Tag Archives: IMF

Gita Gopinath On Fiscal Policy

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Gita Gopinath, the IMF’s chief economist is now arguing for a coordinated fiscal expansion, and that “coordinated spending is better than the sum of the individual parts” (CNN interviewer quoting her) and that “it is time for a global synchronised fiscal push to lift up prospects for all” (FT article referred in the CNN interview.

This is of course welcome! A lot of countries can’t do it alone and a coordinated expansion would allow them to raise output, keeping balance of payments in check.

It’s sad however, that the message was this late (although anything better than never). Also the characterisation of the problem as if we’re in a liquidity trap is dubious as they just want to say that fiscal policy will work only now, not after a recovery. But fiscal policy always works.

Wynne Godley On Sensibility

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Wynne Godley in a 1988 article, The Sensibility Of Contemporary Institutions in Theology, (first given as a Sermon before the University in King’s College Chapel, 31 May 1987:

Recourse to the dictionary gives, among the definitions of the word sensibility, ‘the glad or sorrowful recognition of a fact or a condition of things’. Also, ‘readiness to feel compassion for suffering’.

…

But the major issues at stake have been vastly more important than ones which concern sensibility narrowly defined. They go beyond who becomes rich and who remains poor. They extend to matters such as slavery, mass unemployment and civil war.

…

… The IMF would do well to reperuse its own Article I, which .lists among its purposes: ‘to facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy … ‘ In this passage you hear the authentic note of optimism and mutual concern which informed economic relationships within and between countries in the first twenty-five years after the war.

I have been forced to recognize with sadness and very great disappointment that I have so far failed in my personal endeavour to change the course of events or the attitudes of other people. But I remain steadfast to what I understand to be the meaning of Christianity: the unique value it places on the individual inner life; the ability to tolerate aloneness and the imminence of death; the joyful and sensitive concern for and love of other human beings.

Link

Omission And Commission In The Development Economics Of Daron Acemoglu And Esther Duflo

There’s a new paper by Robert Chernomas and Ian Hudson which critiques the economics of Daron Acemoglu and Esther Duflo. The paper was written earlier but it’s publication coincides with the recent award of the Nobel Prize, of which Duflo was one of the recipients.

Abstract:

This article is a critical review of the work of Esther Duflo, recently awarded the 2019 Nobel Prize for economics, and of Daron Acemoglu, who like Duflo has received the John Bates Clark Medal in recognition of research in development economics. Aside from the differences in the two scholars’ approaches, we argue that both downplay the role of the state and of international economic structures that influence national development, thereby obscuring the actual existing causes of contemporary underdevelopment.

From the conclusion:

It would be difficult to argue that the power of contemporary MNCs, the IMF and foreign governments did not have a significant, if not determining, influence on the development of many poor countries. Yet it would be difficult to find any mention of these recent external actors in either Duflo or Acemoglu’s work.

Government Borrowing In Foreign Currency

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On Twitter, people are discussing the Argentinian debt in foreign currency, as if it’s solely the error of the government to have done it. There is of course truth to it, some governments might volitionally issue bonds in foreign currency. But that alone seems insufficient as an explanation.

Also, people wonder what the government does with the funds obtained. Maybe the government buys some goods for public distribution? But if the government wants to buy something from abroad, it can anyway make an FX transaction with a bank and this question about usage for goods doesn’t seem that relevant.

The answer is: original sin.

In their paper Exchange Rates And Financial Fragility, Barry Eichengreen and Ricardo Hausmann write:

The Original Sin Hypothesis. The second view emphasizes an incompleteness in financial markets we call “original sin.” This is a situation in which the domestic currency cannot be used to borrow abroad or to borrow long term, even domestically. In the presence of this incompleteness, financial fragility is unavoidable because all domestic investments will have either a currency mismatch (projects that generate pesos will be financed with dollars) or a maturity mismatch (long-term projects will be financed with short-term loans).

Critically, these mismatches exist not because banks and firms lack the prudence to hedge their exposures. The problem rather is that a country whose external liabilities are necessarily denominated in foreign exchange is by definition unable to hedge. Assuming that there will be someone on the other side of the market for foreign currency hedges is equivalent to assuming that the country can borrow abroad in its own currency. Similarly, the problem is not that firms simply lack the foresight to match the maturity structure of their assets and liabilities; it is that they find it impossible to do so. The incompleteness of financial markets is thus at the root of financial fragility.

It follows that both fixed and flexible exchange rates are problematic.

Of course, this is a bit hypothetical but how does it work?

Ronald Mckinnnon, in his paper Money And Finance On The Periphery Of The International Dollar Standard, highlighted the mechanism:

Consider the implications for optimal short-term foreign exchange management, first when capital controls are absent, and second, when they are effectively applied.

