The IMF has two voices. Thus far only its forecasters have been heard in the referendum debate via media interviews of the managing director, Christine Lagarde, and the dismal predictions for the UK post-Brexit published in report last week.
The IMF has another voice, that of its record keepers, which is seldom heard in the debate, since they only speak one-to-one when spoken to and their data seldom spontaneously generates news stories. In the present debate they are, however, worth interrogating. Their datasets provide telling answers to some of the forecasters’ gloomy predictions.
In essence, the IMF forecasters’ recent paper compares two visions of the future. One is the baseline of continued UK membership of the EU, in which business continues as usual and there are no uncertainties or risks. There is no Eurozone crisis or EC budgetary issues to be resolved, no migration, unemployment, growth or productivity problems. The UK will not therefore be expected to contribute to any Eurozone bailouts, nor to any mid-term budget reviews. The FTT will be forgotten once and for all, along with other unwelcome EC regulatory proposals.
By contrast, in their vision of the post-Brexit UK, one uncertainty follows another, and all turn out badly for the UK economy. Prospective gains of Brexit such as reduction in payments to the EU, or control of immigration, or in the freedom for the UK to negotiate its own trade agreements, are found, for one reason or another, illusory, and not merely of no effect but have a negative impact on the economy. Any reduction in uncontrolled immigration, for example, will apparently reduce immigrants’ positive fiscal contribution to the UK economy, and to its productivity, by making it more difficult to match employees to jobs. Why uncontrolled and unpredictable immigration does this matching better than a managed system is not explained.
The alternative voice from the IMF trade datasets does not challenge the forecasters’ predictions of course, since it refers only to past events, but in doing so it repeatedly throws doubt on their starting assumptions.
The forecasters try, for example, to demonstrate the benefits of EU membership on UK trade by means of a gravity model. The datasets show that while UK exports to the EU countries grew rapidly over the 20 years of the Common Market 1973-1992, (CAGR 5.69%) they have decelerated significantly during the life of the Single Market 1993-2015 (CAGR 0.98%), and hence show its benefits are imaginary.
The forecasters then try to show that the UK economy will suffer post-Brexit because it would, as they put it, ‘lose access to the single market’. It is not entirely clear what this phrase means, since the database shows that 184 countries that had access to the Single Market in 2015 and the goods exports of 131 countries grew faster since 1993 than those of the UK. The data on the exports of services to the EU is more limited, but it similarly shows that, over the years 2004-2012, the exports of sixteen non-member countries have also grown more rapidly than those of the UK.
In sum, the record-keepers show that the benefits of membership for the UK have been less than remarkable, and losing them might not, therefore, be as bad as the forecasters’ predict, and they would not require the many concessions which the forecasters think the UK would be obliged to make to secure access to the single market.
The main problem for UK exporters post-Brexit, according to the forecasters, is that they would have to trade under WTO rules, which would, they think, means a significant reduction in UK trade with the Single Market.
The record-keepers are not so sure. They show 88 of the 184 countries trading with the EU are already in this position. If we select the largest 40 of them, with exports to the EU in 2015 of more than $1bn, we find that the exports of 36 of them to the EU grew more rapidly than those of the UK over the years 1993-2015, even though the UK was enjoying all the benefits of EU membership. These figures suggest that either the benefits of membership, or the disadvantages of trading under WTO rules, have been exaggerated, or maybe both.
The forecasters predict other problems for post-Brexit UK. One is that it would ‘need to renegotiate trade relationships with the 60 non-EU economies where trade is currently governed by EU agreements. These renegotiations, they point out, ‘could drag on for years…. which in turn would discourage consumption and investment and roil financial markets.’
The IMF record-keepers lead one to wonder whether the financial markets would pay the least attention to these renegotiations. They show that all these agreements, excluding those with EFTA countries, cover just 6 per cent of the markets for UK goods exports, and 1.85 per cent of UK services exports. Moreover, the tariffs due in the event of failed negotiations are minuscule, less than annual fluctuations in the value of sterling, and it is not even certain that these EU agreements have benefited UK exports at all. Pilot measures suggest that, in a majority of cases, post-agreement UK export growth has declined. The post-Brexit UK government might therefore make better use of its time, by negotiating more effective trade agreements than the EC has managed over the past 43 years.
Which IMF voice is to be believed? The forecasting voice of the IMF has a less than exemplary record of forecasting, having failed to predict the financial crisis, grossly underestimated the impact of the austerity measures it helped to impose on Greece, and wrongly predicted the future of UK economy in 2013. They have not, moreover, shown themselves to be able to withstand external political pressures, and in this case are open to the suspicion that they have provided forecasts which they know will please their major shareholders, the EU and the US governments.
The record-keepers by contrast are above suspicion. They owe nothing to member governments and remain impartial and impassive observers. But they have to be asked, otherwise they say nothing.