The IMF and Institutional Reform in Ireland

The IMF report highlights two areas for institutional reform.  This is important, since institutional reform can be helpful not only in resolving the current crisis but also in preventing future crises. In particular, the IMF report advocates:

1.  A special bank resolution regime. “Such a regime would recognize the unique role played by banks in the economy and give the authorities the power to quickly transfer assets and deposits to another institution (a purchase-and-assumption transaction) or to establish a bridge bank (a new limited life bank into which the old bank is transferred to facilitate its sale).”

2. A statutory fiscal rule. “In this regard, a fiscal rule can create the basis of a public commitment to fiscal prudence. This would be valuable for navigating the ongoing politically-sensitive consolidation and maintaining long-term fiscal policy stability. In the context of the European Union’s Stability and Growth Pact, a statutory commitment to a medium-term objective of close to structural balance would be appropriate. This would need to be supported by a medium-term expenditure framework that outlines a detailed time path of expenditure reductions. Transparency and mechanisms to ensure the review of these objectives would limit the risk that they are diluted. While the authorities were supportive of such a rules-based framework, they were less sure of how quickly it could be implemented.”

12 replies on “The IMF and Institutional Reform in Ireland”

The IMF seems to think that all of the banks are gone. Well said IMF!
We still need a clearing system as I have said before. The liquidation of the assets and liabilities is not going to be a going concern, as it will not take long……

Re: A statutory fiscal rule

Where would we be with a statutory fiscal rule that only allowed deficits of 5%? Would most of the contributors to this site be out of a job? This strikes me as a crazy idea in the context of a country subject to the vicissitudes of a global economy beyond its control.

The question must also be asked whether the IMF would like such rules to be granted the status of international law further down the line?
Monetary systems and economic systems are abstract tools for the operation of civil society. They must be adjusted to match the reality of a world undergoing huge physical and scientific changes. To put legal barriers in the way of such adjustments makes no sense, especially when we are told that the only thing that has saved us from another great depression now has been the nimbleness of States in reacting to the problems.

A statutory fiscal rule…. ugh we all know how easy it is to subvert these sort of rules. Brazil and Argentina introduced these sort of fiscal responsibility laws in the 1990s. Bottom line: it didn’t turn out well for them. The legal system is not really the best way to get politicians to basically do the right thing. There are other ways to hold politicians to account.

It would be nice if we could introduce laws that made everyone do the right thing all the time. If only government was so simple.

I don’t approve of the German fiscal rule that Wolfgang Munchau has been writing about, and so can hardly approve of a fixed numerical rule in the Irish context either (i.e. legally binding limits on deficits irrespective of the state of the economy).

But, this is the second time that the country has been brought to the precipice in my adult lifetime, and so there is surely a case to be made that we need some sort of institutional reform. Different electoral system? A second republic? New relationships between government ministries? I don’t know what the solution is but something has got to change.

K.O’R. is absolutely correct. There are underlying problems here:

– Lack of political oversight (see political reform post)
– Too big to fail (see post linkin Willem Buiter)
– Too complex to exist
– Animal spirits, behavioural economics, the myth of Econ-man (aka the stupidity of humans) [Thaler, Shiller etc]
– Failures of regulation
– Derivatives et al

We need systems that we can regulate, that people of average intelligence can understand, which democratic institutions can oversee and make accountable, which are not too big to fail, which are not too interlinked and which are based on real industry.

As we looked at the precipice earlier during your adult lifetime, three of us did some thinking and writing about how we govern ourselves.

Those responsible (Elaine Byrne, Matt Wall and Jane Suiter) for the Irish Political Reform Conference in TCD on Monday 22 June 2009, were kind enough to post one paper and links to three other papers here

the thinking was explicitly focused on how we govern ourselves, which is wider than what I understand this site prefers to focus on.

@Donal, thanks for the link. Institutions, political economy and so on are now at the heart of the empirical literature on economic growth, so I imagine lots of people on this site would be interested in this sort of stuff.

many thanks Donal. Personally I think this crisis is a good opportunity to have a root and branch look at Ireland’s institutions.

Don’t know about the rest of you but I wouldn’t be lauding any recommendations by the IMF. It’s historical record is that of a *destabilizing* force for national economies. And the strings attached to the money it lends usually decimate the wealth of the average citizen. Please have a close look at all the countries the IMF has touched in its short history before welcoming it with open arms!

Looked at in another light, the first recommendation above codifies a fire-sale for bankrupt banks. Given the fractional reserve nature of our banking system, it would be relatively easy to predatorily cause a “bank run” on an Irish bank that would allow a bridge bank (read as: a temporary bank controlled by international bank interests) to pick up the assets for cents on the euro. This is not a good thing for Ireland.

Similarly, the second recommendation, “expense reduction”, could be anything. I’d prefer the decision of what gets cut to be decided by *our* politicians, who are at least answerable to us through elections, rather than by a liberal / neocon washington-based group who don’t really care about the Irish electorate. Recommendations for privatization would ultimately put control of Irish utilities in international investors, who demonstrably care about nothing more than maximizing (& re-patriating!) profit. Full stop.

In the past, the IMF has imposed water privitization on 12 countries which *always* results in higher costs to consumers, and even tried to privatize rainwater collection in Bolivia!!! When the Bolivian people revolted, Bechtel (the US company awarded the water rights) sued the Bolivian government for $25 million. This figure was far in excess of what Bechtel had invested in Bolivia but they sued for lost “projected profits” from the water monopoly.

Is this really the kind of “help” we need in this country???

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