IMF advisement relies on false assumptions which create catastrophic consequences

To see what the problem looks like, consider a recent IMF loan. In March, Ecuador signed an agreement to borrow $4.2bn from the IMF over three years, provided that the government would adhere to a certain economic program spelled out in the arrangement. In the words of Christine Lagarde – then the IMF chief – this was “a comprehensive reform program aimed at modernizing the economy and paving the way for strong, sustained, and equitable growth”.

But is it? The program calls for an enormous tightening of the country’s national budget – about 6% of GDP over the next three years. (For comparison, imagine tightening the US federal budget by $1.4 trillion, through some combination of cutting spending and raising taxes). In Ecuador, this will include firing tens of thousands of public sector employees, raising taxes that fall disproportionately on poor people, and making cuts to public investment.

The overall impact of this large fiscal tightening will be to push the economy into recession. The IMF’s projections are for a relatively mild recession until next year, but it will likely be much deeper and longer – as often happens with IMF programs. Unemployment will rise – even the IMF program projections acknowledge that – and so will poverty.

One reason that it will likely turn out much worse than the IMF projects is that the program relies on assumptions that are not believable. For example, the IMF projects that there will be a net foreign private sector inflow into the economy of $5.4bn (about 5% of GDP) for 2019–2022. But if we look at the last three years, there was an outflow of $16.5bn (17% of GDP). What would make foreign investors suddenly so much more excited about bringing their money to Ecuador? Certainly not the recession that even the IMF is projecting.

There are other implausible assumptions and even some that result from accounting errors, and sadly they all go in the same direction. It seems that the program’s “expansionary austerity” – something that almost never happens – is unlikely to make Ecuador into a world-famous exception, where the economy grows as aggregate demand is slashed.

The program also seeks to reshape the economy in ways that, to many Ecuadorians, would appear to be political. The central bank will be made more autonomous; public assets will be privatized; and labor law will be changed in ways that give employers more unbridled power over workers. Some of these changes – for example, the separation of the central bank from other government decision-making – will make economic recovery even more difficult.