IMF gets emerging markets wrong, again
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Article summary
- Fund conducts “U-turn” to warn of risks to developing country stability
- Critics contend IMF failing to learn lessons from past emerging market crises
- IMF cautiously reiterates potential for capital controls in developing countries to manage financial instability in principle, but not necessarily in practice
Amidst heightened risks of financial instability in major developing country economies, the Fund was forced to re-assess its global economic prognosis and risk assessment in an analysis provided to the G20 summit in September. Managing director Christine Lagarde conceded in August that, despite the Fund’s April forecasts highlighting the positive contribution of emerging markets’ growth, there is “the risks of a slowdown in emerging markets pulling back growth everywhere” in a move reported by the Financial Times as a “humbling series of U-turns”. Lagarde added that “tracing the interconnections” between countries is core to the Fund’s “revamped surveillance framework”, the centerpiece of which is the series of Spillover reports which identify risks through the economic and financial ‘interconnections’ between countries. The Financial Times article also reported that “[the Fund’s] clout with presidents and prime ministers is likely to be diminished by the IMF’s failure to provide an accurate assessment of the world economy as recently as its spring meetings in April”.
Pressure on developing countries
While the 2013 Spillover Report was being readied for publication, large developing countries’ economies came under sustained pressure in recent months, with currency values falling sharply in Brazil, Indonesia, South Africa, Turkey and India, amongst others. As a result a number of developing countries have instituted policies to support their currencies’ value, including a late-August announcement from Brazil of $60 billion resources being earmarked to support their currency. In July, Indian officials denied any need for IMF support amidst growing rumours of economic fragility. India’s then central bank governor Duvvuri Subbarao responded to questions about the need for India to turn to the Fund by saying “the answer is no!” By late August, India’s rupee had fallen to its lowest-ever level against the US dollar after weeks of speculation.
The IMF’s September G20 briefing note argued that India’s “rising deficits” required “tough choices” in particular calling for reform of the tax and subsidy regime so that spending would be reduced, and a singles sales tax introduced. A September briefing from Kavaljit Singh of Indian policy research institute Madhyam, advised against turning to the IMF for a loan “which comes with stiff conditions”. It reiterated that Indian authorities “should not hesitate to impose capital controls … to protect … from a sudden capital flight” and instead suggested that India should expand on its bilateral arrangements with key trading partners.
Singh said that “the IMF’s policy advice to India to undertake tax and subsidy reforms to avert an impending crisis is completely off the mark. The main source of India’s vulnerability is the external sector imbalances (i.e. the current account deficit and its dependence on short-term “hot money” flows to finance it). The IMF had given similar policy advice to Thailand, Indonesia and South Korea when these countries experienced rapid capital flight and currency crashes in 1997. It proves that the IMF has not learnt lessons from the past (and current) financial crises as it continues to pursue an orthodox economic policy agenda to the detriment of developing countries. Due to its policy mistakes, even a mention of a future loan from the IMF raises suspicion in India.”