Alan Dukes: National Finances
It is nonsense to think that the IMF will have to bail out the economy. We just need to learn the lessons from the past, writes Alan Dukes.
I have recently been asked on several occasions whether Ireland can recover from the current recession, or whether the IMF will come in, take over and run things for us (usually with the sub-text that being "run" by the IMF would be a very unpleasant experience).
Let's get rid of the IMF mythology first. That agency can get involved only if it is asked to do so. For this to happen, the Government would have to come to the conclusion that all other policy and support measures had proven or would prove to be insufficient and that the only viable option would be to seek special IMF funding for a recovery programme. It would then have to negotiate a programme with the IMF. Such a programme would, in this scenario, consist of a more rapid fiscal and economic adjustment process than the Government would otherwise contemplate. We have not (or not yet) reached the stage where special IMF assistance is the only remaining option: Indeed, we are very far away from that.
The ECB is providing substantial underpinning to the banking system and financial markets are taking a (somewhat) less gloomy view of our economy than was the case some months ago. We have not nearly exhausted the full panoply of fiscal and economic policy measures open to us. The essential point is that we have choices. It is up to our own political system to decide on the balance and the speed of the adjustment.
We can, of course, recover from this recession. Not only that, we can influence the pace of the recovery, within certain limits. Those limits will be determined largely by the pace of recovery elsewhere. Most commentators would, I think, agree that the recovery will depend on the following factors, in this order:
- continuation of (relatively) good growth rates in China and India,
- a real upturn in the US economy, leading to
- an upturn in the EU economy.
The factor we can influence is the time it takes for an upturn in the US economy to begin to stimulate a resumption of growth here. The slower we are in making the fiscal and economic adjustments required to get our economy back into a stronger competitive position, the longer will be the time lag between a resumption of growth in the US and the beginning of a recovery here.
This is, in fact, familiar territory for us. We were in a situation between 1979 and the early 1990s which had a good deal in common with today's - but without the global credit crunch.
By the end of 1979, we needed a a radical fiscal and economic reform after seven years of deficit financing. That reform was initiated in 1981, briefly interrupted in 1982, re-started at too slow a pace at the end of 1982 and smartened up in 1987. It was not until the early 1990s that employment began to pick up, unemployment began to decline and we eventually moved into a position of net immigration. The pace of the reform was kept modest in 1983 because of fears of the effects of a more strongly deflationary approach. The most obvious result was that "deflationary" conditions simply lasted for longer than they otherwise might have.
Today, it is clear that we are facing into a deflationary period. GDP is down and heading further down this year and next and perhaps in 2011 also. In an economy that has lost competitiveness, deflation can have beneficial effects if it is properly handled. Most importantly, it can help to restore competitiveness.
What we have to do now is to ensure that the current deflationary conditions produce that result and that they produce it in the shortest possible time. Prevarication is not only the "thief of time": it is also the enemy of economic growth, of employment expansion and of the capacity to deal with social and economic disadvantage.
Ideally, we should have a robust adjustment programme in place before the effects of a resumption of growth elsewhere begin to manifest themselves. In that way, we can benefit more quickly.
