International Monetary Fundamentals

A very interesting article in today's Economist about the new direction the IMF is taking in today's economic crisis and what that means for developing countries. Notably, the IMF has taken a bit of a Keynesian, pro-gov spending turn:

But it is back in a new guise. The IMF is notorious for favouring hard money and tight budgets. The new fund (“IMF 2.0” as Time magazine called it) believes in casual Fridays and Keynesian policies. Since January 2008, Mr Strauss-Kahn has urged the world’s biggest economies to loosen their belts. And fiscal stimulus is not just for rich countries, he said at the spring meetings last week. Poor, well-run countries like Tanzania should also try it.

One thing that particularly surprised me about this article was the IMF's warming-up to mixed neoliberal strategies, such as "heterodox" monetary and fiscal policy--something that, particularly in 1990s Latin America, has included such heresies as wage increases, price controls and increased social spending. (NB: I am only making a point here, not actually taking a position on loan conditionality.)

Furthermore, I found the implication that the IMF was changing because this financial crisis, unlike the East Asian crisis of 1997, "originated with rich-world lenders, not emerging-market borrowers" to be a bit unsettling. Now I'm not an IMF-hater, and I do know that it's meant to be a market-psychological lender-of-last-resort rather than a development bank, but it just seems a little off that it takes a crisis in the developed world to get the IMF to change its practices (of course, the developed countries do hold majority shares, but still). In any case, it is welcome to see the IMF taking political realities into account when advising fiscal policies. I was talking to a friend from the Kennedy School a few weeks ago, and he mentioned that the World Bank had started advertising posts for political scientists, something that he had never seen before. Guess it's time to show those economists ...

P.S. The article brings up a really compelling point about fiscal multipliers being low or negative in developing countries and that having a strong effect on the reach of government spending (the alternative is lower taxes, but if taxation capacity is poor to begin with ...). Just some stuff for the Bank to work on, especially if it's institutional inefficiency or corruption.