In censuring the UK’s mini budget, the IMF appears to be neglecting its central economic role, says international economic lawyer, David Collins. Rather than weighing in against the UK’s mini budget, it should focus on its obligation to support high employment and growth in international trade.
The International Monetary Fund (IMF) has been unusually prominent in UK public discourse since Liz Truss became Prime Minister, instituting a mini-budget focused on reducing the tax burden to stimulate growth. Crisis-addicted newspapers and television stations were quick to pounce on the IMF’s dire predictions that the UK’s new fiscal priorities would stoke inflation and exacerbate inequality. Turbulent markets and a slipping pound, mostly caused by lockdown profligacy and President Putin’s war, were met with shrieks of glee from across much of the establishment.
But if we examine the IMF’s own remit, it is clear that the censure of Truss’s mini-budget constitutes a bizarre intervention which represents a disturbing departure from the organization’s important role in global economic governance.
One of the three pillars of the Bretton Woods system, along with the GATT (later WTO) and the World Bank, the IMF is charged with promoting international monetary cooperation and stable exchange rates. It also serves a surveillance role, commenting on the macroeconomic policies of its 190 member countries, usually with little fanfare. The IMF does this to discharge what is arguably its central purpose, outlined in Article I ii) of the IMF’s Articles of Agreement, an international treaty which binds the IMF and its members. The relevant provision reads:
“[The purpose of the IMF is] [t]o facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy.”
It would seem from this statement that the IMF should have strongly supported Kwasi Kwarteng’s growth agenda, rather than condemned it. The UK’s employment is running at near record high levels; lifting the ban on fracking is as good an example of developing productive resources as can be imagined; trade agreements are being negotiated and signed at a rapid pace; and, while real income may be in jeopardy due to inflation, the UK’s forecast growth is higher than most G7 countries, a fact which the IMF has acknowledged in the last few days (not that the media has paid much attention to it).
Nowhere do the IMF Articles mention preventing “inequality” a concept which appears to be an essential consideration in crafting any policy, at least among certain circles, since it was popularized by Thomas Piketty, the French economist, some 10 years ago. The problem with assessing economic strategy based on its impact on inequality is because this prioritizes the distribution of wealth rather than the creation of it, which is essentially a political determination. But we know from Article IV.3 b) of the IMF Articles (on surveillance over exchange rates) that the IMF has no business getting involved with its members’ politics: “The [IMF’s] principles shall respect the domestic social and political policies of members.” Moreover, under Schedule C of the Articles (on the adoption of par values) the IMF promises that it “shall not object [to a member’s decision] because of the domestic social or political policies of the member proposing [it].” Why then does it appear that the IMF is drawing inspiration from a Labour party manifesto?
It is precisely this kind of political interventionism which gives organizations like the IMF a bad name and which, by extension, undermines faith in global organizations, like the WTO and World Bank, to the detriment of our economic prosperity.
Respect for and adherence to international law as practiced by global organizations such as the IMF is predicated on those organizations following their own rules and not being swayed by whatever political cause happens to be popular at the time. Left unchecked, mission creep could end up proving fatal to the Bretton Woods noble legacy. For its part, the UK must not be swayed from its current economic course by the intrusion of international policy-making bodies who derogate from their true purpose.