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Unachieved stability

April 22, 2013

ACCORDING to a report by the Independent Evaluation Office of the International Monetary Fund (IMF) a couple of years ago, Pakistan is one of the “prolonged” users of the Fund’s resources. In other words, it is among those countries which have been under IMF-supported programmes for seven or more years in a 10-year period.

Overall, Pakistan has been under IMF programmes almost continuously since the late 1980s, with only a small gap during the first decade of the new millennium.

Towards the end of the 1970s, and especially after the Third World debt crisis of the 1980s, the IMF enhanced its role through its structural adjustment window, to provide a cushion to crisis-hit countries, in terms of balance of payments support, and through policy prescription in the shape of conditions — the observance of policy benchmarks and performance criteria.

This was in order to help bring about improvement in the macroeconomic situation, so that the recipient country could move towards a sustainable economic growth trajectory.

Given the ever-increasing number of developing countries utilising Fund resources at one time or another since the 1980s, research literature has focused on understanding the impact of programmes on the economic performance of recipient countries.

Sadly, three decades down the line, research has found that most programme countries were not able to achieve macroeconomic stability on any sustained basis. Most research literature concludes that Fund programmes at best have been growth-neutral, along with having a mixed impact in terms of balance of payments.

The impact on inflation has been more or less neutral, since reductions in the rate were quickly matched by increases. Lack of growth meant diminished effects on poverty alleviation and income inequality reduction.

Given the low level of programme success overall, literature recommends that firstly the Fund revisit how programmes have been designed and implemented, especially with regard to prolonged users. Secondly, it points out the importance of understanding the role played by incomplete programmes in the overall low success rate — an area that remains under-researched.

Research has also raised concerns as to why the Fund entered into programmes with member countries so quickly after the end of one programme, especially if it had been unsuccessful, as in Pakistan’s case.

Moreover, thinkers like Stanley Fisher recommend to the Fund to come up with some kind of penalty for those who want to enter another programme after having failed to complete a previous one. Research consensus tends to indicate that the Fund needs to tread more intelligently — and completely on the basis of technical merit — the line between supporting countries returning to the IMF, and the ones that are getting into the habit of finding ‘easy money’ and remaining irresponsible in their fiscal affairs (in turn, raising the problem of ‘moral hazard’).

Orthodox/neo-classical economics has more or less remained the underlying basis of IMF stabilisation frameworks, a school of thought that has come under severe criticism by heterodox literature in economics, headed by a new wave of institutional economics, with thinkers like Douglas North, Oliver Williamson, Daron Acemoglu, and James Robinson.

They have put into perspective the importance of a world where individuals conduct transactions in an incomplete information environment, and in turn, have to incur costs to gather more information about the field in which they are working.

Hence, the role of the state is important in such a market to reduce these costs and to provide incentives for creativity through protection of property rights and enforcement of contracts; with consequences in terms of higher investment, and economic growth.

Therefore, in order to reach the above-mentioned objectives, there arises the need to have both efficient formal institutions — rules, regulations, constitutions — and conducive informal institutions — customs, norms, habits, etc. Also, the political economic context needs to be brought into the picture for making frameworks realistic and doable in a quick and smart way.

Research has indicated that many of the countries that have undergone an ‘institutional transition’, that is have been able to improve and sustain high levels of institutional quality (measures to assess this have included governance-related indicators, political risk indicators, business and investment climate etc) are the ones who have seen an improvement in their macroeconomic indicators.

To be fair, the Fund has been looking inwards, especially since the start of the new millennium. Among other efforts, it has been trying to deal with its negative image of hammering conditions on programme countries by pursuing recipient countries to take ownership of the programme’s content.

Having said that, research indicates there is still a long way to go for the Fund, especially in terms of reassessing the behavioural assumptions of its financial programming framework. As Pakistan is most likely to embark on negotiations with the Fund for yet another programme, it presents a huge opportunity for both to reflect on the scope, design and implementation of such a programme.

Overall, a macroeconomic framework that could most probably work will depend on the strength of its being context-specific, backed by conducive institutions, and supported by a more selfless class of political and economic elites.

In this sense, the debate on an economic reform agenda that brings sustained macroeconomic stability, allows the recipient country to break free from the prolonged user syndrome, and, which is pro-growth, will have to shift to an economic framework that puts institution-building centre stage. Macroeconomic indicators are only the consequences — let’s tackle the causes.

The writer is an economist focusing on institutional change and macroeconomic stabilisation.