Will IMF ever learn?

In Hungary, the IMF objects to a tax on the banking sector and wants privatisation and a cut in spending to control the fiscal deficit, exposing its capitalist agenda.

IT was too good to be true. For a while after the global crisis, we were told that the International Monetary Fund had changed its position with respect to the strict and generally pro-cyclical measures it had been suggesting to countries in the throes of financial or balance of payments crisis. Their economists accepted the need for fiscal stimuli and generally counter-cyclical macroeconomic policies to combat the recession.

According its own internal review in September 2009 (IMF Review of Recent Crisis Programs; Strategy, Policy and Review Department, Washington, September 2009), the IMF has changed in this respect: Internalising lessons from the past, [IMF] programmes have responded to country conditions and adapted to worsening economic circumstances to attenuate contractionary forces. The stance of fiscal policy in most cases has been accommodative and adjusted to evolving conditions. Deficits were allowed to rise in response to falling revenues and, in cases where domestic and external financing was lacking, this was facilitated by channelling Fund resources directly to the budget.

Other independent assessments have not been so sanguine, and have generally found that the emphasis on fiscal retrenchment and excessive austerity in the midst of a crisis continues in most Fund programmes. A recent study by UNICEF (Isabel Ortiz, Gabriel Vergara and Jingqing Chai, Prioritizing Expenditures for a Recovery with a Human Face: Results from a Rapid Desk Review of 86 recent IMF Country Reports, Social and Economic Policy Working Briefs, UNICEF Policy and Practice, New York, April 2010) found that in 57 of the 86 countries reviewed, the IMF had recommended contractions in total public expenditure and in crucial social expenditure.

Hungary's problems

The latest sign of the IMF's actual intransigence in demanding even more stringent austerity measures in the face of extreme economic hardship comes from Hungary. In November 2008, Hungary signed a Stand-By Arrangement with the IMF for 10.5 billion SDRs (special drawing rights), as part of a joint rescue package worked out with the European Union. Various IMF reviews found that Hungary complied with all the severe pro-cyclical conditions imposed on it, including a massive reduction of fiscal deficit from more than 9 per cent of GDP in the last quarter of 2008 to around 3.8 per cent thereafter. At least partly as a result of this, real GDP declined by 6.2 per cent in 2009. In fact, Hungary did not draw the final instalment of SDR 725 million that remains under the SBA.

The harsh economic conditions and continuing focus on retrenchment and austerity led to social and political turmoil, with even policemen going on strike demanding pay and arrears. The government of the Social Democratic Party was defeated thoroughly in the elections held in May this year. The centre-right Fidesz Party, which had campaigned on a promise of less austerity, won a resounding two-thirds majority in Parliament. The far right Jobbik Party also did very well.

However, once in power, the new government backtracked quickly on its vague pre-electoral promises. It announced that the fiscal situation was much worse than it had expected, and so more severe cuts would be required. Nevertheless, there were tax cuts for the wealthy, on the pretext that this would somehow help revive economic growth. Meanwhile, more pain was to be imposed on workers and users of public services.

According to the new government's decisions, public sector wages are to be cut (in nominal terms in an inflationary environment) by around 15 per cent; redundancy payments are to be limited to two months' pay, with all other payments subject to a 98 per cent tax; recently privatised pension funds are to be allowed to further slash pensions of workers, all along with an increase in the retirement age. Coming on top of nearly five years of similar austerity measures, these policies are likely to add to material distress, and will prevent or delay any recovery in the economy.

One would have thought that this was enough to satisfy even the IMF, but apparently not. In mid-July, the visiting IMF team broke off discussions with the government and returned home to Washington, declaring lack of satisfaction with the progress so far.

IMF's bias

Apparently, the IMF was unhappy that more was not being done on the expenditure side to reduce the fiscal deficit, so as to ensure the planned 3.8 per cent of GDP for this year. The IMF demanded privatisation of state-owned enterprises and further reductions in spending. But at the same time, the IMF officials objected to something that would have actually helped to reduce the deficit a proposed tax on the banking sector that is expected to raise nearly $1 billion. The IMF found this to be high and likely to adversely affect lending and growth.

So, not all deficit-reduction measures are to the taste of the IMF. Anything that affects adversely bankers and other forms of capital is unacceptable; and the belt-tightening had to focus on the public at large, especially workers. The income distribution bias of the IMF could not be more clearly displayed. But this time, even the centre-right party realises that it cannot risk renewed public anger with more such measures, at least until the municipal elections that are to be held in October.

So, whose interests are being served by such demands by the IMF? The swift reaction to the banking levy suggests that the interest of financiers remains central to the vision and activities of the IMF. But, while the pro-cyclical proclivities of the IMF are well known, one hoped that given its own statements in the recent past, it would at least be a little shamefaced about insisting upon them.

E.U. pressure

The IMF is not alone in insisting upon these clearly misguided and unfairly contractionary measures. It is being pushed further along this road by the European Union, which insists on a combined push towards austerity by all wayward European economies. And the E.U. itself is being pushed by Germany, among the large member countries, fed by jingoistic fears that the German people are paying for the profligacy of some of the smaller and weaker economies.

It does not need to be repeated that deflationary policies and austerity packages in the midst of a recession can work only if net exports come to the rescue, and the economies concerned can find dynamic markets abroad, which allow them to grow out of the crisis. But if similar policies, including fiscal contraction, are imposed on the major trading partners, such a strategy will end in worsening the problem and leading to further economic damage.

The likely devastation on the real economies of Europe is obvious to almost all impartial observers, and so such a policy appears inexplicable. But this may miss the point. The purpose right now is to somehow save the banking system, which is deeply implicated in the more fragile economies. Thus, banks from just five countries (Austria, Germany, Italy, Belgium and France) hold more than $126 billion of Hungarian public debt. Several of the largest banks in Germany, Italy and Austria are also heavily involved in Hungary indirectly, through the activities of their subsidiaries or banks in which they have significant shares.

This entire exercise of pushing for deeper and more painful austerity in the midst of an already prolonged recession in Hungary is essentially to save these banks from any diminution in the value of their assets. It is evident how financial markets are reacting. Already in the week since the breakdown of the IMF talks, the Hungarian forint has slumped to its lowest level in the past two years, and yields on Hungarian bonds have risen, even though no fundamentals have changed.

How much more of such macroeconomic nonsense are the people of Europe willing to tolerate? The ongoing protests in Greece, the growing unrest in Spain and the emerging disaffection in Italy and Ireland, suggest that some kind of tipping point may be approaching in Europe. If this is to lead to some genuinely progressive alternatives rather than to vicious and barbarian reaction, then leftist forces need to be much more active in voicing and popularising their own agenda.