[A thread] on the the economic theories and models underlying IMF stabilisation programmes, and some outcomes.

Note how the letter of intent from South Africa authorities reflects IMF thinking

Notes from a masters course I took taught by Prof Alice Sindzingre at @SOASEconomics

Lets start with the IMF mandate: The IMF mandate is to finance temporary balance of payments (BoP) disequilibria. When balance of payments deficits are not inherently temporary they must be rendered so by corrective policy instruments controlled by the authorities to the BoP. /2

IMF stabilisation programmes shift from state-led to market-led policies. These stabilisation programmes are based on theoretical relationships between policy targets and macroeconomic aggregates (e.g., growth) /3

Their underlying model reflects the Monetary Approach to the Balance of Payments – or Financial Programming (or Jacques Polak’s model), developed in the 1950s within the IMF. The model’s main focus is the balance of payments effects of credit creation by the banking system./4

The IMF monetary model consists in macroeconomic accounting identities that link growth, inflation, money supply, current account, and budget deficit (Polak 1997).../5

...with intermediate policy targets (e.g., domestic credit to the private sector, reserve accumulation) designed to be consistent with macroeconomic targets like growth, current account adjustment, and inflation supposed to resolve the country’s difficulties. /6

The government is viewed as ‘crowding-out’ private investment. Hence, IMF stabilisation programs are focused on the reduction of domestic demand, fiscal deficits, and the stabilisation of public spending, i.e. reduction of the wage bill, investment.../7

... equipment, maintenance and recurrent costs, and increase of public revenues, broadening the tax base, export growth.
/8

For the IMF, the determinants of growth are a limited fiscal deficit, trade openness, minimal state intervention, private investment, making the market mechanism work, “getting prices right” (i.e., wages, goods and services, interest rates, exchange rates). /9

In the 1990s: besides the IMF model itself, theories of credibility, reflections on conditionality; theories of “global public goods”: A key justification of the arrangements with the IFI = in ‘signaling’ the commitment of a government to policy reform /10

Despite the implementation of the programmes from the early 1980s onwards, over time, no sustainable growth in SSA: prolonged lending, repeated programmes, accumulation of conditionalities /11

For some SSA countries, the 2010s are the 3rd decade of being under programmes prescribed by the IMF and the World Bank. (Mumssen et al 2013) /12

Typically, IMF studies find positive effects, e.g. a positive impact on revenue collection, particularly in low-income countries. . (Bird & Rowlands ) /13

But for other studies outside the IMF, participation in an IMF programme has led to reductions in output growth (Przeworski and Vreeland, 2000) /14

Similarly, some studies find that IMF programmes have a negative effect on growth; being under an IMF programme gives a negative signal to international investors (Thacker 1999) /15

For other studies, IMF programmes (read policies) had no significant effect on growth. Also, some studies find that IMF programmes had negative distributional effects – e.g., wage compression. /16

IMF lending (read policy) is either neutral or detrimental to growth. The channel for this effect is a negative impact of IMF lending on public and private investment. (Butkiewicz and Yanikkaya. 2005) /17

The fact that this lack of diversification is a cause of recourse to the IMF for financing is even recognised within the IMF (Bal Gündüz, Yasemin, 2009). Despite decades of structural adjustment programmes, no or little structural change within SSA economies. /18

Via 2,095 observations of 110 countries during 1961–93, Vreeland (2002) finds that IMF programmes have negative distributional consequences in redistributing income away from labour /19

Via a sample of 50% of the world’s population in 2000, they find that IMF conditionality decreases the protective effect of parents’ education on child malnourishment by 17%. Similar adverse effects are observed in sanitation, shelter, and health care access. (Daoud et al 2017)

The IMF has traditionally used crises to force fundamental structural reforms (which is what treasury is doing)

More generally, IFI programmes rely on the neoclassical framework, ignoring other approaches (Gore 2000) /20

More recently, the IMF also claimed that it had changed its policy prescriptions and analysis of economic mechanisms. It has even been argued that the global crisis has induced a ‘Keynesian turn’ within the IMF. (Cornel 2014) /21

In 2016, the IMF claimed to have evolved on policies. They explain that instead of delivering growth, some neoliberal policies have increased inequality, in turn jeopardizing durable expansion. (Ostry et al 2016) /22

All this to say, despite all the research and evidence, South Africa set it's own "conditions" to get the loan and we effectively replicated an IMF program.

Why????? /23