ECONOMICS:No one is suggesting Ireland needs the IMF - yet - but it might be instructive to see what this experienced body could do for us, writes MICHAEL CASEY

IN THE midst of our economic travails, three frightening letters have appeared in dispatches - I, M and F. It is a pity that the International Monetary Fund is seen as such a bogeyman, because it does excellent work around the globe by lending to countries and "encouraging" them to adopt corrective economic policies in the context of fully articulated, joined-up plans.

It is not being suggested that Ireland will have to approach the IMF, but as a contingency measure it is useful to consider what the IMF could do for a country like Ireland - which is experiencing severe economic and financial difficulties. It could do a lot.

It is the plan for economic adjustment that is the defining characteristic of the IMF. No other lending agency does this with anything like the same degree of rigour - and it employs hundreds of highly qualified macroeconomists for this work.

Incidentally, the IMF also has considerable experience in financial bailouts and in the vagaries of international capital markets. The IMF has far more experience and expertise at its fingertips than the Irish Government and public sector put together.

Of course, it is the policy plan that irritates governments on the receiving end. This may be because the plan involves tough choices the government in question really doesn't want to make. It may suggest that the government lacks the competence to formulate a plan on its own. Questions of democratic accountability sometimes arise.

These reasons usually explain why many countries do not consider going to the IMF until they have exhausted all other possibilities and are in a very bad state - a recent example being Iceland.

Unfortunately, that usually means that the economic adjustment has to be more severe than it might otherwise have been, and there is a greater chance of the recovery programme going off the rails before all of the agreed economic targets have been achieved. If the conditionality is not met, lending from the IMF will cease, or the whole programme may be renegotiated.

Countries that come late to the IMF usually find it difficult to adhere to the plan. The conditionality tends to be breached after about two years when "adjustment fatigue" sets in.

Governments tend to wilt under pressure at that key juncture where the medicine is still bitter, but the cure hasn't yet taken hold.

Some countries have worked out ways of lessening the political drawbacks of going to the IMF. They may, for example, use the IMF as a scapegoat, and blame the institution for the bitter medicine that has to be ingested.

Some countries have this blame game down to a fine art. Local newspapers and broadcasters discuss upcoming "test dates" - those end-quarters when the agreed economic conditions fall to be reviewed. Citizens of the countries in question bet on whether the tests will be met or not.

Some governments pretend that the economic plan has been worked out by themselves. The IMF does not object at all to this little subterfuge; if it helps to save face for the government in question, that is all good.

For years now the IMF has tended to focus on less developed countries, and a certain kind of snobbery has arisen because of that. UK policy-makers still feel a frisson of embarrassment when they think of their approach to the IMF in the mid-1970s. The fact that a developed country like Iceland is now a client of the IMF may break that pattern.

If Ireland were to go to the IMF, what kind of economic plan might emerge? Normally, the IMF would look for a currency devaluation to restore competitiveness, but this is not an option for us. Neither are changes in monetary policy, because interest rates are determined in Frankfurt. The IMF has, however, dealt with countries which belong to monetary unions in the Caribbean and Africa. The emphasis would have to be on fiscal policy.

Since the IMF "model" tends to be a free-market one, there probably would not be a significant increase in taxation, over and above what has already occurred in terms of VAT, the income levy and pension levy. Some form of property tax might, however, be proposed, since this would not distort market signals. Many charges for services provided by the public sector would probably be introduced.

Expenditure cuts would more than likely be deeper than envisaged at present - in the region of €16 billion over a three-year period or €20 billion over a five-year period. Increases in real social welfare spending would be contained to about 1 per cent per annum or less. The emphasis would be on eliminating the structural budget deficit.

It is likely that some State assets would be privatised. Public private partnerships would be encouraged. There would be substantial public sector reform, voluntary redundancies, and a complete rationalisation of our 800 public bodies. The latter would probably be reduced to 400 over a three-year period. The system of political appointees would be abolished in favour of open competition. Meritocracy would replace cronyism. All cosy cartels would be swept away.

Incomes would probably be cut in the public sector in the first year and frozen for the subsequent two years. There would be a strong recommendation that wages in the private sector should move pari passu so that competitiveness could be restored. There would be no attempt to alter materially the existing distribution of income. This is a politically sensitive area into which the IMF does not venture.

Considerable help and advice would be available on how to deal with the banking difficulties. While nationalisation might not be the first preference of the IMF, it is likely that one of their specialised teams could make a best estimate of the bad debts and recommend an appropriate solution that would "satisfy" the international markets, which hold the IMF in very high esteem. Advice would be offered in relation to an effective system of financial regulation for the future.

In short, the IMF could be seen as a one-stop shop which would tackle all of our problems in one fell swoop and would not be swayed or distracted in any way by vested interests and lobby groups.
All of this would be done in the context of an economic plan - which we still do not have. Borrowing from the IMF would be cheaper than from global markets. And an IMF programme would have a positive effect on Ireland's credit rating. Successful completion of the programme would earn us the international seal of good housekeeping which we have, unfortunately, lost in the last few months.
It is a pity that recourse to the IMF is regarded as such an extreme, and almost embarrassing, step. Because of this, most countries delay their applications, but this means the adjustment will be more severe.

At the present time, there is another good reason countries should apply to the IMF sooner rather than later: it is likely that the IMF's own liquidity position is going to come under pressure as other countries borrow from it. This may happen despite the IMF's plan to increase dramatically its own funding.

There is, however, probably an intermediate step available to Ireland by virtue of its membership of the European Monetary Union (EMU). Even though the European Central Bank and the Maastricht Treaty are opposed to bailing out member states in difficulty, there is a provision for "exceptional cases". Countries like Germany and France - and indeed, the EMU itself - could suffer reputational damage if one or more member states found themselves in severe distress. If Germany and/or France were to help Ireland there would probably be some form of conditionality which might even include "tax harmonisation". The Irish Government would need to tread carefully.

Here again, the old question of moral hazard rears its ugly head. An EMU member country, just like a poorly performing bank, can take the easy way out by relying on a bailout instead of putting its own house in order. While our Government is trying to do its own housekeeping, it is not exactly making giant strides. In the unlikely event that Ireland were to opt for the IMF, it should, if only as a matter of courtesy, clear its lines with the EU.

In the early 1980s when Ireland had huge fiscal and balance-of-payments deficits and an unemployment rate of 15 per cent, it was still able to borrow on global markets. And, while we didn't go near the IMF, there was one rather interesting development while I was there.

The managing director of the IMF held a lunch every quarter to discuss seven or eight of the worst economies in the world - usually poor third-world countries. To everyone's consternation, Ireland appeared on the "basket-country" agenda for one quarter during that period. The minister for finance and the Department of Finance were horrified. Ireland remained on the "hit list" for two quarters.

That was as close as we ever came to IMF discipline. But it served to concentrate the mind, and our own belated programme of fiscal rectitude began shortly afterwards. And that, many commentators believe, set the scene for the Celtic Tiger.

• Michael Casey is the former chief economist of the Central bank and IMF board member