IMF Survey : Evolution Not Revolution: Rethinking Policy at the IMF

IMF News, June 2, 2016

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Publication date: June 2, 2016.
Context: The global financial crisis prompted a broad rethink of macroeconomic and financial policies in the global academic and policy community.
Perspective: Eight months into the job as IMF Chief Economist, Maury Obstfeld reflects on the IMF’s role in the rethinking and in furthering economic and financial stability.
Core message: The process is described as evolution, not revolution—the Fund continues to base its approach on open and competitive markets, robust macro policy frameworks, financial stability, and strong institutions, while incorporating important new insights.

Findings:
- The Fund favors fiscal policies that support long-term growth and equity.
- It is misleading to frame the Fund as categorically for or against austerity; "Nobody wants needless austerity."
- Governments must live within their means on a long-term basis or face some form of debt default, which is typically quite costly for citizens, especially the poorest. This is characterized as a fact, not an ideological position.
- Research indicates that when public debt rises to levels that risk losing market access, subsequent forced tightening often causes the poor to suffer disproportionately.
Operational guidance / policy recommendations:
- Countries need credible medium-term fiscal frameworks that leave markets confident the public debt can be repaid without very high inflation.
- Such frameworks typically provide room to soften slumps through fiscal means, including automatic stabilizers.
- Where economies face limits to sustainable pain, the Fund recommends debt re-profiling or debt reduction, which require creditors to bear part of the cost of adjustment—this is the approach the Fund is recommending for Greece.
- Policy advice should vary by country and situation; always consider the most vulnerable when planning fiscal adjustment.

Background:
- Past crises showed capital inflow surges can fuel domestic credit booms and financial instability, leaving economies exposed when flows reverse.
Institutional development:
- In 2012, the Fund adopted an "Institutional View" on conditions in which measures limiting capital flow could be helpful, based in part on Research Department work.
Current work and challenges:
- The Fund is undertaking a stocktaking of experience with capital flow measures in recent years and is asking if and how the Institutional View should be amended.
- One challenge is incorporating the sometimes complementary role of macroprudential policies.
Framing: This work exemplifies learning from experience and letting Fund thinking evolve accordingly.

Findings:
- In the postwar period, trade has been a remarkable engine of global growth and can continue to be so.
- The recent slowdown in trade growth is not fully understood; possible reasons include low global investment, the commodity-price decline, and the possible contraction of global value chains.
- The deceleration is seen as concentrated in emerging markets.
Future analysis:
- The Fund will have a much fuller analysis of the causes in the forthcoming October 2016 World Economic Outlook.
Distributional concern:
- Trade's consequences are complex and include changes in income and job distribution that many countries have addressed inadequately, fueling protectionist sentiments.
Summary judgment: The recent slowdown in trade growth "may be more or less worrisome, but it is unlikely to represent good news for anyone."

The Fund seeks to build on experiences in the field and on new research to improve effectiveness in economic surveillance, technical assistance, and crisis response.
The Fund views it as especially important to constantly re-evaluate thinking in light of new evidence given the impacts of its decisions on member countries and the global economic system.

IMF Survey: Evolution Not Revolution: Rethinking Policy at the IMF. June 2, 2016.