Alexandra Zeitz, St. Antony’s College, Oxford
Speakers: Adam Bennett, St. Antony’s College, Oxford and Robin McConnachie, Oxford Analytica
Chair: Stewart Fleming, St. Antony’s College, Oxford
When the IMF is called in during a time of economic crisis, the programme agreed is often politically contentious. One of the defining questions in the aftermath of the IMF’s intervention is frequently: “did it work?” In late November, PEFM heard from Adam Bennett, formerly of the IMF, about the effectiveness of IMF programmes in a region where the Fund has played a prominent role in recent decades: the Balkans. Robin McConnachie, who has acted as an advisor to governments in the region, contributed his insights into what makes for successful reform programmes.
How does one capture the impact of an IMF programme? Bennett explained that the Fund itself has grappled with the numerous measurement challenges of evaluating effectiveness. Simple measures comparing indicators before and after an IMF programme neglect the counterfactual of how the country would be faring in the absence of an IMF programme. Comparisons between countries with and without IMF programmes cannot account for the fact that countries with IMF programmes often faced worse conditions than those that received no programme.
The Fund has responded to these measurement concerns by building complex models that attempt to capture the impact of policy interventions. These models, however, can only be as accurate as the assumptions they are built on. For his evaluation of the IMF’s programmes in the Balkans, therefore, Bennett used simple comparisons between those Balkan countries with and without IMF programmes and contrasted countries’ actual performance with the targets set in the programme.
In this snapshot evaluation of IMF interventions in the Balkans, Bennett showed that programmes appear, at first glance, to have had a negligible impact. After the financial crisis, growth fell from pre-crisis rates of 5% to 0% across the region, regardless of whether countries had a programme with the IMF or not. Inflation rates across the region averaged approximately 4-5% over the pre- and post-crisis period, with no discernible difference between those countries with and without programmes. Similarly, countries across the region seem to have had broadly similar current account positions in the aftermath of the crisis, regardless of whether the IMF intervened.
Yet, Bennett presented evidence that suggests IMF programmes were in fact able to avert even worse crises in those countries in which they operated. When accounting for the impact of foreign direct investment flows, it appears that the balance of payments position of those economies that ultimately received IMF intervention were weaker than those that received no programme. Absent exceptional financing, and without any private capital inflows (which had dried up) these balance of payments deficits would have been forced immediately to zero, either through a severe contraction of domestic demand or by a large devaluation (for countries with independent currencies), or both, and thereby generate a much worse interim growth outlook and/or inflation scenario than in fact occurred.
Bennett thus argued that the IMF provided classic balance of payments financing to Balkan economies during the crisis. As set out in the IMF’s Article I, the Fund’s purpose is (inter alia) to make it’s resources “temporarily available” and “under adequate safeguards” (i.e., subject to conditionality) so as to provide its members “with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity”.
In reviewing the trajectory of IMF programmes over recent decades, Bennett highlighted the declining role of stringent conditions, even as the resources provided by IMF programmes in the Balkans grew in the aftermath of the crisis. Tough quarterly and structural performance criteria tapered off in IMF programmes after the mid-2000s, when the IMF responded to the critiques that it had overreached and become excessively intrusive in response to the Asian financial crisis. And yet, from 2011 onwards, there was a noticeable uptick in ‘prior action’ conditions attached to IMF loans: actions the country must take in order to secure disbursement of funds.
Robin McConnachie presented a more critical view of the conditions attached to IMF programmes. Drawing on his experience advising governments on the receiving end of such conditions, McConnachie stressed the importance of local enthusiasm and support in order for reforms to succeed. Securing such support requires diplomatic sensitivity about the internal politics of relevant bureaucracies. Efforts to, for instance, establish a local securities market will be dependent on the backing of a local champion, ideally a cabinet minister. A particularly sensitive relationship is the one between the Central Bank and the Ministry of Finance, both of whom are needed for successful reforms, but who may have built up legacies of mistrust and strained communication.
Though the IMF has corrected these mistakes in later years, McConnachie argued that in the 1990s heyday of post-Soviet liberalization and reform the IMF had often taken a ‘one-size-fits-all’ approach across the Balkan region. As programmes sprang up across the region, young IMF staffers often took the lead, transposing policies that had been successful in one context to a different country. It is not surprising, McConnachie implied, if these programmes struggle to rouse the local enthusiasm required.
Both speakers stressed the importance of good communication. The IMF and local governments must be careful to clearly explain the intended benefits of reforms to the public in order to secure much-needed legitimacy and political support. But this received some push-back from the audience. Communicating the technical or long-term benefits of reforms may ignore the severe costs (even if short-term) that they entail. Reforms, particularly structural ones, will have distributional consequences and unleash political backlash. While the Fund may wish to leave these questions to domestic governments, it cannot wholly insulate itself from the politics of its programmes.