Are We Better Off Getting Advice from the IMF than a Drunk in the Street?

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Sunday, 27 June 2010 07:44

If we look at the track record, probably not. After all, where was the IMF when the housing bubble in the United States and elsewhere was building up to ever more dangerous levels? Was it frantically yelling at governments to rein in the bubbles before they burst with disastrous consequences? No, the housing bubbles were no big deal at IMF land.

This would have been worth noting in a Washington Post article that repeats at length IMF recommendations about reducing budget deficits, cutting back on labor market protections for workers, and rolling back pension and health care benefits. After all, any reasonable person would ask when the IMF stopped being wrong about the economy. 

Actually, advice from the IMF may compare unfavorably to advice from a random drunk. The drunk will just be incoherent. There is reason to believe that the IMF has political motivations in the advice it gives. At the end of 2001 Argentina defaulted on its debt enraging the IMF. Prior to the default Argentina had been an IMF poster child eagerly embracing the IMF's program. 

The IMF's growth forecasts clearly reflected its change of attitude toward Argentina. Prior to the default the IMF was consistently overly optimistic about Argentina's growth prospects projecting much higher growth than Argentina actually experienced. After the default, the IMF was hugely over-pessimistic, projecting much lower growth rates than it subsequently experienced. It is difficult to explain this pattern of errors except by a political motivation.