IMF: telling it like it isn’t

Since New Zealand joined the International Monetary Fund almost 60 year ago now –  amid all sorts of controversy we were very late to join – their officials have produced a report (Article IV consultation) on New Zealand’s economy every year or so.  These reports used to be held very closely –  which might have made for more free and frank advice – but these days they are routinely published for most countries (including New Zealand).    I’ve participated in quite a few of these reviews over the years, in New Zealand, in other countries where I’ve worked, and in my time on the board of the IMF.  I increasingly wonder why they bother.  For most countries, there isn’t an obvious gap in the market for economic commentary requiring a supranational agency to fill, and if there is occasionally some really good analysis included with the published report, it is rare for the IMF to be adding very much value.  That has long been so in New Zealand.

The IMF once had a fearsome reputation as a nest of fairly hardline ‘right wing’ economists.   The reality of hard budget constraints can have that sort of effect.  And bankers will put conditions on their loans.

But, of course, the IMF doesn’t really have an independent existence.  It is governed by an Executive Board meeting in near-permanent session, where the clout is held by Executive Directors appointed by, and dismissable by, the governments of larger economies and –  reasoanably enough I suppose –  the actions and words of the IMF tend to reflect the politics and preferences of the shareholders.   It isn’t that the Managing Director is unimportant, but the Managing Director gets and keeps her job, and her effectiveness, by keeping onside with the shareholders.   Good money gets thrown after bad –  in places like Greece, Pakistan, and Argentina –  to reflect these shareholder political preferences.  Sometimes the MDs even have personal political and career ambitions to pursue, in turn usually dependent on the goodwill of major shareholders (bearing in mind that every single MD  –  including the next one – has been from Europe.   Except perhaps on quite narrowly technical points, it doesn’t make sense to think of Fund’s view apart from the politics and preferences of the governments that dominate it.    Like the OECD, that makes it part of the centre-left consensus on most things.

But there are also lower-level institutional incentives.  The IMF wants to be “helpful”, it wants access, and its mission-team leaders want to be promoted to more important responsibilities.  When dealing with normal countries with reasonably normal governments, there is quite an incentive to make nice, to talk up things the government you are dealing with is fond of, not to make much of consistency through time (governments change after all).  All compounded by the tendency for Fund missions to weigh in on stuff they really don’t know much about at all (staff tend to have a great deal more macro expertise than that on, say, productivity or housing –  reflecting their formal mandate –  and New Zealand being a somewhat idiosyncratic economy, and staff turning over quite quickly, few really know much about New Zealand).

The latest Article IV report for New Zealand was published on Saturday.   Being dropped into a news deadzone (only accentuated by the RWC) presumably the government –  which has its say on timing –  wanted even less coverage than the little attention these reports usually get in New Zealand media.

Which was odd in a way because in many respects the document  –  at least the headline bits –  could have been published by a government PR body.   There was, for example, that talk about the “solid” economic expansion which must have been welcome, at least until one dug down a few paragraphs and found that staff recognised that any relatively decent performance, albeit (as they note) with skewed downside risks is coming only from supportive macro policy (fiscal and monetary), not from any robust long-term foundations.  Oh, and that they thought that the unemployment was now lower than could be sustained.

Lots of policies were deemed “appropriate”, but with little or no supporting analysis it was hard to know why we should agree with the social democrats from Washington.  Last year the Fund seemed keen on a capital gains tax, but this year –  free and frank advisor role notwithstanding –  the waters have apparently closed over that option and it gets no mention at all.  Last year, Kiwibuild was talked of positively, while this year’s report –  written weeks ago –  is left with vague talk of resets, “key programs still need to be calibrated” etc.

It is on the productivity front that the Fund is perhaps the most far-fetched.    Buried deep in the report is this chart (of OECD data)


Which is a chart so bleak it could almost have originated here.

They also note that business investment has been weak this decade.

And yet, like our own government agencies I guess, they include projections in the report suggesting that total factor productivity growth is just about to accelerate away again, and that lots of capital-deepening business investment will also occur over the next five years (projections to 2024).    From a quick glance at global or domestic bond markets, you’d have to think that market pricing doesn’t really agree with the Fund.   Oddly, when they comment explicitly on the productivity projections we are told to expect this renewed growth because of “cost control and efficiency gains”.  Well, maybe…..

But, or so we are told by the IMF, there is in fact a promising productivity-focused policy agenda already being implemented by the government.  Perhaps you missed it. I did.

But here is what the IMF has in mind

Addressing long-standing low productivity growth continues to be a central concern. In this respect, some important first steps have been taken, including the introduction of a new R&D tax credit regime; the creation of the New Zealand Infrastructure Commission to help in closing infrastructure gaps; and the reform of the vocational education and training sector.

and, elsewhere in the same document

Within the greater focus on wellbeing under the Living Standards Framework, the government has a roster of policies to foster productivity growth. These include introducing an R&D tax credit regime, continuing to increase education spending, creating a New Zealand Infrastructure Commission to enhance procurement and delivery and set up of an infrastructure pipeline, using wage increases to further more inclusive growth, and fostering regional development through the Provincial Growth Fund and greater focus on regional immigration to align immigration of skilled labor with employers’ needs in the regions.

