IMF crisis response was biased to benefit powerful member states, IMF’s own Independent Evaluation Office finds
The IMF’s Independent Evaluation Office (IEO) has released its report
on the IMF response to the financial and economic crisis. Assessing the years from 2008 to 2013, the report finds that the IMF has violated principles of uniform treatment of member countries and tailored its actions to more powerful members’ needs.
Building on previous self-critique by IMF staff, the IEO also confirms that the advice to Member States to cut fiscal spending in 2010, having initially encouraged fiscal expansion to offset the crisis, was premature. The expansionary monetary policies that replaced fiscal expansion caused financial volatility and harmed developing countries. Due to its limited mandate, however, the IEO’s report failed to address the harmful impact of conditionality and the obvious flaws of the IMF’s sovereign debt restructuring framework. Here is our analysis of the report’s findings – and shortcomings.IMF advice on fiscal policies
The IEO welcomes the fact that the IMF advocated a fiscal expansion of up to 2% of global gross domestic product (GDP) in the early years of the global financial crisis. However, the IMF started to advocate fiscal contraction early, from 2010 onwards. This change was caused by debt sustainability concerns for some Member States. The IEO writes, however, that it was also recommended to countries such as the USA and Japan despite their bond yields being at record lows. Most worryingly, fiscal contraction was also advised to countries with sufficient fiscal space to provide further stimulus. In the EU, the IMF advised Germany to cut spending early on, although the IEO finds now that “the onus of contributing to the global stimulus should have been placed on the most creditworthy economies in the Union.” IMF advice on monetary policies
While monetary policies complemented fiscal expansion in the early years of the financial crisis, they became the advanced economies’ main policy instrument when the shift to austerity policies was implemented in 2010. The IEO report reflects criticism by emerging market officials that the risk of spillovers of the capital flow “tsunami” (as Brazil’s President Dilma Rousseff called it
) that followed – originating in the global north and flooding other nations – was not communicated well. Highly fragile
emerging markets have been particularly adversely affected. The IMF hesitated too long to offer advice on the appropriate defence measures. Emerging market officials reported to the IEO that the IMF’s views “on the advisability of capital controls to deal with the consequences of these spillovers, did not give enough weight to their circumstances”. Involvement with G20 and Troika
A novelty for the IMF during the recent crisis was the unprecedented degree of collaboration with other institutions in which only a few IMF Member States have a stake. The IEO report finds that this is problematic. For example, the involvement with the G20 “raised questions about whether all members have a voice in decision-making, and about to whom the IMF and its management are accountable”. Similarly, the close involvement with EU and European Central Bank in the Troika “raises questions as to whether it afforded greater traction of the IMF’s policy advice, or whether it increased pressure on the IMF to compromise its positions”. In particular interviews from emerging markets guessed it was the latter. IMF crisis lending
Perhaps the key action of the IMF was to boost non-concessional lending, from almost nothing to $400 billion at the peak of the crisis. This involved boosting the IMF’s own credit capacity, which was enhanced primarily through money that the IMF borrowed from selected Member States. The IEO writes “because the agreed quota increase has not yet taken effect, the IMF remains reliant on borrowing for 70 per cent of its credit capacity, and access to more than half of the IMF’s credit capacity is controlled by a super-majority of creditors”.
Moreover, it was mainly European members that benefited from ‘exceptional access’ to IMF resources far beyond their quota, and despite failing sustainability assessments. The IEO reports that officials from other countries are not confident that such exceptional access is also available to their countries when needed and concluded that such “concerns are exacerbated by the under-representation of EMEs [emerging market economies] in the governance of the IMF. As such, quota and governance reform are critical to give greater legitimacy to the IMF, and to reinforce its role in global surveillance and crisis response.”Financial regulation
The approach to financial regulation has seen a certain shift over the crisis years. The lax or non-regulation that triggered the crisis was partly due to IMF advice. The IEO writes that “before the crisis, the IMF was largely of the mindset that minimal regulation and light-touch supervision would suffice to bring about financial stability, since financial markets were self-stabilizing.” This has obviously been wrong, so the approach was changed and a number of new surveillance instruments have been introduced over the years. However, some officials interviewed by the IEO “considered that the IMF was still too hesitant to highlight risks with sufficient urgency if this entailed criticizing the policies of influential members”. Blind spots
Two major gaps in the IEO report are that the harmful roles of IMF conditionality and the IMF’s defunct sovereign debt restructuring framework have not been considered. Conditionality
The IEO report flags several times that the IMF had streamlined conditionality. Recent Eurodad researc
h, however, found that this was not the case, and that the average number of conditions has increased instead. Later in the report, the IEO timidly confirms that, due to the Eurozone programmes, their number increased again, and points at the EU institutions as an additional imposer of conditionality. While the high level of conditionality in Europe helped to drive the increase in conditionality found in the Eurodad study, it was not the only cause, with high levels of conditions also found in other countries.
The failure to address the actual character or quality of conditionality is a blind spot in the IEO’s report. Eurodad found that actions encouraged by the IMF, such as regressive tax policies, privatisations, fiscal austerity and cuts in welfare systems, contributed to the fact that the poorest and most vulnerable parts of the population – those who were least involved in causing the crisis – had to carry the larger burden of the fallout from the crisis.Sovereign debt restructuring
The IEO report also makes no mention of the shortcomings of sovereign debt restructurings where they took place (e.g. in Greece), and where they should have taken place but did not. IMF staff themselves are fully aware
that the IMF’s current framework has fundamental shortcomings. As are the vast majority of the Member States
. However, the IEO report turns a blind eye to this fundamental crisis response instrument.
This may be due to the limited mandate of the IEO, which cannot assess ongoing IMF programmes. But the fact that such a mandate is tilted in a way that makes it impossible to address key areas of concern does beg the question how useful such in-house evaluations actually are. Surely, while the IEO’s work is useful for some purposes, the IMF’s internal evaluation system is inadequate for addressing some of the most sensitive areas. There remains a lot of room for better and truly independent surveillance of the IMF itself.