The IMF has lost sight of its primary purpose (The Times)

CPS Research Fellow Rupert Darwall argues in The Times that the International Monetary Fund has lost sight of its primary purpose.

To view the full article, visit The Times website.

Rupert Darwall“I think you’re playing with fire,” the International Monetary Fund’s chief economist, Olivier Blanchard, said in April as he singled out the UK as being in the economic danger zone. Demand was weak, banks were deleveraging and the Government’s fiscal strategy was contributing to near-zero growth. It was time for the Chancellor, George Osborne, to ease up on debt reduction. Six months later, the housing market is catching fire, record numbers of cars are being bought with credit — and the IMF has upgraded its growth forecasts for Britain, even though the pace of fiscal consolidation remains unchanged.

On its own admission, the IMF has been getting quite a lot wrong of late. In January an IMF working paper co-written by Mr Blanchard looked at why its growth forecasts for European recovery had been too optimistic. In June the IMF produced another paper, admitting “notable failures” over the first Greek bailout. Doubtless in due course there will be a paper on what went wrong with the UK forecasts.

It’s easy to be wrong, but the IMF’s being so publicly wrong is important. It is the global economy’s long-stop in a financial crisis. Its role is not just about the money it can lend but the confidence it can bring. Mr Blanchard is a neo-Keynesian who emphasises the role of demand — and the role of fiscal policy in boosting it — and tends to underestimate the impact of money and credit.

This marks a big change. The IMF used to see its main role in crisis stabilisation as providing political cover to finance ministers trying to control their public finances. The strings attached to IMF support were very often what a finance minister wanted to do anyway. This meant the IMF was on the side of fiscal orthodoxy and sound money.

By contrast, Mr Blanchard’s intervention undermined Mr Osborne and was picked up with glee by his Labour Shadow Ed Balls. It made the politics of fiscal responsibility harder. In urging the Chancellor to depart from his plans with the mantra of “make me fiscally responsible, but not now”, Mr Blanchard would have had him undermine his own credibility. There are always reasons why now is not the right time for tough medicine.

The IMF’s role has changed from supporting ministers doing difficult jobs to airing its opinion as to what finance ministers should do. The shift is from a functional role to being a source of economic wisdom.”

To view the full article, visit The Times website.

Date Added: Thursday 10th October 2013