Dr. Omer Javed |
IMF programmes are highly tilted towards aggregate demand management, and least focused on supply-sided impetus. Also, they ask for following a brand of economics — under the neoclassical/ neoliberal/ Washington consensus styled policies influence — that has come under severe academic criticism at the back of their negative impacts on economies of individual countries, and in turn globally, since the interconnections and interdependencies have grown ever so strong over the last many years.
Hence, the once so-called popular mainstream economics is fast losing its gloss, since the last three decades or so during which time many countries went into IMF programmes; yet consequences on their economies of such programmes have been on average inconsequential for economic growth or macroeconomic stability, at least once after the programme ended. The performance of this brand of economics has come under all the more the criticism after the Global Financial Crisis of 2008, and the efforts for a revisit have been undertaken ever so strongly.
More importantly, that needs to be put in place; the sooner the better for both addressing the fundamental economic issues and for meaningfully raising investor confidence.
There are indeed many perspectives for the current government to keep in mind, therefore, as it is on the cusp of entering an IMF programme. On a lighter note, a crude example with regard to the IMF programme could be that a doctor asks a patient to take overall a generic antibiotic (and that is mostly not patient specific), and hardly prescribes any pro-biotic. At the same time, the doctor persists with the same antibiotic, even though there is a lot of evidence over the lack of the effectiveness of that antibiotic over time.
Read more: Approaching the IMF programme – Omer Javed
Going to IMF means having to negotiate out their highly entrenched neoliberal programme. It is not good for any economy; especially for those countries where institutional development is at a nascent stage, like in the developing countries. This is because IMF programmes assume strong institutional environment for programme conditionalities to be met. For instance, for monetary transmission mechanism to work requires developed and well entrenched financial markets.
Here lies one of the main dilemmas, whereby, when seen in the light of actual institutional lacking of developing countries, and the level of quiet of IMF programmes to address them. The structural adjustment package is just a small patchwork to unclog some of the features of the economic system; but the system requires an overhauling and a lot of institutional built up. At the same time, an IMF programme assumes — when it is trying to emphasise controlling inflation through primarily contractionary monetary policy — that government has reasonably controlled against fiscal related issues of markets.
Here, for example it is assumed, (i) that role of cartels will be minimal in influencing price signals, (ii) that property and contractual rights will be ensured through strong governance and judicial structures, (iii) that speculative activity will be curtailed and only actual demand and supply volumes will determine prices, and (iv) where transaction costs in economic exchanges will be reduced to the minimum through strong institutions. Yet, these assumptions are quite unreasonable given the ground realities of any typical developing country, which are mainly, in the first place, under the developing country category because such assumptions have not been met.
In that sense, a typical IMF programme is basically a non-starter to start with! Hence, the government in the upcoming programme negotiations will have to reach conditionalities on both demand management and supply side, so that target objectives could be reached with minimum possible recessionary impact, and that improve the ground realities to catch up as much as possible with the inherent programme assumption; where hopes of this happening kept in check, since institutional quality changes occur at a slow pace on average.
The performance of this brand of economics has come under all the more the criticism after the Global Financial Crisis of 2008, and the efforts for a revisit have been undertaken ever so strongly.
Given the difficult current account situation, low levels of foreign exchange reserves, and a large fiscal deficit, it is indeed understandable that PTI led government has not much choice but to go to the IMF, but they will have to remain mindful during negotiations about the neoliberal aspects of IMF programmes, and to undo them as far as possible. Hopefully, the current government is mindful of these aspects.
Let me give some example as to how the neoliberal aspects of both public policy and in IMF programmes, have negatively impacted both developed and developing countries:
- Neoliberal policies in US, for example, meant in one of its threads of thought process — trickle-down phenomenon- was to tax less the rich (corporations and individuals), whereby since 1970s the rate of income tax has decreased on the richest from 70 percent to 35 percent, but there has been no trickle down. Instead poverty has increased, real wages have remained quite sticky, and finally due to other strands of neoliberal policies coming together, resulted in being one of the main causes of the Global Financial Crisis of 2008. The similar mindset is of the IMF programmes.
