Tag: imf

El-Sisi the Reformer?

Is Egypt’s economy taking a turn for the better? The government is hosting an economic summit in February next year, aiming to attract foreign investment, with the participation of not just private investors but also of the International Monetary Fund.

[Christine] Lagarde said Egyptian authorities’ “recent reform efforts” were “encouraging” and expressed her hope that participants in the upcoming summit will see how these reforms can “help restore durable economic stability and sustainable growth to Egypt.”

On the surface, it appears that Egypt’s government is making tangible progress addressing the country’s fiscal problem. The planned energy subsidies cuts are under way, although these are also accompanied by tax increases, mainly through a planned introduction of a value-added tax, hikes to tobacco and alcohol taxes and a new tax on capital earnings.

Experience from other countries, most notably from Europe in the aftermath of the global financial crisis, shows that fiscal consolidations that rely on revenue increases lead to worse outcomes than consolidations that consist of permanent reductions to government spending.

But, whatever one thinks about this particular question, there are two additional reasons to be skeptical. First, putting aside the fuel price hikes that have already occurred, much of the praise directed at the Egyptian government presupposes that it will deliver on its promise to slash subsidies by one third in the fiscal year 2014/2015. That would be welcome news but it is worth remembering that similar reform targets were set in the past and were systematically missed:

According to the budget for the past fiscal year, 2013–2014, the subsidies to oil materials were already supposed to be close to EGP100bn ($14bn). Yet, the actual spending was drastically higher, perhaps by as much as an additional EGP70bn ($10bn)

Second, it is deceptive to look at the fiscal question in isolation, as a technocratic problem that can be solved by clever tweaks to existing policies. Egypt’s economic problem is political in nature, and will continue to plague the country as long it is governed by a kleptocratic, unaccountable elite.

The government – more specifically its military forces – own and run a large part of the economy, shielded from competition, and generating rents. The military coup last year led to the strengthening of the opaque network of cronyism that has long characterized military-run enterprises. Some estimates suggest that as much as half of last year’s stimulus, worth around $4bn and funded predominantly by funds from the United Arab Emirates, has been directed at military-controlled enterprises that became involved in road construction and other forms of infrastructure works, displacing the traditional construction companies.

Just as it was a mistake to see Vladimir Putin as a market reformer in the early 2000s, notwithstanding some of the real policy shifts (such as the introduction of a flat tax), it would be a mistake to see President Abdel Fattah el-Sisi as somebody aiming to open Egypt’s economy to competition and raise the living standards of Egyptians through increased economic freedom. If economic reforms occur, they will occur with the narrow goal of strengthening his hold on power and satisfying the material needs of the generals backing him.

In Egypt, as in other countries of the region, economic and political oppression go hand in hand and are mutually reinforcing. Nothing is a bigger threat to a military dictatorship than an economically empowered citizenry. For this reason, we should not expect genuine reforms to be very high on Mr. el-Sisi’s list of priorities.

Balcerowicz’s Polish Big Bang versus Ukraine

On May 21, 2014, Leszek Balcerowicz will receive the 2014 Milton Friedman Prize for Advancing Liberty during a dinner at the Waldorf-Astoria Hotel in New York. The prestigious annual award by the Cato Institute carries with it a well-deserved check for $250,000.

For those who might have forgotten the accomplishments of my long-time friend, allow me to suggest that, in Balcerowicz’s case, a picture is literally worth a thousand words.

But, before the picture, a little background.

In 1989, Balcerowicz became Poland’s Deputy Prime Minister and Finance Minister in Eastern Europe’s first non-communist government since World War II. Balcerowicz held these positions from 1989 through 1991, and again from 1997 through 2000. Subsequently, in 2001, he became the Chairman of the National Bank of Poland, a post he held until January 2007.

A student of the “Five P’s”: prior preparation prevents poor performance; Balcerowicz was ready when he first took office in 1989. Indeed, he pulled his comprehensive economic game plan to liberalize and transform the Polish economy out of his desk drawer and proceeded to implement what became known as the “Big Bang”. As they say, the rest is history.

The results of the “Big Bang” speak for themselves in the accompanying chart. Poland’s economy has more than doubled since the fall of the Soviet Union in 1992, growing at an average annual rate of 4.42%.

