IMF needs to take closer look before prescribing


ANALYSIS:Reform must be based on evidence – what is orthodox today may be proved wrong tomorrow, writes DAN O'BRIEN

A REPORT published on Monday by the IMF, advocating structural economic reform in the euro area, gives further reason to believe that more time should be taken to draw up the conditions of Ireland’s bailout.

The short document acknowledges the different reform issues across national economies in the euro zone.

It contains observations on past reforms and some sound points on future reforms, and how they might be successfully co-ordinated. But some of the specific proposals made for Ireland suggest the IMF needs to look into the structure and functioning of the Irish economy in greater depth before it draws up a list of reform conditions with the European Commission and the European Central Bank.

The commission did not focus on Irish economic reform issues in great depth in the past, owing to a seemingly stellar performance. Nor did the IMF, if for different reasons. Its main focus is on macroeconomic matters and monetary affairs and less on the sort of microeconomic analysis that underpins structural economic reforms.

One of the five proposals it advocates in its new report is that the Government “focus public resources on high-priority projects in the knowledge-based economy”. If this is the best the IMF can come up with then we are in even more trouble than we thought we were.

Nor does another of the five proposals reassure. More money should be given to Fás, the State training agency, it urges.

Quite apart from the State’s dire fiscal position, of which the IMF is as aware as anyone, to suggest giving even more borrowed cash to an unreformed Fás is ludicrous. The agency needs to be fundamentally reformed – ideally by having the good people who work in it moved to new entities that are intelligently designed and structured. Once that happens, the IMF’s suggestion of beefing up the assistance given to the unemployed to find work should be implemented.

Of the more serious suggestions, none is more controversial than the call for a lowering of the minimum wage. The call was unnecessary as the Government had already signalled a reduction, but it seals the deal. The only question to be answered now is by how much.

The reduction in the minimum wage rate will happen because the rate is considered too high when compared to competitor countries, too high compared to wages, which are falling, and too high compared to benefit entitlements.

While those entitlements are expected to be reduced in the coming years, the effect on the differential between work and welfare is likely to be cancelled out by higher taxes on lower incomes (euphemistically described as “widening the income tax base”).

It is understandable that many people think cutting the minimum wage is a heartless thing to do. And it can be in theory.

But it should be remembered that a minimum wage is a bluntly effective way to prevent unscrupulous employers exploiting people by offering them wages below a level that is considered a floor. It is not a means of income support (that is the role of the welfare system). Also of note from the report is its assessment of how much structural economic reform is needed in 11 euro zone countries and five others.

Among the group of 16, the IMF finds those in least need of structural economic reform are Britain, Denmark and the Netherlands, followed closely by Sweden.

That the IMF recognises the success of the big-state Nordic economies should reassure those in this country who believe that the fund is a crazed “neoliberal” outfit bent on imposing Anglo-Saxon economic models whenever it has the chance.

The fund has rightly been criticised in the past for its failures, but the policies it advocates are based on those that appear to be the most effective and successful across the world at any given time.

Policies considered orthodox today may be proven wrong tomorrow, but an evidence-based approach is the best that can be hoped for.