Wednesday, February 09, 2005

More of the same

And how stupid does the IMF think we are? From today's WSJ:

IMF Wants Further Economic Liberalization In Latin America

Staff Reporter of the Wall Street Journal
February 9, 2005; Page A9

WASHINGTON -- An International Monetary Fund study released yesterday blames a decade of disappointing growth in Latin America on the failure of nations in the region to more fully liberalize their economies and work-force rules, and on high levels of government corruption.

The IMF prescribes a series of remedies, including insulating central banks from political pressure but largely ignores criticism that earlier IMF advice is partly to blame for the region's woes.

The report, part of a series on regions and issues of interest to the fund, is sure to intensify self-examination in Latin America. Populist discontent with lackluster economies has helped leftist politicians win power in such countries as Venezuela, Brazil and Uruguay. Faced with a record of economic failure, development-agency officials, academics and Latin American government officials are rethinking ideas on how to spur growth.

[Lagging Growth]

Most Latin American countries adopted far-reaching economic-overhaul agendas during the 1990s. These included selling off state-owned enterprises, sharply reducing tariffs, battling inflation with debt reduction and tight monetary policy, as well as opening to foreign investment. Many of these changes were strongly advocated by the IMF, which put together about 70 loan packages for Latin American nations between 1989 and 2004. Typically, the fund -- a global lending agency that aims to promote economic growth -- requires countries to open their markets in order to get its low-cost financing.

Nevertheless, between 1998 and 2003, per-capita gross domestic product actually fell by 0.1% in the region, after adjusting for inflation, the IMF reported. The poverty rate remained stuck at more than 40%.

What went wrong? The IMF says the region was battered by economic crises partly because it had opened its markets so widely to capital from abroad without strengthening financial regulation, leaving them overexposed during financial crises of 1994 and 1997-98. The region also didn't liberalize as much as it should, the IMF found. For example, although tariffs were slashed to about 11% in the late 1990s from around 49% in the mid-1980s, that wasn't sufficient because many countries kept tariffs high on industrial goods.

"From an institutional and structural perspective, reforms were uneven and remained incomplete," the IMF report says.

The analysis flabbergasted critics of the IMF because the report didn't explain the fund's advocacy of policies that the report criticized. For years before the 1997-98 financial crisis, for instance, the IMF was pushing countries to open their markets to foreign capital -- even though that eventually made the countries vulnerable to sudden withdrawal of funds.

The report also chastises Latin American governments for not using fiscal policy to counteract the effects of downturns. But during financial crises, the IMF counseled nations to keep interest rates high and budgets tight as a way to protect their currency and limit inflation, even though that may have worsened recessions.

"What a whitewash," said Joseph Stiglitz, a Nobel Prize-winning economist who clashed with the IMF when he was the World Bank's chief economist in the late 1990s. "The IMF was part of the problem."

Anoop Singh, the IMF's chief for Latin America, said the report isn't meant to examine the fund's failings and noted that an earlier IMF report had criticized its policy toward Argentina. Had yesterday's report done the same, "it would have been open to the charge of it being defensive and too focused on the fund."

The IMF report made several recommendations to generate growth, including further insulating central banks from political pressure by having them announce a target for inflation, and wrapping monetary policy around that goal. Latin American nations also should ease labor-law restrictions that make it hard for workers to shift to growing industries, the fund recommends. It also urges a crackdown on corruption because "visibly reducing corruption would provide a positive impetus to growth and help to sustain support for the reform process." But it offers few specifics of how the IMF might help relieve corruption.

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