it again. Just trust us.”

And what actually Stiglitz said that prompt the honorable deputy director to react so swiftly? Let me quote at length two important questions and his reply:

As a steadfast critic of the IMF, what would you suggest to the IMF to make its future policy advises work better?
The problem is that when a country goes into a downturn, it is told to cut back on expenditures and raise interest rates. Their policies are what we call pro-cyclical, that exacerbate the downturn. What I advocate is a counter-cyclical policy: When you lend money to a country, you tell them to keep interest rates low and to keep taxes low to stimulate the economy. So, you have a loan that would stimulate the economy so that the economy could grow.

But the IMF loans are to strengthen reserves, not to finance economic activities.
That's why their loans do not help the economy recover from a crisis, that's exactly the problem. Their finance focuses on financial stability than real stability. They have to focus more on real stability.”

Hmm… it sound very similar to first year macroeconomics course I had (and as I am studying at post-grad level, still recommended at most cases of depression as long as not causing high inflation). Lord Keynes proposed it more than fifty years ago and it is one of few policy prescription that has been followed closely by western countries. But it is exactly what the policy that IMF asked countries in crisis NOT to do by insisting to reduce government expanditure (which worsen impact to the poor) and increse interest rates (which fail to reduce capital flight and bring new investment in short run, when it is most needed).

As a former chairman of Economic Advisor to President Clinton that oversaw longest economic boom in American recent history and chief economist of World Bank (as well as OECD), Chairman Joe has his own experiences and opinions. Too bad he was never chief economist of IMF. Maybe IMF will be watching it's own member's economies and taking care of it more than being so busy watching its own reputation.

For more sharp analysis on IMF usefulness (and uselessness), read an excellent short piece by Paul Krugman here.

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