IMF advice accused of risking new recession

13 September 2011

Since the financial crisis, the IMF has used nuanced rhetoric about austerity policies and the need to stimulate growth, but critics say its actions risk pushing the world back into recession and hurting workers.

In mid-August, facing the heightened risks of a widespread debt crisis in Europe (see Update 77), the IMF’s managing director Christine Lagarde revived the IMF’s line (see Update 71, 70) that “slamming on the brakes too quickly will hurt the recovery and worsen job prospects. So fiscal adjustment must resolve the conundrum of being neither too fast nor too slow.” But she failed to spell out specific measures for major world economies to achieve “medium-term consolidation and short-term support for growth and jobs”. Many critics have complained that the IMF rhetoric is not matched by deeds, especially when it comes to borrowing countries.

The early September Trade and development report from the UN Conference on Trade and Development (UNCTAD) finds IMF fiscal policy advice uses many mistaken assumptions. It says “the recommendations of major international institutions such as the IMF … suggest that recognition of the need for fiscal stimulus during the crisis has not been followed up by a more profound rethinking of the principles of macroeconomic policy.”

calls the IMF's detailed recommendations for the short term "shocking"

It argues that “IMF-sponsored programmes have systematically overstated economic recovery and fiscal consolidation.” It also points out that the measures recommended “have tended to cut spending and increase taxes on items that would most likely have a negative impact on income distribution, and as a result they might have a further negative effect on the already feeble recovery.”

Ignoring employment?

In a late June special edition of the International Journal of Labour Research, Dan Cunniah from the International Labour Organisation agreed that “a premature fiscal consolidation runs a high risk of jeopardising the recovery”, but went on to argue that “‘competitive austerity’, where governments will restrain their spending and workers their earnings to restore ‘competitiveness’… will clearly not work if everyone applies these mechanisms.” In the same publication, Trevor Evans of the Berlin School of Economics and Law notes that last year the IMF itself “warned that such widespread fiscal consolidation might tip Europe back into recession” but that this year the IMF conditionality in Greece, Portugal and Ireland as well as policy advice to other countries has demanded austerity.

A paper by the ILO’s Iyanatul Islam’s (see Update 77) argues that the IMF “do[es] not explicitly make the case for a renewed commitment to full employment as a core policy goal” and criticises IMF-backed low inflation targets in low-income countries.

A late May discussion paper by the European Trade Union Confederation argues that the IMF is using the eurozone crisis as a means to deregulate wages and labour markets in the euro area, focussing not just on borrowing countries. The paper welcomes new IMF rhetoric about the importance of inequality, but worries that this is “not followed up by an actual change in structural reform conditions being attached to lending to countries facing financial market turmoil.” It also welcomes the IMF’s claims to be worried about undermining recoveries through spending cuts, but calls the IMF’s detailed recommendations for the short term “shocking”, with a particular focus on how “the main thrust of the IMF policy programme is to intervene in wage formation and collective bargaining so as to push wages down.” The paper complains that the medium term focus on reducing and harmonising employment protection legislation shows “a certain ‘disconnect’ between the messages from the top of the IMF and the policy advice that is offered in practice.”