Why the IMFs advice to developing countries seems to come from a remote place.
Particularly since 2008,the IMF has been providing useful service to the global economy. In its annual meetings last month,the IMF cautioned the major economies about the persistent risks,emerging challenges and weak recovery. While the IMF generally gives good advice,in some cases it is clear that there is a lack of practical experience. To illustrate,practitioners from any country would know that when faced with sudden capital movements,capital controls and not quick attempts to erect macro prudential norms are the only effective tools. Similarly,earlier,there was a reluctance to accept that inflation targeting was unfeasible for many countries. This late recognition of simple facts can do immense harm to the countries being advised.
The other area is forecasts,especially for developing countries,which are frequently changed and can have financial implications for markets and ratings. Illustratively,Finance Minister P. Chidambaram had to contest the latest estimates made by the IMF on Indias growth rate.
The IMFs annual report could shed some light on these problems. Nearly 70 per cent of the managerial staff 332 out of a total 2,518 officials continues to be from the developed countries. Of the 777 doctorates working at the IMF,480 are from US institutions,224 from Europe and 21 from Canada. No doubt,as the professional training is similar,so is the diagnosis of different problems faced by a heterogeneous set of developing countries. In most cases,neither the US academia nor such trained PhD students are familiar with the contextual terra firma of developing countries. Hence,multi-spectrum,generalised advice based on evidence gathered in advanced economies is repackaged and offered to developing countries. It is not surprising,then,that the IMFs advice to developing countries is criticised as impractical by local economists.
To ensure that the IMFs prescriptions can be realistically implemented in different economies,it might be useful to have a healthy blend of mid-career experts hired from member countries and fresh recruits from university. As such,it would be relevant to learn what percentage of the professional staff in functional and area departments of the IMF have the experience of grappling with real-life economic situations in a particular country. This could ensure improved credibility and acceptance of the IMFs recommendations.
Given that the global economy is still in a precarious position,the IMFs limited resources have to be utilised effectively. In this context,since most country data is available on the internet and video conferencing is always an option,the IMF could consider effective alternatives to substantial travel expenditure. Actually,to inspire confidence,it could benefit from a larger presence in the region under scrutiny. At present,the IMF,unlike the World Bank,mainly operates from its Washington DC headquarters and its staff pays brief visits to collect interview-based information from officials in a country. These short visits may not realistically capture the ground realities,which reflects in the superficiality of the recommendations. To effectively understand the local economy,more IMF economists could be either located in or closer to the countries they advise. The argument that a single resident representative for a group of countries is sufficient to collect local information failed the IMF during the Asian crisis of 1997-98 and the recent crisis. Therefore,spreading out in the regions with more regional offices could help the IMF collect robust inputs and provide relevant advice. It would have been a more efficient use of resources to buy office space in countries that require scrutiny. Also,the IMF could call country visits of its officials a more value-neutral consultation,instead of the current mission,and conduct business in a friendlier manner. A clearer indication of the work ethics and accountability norms to which IMF officials are bound,especially in the countries they advise,would also lend credibility to the institutions role in member countries.
Finally,would it be more useful if the IMF,which has access to economic ministries in all countries,identified potential areas and opportunities to kick-start growth,globally?
The writer is RBI Chair Professor of Economics,IIM Bangalore. Views are personal