IMF admits it got Greece wrong. What does it get right?
Years ago when I worked at Bloomberg I noticed that the World Bank and the International Monetary Fund seemed to, without fail, overestimate economic growth for their customers in good times, and underestimate coming contractions in bad times.
Since Bloomberg encouraged us to be data driven and rigorous, I proposed we develop some boiler plate for the brief stories about the latest GDP prediction from the lenders (which we slavishly and uncritically turned into stories within minutes of their landing in our fax machines.) Something like: "The World Bank, which has overestimated coming Indonesian GDP growth six consecutive times, today predicted that Indonesia's GDP will rise by 7 percent in 1997."
Over the years current and former employees of both groups have explained that bias is down to the belief inside the financial institutions that their rosy projections can take on a life of their own by inspiring that elusive beast "investor confidence" and unleashing a deluge of cash upon their clients. They see it as a form of benevolent lying.
A senior editor there shut my proposal down as silly, for reasons I could never quite fathom.
Nevertheless, the evidence that these groups get it wrong have been mounting for decades, however, many of us in the press still act surprised when they're wrong, yet again. The latest evidence is the IMF's mea culpa this week over its incorrect assumptions and ineffective prescriptions for Greece in relation to the ultimately $310 billion bailout of the country. It's the latest, and some of the largest, evidence that the oracular powers and financial wisdom of the Bretton Woods institutions aren't what they're cracked up to be.
In short, the IMF austerity program for the country has been a failure, at least from the perspective of the Greek people (the IMF estimates it may have prevented "contagion" from spreading to other countries, which is surely a comfort to all the Greeks out of work).
New IMF report
In the case of Greece, the IMF published a report yesterday that said the Fund had (wait for it...) underestimated the depth of the Greek economic downturn, underestimated the harm to Greek income and employment that would be caused by slashing spending, and overestimated the likelihood that "investor confidence" would return in response to all this and spread its magic pixie dust over the Greek people.
The IMF also admits, obliquely, the extent to which politics and not the best and most honest advice possible, played a role as the Fund worked with the European Central Bank (ECB) and the European Commission to figure out what to do two years ago as Greece teetered on the edge of bankruptcy and an exit from the euro.
"On the positive side, moving ahead with the Greek program gave the euro area time to build a firewall to protect other vulnerable members and averted potentially severe effects on the global economy," the Fund writes. "However, not tackling the public debt problem decisively at the outset or early in the program created uncertainty about the euro area’s capacity to resolve the crisis and likely aggravated the contraction in output. An upfront debt restructuring would have been better for Greece although this was not acceptable to the euro partners."
By debt restructuring, they mean sharp reductions in the amount of money owed by Greece to private and government lenders across Europe. But everybody else wanted to get paid, so the IMF acquiesced. (The European Commission said today that the IMF is wrong about this and that haircuts for lenders before the bailout would have led to "devastating consequences.")
This is far from the first time. In the early 1990s, the IMF warned Argentina against imposing currency controls to deal with a financial crisis. Argentina ignored the IMF, and the Fund later admitted the country's politicians were correct in doing so.
In the middle of that decade, the so-called Asian financial crisis hit much of the region, with capital flight threatening private banks, government coffers, and project finance alike. Thailand and Indonesia accepted IMF loans in exchange for "structural adjustment programs" (government spending cuts, foreign investor friendly legal changes, promises to have fully convertible currencies), while Malaysia, against dire warnings from the IMF, imposed currency controls and sought to stimulate the economy out of the downturn with an expansive government budget. The results? Malaysia weathered the crisis better than its neighbors, with fewer job losses and much less political turmoil.
In 2001, Argentina ran aground financially again and appealed to the IMF for cash. A review by the Fund later found that its projections for Argentina were too rosy at the time, complained that the IMF backed the Argentine government in public even when senior officials in private knew it was pursuing a disastrous course, and undermined its own credibility. The author wrote that "any catalytic role that IMF financing might have had in the past has been put into question, as large-scale IMF support can no longer be seen as signaling policy sustainability."
IMF seal of approval
Yet come 2010, there was an assumption from within the IMF that its seal of approval would breed confidence in investors. It wasn't true then, and it certainly isn't true in the case of Greece now.
That wasn't the only strange assumption the IMF made. On page 5 of another recently released report the Fund writes that it expected that "fiscal consolidation" (government spending cuts and tax increases) and expected productivity gains had authorities expecting "that the crisis would mobilize broad political support for comprehensive structural reforms." What that essentially means is that the IMF and its partners apparently believe that the Greek people, as their economy tanked and employment sank, would rally around policies likely to lead to further short-term unemployment.
Any student of politics, well, anywhere, probably wouldn't make that kind of assumption.
Finally, is the question of whether "austerity" – which used to be called shock therapy sometimes – actually works. The IMF admits in the case of Greece it might have made more sense to provide more cash to the country (though says that was not politically possible, given the reluctance of wealthy European nations like Germany to pony up more) and eased Greece's deficit targets.
But as things deteriorated, the IMF and its European partners instead tightened the fiscal screws. "The scope for increasing flexibility was also limited," the authors write. "The fiscal targets became even more ambitious once the downturn exceeded expectations."
IMF Managing Director Christine Lagarde probably feels awful about the Fund's errors. But at least she has $550,000 compensation package to cheer her up (tax free to boot; IMF and World Bank executive salaries are unburdened by the taxes they're always urging struggling governments like Greece to increase on their citizens.)
Meanwhile, Greece's people are left to ponder whose advice they'll take next, as the country heads through its sixth consecutive year of economic contraction.