What about neighboring Ukraine? The contrast with Balcerowicz’s Poland couldn’t be starker. As Oleh Havrylyshyn, the former deputy finance minister of Ukraine, spells out in his classic book – Divergent Paths in Post-Communist Transformation: Capitalism for All or Capitalism for the Few – Ukraine rejected the Big Bang, free-market approach to reform. In consequence, it has taken a road to nowhere, remaining in the shadow of a corrupt communist system.

Unlike Poland’s prosperity, Ukraine has witnessed a post-Soviet contraction in its economy. Yes, the Ukrainian economy has been contracting at a real annual rate of almost 1% since the fall of the Soviet Union. Accordingly, it is smaller today in real terms than it was in 1992.

Many think the International Monetary Fund, which just ponied up $17 billion for Ukraine, will turn things around. Don’t hold your breath. Over the years, the IMF has dispensed its medicine and money in Ukraine with negative results.

When it comes to much-needed liberal economic reforms, one has to do something big; something that captures the public’s imagination and garners wide support. Unfortunately, Ukraine lacks a clear economic game plan – one with wide popular support.

Another Defective IMF study on Inequality and Redistribution

IMF Warns on the Dangers of Inequality,” screams the headline of a story by Ian Talley in the Wall Street Journal. The IMF – which Talley dubs “the world’s top economic institution”– is said to be “warning that rising income inequality is weighing on global economic growth and fueling political instability.” 

This has been a familiar chorus from the White House/IMF songbook since late 2011, when President Obama’s Special Assistant David Lipton became Deputy Managing Director of the IMF.  It echoes a December 2012 New York Times piece, “Income Inequality May Take Toll on Growth,” and a January 14, Financial Times feature, “IMF warns on threat of income inequality.”  This isn’t news.

Talley writes, “The IMF … says advanced and developing economies need to raise more revenues through taxes, focusing on progressive taxation that moves more of the burden for social security, health care and other state benefits to the high-income earners.” That isn’t news either.  The IMF has an ugly history of advising countries to raise tax rates, with disastrous results.  The inequality crusade is just a new pretext for old mistakes.

Can We Have An Evidence-Based Debate about the Future of the IMF?

On Saturday, March 30, the New York Times ran a curious editorial about the International Monetary Fund (IMF). The piece makes the case for a quick ratification of IMF’s quota reform by the United States, which it pictures as being in America’s interest. Unfortunately, the article is somewhat casual when it comes to the evidence it presents in support of its argument.

Firstly, the authors claim that the IMF

“has helped stabilize the global economy, most recently by providing loans to troubled European countries like Greece and Ireland.”

It is far from obvious that the repeated bailouts to Greece, in which the IMF has participated, have done much to calm the financial markets or to help the country’s economy. Recall that Greece is still going through a recession deeper than the Great Depression, with youth unemployment at around 60 percent, and no signs of recovery.

Secondly, there is the following assertion:

“[T]he fund’s capital […] has fallen sharply as a percentage of the global economy in the last decade.”

That is misleading as it does not take into consideration the increased use of the ‘new arrangements to borrow,’ (NAB) through which the Fund’s lending capacity was tripled in 2009, from $250 billion to $750 billion. That represented a historically unprecedented hike in the amount of resources available to any international organization.

Thirdly, the statement that the increase in quotas will happen “without increasing America’s financial commitment to the organization” is disingenuous. While the increase in quotas is to be accompanied by a reduction in the use of NAB’s – making it appear fiscally neutral on surface – the deployment of the NAB’s is accompanied by a stringent approval procedure, whereas the quotas can be deployed towards various lending purposes at the Fund’s discretion. Greater reliance on quota funding would thus enable the Fund to make bigger claims on the public purse, with less accountability.

A debate about the future of the IMF is long overdue in this country. But it should be a debate based on a careful examination of the Fund’s track record in mitigating financial crises around the world. To flatly assert, like the editorial does, that “[i]ncreasing the fund’s resources will ensure that it can respond quickly to another wave of turmoil in Europe or elsewhere” does not do the job. If anything, that claim - like much of the editorial - only strains credulity.

Cyprus: Follow the Money

While the Cypriot Parliament may be dragging its feet on a proposed rescue plan for Cyprus’ banks, the country ultimately faces a choice between Brussels’ bitter pill…and bankruptcy. Cyprus’ newly-elected President, Nicos Anastasiades, has quite accurately summed up the situation:

“A disorderly bankruptcy would have forced us to leave the euro and forced a devaluation.”

