IMF's (Shocking?) Endorsement of Procyclicality

♠ Posted by Emmanuel in , at 4/18/2012 03:44:00 PM
I needn't recycle criticisms you're most familiar with concerning how the IMF exacerbates difficulties by deterring poor countries from using countercyclical policies to cope with downturns--either indirectly via policy suggestions during Article IV consultations or via conditionalities when they encounter balance of payments crises. Review the Joseph Stiglitz (countercyclical) versus Kenneth Rogoff (balanced budget) debate over Washington Consensus-style policies.

Recently, I received an invitation to attend the rollout of the IMF's flagship publication, the World Economic Outlook, which is published biannually. Apparently, various IMF research team members go on an international roadshow to launch this publication since it's yet another I've attended in...another part of the world. While the WEO admittedly contains a lot of useful information about general macroeconomic trends, I've found the economic forecasts more of a mixed bag. Hence, I did not expect to find anything startlingly new in the current April 2012 report.

Boy, was I wrong. Dead wrong, in fact. While its (rather randy, dontcha agree?) previous Managing Director Dominique Strauss-Kahn famously declared the Washington Consensus-era IMF a goner, limited transference has been seen in policy suggestions given to poor countries. Unfairly perhaps as some suggest, industrialized countries have been given a free pass in "pump priming"--but not LDCs. During the presentation, though, I was astounded to see as graphical an illustration of new thinking as you'd hope to find. Since this issue's theme is commodities, one of the things the authors studied was the impact of fiscal policy when exporters encounter a global supply shock. Quite apropos for the times, methinks. Modelling these conditions for a "small, open oil exporter" (read: LDC), they came up with this chart taken from p. 19 of chapter 4 concerning Commodity Price Swings and Commodity Exporters:

Shock! Horror! Panel 1 is obvious: the volume produced by a "small, open oil exporter" has a negligible effect on global energy prices. However, panel 2 is as blunt a mercy killing of the "Washington Consensus" as you're likely to get from these folks and their econometric models. Your eyes don't deceive you: According to IMF research, an LDC commodity exporter would be far better off running a countercyclical policy in the run-up to and in the aftermath of such a shock. Sure they may not reap the full rewards of steep price rises in the immediate aftermath, but they're better positioned in the longer run to reap continued benefits instead of succumbing to a typical boom-bust pattern.

And in case you're wondering, the wording of these scenarios indicates I'm not making this stuff up. First you have the balanced budget (AKA Washington Consensus) scenario:
A balanced budget rule: Under such a rule, the government budget is balanced in every period, so all exceptional commodity royalties and tax revenues are redistributed immediately to households through lower tax rates. This rule is procyclical by design but maintains fiscal balance and net debt at long-term targets.
Meanwhile, the countercyclical scenario is as follows:
A countercyclical rule: Under this rule, the fiscal authority not only saves exceptionally high commodity royalties and tax revenues, but also increases taxes to dampen the stimulus to aggregate demand from higher oil revenue accruing to the private sector. In the case of exceptionally low royalties and tax revenues, taxes are lowered temporarily. This rule implies larger changes in budget surpluses and government debt in response to oil price changes. However, it acts countercyclically, increasing (reducing) the structural balance
during periods of strong (weak) oil prices and/or economic activity.
Yes, there are many contextual qualifiers offered here. It pertains to a small oil exporter that does not habitually run substantial fiscal deficits (i.e., one that actually has savings to spend during downturns) etc. But, to depict matters so starkly in favour of something the IMF would have once objected to vehemently not so long ago illustrates the evolution in IMF thinking.

That said, I'm not entirely convinced that this sort of thinking filters down to policy prescriptions IMF staffers make. Sure it sounds nice to read about the kinder, gentler IMF that gives a thumbs-up to pump priming. But, do the visiting IMF country teams now dispense the same sort of policy advice--especially when poor countries alike commodity exporters run into trouble? I believe that important questions remains to be answered.