Every two years the IMF publishes its “World Economic Outlook“. (I’ll call it, aptly, WOE) The most recent advanced copy was released last week on the internet. [link], and I suggest that all global investors take a look at it.
I disagree with most of the IMF’s economic worldview and policies, as they are constructed on false Keynesian assumptions, entailing mercantilism, devaluationism, and a bias towards “taxing and spending.” Yet this is precisely why I think that WOE should be read – because it provides a summary of the dangerous “conventional” thinking held by the majority of powerful global policymakers and institutions. If the IMF recommends a policy to a country in its WOE, we can assume that most other countries will pressure that country to accept it.
The WOE’s first and main section is titled “Global Economic Prospects and Policy Challenges.” It contains some useful features, including quick summaries of the economic histories of major and minor economies around the world, as well as some useful historical and projected economic data.
The first part starts off by tackling the challenges of the world’s largest economies: The U.S., Europe, and Japan.
The IMF’s overall theme is that the high-growth U.S. economy needs to be slowed while the slower growth Japanese and European economies need to be accelerated. Or in their words, “The major currency areas will need to continue to pursue policies directed at achieving an orderly rebalancing of growth and demand. While the United States will need to restrain the growth of domestic demand, Europe and Japan will need to ensure that domestic demand grows rapidly.”
In other words, the IMF recommends that currency policies be employed in Robin Hood fashion. The IMF falsely believes that devaluation is “stimulative” while a strong currency is economically “restrictive.” So it seems to be recommending the continuation of a strong dollar, and weak euro, and the initiation of a weaker yen policy.
The IMF is concerned that the U.S. has grown too fast, and recommends that “demand” be constrained by tight (but not too tight) monetary policy and by “resisting calls for tax reductions.” Sounds like the IMF favors Al Gore for president.
Though wanting the U.S. to slow, the IMF is fearful that if the economy slows too fast, the rest of the world’s economies could be undermined, resulting in turmoil. Repeatedly, the IMF warns that the U.S. economy is full of “imbalances” and is particularly concerned about its current account deficit (a.k.a. inward investment surplus).
In Europe, however, the IMF deems tax cuts appropriate: “the central fiscal challenge is to build on ongoing efforts to reduce the tax burden, which remains very high by international standards and undermines incentives and long-term growth prospects. The recent income tax reform in Germany is a major step forward; and the package of tax cuts announced in France is also welcome.” How true. But it seems that this appreciation of “supply-side” economic policy is isolated to this one comment on Europe.
Regarding Japan, the IMF sticks to its long-recommended and long-ineffective policy of “pump-priming” and easy money. “Implementation of a supplementary budget to support public investment beyond mid-2000 will be important to assure continued recovery. Monetary policy should remain accommodative.” The IMF apparently thinks that its previously mentioned economic benefits coming from tax reduction somehow don’t apply to Japan, and blinded by Keynesian economics, doesn’t even mention the possibility that tax cuts and deregulation could promote sustainable economic growth in Japan.
Of course all of the IMF’s policy prescriptions won’t be followed. Some countries will resist its advice, and some will try but fail to implement it. In any case, bureaucracies around the world will be studying WOE carefully. Whether they agree or disagree with the IMF, global investors must understand how the IMF and global leaders view the world’s economies, lest they be surprised by actions taken to change future economic events.
