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Conditionality

Analysis

Saying one thing but meaning another: IMF advises protecting jobs and cutting spending

30 September 2010

While Hungary has booted out the IMF, Greece is still toeing the line of IMF austerity demands. The IMF has softened its rhetoric in some places, notably on unemployment, but critics worry that many staff are still pushing fiscal retrenchment that may damage growth prospects.

Hungary’s populist prime minister Viktor Orban broke off his country’s programme with the IMF (see Update 66) at end July, declaring that “we need to reach agreement not with the IMF, but with the European Union.” However, he was also unable to come to an agreement with the EU and then stated that Hungary needed to “restore its economic self rule.” Orban,  leader of the Fidesz party which won national elections in April, had campaigned on a platform against Hungary’s austere IMF deal.

Hungarian officials had blamed the low 2.8 per cent fiscal deficit target that the IMF and EU were pushing for 2011, which the IMF insisted “remain[s] an appropriate anchor for the necessary consolidation process and debt sustainability, and should be adhered to, but additional measures will need to be taken to achieve these objectives.”

Media reports cited disagreement over the government’s proposed bank taxes as the real reason for the dispute with the IMF. The government is introducing a bank levy to raise 200 billion forint (€710 million) to help bridge the fiscal gap, instead of further cutting government spending. Hungary’s banking sector is almost entirely owned by Western European banks.  The IMF argued that the tax “is likely to adversely affect lending and growth”, despite mild support from the IMF for other bank levies that have been introduced in Europe (see page 5, Update 71).

Balazs Szent-Ivanyi, a researcher in the world economy programme at Corvinus University of Budapest explained, “we must look at political reasons to understand the government’s decision. We are going to have municipal elections in October, and the government is purposely postponing all major financial decisions, and, in fact, any talk about further austerity measures. They have realised that there is currently no other choice but austerity, but fear to admit it before the elections.”

The LMP, a relatively new green party comprised of former NGO leaders, was comfortable with the government’s hard stand against international institutions, but questioned the policy agenda that Fidesz was taking. In relation to the bank tax, LMP said: “the so called ‘Lex Járai’ – that exempts Fidesz-related insurance companies from the bank levy and is against EU norms – questions the credibility of the government,” and that the plans to “stimulate the consumption of the wealthy and upper classes by introducing a flat rate income tax, considerably decreasing company taxes and abolishing estate taxes … are inadequate to kickstart economic development.” It called on the government to “prevent social and educational budget cuts that endanger the reproduction of human capital.”

Austerity continues in Europe

While Hungary wriggles out of the embrace of the IMF and EU, Greece is firmly locked in. The Greek government passed its first review by the IMF and EU in September to borrow its second tranche of money (see Update 71). The government has proceeded with creditor-required plans to reduce pensions and now must “present [a] detailed privatisation plan with dates and revenue guidelines” by the end of the year. Under plans announced in the summer, the privatisation will include the railways, electricity and gas sectors, water services for two major cities, the post office, and numerous other state enterprises. The Greek economy had fallen deeper into recession even before the IMF- and EU-required austerity measures really started to bite. Early September figures of second quarter GDP showed a 3.7 per cent decline compared to the previous year.

Petros Kosmas, lecturer at the Varna Free University of Cyprus, worried that the IMF-EU approach was counterproductive. “Greece has been obliged to instigate the most severe austerity package in our modern economic history. … At this cost, there is an acute danger that the resulting recession in Greece will lead to the very situation it was meant to avoid – i.e. a default.”

An early September report, The eurozone: Between austerity and default, produced by the Research on Money and Finance group of academics, argues that debtor-led default should be actively considered. “Default, debt renegotiation and exit from the eurozone have very serious implications. These must be weighed against the equally serious implications of recession and long-term stagnation of several eurozone countries. It is essential to have a frank public debate over the costs, benefits and social implications of bold action to break the cycle of debt as opposed to enduring long-term stagnation.”

Sporadic strikes erupted across Greece throughout the summer, including a general strike at end June and more protests during the IMF mission visit at end August. Another massive general strike is planned by the Greek trade unions for end September, which is being coordinated with other strikes and protests against IMF and EU economic policies planned in Ukraine, Serbia, Spain, and by the European Trade Union Confederation in Belgium.

Romanian trade unions staged a 20,000 person protest against austerity measures in Bucharest on a separate date at end September. Liviu Apostoiu, of the Romanian trade union confederation Cartel ALFA, argued that the IMF programme in his country “deepened the recession, financial crisis, and poverty and led to a dramatic reduction in employment.” The Romanian loan expires in May next year, but the president of the country believes the government must renew it. Apostoiu disagreed: “a new agreement with IMF is not necessary. A new loan from IMF will only worsen the level of poverty and the economic crisis.”

