Thursday, July 1, 2010

Laws of Fiscal Austerity

The IMF has some guidelines (by Blanchard and Cottarelli) for developed countries that would like to improve their fiscal balance sheets. Only, this being the IMF, they call them Ten Commandments. I'm not kidding. They include:

Thou shalt neither put all the spending cuts up front, nor all in the distant future.

Thou shalt reform health care and social security as soon as possible.

Thou shalt be equitable.  In fact, the IMF is going to tell you what VAT tax rate to have (15%).

Thou shalt coordinate. Both between fiscal and monetary and between countries. "Calls for an early monetary policy tightening in advanced economies are misplaced."

It will be interesting to see the reactions, if any, to such advice. Some possibilities:

A) Developed countries give the IMF a boost of credibility and follow through the way they claim developing countries should.
B) Developed countries decide the IMF may not understand in-country perspectives and adjusts their governance structure to reward more modest policy pronouncements.
C) Advice? What advice? We didn't hear any advice. Oh, sorry, were you talking to me?
D) The IMF loses* legitimacy and its governance worsens as developed nations reprimand it for not being their tool of third world oppression [It sometimes frightens me how easy it is to write someone else's propoganda.]

*Extra credit: Draw a political cartoon depicting what would happen if the IMF 'looses' legitimacy on an unsuspecting government....

Speaking of the Ten Commandments, Arnold Friberg has passed away.

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