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Home Publications Blogs The Americas Blog IMF Ignores Proven Alternatives With Recommendations to Honduras

IMF Ignores Proven Alternatives With Recommendations to Honduras

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Written by Arthur Phillips   
Thursday, 21 February 2013 10:00

On Friday, February 15, the International Monetary Fund (IMF) announced that it had concluded its most recent Article IV consultation with Honduras. The Fund’s recommendations varied little from those it has offered many other countries in recent years: cut public spending, reduce deficits, reform pensions and depress wages.

The IMF regularly conducts Article IV consultations with almost all of its member countries—with Argentina, which since 2006 has refused to take part in the process, being one notable exception. The official reviews are a way for the Fund to present its analysis of each country’s economic prospects and to advocate for a set of reforms. While it is difficult to precisely assess the influence of the consultations, it has been noted that in many cases the recommended policies have been adopted against popular public opinion. And in countries that end up borrowing from the fund, these policies are often preconditions for receiving future IMF loans.

The Fund’s recommendations on Honduras diverged little from the policies it is pushing in many other countries. Below is a selection from the IMF’s brief (347-word, to be exact) Executive Board Assessment of its most recent consultation with Honduras:

Directors . . . underscored the need to tighten macroeconomic policies and press ahead with structural reforms . . .. [They] welcomed the planned reduction of the budget deficit in 2013, and urged early adoption of the measures needed to ensure this outcome and avoid further central bank borrowing or accumulation of domestic payments arrears. They called for sustained medium-term fiscal consolidation . . . [and] supported plans to restrain the public sector wage bill . . . and emphasized the importance of reducing energy subsidies . . .. Directors concurred that monetary policy should be tightened . . . [and] regarded plans to reform state-owned enterprises as critical to strengthen the fiscal position and support growth, and encouraged timely implementation . . . and welcomed the ongoing reform of public pension funds.

It is difficult to overlook how much this assessment resembles the Fund’s recommendations to European countries struggling to emerge from the global recession. CEPR co-director Mark Weisbrot and Senior Research Associate Helene Jorgensen recently released a paper analyzing 67 Article IV consultations for European member countries between 2008 and 2012, in which the authors found that the lending body was pushing a “one-size-fits-all” approach that often included pro-cyclical policy recommendations. In the paper Weisbrot and Jorgensen summarized their findings, in part, as follows:

This content analysis finds a consistent pattern of policy recommendations, which indicates (1) a macroeconomic policy that focuses on reducing spending and shrinking the size of government, in many cases regardless of whether this is appropriate or necessary, or may even exacerbate an economic downturn; and (2) a focus on other policy issues that would tend to reduce social protections for broad sectors of the population (including public pensions, health care, and employment protections), reduce labor’s share of national income, and possibly increase poverty, social exclusion, and economic and social inequality as a result.

Given the consistency of the Fund’s advice, one might think there are no alternatives to such prescriptions. But a look at Ecuador’s economy definitively tells us otherwise.

As detailed in a new paper by CEPR’s Weisbrot, Jake Johnston and Stephan Lefebvre (and noted recently on The Americas Blog), since Rafael Correa was sworn in as president in 2007, Ecuador’s government has taken an unorthodox approach to shoring up its macroeconomic standing. From bringing the Central Bank under the control of the executive branch, to taxing capital flight, to defaulting on illegitimate foreign debt, and launching new regulations on the financial industry, the Correa government repeatedly took steps that are antithetical to the IMF’s perspective and advice. The results? A reduction in unemployment to its lowest point on record, a 27% decline in poverty from its 2006 level, and an increase in government revenue from 26 to 40% of GDP over the same period, all in the context of greatly expanded spending on infrastructure, health, and education. The Ecuadorian example should be enough evidence that the IMF’s singular prescriptions are not the only option—in fact, they may be far worse than other “unconventional” approaches.

In the case of Honduras, it is perhaps worth noting that the IMF had a rocky response to the June 28, 2009, military coup that deposed Honduras’ democratically elected president Manuel Zelaya.

Exactly two months after Zelaya’s illegal ouster, which led most foreign governments and international lenders to freeze aid to Honduras, the IMF announced that it would extend $150.1 million in loans to the Central American country’s illegitimate government. Another $13.8 million was released just a week later. Yet on September 6, perhaps partly in response to criticism, the IMF released a statement saying the de facto government could not use the money “until a decision on whether the Fund deals with this regime or the government of Honduras.” That decision was finally made on September 24, when the IMF ordered that the funds would only be made available to the deposed president.

Despite the clumsiness of this decision and the mixed messages it sent the coup-government in Tegucigalpa, it marked an improvement over the Fund’s response to the 2002 coup that temporarily overthrew Venezuela’s socialist president Hugo Chavez. One day after the coup, a spokesman stated that the lending body stood “ready to assist the new administration in whatever manner they find suitable.”

Tags: coup | government spending | Honduras | imf

 

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