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IMF: We Were Wrong About Austerity
World Economy

IMF: We Were Wrong About Austerity

The International Monetary Fund ignored its own research and pushed too early for richer countries to trim budgets after the global financial crisis, the IMF’s internal auditor said Wednesday.
The Washington-based multilateral lender, concerned about high debt levels and large fiscal deficits, urged countries like Germany, the United States and Japan to pursue austerity in 2010-11 before their economies had fully recovered from the crisis, Business World reported.
At the same time, the IMF advocated loose monetary policies to sustain growth and boost demand in advanced economies, initially ignoring the possible spillover risks of such policies for emerging market countries, the Independent Evaluation Office, or IEO, said in a report that analyzed the IMF’s crisis response.
“This policy mix was less than fully effective in promoting recovery and exacerbated adverse spillovers,” the IEO wrote.
The IMF advises its 188 member countries on economic policy, and provides emergency financial assistance to its members on the condition they get their economies back on track.
The internal auditor said the IMF should have known that the combination of tight fiscal policy and expansionary monetary policy would be less effective in boosting growth after a crisis. Evidence showed that the private sector’s focus on reducing debt made it less susceptible to monetary stimulus.
In 2012, the IMF finally admitted that it had underestimated how much budget cuts could hurt growth and recommended a slower pace for austerity policies. But its auditor said the IMF’s own research showed this relationship even before the crisis.
IMF Managing Director Christine Lagarde said the IMF’s advice was reasonable, given the information and economic growth forecasts it had in 2010.
“I strongly believe that advising economies with rapidly rising debt burdens to move toward measured consolidation was the right call to make,” Lagarde said in a statement.
The IEO report looked at the IMF’s crisis response through the end of 2013 but excluded lending to eurozone countries in order to avoid interfering with current programs, such as the IMF’s loan program to Cyprus, which will not end until 2016.
However, the auditor did acknowledge that the IMF’s close work with the European Central Bank and European Commission on eurozone loan programs raised some concerns about the IMF’s independence and equal treatment of all members.
 

 

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