In my last post, I outlined the IMF’s abysmal track record in charting Greece’s GDP growth path. The IMF’s initial Stand-By Arrangement (SBA) programme was expected to produce a single-digit dip in GDP followed by a rapid recovering. In reality, GDP has crashed by over 20% and we see no sign yet of any expansion.
In the Fund’s May 2013 “Greece: Ex Post Evaluation” publication, the IMF admitted some failings in its growth forecasting and its assessment of what would drive the recovery:
Competitiveness improved somewhat on the back of falling wages, but structural reforms stalled and productivity gains proved elusive.
Note that economic recoveries from recessions usually have two components: 1) the gradual removal of the gap between potential output and actual output as idle capital and labour is gradually put back to work, and 2) a pick up from long-term structural productivity gains as new technology becomes available. The former can be thought of as a short-term cyclical component of growth and the latter as a long-term structural component of growth.
The IMF’s biggest forecasting mistake was with respect to Greece’s true potential GDP. In short, as we headed into the Great Recession, Greece was probably in the situation of having actual GDP far in excess of potential GDP. Accordingly, the IMF expected the economy to rebound to an equilibrium that just did not exist. How could this be? Continue reading