Appraising the IMF's Performance

• Author: Peter B. Kenen
• Position: Walker Professor of Economics and International Finance at Princeton University
• Pages: 41-45

A review of the first three studies by the new Independent Evaluation Office

Page 41

Does the IMF adopt a one-size-fits-all approach to fiscal policy in countries that seek its assistance, requiring retrenchment in every instance? Were the fiscal provisions of IMF programs responsible for the large output contractions in the countries beset by the Asian crisis of 1997-98? Why were those programs so slow to halt the capital outflows from those countries? Do IMF programs depress growth, and do they hurt the poor? And why have some countries been chronically dependent on IMF financing, which is supposed to be temporary?

Fresh answers to these questions are now available in the first set of studies produced by the

Independent Evaluation Office (IEO) of the IMF, and if they are typical of the studies it will produce in the future, the IMF and its member countries will benefit significantly. Its analyses are thorough, combining careful quantitative work, detailed country studies, and discussions with IMF staff, national officials, and others. Its conclusions are eminently sensible, and most of its recommendations should be adopted, although some of them run afoul of an intractable conflict between candor and transparency.

The IEO chose three subjects for its first year's studies: fiscal adjustment in IMF-supported programs, the role of the IMF in three capital account crises (Indonesia, Korea, and Brazil), and the prolonged use of IMF resources.

Assessing fiscal strategy

The IEO report on fiscal adjustment poses two main questions: Have IMF programs required excessive fiscal adjustment? Has the fiscal adjustment been adequate in quality-in composition, sustainability, and incidence, especially in its impact on social spending and the vulnerable members of society?

A country obliged to improve its current account balance often has to make more resources available for the production of exports and import-competing goods and must then reduce aggregate domestic demand. For this reason, if no other, it is often necessary to tighten fiscal policy. But the amount of tightening cannot be chosen without first projecting aggregate expenditure, especially domestic investment. In some cases, moreover, a tightening is needed because of constraints on governments' ability to borrow or the need to achieve or maintain debt sustainability.

Yet the IEO finds that the link between the fiscal and current account balances in IMF programs is weaker than might be expected. A cross-sectional analysis covering 143 recent programs does reveal a positive link between the sign of the targeted change in the primary fiscal balance and the sign of the projected change in the current account balance, but the two are quite different in size. When the current account is projected to improve by 1 percent of GDP, the fiscal balance is supposed to improve by only one-fifth as much. A far larger share of the targeted change in the fiscal balance is explained by the initial state of that balance. If a government has a big budget deficit, it is supposed to reduce it.

Table 1

Varying approaches

Not all IMF programs called for improvements in both the fiscal balance and the current account balance.

[ SEE THE GRAPHIC AT THE ATTACHED PDF ]

The same pattern emerges in Table 1, which classifies most of those same programs by the projected changes in the two balances. Although 70 percent of them call for an improvement in the fiscal balance, only two-thirds of that group call for improvement in the current account balance. The mainPage 42 feature of programs that call for an improvement in the fiscal balance is the initial size of the fiscal deficit. Conversely, half of the programs that contemplate a deterioration in the fiscal balance still call for an improvement in the current account balance.

Table 2

Is growth depressed?

The IEO found that countries grew faster with an IMF program in place.

[ SEE THE GRAPHIC AT THE ATTACHED PDF ]

Invoking these and other findings, the IEO concludes convincingly that IMF programs do not display a one-size-fitsall strategy. Furthermore, its findings suggest that IMF programs do not depress economic growth. Table 2 presents some of the relevant evidence. Typically, GDP growth in the preprogram year was much slower than trend growth in the prior decade, save in low-income countries. And, in all but one country group, growth in the first program year was faster than in the preprogram year, and it was typically higher in the second program year. The table also shows that the exceptional case-slower growth in the first program year-was due chiefly to sharp economic contractions in the small number of countries beset by the capital account crises of the past few years, a subject discussed below.

The IEO evaluation also addresses the common criticism of the IMF that it is not sufficiently sensitive to the effect of fiscal adjustment on vital social programs, such as health care and education. To this end, the IEO compares the relevant levels of government spending by individual countries in years when they had IMF programs with levels of spending in other years. In the vast majority of cases, there was no significant difference, no matter how spending was measured. Where there were significant differences, moreover, the number of cases...