relatively Wonkish: Who benefits from the IMF’s new design of monetary conditionality?

4 Apr

Here is Daniela Gabor (Bristol Business School):

“the IMF’s advice in Eastern Europe sought to renew policy commitments to private finance, from the insistence on protecting commercial banks’ balance sheets to its organisation in Vienna of the European Bank Coordination Initiative (EBCI) during its negotiations with Romania in March 2009 (Gabor, 2010b). The EBCI brought together what the IMF viewed as key stakeholders in the process of securing Western European bank’s commitments to stay in the region: the parent banks, country authorities and international institutions (ECB, European Commission, European Bank for Reconstruction and Development). The absence of civil society organisations or trade unions (to represent highly indebted households or public sector workers) and the lack of transparency raise questions about the decisions made in Vienna. Indeed, while governments reiterated commitments to austerity, parent banks conditioned their continued presence in Eastern Europe on the availability of “appropriate investment instruments” (Andersen, 2009). From this perspective, the apparent inconsistencies in the IMF’s treatment of central banking can be read differently: ‘prudent’ monetary policy involves maintaining interest rate differentials and liquidity policies that enable commercial banks to obtain high returns in government debt markets or currency markets (Gabor, 2010b).

Hungary’s experience is illustrative. During 2009, Hungary was the IMF’s star pupil in Eastern Europe. Unlike its peers, it remained committed to the original deficit target; its output contraction was lowest, lending weight to the IMF’s insistence on fiscal rollbacks to restore confidence and growth. Elections in May 2010 brought in a new government that promised to reverse the social costs of austerity by asking “the strongest participants of the economy [to] help those who are still in distress” (Financial Times, 2010). First the government imposed, in July 2010, a 0.7 per cent of GDP levy on banks (four times higher than anywhere else) that the IMF decried as “highly distortive” for banking activity – as if banks had all along been governed by the smooth laws of equilibrium rather than by business models that brought the financial crisis to Eastern Europe. The IMF immediately suspended its Hungary programme, predicting a severe market reaction and the possible withdrawal of foreign banks. Such a withdrawal never materialised. While committed to the deficit target initially agreed with the IMF for 2010, in October the new government sought to stimulate private demand by cuts in both income and corporate tax. To maintain revenue it instead imposed temporary ‘crisis’ taxes on businesses in the highly profitable retail, energy and telecoms sectors, and shifted pension funds from private financial institutions to finance the deficit – all measures condemned by the IMF. The Hungarian government further questioned the Hungarian central bank’s policies, demanding lower borrowing costs to boost spending and investment. This very public conflict was aggravated by the central bank’s decision to raise interest rates twice in late 2010, citing concerns with inflation.

What Hungary’s experience demonstrates is that macroeconomic policies, and inevitably the IMF’s conditionality, play a crucial role in deciding how to distribute the burden of adjustment during crisis. The IMF’s new economics of crisis claimed to entail an objective approach, however, the record in Eastern Europe shows that its interventions are mediated by politics and tailored to financial interests. Indeed, the IMF originally embraced inflation targeting because it allowed countries to abandon exchange rate concerns and focus on influencing inflation through aggregate demand control. Yet in response to a crisis triggered by banking sector practices, conditionality continues to be dominated by fiscal concerns, whereas monetary policy advice is quietly geared towards ensuring profitable investment opportunities for private finance. The new economics of crisis legitimises policy advice that imposes ‘antisocial’ measures (wage cuts, public sector layoffs, taxes on consumption) in order to protect financial sector returns.”

This article is adapted from: Daniela Gabor, “The International Monetary Fund and its New Economics” Development and Change, 45:1 (Sept 2010), 805-830.

A shorter version can be found here: http://www.brettonwoodsproject.org/art-567716

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