IMF Annual Meetings: A public sector shutdown meets its master
By Bodo Ellmers
When the delegations arrive in Washington next week for the Annual Meetings of the International Monetary Fund (IMF) and the World Bank, they will face a situation that the citizens of IMF programme countries know all too well: The public sector has shut down due to a debt crisis and the policy response that followed. Let’s see if this helps to make the governors of the international financial architecture’s most powerful institution learn some lessons and make the right decisions.
Welcome to the IMF’s first Annual Austerity Meeting
The good news for the IMF: Absenteeism from the Annual Meetings will be much lower than usual as sight-seeing options in Washington are currently limited. The Smithsonian Museum complex may be the world’s largest and is indeed worth a visit, but it’s currently closed because the staff had to be laid off – a fate that is shared by 800,000 workers who were employed by the US government in more liquid times. So there is a chance that someone will actually listen to Madame Lagarde’s keynote address and IMF staff presenting their new reports.
The shutdown also brings the opportunity to update some recent IMF research, for example, on fiscal multipliers. CNN estimates that the shutdown could cost the US economy about USD 1 billion every week. Other estimates are that a 2-week shutdown would reduce GDP growth by 0.3 percentage points. While the IMF’s track record is to misjudge the impact of public spending cuts on economic growth by a wide margin, the US’s current experience offers a valuable opportunity to test improved methodologies that were developed after Greece’s economy was ‘accidentally’ destroyed following erroneous IMF advice. Now, is CNN’s estimate right or wrong? We are all waiting for the IMF’s response.
Home-made public sector shutdowns
Of course, the current situation in the US is not funny and it would be inappropriate to make jokes at the US’s expense. We hope that federal employees will get paid soon, and that American citizens can fully enjoy their public services again – which are not very generous anyway, when compared to most European states (pre-Troika programmes). But what distinguishes the situation in the US from those in other countries is that the trouble is home-made and can be home-solved too. In many other countries, debt crises are jointly made by the IMF and cannot be solved without assistance from the IMF.
The US government is in a more comfortable situation than developing countries, or even than Euro zone countries that gave up their sovereign monetary policy when they joined the European Monetary Union. US government debt is basically all US dollar debt. US government expenses are basically all US dollar expenses and - still being the master of its own money, the Fed is under tighter democratic control than central banks elsewhere - the US government can essentially print as many US dollars as they like to fund public expenses or pay off debts. It is simply a legal debt ceiling that is causing the current troubles, and laws can be changed – if you have the majority to do so, which the Obama administration, to its misfortune, does not have in the US Congress.
American public debt soared due to tax cuts that led to chronic fiscal deficits and consequently high borrowing needs to fill the gaps. This coupled with the ‘debt shock’ that were the bank bail-outs during the financial crisis – which were, in turn, a consequence of financial sector liberalisation and the reckless lending and borrowing it facilitated – led to the enormous sovereign debt piles we are seeing now.
And IMF-made public sector shutdowns
Developing countries experienced tax and import tariff cuts, capital account and financial sector liberalisation, and publicly-funded bank bail-outs too. But here it was ‘soft’ advice or hard loan conditionality by the IMF and its sister organisation, the World Bank, that led to such false policies that increased vulnerability and often triggered sovereign debt crises. Debt limits that restrict public borrowing and can constrain public spending exist for developing countries too. But here it is not a democratically elected parliament that sets and can change them, it is the IMF.
Debt crises are obviously not uncommon for developing countries (nor are they for Europe these days), but here printing money is not an option because their debt is mostly foreign currency debt and, if it becomes unsustainable, they cannot print their way out of trouble. They would need emergency loans in situations of illiquidity or sovereign debt restructuring in situations of clear insolvency. In both cases, the IMF plays a central role.
Need help from the IMF? You’ll get too little – too late
The US’s public sector shutdown might already be over when the Annual Meetings actually start, depending on how long the wranglers in the US Congress need to reach consensus and make the fresh dollars flow. In developing countries, the impact of debt crises is felt for much, much longer.
All the evidence is that IMF and IMF-facilitated debt relief often comes too little – too late, so that public services are already ruined when the relief finally comes. When it comes, it comes with conditions to cut public services even further, so that the crises hit the poorest people hardest because they don’t have the cash to satisfy their needs on private markets.
Delegates from Eurodad are going to ask at the Annual Meetings why the IMF suffers from this too little – too late problem. We had hoped that an IMF expert would contribute some explanation on our panel, but for some reason our request remained unanswered. Anyway, our independent experts definitely have some deep insights into the flaws in the system. And, let’s see, perhaps the US shutdown might even incentivise the IMF governors to an overdue reflection on the fundamental change that this system urgently needs.