IMF admits that ‘neoliberalism’ can fuel inequality and stunt growth
There may not be much rejoicing yet, but the repentance by the International Monetary Fund over its devotion to policies of neoliberal austerity policies will certain leave many of its critics with a wry smile.
In a monthly magazine that the financial watchdog publishes (that does not often receive much attention), three of its most senior economists said that “neoliberalism” had been oversold as a remedy.
Buried on page 38 of the magazine, Jonathan Ostry, Prakash Loungani, Davide Furceri - respectively the IMF’s deputy director, division chief and economist - authored an article that appeared at first glance to turn three decades of thinking on its head.
“Instead of delivering growth, some neoliberal policies have increased inequality, in turn jeopardising durable expansion,” they wrote.
Even their use of the word neoliberalism is surprising given that it is the word that critics of austerity have used in the past to condemn the Fund.
Indeed just a couple of days before the magazine came out, the socialist newspaper Morning Star lashed out at “nearly 40 years of neoliberal madness promoted at home by New Labour and the Tories playing second fiddle to unelected EU commissioners and directives.”
But what exactly are the IMF economists saying? Rather than put the whole neoliberal agenda on trial, they focus on two particular aspects of neoliberal policies they have not “delivered as expected”.
The first is the removal of restrictions on the movement of capital across a country’s borders, otherwise known as capital account liberalisation. The second is fiscal consolidation, sometimes called “austerity,” which is shorthand for policies to reduce fiscal deficits and debt levels.
The IMF pushed capital liberalisation heavily during the 1980s and 1990s. While it attracted direct foreign investment that boosted long-term growth as the host country gained new factories and higher skills, it also sucked in speculative footloose capital.
The authors point out that since 1980, there have been about 150 episodes of surges in capital inflows in more than 50 emerging market economies, of which a fifth ended in a financial crisis.
But far more controversial in developed economies such as the UK has been the prescription for countries to cut government spending to cut back on their annual deficits and overall debts.
Advocates of austerity say that holding smaller debts give countries greater room to cope with unexpected shocks while a high debt stock can be bad for economic growth.
The problem, as the authors concede, is that economic theory provides little guidance on what the public debt target should be. They ask whether there really is a “defensible case” for countries like the UK, the US and Germany to pay down public debt?
What they suggest is finding a balance and a “more nuanced” view of what neoliberalism can achieve
The IMF came close to answer in 2013 when its managing director Christine Lagarde told Chancellor George Osborne to rethink the pace of his deficit reduction plan because of the impact on growth.
A year later she backed down, but now the IMF’s economists say that for countries with a strong track record, the benefit of debt reduction, in terms of insurance against a future fiscal crisis, turns out to be “remarkably small”.
“Austerity policies hurt demand - and thus worsen employment and unemployment,” they write. “In sum, the benefits of some policies that are an important part of the neoliberal agenda appear to have been somewhat overplayed.”
At the heart of the concern is the conclusion that one of the costs of implementing these policies is higher inequality, which in turn damages the prospects for growth.
This is an argument that has long been argued by scholars such as Sir Anthony Atkinson, among many others. In the US Bernie Sanders has attracted a lot of support for his campaign to be the Democrat presidential candidate with this argument.
It is important to point out that the IMF is not abandoning the wider neoliberal agenda such as opening up economies to free trade, privatisation and foreign investment.
“There is much to cheer in the neoliberal agenda,” they wrote. “The expansion of global trade has rescued millions from abject poverty.
“Foreign direct investment has often been a way to transfer technology and know-how to developing economies. Privatisation of state-owned enterprises has in many instances led to more efficient provision of services and lowered the fiscal burden on governments.”
What they suggest is finding a balance and a “more nuanced” view of what neoliberalism can achieve. It points to its support for the US Congress to raise the debt ceiling and its call on countries “with fiscal space” - IMF code for Germany - to spend more.
Perhaps more pertinent is its recent demand that Germany and the rest of the Eurogroup forgive some of Greece’s debts as part of a deal to furnish it with more bailout cash.
That episode perhaps gives the best indication of the uncertain path that the IMF is treading. While it argued strongly for debt relief as a pre-condition for further loans to Greece and even hinted it would pull out of the Troika and leave the EU and the European Central Bank alone, it pulled back.
In exchange for a promise to include debt relief in 2018 it dropped its opposition. Abolish neoliberalism, in other words, but not yet.
The article is less a Damascene conversion away from the neoliberal agenda but just a tiny step towards embracing the idea of basing a policy programme on experience rather than dogma.
About the author
Phil has run Clarity Economics, a London-based consultancy, since 2007 and, before that, was Economics Correspondent at The Independent.
Phil won feature writer of the year Work Foundation Work World media awards in 2009, and was commended by the Royal Statistical Society in 2007.
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