 Yes, Brussels and the IMF have finally decided to come to the aid of the tiny island, which accounts for just 0.2% of European output – to the tune of roughly $13 Billion. But, this bailout is different. Indeed, the term “bail-in” has emerged, a reference to the fact that EU-IMF aid is conditional upon Cyprus imposing a hefty tax on its depositors. Not surprisingly, the Cypriots, among others, are less than pleased about this so-called “haircut”.

Still, the question lingers: Why now? The sorry state of Cyprus’ banking system is certainly no secret. What’s more, the IMF has supported a “bail-in” solution for some time. So, why has the EU only recently decided to pull the trigger on a Cyprus rescue plan?

One reason can be found by taking a look at the composition of Cyprus’ bank deposits (see the accompanying chart).

 

There are two main take-aways from this chart:

  1. European depositors’ money began to flow out of Cyprus’ banks back in 2010. Indeed, most European depositors have already found the exit door.
  2. Over that same period, non-Europeans (read: Russians) have increased their Cypriot exposure. If the proposed haircut goes through, Russian depositors could lose up to $3 billion. No wonder Valdimir Putin is up in arms about the bail-in.

Perhaps a different “red telephone” from Moscow will be ringing in Brussels soon.

Europe’s Self-Inflicted Decline: French Taxing, Italian Regulating, Greek Mooching, and IMF Economic Illiteracy

Every day brings more and more evidence that Obamanomics is failing in Europe.  I wrote some “Observations on the European Farce” last week, but the news this morning is even more surreal.

Let’s start with France, where I endorsed the explicit socialist over the implicit socialist precisely because of a morbid desire to see a nation commit faster economic suicide. Well, Monsieur Hollande isn’t disappointing me. Let’s look at some of his new initiatives, as reported by Tax-News.com.

The French Minister responsible for Parliamentary Relations, Alain Vidalies, has recently conceded that EUR10bn (USD12.7bn) is needed to balance the country’s budget this year, to be achieved notably by means of implementing a number of emergency tax measures. …The government plans to abolish the exemption from social contributions applicable to overtime hours, expected to yield a gain for the state of around EUR3.2bn, and to subject overtime hours to taxation, predicted to realize approximately EUR1.4bn in additional revenues. Other proposed measures include plans to reform the country’s solidarity tax on wealth (ISF), to cap tax breaks at EUR10,000, to impose a 3% tax on dividends and to increase the inheritance tax as well as the tax on donations. …French President Hollande announced plans during his election campaign to reform ISF. Holland intends to restore the wealth tax scale of between 0.55% and 1.8%, in place before the former government’s 2011 reform, to be applied on wealth in excess of EUR1.3m. Currently a 0.25% rate is imposed on net taxable wealth in excess of EUR1.3m and 0.5% on net taxable assets above EUR3m.

France already has the highest tax burden of any non-Scandinavian nation, so why not further squeeze the productive sector? That’s bound to boost jobs and competitiveness, right? And more revenue as well!

In reality, the Laffer Curve will kick in because France’s dwindling productive class isn’t going to passively submit as the political jackals start looking for a new meal.

But while France is driving into a fiscal cul-de-sac, Italian politicians have constructed a very impressive maze of red tape, intervention, and regulation. From the Wall Street Journal, here is just a sampling of the idiotic rules that paralyze job creators and entrepreneurs:

Once you hire employee 11, you must submit an annual self-assessment to the national authorities outlining every possible health and safety hazard to which your employees might be subject. These include work-related stress and stress caused by age, gender and racial differences. …Once you hire your 16th employee, national unions can set up shop, and workers may elect their own separate representatives. As your company grows, so does the number of required employee representatives, each of whom is entitled to eight hours of paid leave monthly to fulfill union or works-council duties. …Hire No. 16 also means that your next recruit must qualify as disabled. By the time your firm hires its 51st worker, 7% of the payroll must be handicapped in some way, or else your company owes fees in kind. …Once you hire your 101st employee, you must submit a report every two years on the gender-dynamics within the company. This must include a tabulation of the men and women employed in each production unit, their functions and level within the company, details of their compensation and benefits, and dates and reasons for recruitments, promotions and transfers, as well as the estimated revenue impact. …All of these protections and assurances, along with the bureaucracies that oversee them, subtract 47.6% from the average Italian wage, according to the OECD. …which may explain the temptation to stay small and keep as much of your business as possible off the books. This gray- and black-market accounts for more than a quarter of the Italian economy. It also helps account for unemployment at a 12-year high of 10%, and GDP forecast to contract 1.3% this year.

