Not the IMF way

  • We need a package of creative economic policies

In my doctoral research, which culminated in receiving both distinction and as a Springer published monograph in their ‘Contributions to Economics’ series, I thoroughly studied the economic impact of IMF (International Monetary Fund) programmes on recipient countries, especially those that remained frequent or prolonger user of IMF resources like Pakistan.

Along with extensively reviewing literature of other researchers appraising consequences of IMF programmes, and taking data on IMF programmes from 1980 to 2009, a time of increasing IMF involvement with mainly developing countries, I wish to indicate the following:

The underlying thought process of IMF programmes is rooted in neoclassical/monetarist orthodox school of economic thought, giving no importance to heterodox economic literature, especially institutional and behavioural economics that gives centre stage to institutions, with laws being framed here directly to improve institutions and where governance and incentive structures are being evolved through this legislation, to allow organisations to work effectively and efficiently. On the other hand, under the IMF thought process, institutions are seen in the narrow focus of individuals and corporations, and therefore mostly an exogenous factor, that will improve as the economic conditions improve.

By economic conditions, what is basically meant by IMF is improvement in the macroeconomic fundamental through macroeconomic discipline; lower levels of inflation, and fiscal and current account deficits, and puts to back burner greater welfare role of the state. The problem is that since they have neoclassical philosophical underpinnings, and because IMF has been seen in history to prescribe this philosophy overall in a one-size-fits-all kind of policy prescription, therefore, what this boils down to in IMF programmes, is a set of aggregate demand management policies, where contractionary monetary policy, that is reduce the capacity of public and government to spend, through primarily increasing policy (or interest) rate, so that the cost of borrowing for both the private and government sector is increased; resulted in setting in motion recessionary trends in the economy that does not allow government to invest needed amounts in public works, private sector to invest in increased supply and in turn, more jobs, and in government running appropriate levels of public welfare programmes.

The problem with looking at macroeconomic instability from the perspective of monetarist school of thought, is that, inflation is seen as basically a ‘monetary’ phenomenon, and the fact that policies are quite a broad brush over a spectrum of countries, has meant that (a) countries under IMF programmes mostly saw a negative impact of IMF policies on their economic growth, and (b) improvement in macroeconomic indicators could only be achieved artificially during the time of IMF programmes, at the back of incoming IMF dollars to boost foreign exchange reserves, whereby any progress made quickly depleted after the programme ended because since the focus was not institutional improvement (only some structural adjustment within corporations or organizations) therefore, the needed base for sustained macroeconomic stability could not be achieved.

For the ill-meaning governments, based on protecting the interests of their small elite, these neoliberal policies worked well, since economic reform agenda could be kept overtaken at the back of aid money

In fact, unlike IMF thinking, in developing countries, inflation is at least equally a ‘non-monetary’ phenomenon, for which is needed not primarily overemphasis of monetary aggregates management, but in doing ‘creative economics’ to break the control of cartels in influencing supply side of the economy to keep prices artificially high.

That would require also to look to heterodox economic literature, since it is the failings of markets, at the back of least government regulation (as per the monetarist school of thought-based, and IMF supported policy prescription) but by bringing in some kind of hierarchy (depending on a particular market). This kind of regulation, in institutional economics literature, turns a market into a ‘hybrid’, having the features of a market where consumers and producers interact, but who are regulated by a regulatory check in the shape of governance- and incentive structures put in place by a particular institution, whose responsibility it is to improve the working of that specific market; for instance, financial sector institutions transforming financial markets into a hybrid, or real sector/commodity markets going through the same.

The world is already starting to do that after the global financial crisis of 2008, where unregulated financial markets meant profit seeking risky initiatives leading to serious issues for the economy. The shift is from neoliberal styled unregulated capitalistic policy milieu to one that is more creative in regulating markets and organizations, so that such crises could be avoided, that economic inequality could be reduced, and economic growth downturns could be curtailed. The shift is in turn towards a social democratic styled welfare model for the economy, the one that PTI also looks up to, the one that allows moving towards an egalitarian society.

PTI has planned to create jobs, for which it needs creative economic policies, whereby (a) it regulates financial and real sector/commodity markets to stop the influence of cartels in artificially hiking up prices, (b) disincentivises (not banning) consumer spending from lesser important imports (in the overall context of economic growth), and domestic production avenues (for example creating incentives to re-direct private investment into broader, more labour intensive and value-adding avenues to the economy, than just  some narrow fields, like for instance, clothes, event-management, etc), (c) to use contractionary monetary policy only for a period where macroeconomic corrections are needed, but at that time too not as a replacement of expansionary fiscal policy in certain selected areas like welfare programmes- in social safety nets to vulnerable, in providing subsidised loans to farmers, in giving student loans in vocational education, giving subsidised loans to both exporters in exports where government wants to see growth, especially in labour intensive exports, and for imports into those products/machinery that allows the government-targeted export sectors to get a boost from.

Similarly, to build houses, policies on the same line of thinking as above need to be followed, and not the kind of one-size-fits-all; whereby there is a wholesale contractionary policy being prescribed by IMF to overall curtail aggregate demand, with only some structural enhancements in the working of corporations or organizations to improve needed aggregate supply, so that demand is not reduced mostly to do macroeconomic adjustment, but it is met at a reasonable level by increased supply. That will allow both reduction in inflation but also increase in economic growth. Regulating markets through introduction of hybrids, and by redirecting import- and domestic spending, and private investment in a more productive and value-adding way, that allows needed exports to rise and labour to get absorbed, through overall improvement in governance- and incentive structures, and by time-based increase in policy rate only when crucially needed, will allow government to both bring macroeconomic discipline and at the same time, to make Pakistan a welfare state.

Hence, going to IMF is not at all recommended in the light of above; we need a package of creative economic policies, a good blend of orthodox and heterodox economic policies, unfortunately not possible in the time-tested policies of IMF that do not allow country to move away from neoliberal/Washington Consensus mindset.

If history is any evidence, third world is third world because while countries that developed followed one set of policies that allowed its economy to receive needed government support, its markets to get regulated, but the countries that were their colonies, and later on their aid-dependent, to be destined to unnecessary restrictions on welfare programmes, harmful levels of liberal approach in keeping markets weakly regulated, and not allowing governments and private sector to rationalise consumption and investment policies to move towards sustained economic growth and its proper distribution. Japan for example developed and not China, while the former remained away from the neoliberal mindset but the later was not allowed this by the British, which did the same to India and Egypt also; all otherwise poised to start the industrial revolution, but instead the colonists saw this rise (at the cost of the colonies, which they ruled). The rise of Latin America (many of which were prolonged users of IMF resources during the past) overall is a testament that neoliberal mindset needs to be shunned.

For the ill-meaning governments, based on protecting the interests of their small elite, these neoliberal policies worked well, since economic reform agenda could be kept overtaken at the back of aid money, and which allowed these governments to pass-over the buck of hard economic reform to the next government, but for a government, a kind which PTI wishes to be, one that wants to protect the vulnerable and that stands for providing socio-economic justice, needs to move away to creative economic policies. Would then PTI break this cycle of going to IMF, and not hold the bull of economic reforms by its horns? My own research specifically, and of other researchers more broadly, states that without improvement in institutions, there will be no sustained positive impact of economic policy in improving macroeconomic stability and economic growth; and in meeting the welfare needs of the people, but rather giving them economic justice will remain a far cry as a fallout, in turn.