Reports from the Economic Front

a blog by Marty Hart-Landsberg

The IMF and Hungary

Understandably, our media has focused its economic reporting on the US and secondarily other advanced capitalist countries, like Germany and France.  Developments in the rest of the world have largely been ignored.  As a consequence we are missing a lot.

Studying the third world means confronting the International Monetary Fund (IMF).  The IMF has long been criticized for its heavy handed attempts to promote neoliberal restructuring.  Starting in the early 2000s, third world countries, flush with foreign exchange from rising commodity prices, began paying off their debts to the IMF.  Faced with a loss of leverage and also interest income, the IMF had little choice but to start cutting its own staff.

The global economic crisis changed everything.  Many third world countries are again desperate for funds, and the IMF is happy to supply them—although as always with conditions.

The IMF claims to have learned its lessons.  Its own internal review of past practices highlighted a number of past loan conditions that the IMF now agrees were counterproductive.  Thus, it claims that it is now willing to support capital controls, at least for a limited period.  It also claims that it now supports counter-cyclical policies—which means that it will no longer force governments to implement austerity policies during a period of deepening economic crisis.

Unfortunately, despite its claims, the IMF appears back to its old tricks.  Most importantly, at the same time that it supports counter-cyclical policies in the developed world—for example, encouraging the US and EU to fight the Great Recession with deficit spending and low interest rates—it continues to oppose them in the third world.   A Center for Economic and Policy Research study of 41 countries that had agreements with the IMF in 2009 found that “31 of these agreements involved tightening either fiscal or monetary policy, or both, during a downturn.”

For example, according to Mark Weisbrot, one of the authors of the study:

The Fund is currently squeezing Ukraine . . . to reduce its spending, and suspended its disbursement of funds to the government in order to force budget tightening. This despite the fact that Ukraine’s economy shrank by about 15 percent last year [2009], and its public debt was only 10.6 percent of GDP. A country in this situation should be able to borrow as needed to stimulate the economy, and reduce its deficit after it has accomplished a robust recovery. In nearby Latvia, the IMF and European Commission are lending with conditions that have already resulted in the worst cyclical downturn on record, and it is not clear when or how fast the economy will eventually recover.

The case of Hungry is perhaps the clearest example of the class-bias underlying IMF policies, a bias shared by European elites.  As Jayati Ghosh reported:

In November 2008, Hungary signed a Stand-By Arrangement with the IMF for SDR 10.5 billion, as part of a joint rescue package worked out with the European Union. Various IMF reviews found that Hungary complied with all the very severely procyclical conditions imposed, including a massive reduction of the fiscal deficit from more than 9 per cent of GDP in the last quarter of 2008 to around 3.8 per cent thereafter. At least partly as a result of this, real GDP declined by 6.2 per cent in 2009.

The collapse of the Hungarian economy produced incredible social pain—and not surprisingly, the social democratic party that implemented the IMF mandated policies was defeated in June elections by a center-right party that had campaigned on a promise of less austerity.  However, once in power, the new government found that the economic collapse had made the budget deficit worse and that more severe fiscal measures were required to meet IMF budget deficit targets.

The government proposed new cuts in public sector wages and pensions as well as tax cuts for the wealthy, and asked the IMF for more support.  One might think that this would be enough for the IMF.  But it wasn’t.  The IMF asked for additional privatization of state owned enterprises and further reductions in state spending.  Perhaps most surprising, the IMF also demanded that the Hungarian government cancel an action that would have actually help to cut the deficit—a proposed tax on the banking sector expected to raise nearly $1 billion.  The IMF determined that this tax was too “high” and likely to “adversely affect lending and growth.”

Faced with a popular revolt, the Hungarian government rejected IMF demands for further cuts in spending and also refused to cancel its planned tax increase on the banks.  The IMF responded by breaking off talks.

The government is now seeking to reverse course and promote expansion.  Among other things, it is trying to force the (largely independent) central bank to lower interest rates; the bank (in tune with the IMF) had kept rates high despite the economic collapse.   As a first step, the government has cut the salary of the head of the central bank by 75 percent.

What does all of this mean?  Mark Weisbrot explains as follows:

As the New York Times reported on [August 2], the fight in Hungary “reflects a larger struggle that is expected to play out over the next year or so as most European politicians . . . seek to impose fiscal discipline on their increasingly unruly citizens.”

We can only hope that they get more unruly. The governments of Spain and Greece, for example, have a lot more bargaining power and a lot more alternatives than they have been willing to use. It is ironic that a center-right government in Hungary has taken the lead here; but if the socialist governments of Spain and Greece were to stand up to the European authorities and the IMF, they could also rally popular support. And then we would see a new playing field in Europe that would allow for a more rapid recovery, and possibly end the current assault on the living standards of the majority.

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