Thread by @DanielaGabor

almost quaint that IMF still holds onto 'human capital' to account for divergent growth performance,

but then I read about Eastern Europe's 'success' story and am reminded of how destructive IMF's role in the region has been in early 1990s

https://twitter.com/kestontnt/status/1294717599826284551

seriously, 4 highly-paid economists wrote this ideological crap that wouldnt even pass in an MA dissertation.

IMF economists designing lending packages to Eastern Europe in early 1990s thought that the region suffered from excess demand inherited from socialism, and prescribed the monetarist medicine: devaluation, tight money, tight fiscal policy.

what IMF described as 'shock therapy' or 'tightening the belt', structuralist economists like Alice Amsden decried as 'moral crusade of market fundamentalists' .

to create narrative of 'excess demand' and legitimise monetarist interventions, IMF economists fished into debates on central planning for two concepts: 'monetary overhang' from disequilibrium school & 'soft budget constraint' from Janos Kornai' shortage school

IMF economists didnt care that conceptually, disequilibrium and shortage school were fundamentally at odds with each other (its authors engaged in increasingly acrimonious exchanges)

shortage economists dismissed disequilibrium econ as tourists into econ of central planning, ignorant of realities of socialist production: pervasive shortages from soft budget constraints

while shortage school had its own stereotypes state-owned companies = inefficient white elephants (see Michael Burawoy's brilliant Radiant Past book),

in 1989 the scholarly debate on Eastern Europe agreed on one thing: to disagree on existence of excess demand

in comes the IMF, armed with monetarist narrative of excess demand, based on:
1. Disequilibrium school money neutrality: monetary overhang in household sector (communist worker too liquid/wealthy)
2. Shortage school soft budget constraint: productive sector needs austerity

IMF solution?
1. Impoverish workers by devaluation, price liberalisation % wage repression
2. Strangle manufacturing sector by cutting bank credit for large SOEs who had just lost markets as Soviet economic area disintegrates & access to resources via central planners

Ronald McKinnon, of 'financial repression' fame & zero knowledge of Eastern Europe, went as far as suggesting that State-owned companies should have NO access to bank credit, and instead raise money on capital markets (not existent) or self finance

Eastern Europe is perfect example of why heterodox economic ideas matter for policy - cc @ingridharvold @cacrisalves
we got monetarist waterboarding, when what we need was some good old structuralism
1. Cost-push inflation
2. Industrial policy for state-owned enterprises.

Poland, praised in the IMF blog for 'doing so much better than Mexico' because of its human capital, did in fact do much better than the rest of the region because it had industrial policy (and a zloty stabilisation fund)

Romania, repeatedly tried IMF medicine - Isarescu, CB governor, a keen promoter - with devastating consequences, from collapse of industrial sector to widespread impoverishment and labour migration

if you want to read more about this shameful 'let's dismantle Eastern European manufacturing' episode in IMF history, here is the link

tandfonline.com/doi/full/10.10…

even better, read Michael Burawoy's The Radiant Past, a brilliant take-down of dichotomy 'efficient capitalist firm vs wasteful state socialist firm' from someone who spent years working in both in participant-observation method

press.uchicago.edu/ucp/books/book…