For the past 25 years or so the IMF has used its weight to push economic austerity on countries that experienced financial crises. Now its Chief Economist calls for countries to raise their inflation targets by 2 to 4 percent. Is this a change in economic orthodoxy or might politics just play a role here? My friend and colleague Jim Vreeland, one of the world’s foremost experts on the politics of IMF lending, puts it this way:
The hypocrisy did not go unnoticed by people of the developing world, who grew to hate the IMF, some seeing it as a tentacle of Western imperialism. The debacle that resulted from IMF policy advice during the East Asian Financial Crisis was the last straw. Nearly all emerging market countries and even some poorer countries vowed they would never again borrow from the IMF. During the first decade of the 2000s, the IMF had to go on an austerity program of its own. With few countries borrowing or – importantly – repaying their loans with interest, the Fund did not have the funds to run its operations.
Well, now the shoe is on the other foot. The current economic crisis has driven many countries back to borrowing from the IMF, and the international organization is back in business. For the first time in a long time, however, its customers include advanced industrial economies. And suddenly, economic austerity isn’t looking like the answer.
See here for more insightful analysis from Vreeland.