April 11, 2015

Allow the SMEs and entrepreneurs to help build up the economy, and bridges to somewhere will follow.

Sir, Alan Beattie writes “The IMF, transformed from an agent of neoliberalism to a Gosplan-style advocate of public works, also supports a government investment push”, “The less appealing way to abolish boom and bust” April 11.

IMF, in Chapter IV of its recent World Economic Outlook of 2015, titled “Private investment: What’s the hold up” acknowledges: “Firms with financial constraints face difficulty expanding business investment because they lack funding resources to do so, regardless of their business perspectives” (page 11); “financially dependent sectors invest significantly less than-less dependent sectors during banking crisis” (page 15).

Yet the primary “Policy Implications” reached by the study is: “a strong case for increased public infrastructure investments…[and] for structural reforms…for example reforms to strengthen labor force participation and potential employment, given aging populations. By increasing the outlook for potential output, such measures could encourage private investments” (page 18). 

And only then, almost as an afterthought, is it that the IMF puts forward: “Finally, the evidence… suggests a role for policies aimed at relieving crisis-related financial constraints”.

What “suggests a role”?

How on earth can IMF consider public infrastructure investments more important for the economy than relieving financial constrains?

One explanation could be that the study includes only data that “cover public listed firms only” and not data about “unlisted small and medium sized enterprises” (page 13). Clearly, if you do not study those most in need of access to bank credit, then you will of course not be able to measure the real importance of relieving financial constrains.

The second explanation is that IMF’s professionals insist in covering up for the mistakes of colleagues, the bank regulators. That is because relieving the real financial constrains, requires exposing how the current credit-risk-weighted equity requirements for banks odiously discriminates against the fair access to bank credit of those who most need it, like the SMEs and entrepreneurs.

Sir, the most important thing to do is to get rid of the regulatory distortions so as to enable banks once again to allocate their credit more efficiently to the real economy. If that is done, then you might find places whereto bridges should be construed. Otherwise the risk of building too many bridges to nowhere, is just too big for any economy to manage.