4/23/2015

WhytherethinkatIMFmattersLivemint

Smallboxestuckedintovoluminousofficialreportsoftenprovidethebiggeststories.Acaseinpointisoneboxinthe
latestWorldEconomicOutlookreleasedlastweekbytheInternationalMonetaryFund(IMF).Themultilaterallendersays
thereisweakstatisticalevidencethatlabourmarketreformsactuallyboostproductivityoverthelongrun.Thecasefor
reformsismuchstrongerinproductmarkets.
Thereisundoubtedlyothereconomicresearchthatcanbemarshalledtoshowthatmoreflexiblelabourmarketsdoindeed
boostproductivity.AnditisalsousefultorememberthattheeconometricworkdonebyIMFeconomistsusesdatafrom11
advancedeconomiesfrom1970to2007,sothelessonsmaynotbedirectlyapplicabletoacountrysuchasIndiathathas
bewilderinglabourlaws.WhatmakesitallinterestingisthatthisisthelatestinaseriesofimportantchangesinthewayIMF
looksattheworld,aseconomistFrancescoSaracenohaswritteninarecentblogpost.
SaracenolistsoutseveralmeaculpasthathaveemergedfromthecorridorsofIMFeversincethe2008NorthAtlantic
financialcrisisunderminedtheoldconsensus.One,themultilaterallendernowbackstheuseofhigherfiscaldeficitswhen
aggregatedemandisweakitsOctober2012reportontheworldeconomyadmittedthatfiscalmultiplierisfarhigherthanits
economistshadpreviouslyestimated.Two,itsaidinitsOctober2014editionoftheWorldEconomicOutlookthatpublic
investmentissomethingofafreelunch,aviewthathasalsobeenputoutinthelatestEconomicSurveyoftheIndianfinance
ministry.Three,itsNovember2012paperontheliberalizationandmanagementofcapitalflowsadmitsthatcrossborder
capitalflowscansometimesdestabilizeeconomies,andwaswrittenafewyearsafterthestunningadmissionthatcapital
controlscanbeusedbygovernmentsundersomecircumstances.
AlltheseareindicationsofaprofoundchangeinthewayIMFhasbeguntolookattheworld.Itsworkhorsemodellinkingthe
balanceofpaymentsproblemsofacountrywithitsdomesticpolicieswasdevelopedin1957byJacquesPolak.Thismodel
allowedIMFtonotjustoffermoneytobailoutcountriesthatcouldnotmeettheirinternationalfinancialobligationsbutalso
offeradviceonwhatthesecountriesshoulddotoavoidsuchsituationsofeconomicdistress.
ThecoreoftheelegantPolakmodelwasamonetaryframeworkthatlinkedbalanceofpaymentsproblemstodomesticcredit
creation,underasystemoffixedexchangeratesthatwasthenprevalent.Muchhaschangedsincethen,especiallythe
breakdownoffixedexchangerates,theriseoffootlooseglobalcapitalanddeeperinterlinkagesbetweenvariouscountries
asaresultofglobalization.TheIMFviewthatdevelopedinresponsetothesechangesintheglobaleconomyisnowbeing
questionednotjustfromoutsidebutfromwithinaswell.
Anotherexampleofthesenewstrandsofthinkingistheconferenceonthenewcontoursofmonetarypolicyhostedthismonth
byIMF.Itfollowstwoearlierconferencesonthechallengesposedtoeconomistsbythefinancialcrisis.Theentiretoneof
theseconferenceshasbeenoneoftentativequestioning,andwhatisironicisthattheseconferenceshavebeenledbyIMF
chiefeconomistOlivierBlanchard,whojustafewmonthsbeforeSeptember2008hadwrittenabreezypapersayingthatthe
contentiousissuesinmacroeconomicshadbeensettled.
ThenewthinkingatIMFiswelcome,eventhoughitneedstobepointedoutthatitsrecentflexibilityinresponsetothedistress
inthedevelopedeconomiesisinstarkcontrastwithitsrigidpolicyadvicetodevelopingcountrieswhentheyfacedproblems
earlier.TheneedforglobalinstitutionssuchasIMFtogivemorevoiceandvotingtoemergingeconomieshasbecomeeven
moreimportantasChinabeginstobuildcompetinginternationalfinancialinstitutionssuchastheAsianInfrastructure
InvestmentBank.Theongoingrethinkaboutthenatureofeconomicpolicyshouldalsobeseenaspartofanoverdue
processofstructuraladjustmentinaninstitutionthatspecializesinofferingstructuraladjustmentadvicetoothers.

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