Sorry, it seems, is not the hardest word for the International Monetary Fund. The Fund’s admittance earlier this week that it erred in its response to the Greek financial crisis is not its first stab at self flagellation.
Though the criticism of the Greek bailout is unusually strong, IMF economists have on occasion been handed the whip by other Fund officials over their handling of its programmes.
Internal reviews found mistakes in earlier high-profile programmes, such as Indonesia’s bailout in the 1990s – over which the Fund came under sharp external criticism for underestimating the economic and political fallout of its measures – and Argentina’s technical assistance at the turn of the millennium. The Fund’s independent watchdog also criticised advisers for bowing to pressure from the British authorities to tone down criticism during Gordon Brown’s stint as prime minister.
Do so many mea culpas from the IMF signal a reluctance from its staff to learn from mistakes? It would appear so. Errors highlighted in the case of Greece have cropped up on earlier occasions.
The IMF has acknowledged that its gross domestic product projections were too optimistic for both Greece and Indonesia. Its recalcitrance in accepting the need for writedowns on government debt was also flagged by an internal review into the crisis in Argentina.
Jens Larsen, chief European economist at RBC Capital Markets who was seconded to the IMF during his time as a Bank of England employee, noted: “There is always a tendency to say that, in retrospect, a restructuring should have been done earlier.”
However, both errors may owe more to the nature of the Fund’s work than a stubbornness to learn from its mistakes. The Fund must design programmes in difficult circumstances, often when there is, what Mr Larsen termed, “an almost inevitable collision” between taking tough – but possibly necessary – action and shoring up confidence.
ECB president Mario Draghi on Thursday highlighted the difficulties facing policy makers at the time of the Greek bailout, saying: “We cannot forget that four or five years ago, when the discussions about the adjustment in Greece were taking place, the climate was, in general, much worse. There was a fear of contagion there and very high volatility. That is, in a sense, where the fragmentation of the euro area really started.”
When crises rage, restructuring government debt and forecasting a sharp contraction in economic activity could further undermine confidence and trigger the sort of contagion that Fund bailouts are supposed to stop.
Ousmène Mandeng, a former IMF economist, said: “There is a bias towards over-optimism. But how low can you be? It’s a confidence game . . . You have to be optimistic. You just can’t be unduly optimistic.”
“A better programme design could have been achieved,” he added. “But that is always the case . . . The IMF only comes in when everything has failed. When the Fund comes in, it’s a mess.”
Some of the problems identified in this week’s report are also unique to the Greek situation.
Though they led to a spectacular contraction in GDP, the IMF had far more control over the policies it doled out to Indonesia than in Greece, where it has been forced to share responsibility in an uneasy coalition with the EU Commission and the European Central Bank. As the Fund’s report acknowledged, there was often no clear division of labour.
“The Fund has had less policy freedom,” Mr Mandeng said, adding that, undermined by the Greek government, implementation of the troika’s policies had been “poor”.
The problems surrounding the troika add to a nagging sense that the Fund pulls its punches when policing its largest shareholders: EU members have around one-third of the total voting power on the Fund’s board although their share of the global economy is much smaller.
Despite the earlier criticism that IMF officials had their arm twisted by the Gordon Brown-led government, it appeared last month that UK officials had again managed to get the Fund to play down any doubts they might have over Britain’s economic policies.
Explicit criticism of a large country hardly ever occurs in official IMF documents, even though some senior Fund officials question the degree to which European economies such as the UK have pursued fiscal retrenchment.
The barbed response of Olli Rehn, the European Commission’s economic chief, to the IMF report suggests that, even if the Fund wishes to avoid the mistakes that have arisen from its uneasy relationship with Brussels, if it is ever required to bail out the economy of a major shareholder again, it will struggle to do so.
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