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The IMF and Economic Recovery:
Is Fund Policy Contributing to Downside Risks?

by Mark Weisbrot and Juan Montecino


The IMF’s most recent World Economic Outlook (WEO) projects world economic growth will slow, from 4.8 percent in 2010 to 4.2 percent next year.  Throughout the report, there are numerous concerns expressed about the «fragility» of the global economic recovery.  The Acting Chair of the Executive Board states that «[t]he recovery is losing momentum temporarily during the second half of 2010 and will likely remain weak in the first half of 2011, as extraordinary policy stimulus is gradually withdrawn.»1

The WEO expresses particular concern about the high-income countries, where «low consumer confidence and reduced household incomes and wealth are holding consumption down. . . .  Growth in these economies reached only about 3½ percent during the first half of 2010, a low rate considering that they are emerging from the deepest recession since World War II.  Their recoveries will remain fragile for as long as improving business investment does not translate into higher employment growth.»2

Chapter 3 of the WEO provides empirical research on the effect of fiscal consolidation, concluding that it «typically reduces output and raises unemployment in the short term,» with a one percent of GDP fiscal consolidation leading to a one percent fall in private demand.3 Although the report concludes that the decline in GDP is typically smaller, on the order of 0.5 percent, that is due to an increase in net exports; and the authors note that this cannot happen for all countries at once.

Furthermore, the report’s empirical research on trade flows finds that the high-income countries’ demand for imports will remain, for some time, below pre-crisis trends — even more than would be expected on the basis of reduced growth.  Since the U.S., Europe, and Japan are more than half of the world economy, this translates into significantly reduced demand as well as increased downside risks for low-and-middle-income countries, despite the latter’s much more rapid rebound from the world recession.

In view of these findings and considerations, one might expect a strong bias toward continuing fiscal stimulus in weak economies, and a bias against fiscal consolidation.  However, the IMF continues to support pro-cyclical policies in some countries, fiscal consolidation in many others, and clearly does not support central bank financing of fiscal stimulus — even in countries such as the United States — where the threat of high inflation is very remote.

Pro-cyclical Policies among IMF Borrowing Countries

Figure 1 shows the change in government expenditure from 2009 to 2010 for all 55 countries that currently have IMF programs.  For 32 of these countries, government spending has decreased.  Six of these countries had economies that either contracted this year (Antigua and Barbuda, Greece, Iceland, Romania, and Jamaica) or are projected to grow at less than one percent (Grenada).  We can expect that the spending cuts worsened the downturn or weak economy in these countries.

FIGURE 1: Change in Total Government Expenditure, 2009-2010, IMF Program Countries
Figure 1
Source: IMF 2010 and author’s calculations.

TABLE 1: Expansionary and Contractionary Elements of IMF Agreements, 2008-09
Table 1
Source: IMF agreements and authors’ calculations.

However, it is questionable whether spending cuts were appropriate in other countries as well.  Even for those economies that are in economic recovery in 2010, it is not clear that such cuts would be necessary or desirable.

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