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Friday, 19 April 2013 00:00
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Subbarao has a point when he says IMF did a poor job of predicting the crisis or in offering solutions


Given that the IMF has changed its mind about the desirability of having full capital account convertibility to an Indian-style lesser convertibility, and the Fund nuancing its position on temporary capital controls, it’s not surprising that RBI Governor D Subbarao was quite forthright in his criticism of the IMF. The Fund’s inability to get the size of the sub-prime crisis is well-known and, to cite just one recent instance, it began its predictions for growth in the euro area with a 0.9% projection in April 2012 before coming down to its latest minus 0.3% number.

The biggest blow to the IMF’s credibility, of course, came from its research head Olivier Blanchard releasing a detailed working paper in January saying the IMF had got the ‘fiscal multipliers’—the impact of reducing fiscal deficits on economic growth—horribly wrong. The research paper said the under-estimation during the early part of the European crisis may have been three times. That is, while economists were projecting that a cut in, say Greece’s, government spending by 100 bps would result in a 50 bps fall in GDP, the actual fall in GDP growth was more likely to be 150 bps. That is the reason why the IMF is now in favour of more back-loaded fiscal corrections—witness its muted criticism of the US inability to lower deficits. While this is related to what economists call the liquidity trap—with ample liquidity, interest rate cuts can’t stimulate either investment or consumption, so government consumption is the only solution to keeping demand up—the less developed world can’t but help feel the IMF’s research tends to favour the richer countries.


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