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How Much has the IMF Changed in Response to the Global Crisis?

Author(s): Matías Vernengo

Has Olivier Blanchard managed to change the IMF?

From Triple Crisis:

Following the 2008 Global Crisis the notion that the International Monetary Fund (IMF) has moved away from orthodox views on a range of issues, but particularly regarding the need for austerity, has been pervasive. For example, Paul Krugman has argued, in his influential blog, that Olivier Blanchard, IMF’s director of research (or economic counselor) is “helping make at least one international institution less austerity-mad than the others.”

So what is this new view, exposed by Blanchard? For example, in the preface to the last World Economic Outlook, Blanchard tells us that:

Potential growth in many advanced economies is very low. This is bad on its own, but it also makes fiscal adjustment more difficult. In this context, measures to increase potential growth are becoming more important—from rethinking the shape of labor market institutions, to increasing competition and productivity in a number of nontradables sectors, to rethinking the size of the government, to examining the role of public investment.

Note that in neoclassical (or mainstream) economics speak, potential growth is supply-side determined. That’s why the reforms would be less regulation of labor markets (to allow firms to hire workers for a lower wage), reduced regulation (to generate incentives for firm entry to increase competition), and reduced size of the public sector (that’s what “rethinking” means; nudge, nudge, wink, wink). These policies are needed to boost the supply capacity of the economy, its “potential” or “natural” output. Demand expansion, in the form of more spending and fiscal deficits cannot be pursued, since the growth of potential output is “very low.”

These are, in fact, the same neoliberal reforms that the IMF has always supported, and that since the 1990s have been referred to as the Washington Consensus.

 And there is no doubt that there was no conceptual change in the IMF’s view of how the economy works, and the role of the “natural rate.” As I noted, in a recently published paper, Blanchard said back in 2010:

It is important to start by stating the obvious, namely, that the baby should not be thrown out with the bathwater. Most of the elements of the pre-crisis consensus, including the major conclusions from macroeconomic theory, still hold. Among them, the ultimate targets remain output and inflation stability. The natural rate hypothesis still holds, at least to a good enough approximation…  Stable inflation must remain one of the major goals of monetary policy. Fiscal sustainability is of the essence.” [Emphasis added]

The natural rate hypothesis holds up, meaning only deregulation and proper incentives to rational profit-maximizing agents can boost growth, and demand expansion beyond that limit is futile. Demand cannot, as in heterodox demand-led growth models, change the capacity limit of the economy. Of course, as Krugman would make you believe, the IMF has revolutionized macroeconomics by accepting that in a “liquidity trap” (that’s it, in Krugman’s view, when the rate of interest is close to zero), there is room both for some additional fiscal policy, and for an inflation target above 2 percent (Blanchard has outrageously asked for 4 percent). Paradigm shifting stuff indeed.

But seriously, you may very well ask, whether the IMF has been cautious (to the point of being imperceptible) on the theoretical front, only to provide more space for more relevant change in their policy advice to countries facing external crises.

However, one would be hard pressed to find these policy changes too. Here is what the Greek government has said in their last letter of intent:

We registered a significant primary fiscal surplus in 2013 in program terms, well above target and ahead of schedule. The external position has also improved, with the current account showing a surplus for the first time in decades.


The plan is to intensify the fiscal surpluses, increasing taxes and “reforming the public administration,” the latter being code word for cutting spending. That is, fiscal austerity. By the way, the letter of intent basically reports on policies that have been agreed upon with the IMF.


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