If you make a mistake, common courtesy says you should apologise. The IMF made a mistake in its forecasts for the UK economy — a high profile mistake. It admitted it got it wrong. But should the IMF have apologised?
In 2013, IMF chief economist Olivier Blanchard publicly said that UK Chancellor George Osborne was 'playing with fire' with his tight fiscal austerity measures. And in its 2013 annual report on the UK, the IMF forecast UK GDP growth at 0.9% in 2013 and 1.5% in 2014. The IMF called for an easing of fiscal austerity in order to support what it assessed as a 'nascent recovery.' The UK government's official response to the Fund's advice, as stated in the IMF's report, was 'any deviation from the announced plans for fiscal consolidation would be too risky.'
The Fund's forecasts were off the mark. The British economy grew by 1.7% in 2013 and the IMF is now forecasting growth of 2.9% in 2014. This would make the UK the fastest growing G7 economy.
In an interview in the UK, IMF Managing Director Christine Lagarde admitted that 'We got it wrong. We acknowledged it. Clearly the confidence building that has resulted from the economic policies adopted by the government has surprised many of us'. When asked by the BBC's Andrew Marr whether she should apologise to Osborne, Lagarde said 'Do I have to go on my knees?' The UK Telegraph called this a 'grovelling apology'. Was it appropriate? [fold]
Ashoka Mody from Princeton University has lambasted Lagarde's apology, saying that while it was unprecedented and courageous, it was wrong. Mody has two reasons. First, the Fund was wrong to suggest that fiscal austerity has boosted confidence and, in turn, growth. According to Mody, 'fiscal austerity does what textbook economics says it will do: the more severe the austerity, the greater the drag on growth'. His second concern is that the Fund is paying deference to one of its major shareholders.
Stephen Grenville recently commented in The Interpreter on the poor forecasting record of economists. If they had to go down on their knees for every forecasting error, they would have pretty sore knees. Grenville also noted that forecasters tend to cluster together. It was the same with UK forecasts. Her Majesty's Treasury publishes a comparison of independent forecasts and in March 2013, the average of 17 forecasters for UK GDP growth was 0.9% in 2013 and 1.6% in 2014, the same as the IMF. Everybody got it wrong.
Mody is right in saying that Lagarde was premature to conclude that the unexpected growth in the UK economy demonstrates that austerity measures led to greater confidence. Chris Giles from the Financial Times has noted that Britain's recovery is the subject of great fascination around the world. He summarises that the unexpected recovery was driven by either confidence, policy or a combination of both.
There is no single decisive force at play; the answer is normally 'all of the above'. The recovery was initially driven by a rise in household consumption, and policies were included in the 2013 budget to boost house price and mortgage lending. They appear to have been effective. Confidence did return and private investment has picked up.
Ajai Chopra agrees with Mody that Lagarde's apology was not warranted. Chopra believes the IMF was right to criticise UK fiscal policy, although he would say that, being the IMF's mission chief to the UK from 2008 to 2012. Notwithstanding the recent growth, Choppa points out that GDP has just returned to its 2008 level and the UK recovery has been one of the slowest in the G7, with only Italy doing worse.
Mody's second concern with the apology — that it shows favourable treatment towards a large shareholder — is disturbing, if true. But I think Mody is reading too much into Lagade's apology. For a long time the IMF has been criticised for being too soft on the major economies. However the forthright criticism the IMF directed at UK fiscal policy in 2013 demonstrated that this may be changing.
The IMF should acknowledge when it makes mistakes, but the most important thing is to assess and analyse why it was wrong. The IMF is meant to include in its annual country assessments a section on how authorities have responded to previous Fund advice. It wold be an improvement if there was also a section where the IMF reviewed the accuracy of its assessment of the outlook for each country and the appropriateness of its previous advice. If the IMF was wrong, the report should say why.
Such an approach would remove the need for knee-jerk apologies, and rather than undermining the credibility of the IMF, everyone might learn something.
Photo by Flickr user CarbonNYC.