  • Case 1: No capital controls, imperfect bank regulation. Either because regulatory weakness leaves too many banks (and possibly importers) with exposed foreign exchange positions, or because the government doesn’t want to impose draconian rules against institutions assuming any open foreign exchange position, an informal hedge is provided by keeping the exchange rate steady in the short term. The short time frame over which foreign currency debts—largely in dollars—are incurred, and then repaid on a day-to-day or even a week-to-week basis, defines the same time frame over which the dollar exchange rate is (and should be) kept stable in non-crisis periods.
  • Case 2: Direct capital controls. Suppose the government prevents banks, other financial institutions, and individuals from holding any foreign exchange assets or liabilities. Non-bank firms engaged in foreign trade cannot take positions in foreign exchange except for the minimum necessary in their particular trade. Importers are prevented from building up undue foreign currency debts except for ordinary trade credit, and exporters are required to repatriate their dollar earnings quickly. In particular, banks cannot accept foreign-currency deposits or hold foreign-currency deposits abroad, or make foreign-currency loans. Then private agents in general, and banks in particular, cannot act as dealer-speculators to determine the level of the exchange rate (McKinnon, 1979, Ch. 6). The exchange rate will become indeterminate (highly volatile) unless the government steps in as a dealer to clear international transactions. Thus, the government must take open positions, which determine the level of the exchange rate, and assume the exchange risk. So if the government is determining the exchange rate day-to-day anyway, why not keep it stable?

Real life is a mix of the two cases above.

The exchange rate is where asset supplies and demands clear. But it’s possible that this market clearing doesn’t happen. So the government needs to intervene to allow this happen. This requires the government to borrow in foreign currencies and sell foreign currency in in the foreign exchange markets.

But this process is unsustainable and the adjustment happens via  structural reforms, i.e., wage cuts and deflation of domestic demand and output. That is unfortunate and the real solution is to reform the IMF and the WTO.

Link

IMF Paper On How Export Sophistication Is The Determinant Of Growth

Missed this working paper Sharp Instrument: A Stab At Identifying The Causes Of Economic Growth from May 2018 from three IMF authors with an impressive conclusion.

From the abstract

We find that export sophistication is the only robust determinant of growth among standard growth determinants such as human capital, trade, financial development, and institutions. Our results suggest that other growth determinants may be important to the extent they help improve export sophistication.

Note, not only is it saying that it is robust but that other factors are important as long as they improve export sophistication.

Cambridge Keynesians were clear on this. Here’s Wynne Godley in a 1993 article Time, Increasing Returns And Institutions In Macroeconomics, in Market And Institutions In Economic Development: Essays In Honour Of Paolo Sylos Labini, page 79:

… In the long period it will be the success or failure of  corporations, with or without active help from governments, to compete in world markets which will govern the rise and fall of nations.

and Nicholas Kaldor in Causes Of Growth And Stagnation In The World Economy, first published in 1996 and based on lectures given in 1984:

The growth of a country’s exports thus appears to be the most important factor in determining its rate of progress, and this depends on the outcome of the efforts of its producers to seek out potential markets and to adapt their product structure accordingly. The income elasticity of foreign countries for a particular country’s products is mainly determined by the innovative ability and the adaptive capacity of its manufacturers. In the industrially developed countries, high income elasticities for exports and low income elasticities for imports frequently go together, and they both reflect successful leadership in product development. Technical progress is a continuous process and it largely takes the form of the development and marketing of new products which provide a new and preferable way of satisfying some existing want. Such new products, if successful, gradually replace previously existing products which serve the same needs, and in the course of this process of replacement, the demand for the new product increases out of all proportion to the general increase in demand resulting from economic growth itself. Hence the most successful exporters are able to achieve increasing penetration, both in foreign markets and in home markets, because their products go to replace existing products.

[italics: mine]

The IMF paper is surprising, since the IMF believes in free trade in which market mechanisms work to achieve convergence in fortunes of nations, so exports is hardly important.

The IMF On The Endogeneity Of The Natural Rate Of Growth

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At their blog, in an article titled The Economic Scars of Crises and Recessions, the IMF is now conceding that demand affects supply and that all types of recessions lead to a permanent damage to the supply side. This is known in Post-Keynesian literature as the endogeneity of the natural rate of growth.

Earlier it was thought by them that these are temporary and the economy recovers to its pre-recession trend.

In a 2016 article for the INET, Marc Lavoie had argued how these ideas were new to the mainstream but well known in the heterodox literature.