Spare us.

In case you are wondering that “using wage increases to further more inclusive growth” appears to be a reference to the government ramping up the minimum wage, combined with some modestly-sympathetic references to the proposed Fair Pay Agreements.  If you think those two will boost TFP growth (whatever you might think of the “fairness” arguments), I’m sure someone has all manner of scam projects to sell you.

Or perhaps it was the Provincial Growth Fund –  which no credible observers thinks is likely to lift economywide productivity –  or fees-free tertiary education (“continuing to increase education spending” –  and last year the Fund was explicitly keen on something like fees-free).  I haven’t focused on vocational education reform, but count me sceptical that it is going to make much sustained difference to economywide productivity.

I get that outfits like the Fund like interventions like R&D tax credits. Perhaps it will even make a difference (although I’m sceptical) but the Fund’s supporting “analysis” seems to be no more than “R&D spending in New Zealand is low, so we should have more government subsidies”, with no analysis for why firms haven’t regarded it as attractive to spend more themselves.  And, who knows, perhaps the Infrastructure Commission will do some good work, but (a) it makes no spending decisions, and (b) the government’s own actual infrastructure choices have been more about keeping the Greens happy than about having a credible chance of enhancing productivity growth.

Oh, and it wouldn’t do to skip the other reform the Fund seems most keen on –  it features in the covering statement.  On housing, they seem still right with the government

The reform of the institutional structure, including the establishment of the Ministry of Housing and Urban Development, should help in implementing housing policies. Further work is needed to complete the agenda, including enabling local councils to actively plan for and increase housing supply growth.

(with no mention at all of initiatives that at least some regard as signficant backward steps)  but they still want action on tax, this time an even flakier option

Tax reform, such as a tax on all vacant land, should also be considered.

Again with no supporting analysis whatever.  (Land value rating would be the more sensible, and feasible, option in that space.)

And, bottom line surely, despite having a spiffy new bureaucracy “house prices are expected to continue rising under the baseline economic outlook”.

The other point from the report that I wanted to touch on here was around the Reserve Bank’s bank capital proposals.   The Fund is keen.

The proposed higher capital conservation buffers would provide for a welcome increase in banking system resilience. The new requirements would increase bank capital to levels that are commensurate with the systemic financial risks emanating from the banking system.

Of course, there is no supporting analysis for that proposition either. In a a short report perhaps that might be too troubling, except that as I have pointed out before this seems to be a classic example of the Fund simply going with the flow and echoing whatever the authorities happen to favour at the time.    Don’t want to make life awkward for our mates at the Reserve Bank, I suppose.

Here was what I said when the Fund mission released their concluding statement at the end of their visit to Wellington

They are not much more than a couple of sentences in a press release, with no published supporting analysis.  And the Fund almost always backs the authorities – who are the people they talk to mos?t  –  especially when central banks and regulators want to put more restrictions on banks. Why wouldn’t they?  Any economic costs don’t sheet home to them.  But the IMF’s support isn’t without its problem for the Reserve Bank.     Here is what they said

The new requirements would increase bank capital to levels that are commensurate with the systemic financial risks emanating from the dominance of the four large banks with similar concentrated exposure to mortgages, business models and funding structures.

Which, by logical deduction, appears to be saying that current levels of capital are grossly inadequate to the risks the New Zealand banking system faces. But there was no hint of these serious risks in past Financial Stability Report from the Reserve Bank (although they amped up the rhetoric in the latest one), and –  perhaps more to the point –  no hint of that in past IMF Article IV staff reviews or Executive Board discussions.  This snippet is from last year’s Article IV report, published as recently as June last year.

IMF capital

Not a word from staff, from the Board –  or, indeed, fron the New Zealand authorities in their published comments –  of a pressing need for a huge increase in minimum capital ratios.

In other words, take what the Fund says with a huge bucket of salt.    And if, perchance, the Governor has second thoughts and doesn’t go ahead with large increases, probably next year the Fund would be back to tell us that was “appropriate” too.

As I say, I really struggle to see the value of the Article IV reports.  At one level, perhaps that reflects the fact that the Fund is a macro agency, and macro policy has been where New Zealand –  all on its own –  has done pretty well over the last 25+ years (low government debt, low stable inflation etc etc), and where we face hard issues the Fund has little or nothing to offer except the institutional sympathies of the centre-left.  But it isn’t as if New Zealand is the only place where they struggle to add much value, or make much difference to important debates in a timely ways.  If it were wound up – rarely ever happens to international agencies of course –  it is hard to see how the world would be the poorer.  Some officials would be – and I had several very remunerative years on their payroll –  but not obviously the world, and certainly not New Zealand policymaking or economic analysis.

The Fund does often publish some research done in association with the Article IV report in a separate document. They have done so again this time.  I haven’t yet read the paper in full, but on skimming through it there look to be some points worth coming back to later in the week.