by A swedish kind of death
Tue May 10th, 2011 at 06:16:05 AM EST
This diary was meant to be called "Getting IMF'd" but apparently right now, within the eurozone, IMF plays the role of slightly less raving mad police officer.
Hence the name. Now to the content.
It has been pointed out that while you learn economics you are best positioned to write clearly about what it means. So I have been thinking about what Getting ECB'd or IMF'd means in economic terms, if we look past the terms of money.
IMF comes in when a country is less rich then it recently was. So what is a rich country?
frontpaged - Nomad
International trade and rent
We need to start from the world perspective. We live in a world with lots of international trade. Now trade is rarely equal, and prices do not converge to a mythical point where demand and supply meets. Trade is often beneficial to both parties, but that benefit is divided in a loopsided manner.
There are a number of ways to get a big slice of the benefits, or to collect rent in econo-speak. One of the most obvious ones is to trade a much wanted commodity, and be the dominating supplier or collaborate with other suppliers in order to keep prices up, lets term this the OPEC-strategy. An other often toted way is to manufacture a product that in quality can not (yet) be copied (German quality). Many countries in Europe are also good at selling the feeling of luxury, which has the advantage of always being more original then any copy (French style). Rent can also be extracted from the system of trade in itself, either by setting the rules to benefit your countries companies (Go, go USA) or by placing the country in a political position that allows trade with partners not willing to trade with each other (Afghanistan, Hong Kong, Finland, Yugoslavia - being a border country is a temporary assignment at best). These are the ones I think of, but surely there are more ways.
So a country that by any means manages to get a big slice of the mutual advantage in any trade deal is a rich one, a country that gets a small share is a poor one.
Who gets ECB'd?
To get to the door of the IMF or the ECB a country must be on the slippery slope down. For some reason its citizens wants more then can be extracted from the system of international trade. Perhaps the leading edge in an industry has been lost (as they tend to be), perhaps the rules of trade has changed. Anyway, the first reaction is to borrow from the country you are importing from, but eventually that route tends to close.
In steps the IMF (or ECB in the euro zone) with an offer: you can borrow money but in return you must effect reforms and you will have to repay the loan. Only problem is that this is like a loan from the mob, the strings attached make it highly unlikely that the principal will ever be repayed.
What does the austerity program mean?
So the country in question has lost that which gave them the ability to extract sufficient rent. Does the ECB then demand a program to find another niche in order to capture more rent? No, no, never.
On the contrary, the austerity strategy is a strategy to lower wages. In order for lower wages to be accepted public services - the parts of the economy that runs mostly for internal consumption and was not a part of the problem - must be slashed. Unemployment must be ramped up, which means that in order to borrow foreign goods les work must be doen within the country. Also control of important natural resources must be handed over, attempts at finding an industrial niche looted, attempts at substituting the imported goods by something done domestically scrapped. And the list goes on.
In short a strategy to compete by low salaries, in effect to try to compete will poor countries. And the only way to compete with poor countries is to become one. If Gordon Ramsey used this on Kitchen Nightmares, every single restaurant he visited would be transformed into a fast-food joint.
In order to make the program a little less unappealing, local big-men gets a small slice of the huge pie an becomes extremely rich. In the short run this is a self enforcing loop as the local big-men, now turned oligarchs gets an interest in keeping it going.
As the ECB/IMF-program makes the country less able to extract rent, it becomes more dependent on loans to get foreign goods, services and natural resources. Short lived bubbles are followed by the next dose of austerity.
A number of things can happen that stops the cycle.
- Impoverished. No more loans, cause there are no more wealth to re-distribute. Welcome to your new lives working for subsistence pay (except those at the top and their servants).
- Lucked out. A resource has been found on what is still is government land, a government program produced a new industry or a local cheese is suddenly all the rave. Awash in foreign goods, the government tells the IMF/ECB to take a hike. As new loans are not needed, the old ones need not to be payed. Not that this then happens despite the austerity program.
- Commie strongman. Politician is elected on a program of equality and sticks to it. Politician is denounced as a communist, a strongman and a madman. Country may be subject to sanctions.
- Deep state takes over. Seeing the country that they worked to protect being chopped up and sold off, actors within the deep state acts and puts a their man on the throne. Government makes deals with some oligarchs and takes out others. Note that the deep state in general sees civil liberties as a problem more then anything else.
- Civil war. The hardship is blamed on other groups within the country. Country falls apart along rifts in population. New countries start.
None of these are particularly good.
Conclusion for policy-makers:
If you consider a loan from IMF or ECB, just say no. You are better off with almost any conceivable strategy. If you are praised by the IMF or ECB, start doing the opposite.