- In Sweden, the neoliberal wave of the 1970s shifted the country, one with the lowest income inequality among OECD countries to one fastest rate of increase in recent years. This also resulted in public discontent, the rise of xenophobic populist fringe parties to gain more mass; the recent elections there are quite reflective. Left literature there is pushing for a reverse of the neoliberal policies.
- Latin American developing countries, very much caught in debt traps not that long ago, could only start to make good strides in economic progress after they refused to be treated as the backyard of US, and reversed the neoliberal wave there. They have come a long way since then.
In the light of above, I would urge the current government to negotiate a programme that both provides the needed reserve cushion- the quantum required to bridge finance now appears to be lessening after positive contributions from Saudi Arabia, and likely more to come from China and Malaysia in a little while- but limits to neoliberal type conditionalities to the minimum. And such conditionalities will be difficult to keep at bay if the government goes into longer Extended Fund Facility type programmes; usually spread over three years.
PTI led government has not much choice but to go to the IMF, but they will have to remain mindful during negotiations about the neoliberal aspects of IMF programmes, and to undo them as far as possible.
The justification that such long-term programme graduation is needed to stabilise the economy in such dire peril, is suggestive that the government is quiet oblivious to (a) the existence of neoliberal aspects of any IMF programme, and (b) the strong push at the back of numerous lacklustre programme country experience for a revisit of programme assumptions and conditionalities, among academics and policymakers, to question and reform this brand of once-popular economics. Hence, the confidence is quite out of place for programme’s structural adjustment conditionalities, by policymakers in government and some seasoned national economists, since these conditionalities have proven historically- given the neoliberal set of policies they subscribe to- to do more harm than good, especially in the long term.
Many a programme country cases are quite indicative of a worse-off situation once after the programme ended than when it started, in terms of the macroeconomic stability situation of those countries. Two main reasons for this are (a) a lack of institutional/supply sided focus and (b) limited welfare policies approach reflected in a typical IMF programme. The structural adjustment programme is just recessionary mostly, and lays no profound institutional development grounds that bring sustainability to economic growth and macroeconomic stability situation, or puts in place any deep hedging and welfare instruments for the vulnerable.
Therefore, the less the better of an IMF programme both in terms of time and their usual conditionalities is what needs to be emphasised; a yearlong Standby Arrangement- and with a reasonable pace of adjustment negotiated- will provide the needed reserve cushion, and some safe steps towards stability, but more importantly much needed time period for the government to pursue its own wholesome policy agenda. A three-year programme will strongly diminish PTI’s chances of implementing its welfare reform agenda as outlined in its manifesto; and will also complicate its housing scheme plans at the back of mainly contractionary monetary policy conditionalities in a longer term IMF programme.
IMF, but they will have to remain mindful during negotiations about the neoliberal aspects of IMF programmes, and to undo them as far as possible. Hopefully, the current government is mindful of these aspects.
The world has changed in terms of being alive to the shortcomings of IMF programmes. The international financial markets, and in turn the investor also does not associate the same kind of credibility, it used to in the past, towards the economic soundness of a country that had graduated from a medium to longer term IMF programme. So when the time comes for government to make the effort for a possible refinancing of Euro and Sakuk bonds next year, the investor and the markets will look at Pakistan’s not just economic programme with the IMF, but more important Pakistan’s own home-grown, balanced- in terms of demand and supply-side policies- and wholesome economic reform strategy. More importantly, that needs to be put in place; the sooner the better for both addressing the fundamental economic issues and for meaningfully raising investor confidence.
Time for putting too much weight on IMF programmes has long gone internationally; a select few countries like Pakistan, or a handful of multilaterals- virtually sister organisations of IMF like World Bank, Asian Development Bank, among others, working on a mindset of mutual lookout for each other, in terms of clients and reputation, even when many others view things more objectively- also need to smell the global revisit that is going on to improve the neoliberal brand of economics, one that actually delivers for all in the society, not just the economic and political elites, and oligarchs.
Dr. Omer Javed holds Ph.D in Economics from the University of Barcelona, Spain. A former economist at International Monetary Fund, his work focuses on institutional and political economy, macroeconomic stability and economic growth. This article was first published in Pakistan Today and has been republished with author’s permission. He tweets at @omerjaved7. The views expressed in this article are author’s own and do not necessarily reflect the editorial policy of Global Village Space.