Samuel Longhorn Clemens, advised the young to “be respectful to your superiors, if you have any”. The phrase comes to mind following the nice pat on the head and doggy discuit following the release of the International Monetary Fund’s annual summary report on the UK economy:
The UK economy is on the mend. Economic recovery is underway, unemployment has stabilized, and financial sector health has improved. The government’s strong and credible multi-year fiscal deficit reduction plan is essential to ensure debt sustainability. The plan greatly reduces the risk of a costly loss of confidence in public finances and supports a balanced recovery.
The Chancellor, and the right-leaning press junket, has been duly respectful. But does the IMF’s exercise the kind of superior judgment Twain would have us respect? Let’s examine two recent cases.
Ireland, 2007 – 2010
BEFORE
As late as 25 September 2007 (ten days after the run on Northern Rock, a micro model of the entire Irish economy of the time) , the IMF:
commended Ireland’s continued impressive economic performance, characterized by one of the highest growth rates of GNP per capita among advanced countries and one of the lowest unemployment rates. This performance has been underpinned by outward-oriented policies, prudent fiscal policy, low taxes, and labor market flexibility.
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and congratulated Ireland on her “very strong” growth, “supported by sound policies”. They branded the country’s ruinuously overleveraged banking system “well-capitalized, profitable, and liquid”.
AFTER
The IMF’s 2009 report on the Irish government’s subsequent swingeing cuts was nicely summarised here:
Our main message to the Irish authorities is not on the course which they are taking, which support and we agree with, but on the need to sustain this over an extended period of time.
The goverment has indeed sustained the IMF-endorsed approach. The result is government bond yields are exploding, and will continue to do so now government debt has been downgraded to one notch above junk. Unemployment has been consistently rising to 13.8 percent, and is still
In July this year, the IMF recommended Ireland stay the course.
Indonesia, 1996 – 1998
BEFORE
The IMF was at the head of the pack in lauding the Asian Miracle of the 1990’s. Michel Camdessus, the then managing director of the IMF, speaking in Jakarta on November 7, 1996 welcomed:
high and sustainable rates of growth and, equally important, the kind of “high-quality growth” that also fosters human development, promotes equity, safeguards the environment, and allows an enhancement of the cultural values of your countries.
However, as predicted by some, the ASEAN area and Indonesia in particular were in dire economic straits by July 2007.
AFTER
In August the IMF heartily recommended Indonesia float the rupiah:
The management of the IMF welcomes the timely decision of the Indonesian authorities. The floating of the rupiah, in combination with Indonesia’s strong fundamentals, supported by prudent fiscal and monetary policies, will allow its economy to continue its impressive economic performance of the last several years.
The promise of continued impressive performance was what Huck Finn would call a “stretcher”. Indonesia, under Suharto was intimate with the IMF for years, and so the rupiah floated. Suharto also took the recommended fiscal tightening measures, including the cancelation of food subsidies to the poor.
As a result, the rupiah fell by 83.2 percent against the dollar. Indonesia’s national debt rose from 3 per cent in 1968 to 129 per cent. The regime collapsed after widespread and deadly food riots. Suharto was forced to resign on 21 May. The recovery since then has been slow, and chiefly centered around the profusion of manufacturing in textiles and other low-paid industries with the attendant sweat-shop suffering and indignities.
Notably, in a recent interview with Charlie Rose, George Osborne cited Indonesia as one of the economic success stories of the last 30 years.
Back to Blighty
So, is the IMF’s endorsement a prescient, objective, reassuring one? I think not, and I’m in good company. Back to Twain:
In religion and politics, people’s beliefs and convictions are in almost every case gotten at second-hand, and without examination, from authorities who have not themselves examined the questions at issue, but have taken them at second-hand from other non-examiners, whose opinions about them were not worth a brass farthing.
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