Ukrainian trade unions have also been on the offensive against their country’s IMF programme, saying in mid August that the IMF deal “cynically interferes in a sovereign state’s domestic policy” and that the conditions should be renegotiated. In Latvia, the Harmony Centre party, leading in the polls before an early October election, has called for rewriting the terms of the Baltic country’s IMF deal. Even the country’s central bank governor has called the IMF-required privatisation plans “unforgiveable”.

It’s the jobs, stupid

Despite making tough demands in borrowing countries, the IMF has been putting on a softer face in some arenas, especially when its managing director Dominique Strauss-Kahn takes the stage. In mid September the IMF hosted a joint conference with the International Labour Organisation (ILO) in Norway on the challenges of growth, employment and social cohesion, where Strauss-Kahn stressed the dangers to social stability of mass unemployment. In the joint paper released before the conference, the IMF prepared a section on “the human cost of recessions: assessing it and reducing it,” stating “the cost to those who become unemployed could be a persistent loss in earnings, reduced life expectancy, and lower academic achievement and earnings for their children. And unemployment is likely to affect attitudes in a manner that reduces social cohesion, a cost that all will bear.”

To alleviate this crisis, the IMF argues that “a recovery in aggregate demand is the single best cure for unemployment”, and that “most advanced economies should not tighten their fiscal policies before 2011, because tightening sooner could undermine recovery.” However the report prepared by IMF staff still argues for cutting public servant salaries and government spending. It also claims that “for more open economies, wage moderation could impart a boost to competitiveness and thus spur greater external demand” and that “fiscal adjustment has typically had an inequality-reducing effect over the longer term.” The ILO part of the paper counters this, calling for an increase in real wages and the wage share of national income if aggregate demand is to increase and inequality to go down.

“In low-income countries, where many teachers, medical staff and social workers receive salaries near the poverty line, wage moderation simply equates to increasing poverty and the flight of skilled workers. The latter is increasingly a problem in countries such as Ireland or Spain, where the migration of skilled workers because of downward pressure on salaries is compromising the future of these countries,” said Nuria Molina, director of Brussels-based NGO Eurodad.

Sharan Burrow, the general secretary of the International Trade Union Confederation, called on the IMF to listen to ILO advice when making policy recommendations. She also said: “In the face of the persisting global employment deficit, the IMF should encourage countries, including those that borrow from the Fund, to adopt and maintain job-intensive stimulus policies until recovery is self-sustaining and unemployment is falling to pre-crisis levels.”

Austerity gets in the way

This chimes with some of the advice from the IMF in an early September staff position note on fiscal space in advanced economies, which calculated a theoretical debt limit beyond which a country’s debts would spiral out of control. The limit takes into account both the structure and ownership of debt as well as historical fiscal adjustment patterns, with the authors noting it “is not an absolute and immutable barrier, but it does define a critical point above which the country’s historical fiscal response to rising debt becomes insufficient to maintain debt sustainability.” Only in Greece, Italy, Japan, and Portugal were the current debt forecasts anywhere near the calculated debt limits, so most advanced countries still had fiscal space and would only require adjustment in the medium-term.

However, “the analysis abstracts entirely from liquidity/rollover risk”, meaning a country below the limits could still enter a debt crisis if the bond markets lost faith in the government. This is what many analysts, including the IMF’s former chief economist (see Update 72) assume will happen to Greece, which still pays considerably more in interest on bond markets than the German government pays on its bonds. The IMF has taken extraordinary steps to counter this opinion about Greece, including sending IMF staffers to accompany the Greek finance minister as he went on a roadshow to sell bonds on Wall Street and around Europe in mid September. However, this risk prompts the recommendation in the staff note for quicker fiscal adjustment.

Another early September IMF staff paper returned to the siren call of cutting spending. Calling debt default in advanced economies “unneccessary, undesirable, and unlikely”, it said that “the challenge stems mainly from the advanced economies’ large primary deficits, not from a high average interest rate on debt.” However, if the IMF-style austerity package adopted in Ireland early in 2010 is any guide, countries drastically cutting spending may be pushing their economies into another recession and not heading off sovereign debt crises, which have multiple causes (see Update 71).

Despite the unemployment and jobs crisis, and the acknowledged need for more stimulus, many countries are being told by IMF staff to begin austerity packages now. The UN Conference on Trade and Development’s early September release of the 2010 Trade and Development Report brought another warning from the UN system about this approach: “at this juncture any withdrawal of a stimulus policy seems rather premature, since in many countries private demand remains fragile, having only partially recovered from its trough so far, and with no sign of even approaching its pre-crisis levels. It therefore risks undermining the incipient global recovery and raises the spectre of a double-dip recession that could push the global economy into a vicious circle of debt deflation.”

The IMF has repeatedly claimed to have shaken off the one-size-fits-all approach, but may be entering a Janus-faced era. When Strauss-Kahn speaks the message is one of protecting people and employment, but when many IMF staff advise finance ministries, it is about how to begin cutting spending.