These are not special to just recessions, as the IMF authors seem to be arguing but is happening continuously, even outside recession. The 2002 paper The Endogeneity Of The Natural Rate Of Growth by Miguel A. León‐Ledesma and A. P. Thirlwall for the Cambridge Journal Of Economics is a great reference.

If there’s full employment, the rate of growth of GDP is equal to the rate of growth of the labour force plus the rate of growth of productivity. This is Harrod’s natural rate of growth. Unlike the natural rate of interest or of unemployment, this is not vacuous. Of course, below full employment, an economy can grow faster, although the actual rate of growth depends on demand always. We also know that the rate of growth of productivity depends itself on the rate of growth of the GDP. So that implies that the natural rate of growth is endogenous.

From the León‐Ledesma-Thirlwall paper:

The question of whether the natural growth rate is exogenous or endogenous to demand, and whether it is input growth that causes output growth or vice versa, lies at the heart of the debate between neoclassical growth economists on the one hand, who treat the rate of growth of the labour force and labour productivity as exogenous to the actual rate of growth, and economists in the Keynesian/post-Keynesian tradition, who maintain that growth is primarily demand driven because labour force growth and productivity growth respond to demand growth, both foreign and domestic. The latter view does not imply, of course, that demand growth determines supply growth without limit; rather, that aggregate demand determines aggregate supply over a range of full employment growth rates, and that in most countries demand constraints (related to excessive inflation and balance of payments disequilibrium) tend to bite long before supply constraints are ever reached.

Christine Lagarde On Germany’s Balance Of Payments

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Yesterday, there was a joint conference, Germany – Current Economic Policy Debates, jointly organized by the German Bundesbank and the IMF.

Christine Lagarde wrote an article, Three German Economic Challenges with European Effect at IMFBlog.

In that discusses Germany’s 🇩🇪 current account balance of payments:

Challenge 3: More balanced savings and investments

Another feature of the German economic recovery is the country’s high current account surplus. At nearly 8 percent of GDP, it is also the highest in the world in dollar terms. The high surplus shows that German households and companies still prefer to save rather than invest.

For our part, the IMF has indicated that this surplus is too large—even considering the need to save for retirement in an aging society. Boosting investment in the German economy and reducing the need to save for retirement by encouraging older workers to remain in the labor force can lower the surplus. We need to ask why German households and companies save so much and invest so little, and what policies can resolve this tension.

It’s welcome but still far from any action.

I also have a dislike for this kind of narrative. Usually the phrase saving is used in such discussion because of the identity:

National Saving = National Investment + CAB

where, CAB is the current account balance.

But the saving here is not the same as household saving and/or firms’ saving. Also it needn’t be the case that firms’ investment is low. It’s very well possible that households’ and firms may be saving low and yet the current account balance is high. This is because it depends on other things such as fiscal policy, competitiveness of German firms etc. The same argument is repeated in the other direction when the discussion is about the United States, with the claim that households save too little. But if US households start saving more, the US current account deficit will fall but that will be because of a fall in output and employment.

It’s important to remember that John Maynard Keynes recognized that active policy measures are needed to resolve global imbalances. He proposed to impose penalties on creditor nations in his plan for Bretton-Woods and also require them to take measures such as:

(a) Measures for the expansion of domestic credit and domestic demand.
(b) The appreciation of its local currency in terms of bancor, or, alternatively, the encouragement of an increase in money rates of earnings;
(c) The reduction of tariffs and other discouragements against imports.
(d) International development loans.

– page 24 of The Keynes Plan

Of course Bancor is not the solution but we can still learn from Keynes’ idea for creating policies for balance of payments targets, instead of relying on the market mechanism to resolve imbalances.

Link

The IMF And The New Fiscalism: Was There A U-turn?

The new issue of ROKE is out and the journal has made available Marc Lavoie and Brett Fiebiger’s article free.

Abstract:

In late 2008 a consensus was reached amongst global policymakers that fiscal stimulus was required to counteract the effects of the Great Recession, a view dubbed as the New Fiscalism. Pragmatism triumphed over the stipulations of the New Consensus Macroeconomics, which viewed discretionary fiscal actions as an irrelevant tool of counter-cyclical macroeconomic policy (if not altogether detrimental). The partial re-embrace of Keynes was however relatively short-lived, lasting only until early 2010 when fiscal consolidation came to the forefront again, although the merits of fiscal austerity were questioned when economic recovery did not really materialize in 2012. This paper traces the ups and downs of the debate over the New Fiscalism, especially at the International Monetary Fund, by analysing IMF documents and G20 communiqués. Using fiscal policy as a means to exit the crisis remains contentious even amidst recognition of secular stagnation.