You won’t be surprised to learn that the unelected prime minister of Italy, Mr. Monti, isn’t really trying to fix any of this nonsense and instead is agitating for more bailouts from taxpayers in countries that aren’t quite as corrupt and strangled by red tape.

Monti also is a big supporter of eurobonds, whichs make a lot of sense if you’re the type of person who likes co-signing loans for your unemployed alcoholic cousin with a gambling addiction.

But let’s not forget our Greek friends, the ones from the country that subsidizes pedophiles and requires stool samples from entrepreneurs applying to set up online companies.

The recent elections resulted in a victory for the supposedly conservative party, so what did the new government announce? A flat tax to boost growth? Sweeping deregulation to get rid of the absurd rules that strangle entrepreneurship?

Nope. In addition to whining for further handouts from taxpayers in other nations, the Wall Street Journal reports that the new government has announced that it won’t be pruning any bureaucrats from the country’s bloated government workforce:

Greece’s new three-party coalition government on Thursday ruled out massive public-sector layoffs, a move that could help pacify restive trade unions… The new government’s refusal to slash public payrolls and its demands to renegotiate its loan deal comes just as euro-zone finance ministers meet in Luxembourg to discuss Greece’s troubled overhauls—and possibly weigh a two-year extension the new government is seeking in a bid to ease the terms of the austerity program that has accompanied the bailout. …Cutting the size of the public sector has been a top demand by Greece’s creditors—the European Union, European Central Bank and International Monetary Fund—to reduce costs and help Greece meet its budget-deficit targets needed for the country to get more financing. So far, Greece has laid off just a few hundred workers and failed to implement a so-called labor reserve last year, which foresaw slashing the public sector by 30,000 workers.

Gee, isn’t this just peachy? Best of all, thank to the IMF, the rest of us are helping to subsidize these Greek moochers.

And speaking of the IMF, it just released a report on problems in the eurozone that makes zero mention of excessive government spending or high tax burdens. The tax-free IMF bureaucrats do claim that “Important actions have been taken,” but they’re talking about bailouts and easy money:

The ECB has lowered policy rates and conducted special liquidity interventions to address immediate bank funding pressures and avert an even more rapid escalation of the crisis.

And even though the problems in Europe are solely the result of bad policies by member nations’ governments, the IMF says that “the crisis now calls for a stronger and more collective effort”:

Absent collective mechanisms to break these adverse feedback loops, the crisis has spilled across euro area countries. Contagion from further intensification of the crisis—including acute stress in funding markets and tensions involving systemically-important banks—would be sizeable globally. And spillovers to neighboring EU economies would be particularly large. A more determined and forceful collective response is needed.

Let’s translate this into plain English: The IMF wants more money from American taxpayers (and other victimized producers elsewhere in the world) to subsidize the types of statist policies that I described above in places such as France, Italy, and Greece.

I’ve previously explained why conspiracy theories are silly, but we’ve gotten to the point where I can forgive people for thinking that politicians and bureaucrats are deliberately trying to turn Europe into some sort of statist dystopia.

Confusion over Confusion

On August 29th, I penned “Lagarde Confused, Again.” In it, I argued that Christine Lagarde, the new managing director of the International Monetary Fund, misdiagnosed Europe’s banking crisis.

Ms. Lagarde’s assertion that Europe’s banks “need urgent recapitalization” is based on faulty economics. While the higher capital-asset ratios that Ms. Lagarde extols are intended to strengthen banks (and economies), higher ratios destroy money and are “deflationary.” This is not what a struggling Europe needs. Indeed, higher capital-asset ratios imposed on Europe’s banks at this juncture would virtually ensure that Euroland would take another dive. In consequence, some of the banks that were made “safer” by Ms. Lagarde’s medicine would go to the wall.

Today, the Wall Street Journal’s lead editorial “A TARP for Europe?” adds to the confusion by enthusiastically endorsing Ms. Lagarde’s prescription.