World Bank-IMF Meetings 2011: How the Mighty Have Fallen

For decades at the annual meetings of the World Bank and the International Monetary Fund the heads of these two institutions lectured the representatives from developing countries on how to manage their economies, from the macro of balancing budgets to the micro of privatizing public sector enterprises.  Thusly imparting the enlightenment of sound policy, the Fund and Bank expected those representatives to return to their countries and dutifully implement their instructions.  Those that did not could with few exceptions expect quick discipline in the form of strict conditionalities or suspension of current loan programs.

Then, in 2008 something happened that the IFI mainstreamers never expected:  a near-catastrophic financial collapse in the United States that spread through the developed world like an earthquake with repeated after-shocks.  The collapse was surprising and embarrassing in equal measure because the Bank and Fund had for two decades used conditionalities to impose this same US banking model on developing countries.  Suddenly those who had sung the virtues of inflation targets faced a problem new to them, deflation.  To quote Larry Elliot in The Guardian (25 September 2011):

In the days before sub-prime mortgages and collateralised debt obligations became part of common parlance, the annual gatherings of the International Monetary Fund and the World Bank had a distinct rhythm. Finance ministers from western countries would jet into Washington, spend half an hour slapping each other on the back about how well things were going, then turn their attention to the problems of sub-Saharan Africa.

Having preached to the feckless leaders of the developing world that financial deregulation, balanced budgets and tight monetary policy would bring growth and prosperity, the First World policy makers found themselves with double-dip recession, and pending sovereign debt default, accompanied by double-digit unemployment and fiscal deficits.  Instead of inflation in Turkey or debt default in Latin America, the topics of the annual meeting were the uncertain future of the Euro and excessive fiscal austerity in Great Britain.

To make matters all the more embarrassing to the professors of macroeconomic orthodoxy, while their countries stagnate and decline their formerly feckless pupils enjoy largely uninterrupted prosperity, as the graphic below shows.  Four lines give the average for the United States and Japan, the five largest Western European countries, the mega-growers China and India, and six other developing (“emerging”) countries.

For China and India there was no crisis, growth hardly dipping during the Great Recession.  The group of other developing countries after three quarters of decline in 2009 returned to robust growth in the fourth quarter (over four percent).  By contrast, in that same fourth quarter the rates for the United States, Japan and the large West European countries were negative (Germany the least so at -0.6 percent).  The contrast appears even greater for the period as a whole.  Including the quarters of severe global recession, China and India in no period had a growth rate below five percent.  For the six other developing countries only two had average rates below three percent in any quarter after 2008 (Chile and Korea). Among the “advanced” countries the rule was negative growth rates or at best rates not much different from zero (Germany and France).

 

Quarterly GDP Growth (annualized and seasonally adjusted) for Major Developed and Developing Countries, 2008-2011

Notes: Average rates for the entire period given in legend. WEur(L) includes France, Germany, Italy, Spain and the United Kingdom DvC includes Argentina, Brazil, Chile, Indonesia, South Korea and Turkey. Source: http://www.stats.gov.cn (China), http://7economy.com/archives/8269 (India), www.oecd.org (all others).

Why have the policy tutors performed so miserably and the pupils so brilliantly?  Since these developing countries tend towards export promotion, one might expect the miserable performance of the United States, Japan and Western Europe to have a severely negative impact.  However, the developing countries had shifted trade away from the developed countries to among themselves, though the percentage remains low at about fifteen percent (http://www.oecd.org/dataoecd/30/50/37400725.pdf).

The most important explanation is domestic economic policies, which have been growth enhancing in the developing countries and growth suppressing in the United States, Japan and Western Europe.  In the case of China expansionary macroeconomic policy with a strong component of public investment continues to drive phenomenon growth rates, with a strong element of exchange rate management.  Growth has resulted from extraordinary capital inflow, aggressively expansionist policies and tight government regulation of markets.  With foreign capital flowing in, no worry in Beijing as to what financial markets think about inflation rates.

India has been a more complex story, with considerably less foreign investment and far less merchandise export dependence than China.  Recent statistics show merchandise exports 13-14 percent of GDP in India with China closer to twenty percent.  For both countries the export share in 2010 was substantially below its level in the mid-2000s, with growth almost unchanged.  Exports explain neither China’s nor India’s continued strong growth, nor has it been the result of fiscal “prudence”.  India can boast or blush  over a public sector deficit close to five percent of GDP (by the official statistics).  Until quite recently Chinese fiscal statistics were a state secret, which is an innovative way to prevent concerns in “financial markets”.  This lack of “transparency” does not appear to have undermined “investor confidence” as the foreign investments roll in.  High domestic rates of investment provide much of the explanation of India’s growth boom, from less than 25 percent of GDP in the 1990s, to over thirty percent in the second half of the 2000s.

Common to the other six developing countries are exactly those sins/virtues absent in the “advanced” countries:  the willingness to intervene with growth-enhancing policies, among which are capital controls (Argentina, Brazil, Chile and Korea) and fiscal expansion (Argentina, Chile, Indonesia and Korea).  After implementing a strict macro regime to end hyperinflation, Turkish economic policy under the present government has been notably interventionist. These strong growth rates across eight developing countries should be compared to  the miserable performances of two other countries with governments faithful to neoliberal ideology, Mexico and South Africa [I can supply references by country on request].

After imposing via the Bank and the Fund structural adjustment and stabilization packages to generate the “lost decades” of no growth in Latin America and the sub-Saharan region, it would appear that governments in Japan, the United States and Western Europe are intent upon repeating that experience at home.  I had always assumed that the neoliberal anti-growth Washington Consensus macro policies were always subject to the caveat, “don’t try this at home”.  How wrong I was.  Not just the George Osbornes of this world, but also the Barack Obamas actually believe it and are trying it at home.