The IMF and the G20 Blame Game

Cartoon by Jim Gibson

Whether we need it or not the International Monetary Fund (IMF) publishes a global forecast twice a year. The October 2013 World Economic Outlook was recently announced with about as much fanfare as a rodeo in Ithaca, New York. The link to this several hundred page tome is http://www.imf.org/external/pubs/ft/weo/2013/02/. Luckily one can read what they call the front matter to get the main points. The Wall Street Journal did a nice summary on October 9, "IMF’s Pessimism on Global Growth Widens". Pretty graphs reveal the key points – as compared to last April, the IMF has a revised downward the expected future growth of the world economy. They also forecast an increase in GDP on the Uranus but their interplanetary accuracy is not quite up to Earth standards. With respect to Earth the biggest story line is the downward revision of future economic growth rates of the emerging and developing countries. The average expected future growth of advanced economies was unchanged from April – but the IMF is much more downbeat about short-term prospects of places like Brazil, Russia, India and China.

Why do I bother you with this? For one thing I needed a good reason to pour a cool JD. JD seems to go well with this activity and we all know the old saying that a JD a day keeps the doctor away. But I jest. The real reason I write about this is to gloat. On September 20 my blog was entitled The G20 Blame Game and in that blog my main point was that the emerging countries should quit pointing their fingers of blame at the US and start taking care of their own destinies. I know many of you think I make this stuff up between taking out the garbage and sharpening my dart skills – but I am always pleased to find out that REAL working economists agree with my stuff.

Oliver Blanchard, the IMF’s Chief Economist said, “Emerging markets should use the small window of time available to get their economic houses in order.” The small window is the time before the US Fed begins to taper monetary policy. With Janet Yellen as the new Fed chair that window could be longer than Blanchard believes. But let’s go along with the idea of a short window – what is Blanchard recommending?

The first thing he is not recommending for the emerging nations is more Keynesian policy. He seems to be suggesting that Keynesian expansion is what helped them get into their current mess when he says “the potential reversal of years of cheap cash exposed years of financial and economic weakness.”

So what do you do if you can’t simply open the fiscal and monetary spigots? While Blanchard would probably never utter the words “supply-side economic policies” it is hard to differentiate the IMF’s recommendations from a supply-side approach. I cherry-picked  some of the report’s main points…

• Curbing potential economic expansion are competitive constraints, infrastructure bottlenecks, and slowing investments
• China should rebalance away from exports to domestic consumption
• India and Brazil should remove barriers to foreign investment
• Countries with large budget deficits need to tighten
• Turkey and other countries with high inflation rates must raise interest rates and put in more credible monetary policy
• Emerging markets should let their currencies depreciate
• Europe needs to work on a unified fiscal budget and a banking union
• Japan must continue its economic restructuring
• The Fed should not begin to taper this year but should be ready by 2014 and 
• The US government must solve its budget stalemate

It is true that the IMF worries that US tapering could cause some negative overshooting in emerging markets – drawing precious funds away from those countries. Inasmuch the IMF agrees that these withdrawals should be offset with domestic monetary policy. But this is seen as a replacement for the missing money and not a return to expansionary monetary policy. The IMF is very clear that the world has had plenty of stimulus and now the challenge for most countries is to focus on competitiveness and making capitalism work better.