Referred is also a 2016 article by Janet Yellen who makes a huge concession about the state of Macroeconomics:

The Influence of Demand on Aggregate Supply

The first question I would like to pose concerns the distinction between aggregate supply and aggregate demand: Are there circumstances in which changes in aggregate demand can have an appreciable, persistent effect on aggregate supply?

Prior to the Great Recession, most economists would probably have answered this question with a qualified “no.” They would have broadly agreed with Robert Solow that economic output over the longer term is primarily driven by supply–the amount of output of goods and services the economy is capable of producing, given its labor and capital resources and existing technologies. Aggregate demand, in contrast, was seen as explaining shorter-term fluctuations around the mostly exogenous supply-determined longer-run trend. This conclusion deserves to be reconsidered in light of the failure of the level of economic activity to return to its pre-recession trend in most advanced economies. This post-crisis experience suggests that changes in aggregate demand may have an appreciable, persistent effect on aggregate supply–that is, on potential output.

The idea that persistent shortfalls in aggregate demand could adversely affect the supply side of the economy–an effect commonly referred to as hysteresis–is not new; for example, the possibility was discussed back in the mid-1980s with regard to the performance of European labor markets.

[the title is the link]

An Important Note By The United Nations On The IMF And The World Order

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I recently came across a phrase, social silence, which Gillian Tett of FT describes:

As Pierre Bourdieu, the French anthropologist and intellectual, observed in his seminal work Outline of a theory of practice, the way that an elite typically stays in power in almost any society is not simply by controlling the means of production (i.e. wealth), but by shaping the discourse (or the cognitive map that a society uses to describe the world around it.) And what matters most in relation to that map is not just what is discussed in public, but what is not discussed because those topics are considered boring, irrelevant, taboo or just unthinkable. Or as Bourdieu wrote: “The most successful ideological effects are those which have no need of words, but ask no more than a complicitous silence.”

Very few talk of the world order and how it operates. The current world order can be described as a neoliberal. It is a system of free trade (or more generally globalization), tight fiscal policy, deregulation and privatization.

The IMF is one institutional which has been responsible for maintaining this world order. Since governments need exceptional financing, they are arm-twisted by the IMF.

A recent United Nations General Assemby note, Promotion Of A Democratic And Equitable International Order, has recognized this and criticizes the IMF strongly. Many economists and pundits deny there’s something called neoliberalism but the note is open about the ideology and the word.

In fact, IMF advocacy of structural adjustment has privileged powerful corporate interests and created a vicious cycle of dependence for borrower countries. As noted by Peter Dolack:

Ideology plays a critical role here. International lending organizations … consistently impose austerity. The IMF’s loans, earmarked … to pay debts or stabilize currencies, always come with the same requirements to privatize public assets (which can be sold far below market value to multi-national corporations waiting to pounce); cut social safety nets; drastically reduce the scope of government services; eliminate regulations; and open economies wide to multi-national capital, even if that means the destruction of local industry and agriculture. This results in more debt, which then gives multi-national corporations and the IMF, which enforces those corporate interests, still more leverage to impose more control, including heightened ability to weaken environmental and labour laws.

and also:

IMF still appears more committed to the obsolete neoliberal economic
model.

The report is 18 pages long and critical of the IMF from the start to the end. Please read. You won’t find any discussion of the report in the mainstream media.

After The Economist, The IMF Now Emphasizing Surplus Countries’ Responsibility

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Recently, The Economist had a cover story saying that surplus nations bear responsibility for global imbalances and weak economic growth. Now, the IMF is also advising surplus nations to expand domestic demand.

The IMF tweeted this, with a link to a new report (2017 External Sector Report) on global imbalances:

click to view the tweet on Twitter

As I have said before, this is the biggest concession to Keynes’ idea that surplus countries bear the responsibility.

In an article, The General Theory In An Open Economy, published in 1996, Paul Davidson says:

Keynes was well aware that the domestic employment advantage gained by export-led growth ‘is liable to involve an equal disadvantage to some other country’ (p. 338). When countries pursue an ‘immoderate policy’ (p. 338) of export-led growth (e.g., Japan, Germany and the NICs of Asia in the 1980s), this aggravates the unemployment problem for the surplus nations’ trading partners. These trading partners are then forced to engage in a ‘senseless international competition for a favorable balance which injures all alike’ (pp. 338-9). The traditional approach for improving the trade balance is to make one’s domestic industries more competitive by either forcing down nominal wages (including fringe benefits) to reduce labour production costs and/or by a devaluation of the exchange rate. Competitive gains obtained by manipulating these nominal variables can only foster further global stagnation and recession as one’s trading partners attempt to regain a competitive edge by similar policies.