IMF and Heavily Indebted Countries: Policy Measures out of the Main Stream Approaches

According to Institute of International Finance (IIF) the global debt, private and public, reached the 253 trillion US dollars, by the end of 2019 and 290,6 trillion US dollars by the end of 2020. This amount represents around the 320% of the global Gross Domestic product (GDP)..
During the World Parliamentary Conference, which took place in Washington from 16 to 17 April 2018,it has been pointed out by the Managing Director of International Monetary Fund (IMF) Mrs Ch. Lagarde, the increase of overall debt by approximately 40%, from 2007 to 2018. Taking into account this note and the experience of heavily indebted countries, some interesting points are raised:
Since the policy mix that IMF imposes on countries facing increased deficits of External Transactions Balances and/or Budget Deficits does not produce in many cases the appropriate results, why IMF does not change this policy, by introducing, alternative solutions?
In general, IMF policy measures introduced in the case of heavily indebted countries, give emphasis to the next issues: to structural measures, to the digitalization of the economy and to tax evasion measures.
All these operate in conjunction with a restricted austerity policy. The later policy is the result of financial constraints faced by indebted countries. The main goal of the above mentioned policies is the reduction of the double deficit, i.e. the Current Account Balance deficit and/or budget deficit.
A restricted austerity policy pursues a dramatic reduction of wages and public expenses, which in turn lead to the decrease of public and private consumption and of imports. However a restricted austerity policy provokes social tensions and policy instability. These effects may threaten even the creditor’s loans.
Instead of this pattern of policy mix, IMF could introduce another series of policy measures, which could reduce social tensions, policy instability and consequently could reduce country risk.
More precisely, IMF could apply a soft austerity policy in conjunction with a selective and a short run (max five years) protection policy. These two changes can have an equivalent impact to the deficits under consideration. Analytically, a short run protection policy in favor of domestic production will reduce the Current Account Balance deficit. Besides, increase in domestic production, due to protection, will create direct and indirect taxes. All these will have the same impacts. Consequently, instead of launching drastic reduction of public expenses and hence recession, IMF could simply introduce a soft public expenses reduction in conjunction with the above mentioned protection policy.
So far as the suggested protection policy is concerned, “Buy National” in the frame of public procurement policy, could be a main instrument of the suggested measures. This policy consists of a preferential policy following the old-fashion policy practices. A “Buy National”policy of this pattern would reduce imports of goods and services produced domestically. Even so, the domestic producer will know in advance that this is a short term policy, having positive impacts on its production. Through this proposition IMF could provide a credit of time to entrepreneurs, which in turn can prepare themselves in order to follow rules dealing with the international competition.
Against this proposal IMF points out, inter alia, the following:
a) Such protection measures are a pit of fallacy. Regarding the EU member-states more precisely, that protection measures are against the basic principles of the EC Treaty. However, there are provisions for such policy, met in an explicit way to EC Treaty (Article 115) and implicitly in Article 3 of the Treaty of the European Union and in Articles 107-108and 347 of the Treaty on the Functioning of the European Union. Besides such provisions exist in other Agreements (e.g. under GATT rules Article XII). Finally, it is mentioned that an expression of a short run violation of EU basic rules (i.e. of free movement of capital) is the capital controls, a process which has an end.
b) It is also noticed the difficulty of limiting a deadline to provisory protection measures. Nevertheless an end to this process can easily take place. A representative example is given by the “Voluntary Exports Restrictions” (VER’s). VER’s are based on the same way of thinking, through time-limited exports restrictions, which results from an conciliation process. Consequently the main determinant of this proposal is the conciliation process and not the unilateral decisions about import restrictions and their time-table.
c) Besides, it is supported, that such type of selective protection would insert multiple problems. Indeed, it is well known, that protection measures provoke sectoral distortions on national level. This can happen however under a long term protection process. In contrast a series of a short run protection measures constitutes an interesting incentive in favor of modernization process. Further more, if firms fail to exploit this provisory advantage will interrupt their activity by the end of protection measures. This proposal simply provides an opportunity to protected firms to increase their competitive position via investment to human and physical capital before the ending period of protection measures.
An IMF type restricted austerity policy is probably a preferential choice on behalf of creditors. We know meanwhile, that restricted austerity policies insert political instability and social tensions. All these operate against foreign investors, following the existing empirical investigations. Indebted countries could avoid the above mentioned trends by introducing an alternative policy, which combines budget cuts and provisory protection reducing consequently risks and instability.
The promotion of the dialogue, which can lead to best practices in the frame of policies aiming at reducing either the Current Account Balance deficit or the double deficit of heavily indebted countries, remains a main goal of IMF policy.The suggested policy seems more complicate of course, but it could guaranty the social cohesion, policy stability and steady growth, though more effective policy measures.