The IMF Smashes Its Own Consensus

The New Statesman editorialises:

For the past three decades, mainstream economic thinking has been defined by neoliberalism.

Associated with the reforms of Ronald Reagan and Margaret Thatcher in the 1980s, the doctrine is characterised by two central tenets.

The first is that domestic markets should be deregulated and opened up to foreign competition.

The second is that the state should be shrunk through privatisation and legal limits on the size of deficits and debt. Such policies, embraced and encouraged by institutions such as the World Bank and the International Monetary Fund (IMF), have delivered benefits.

Millions of people have been lifted out of poverty thanks to the expansion of global trade, while the sell-off of state-owned enterprises has improved services in many cases [wrong on both counts].

Yet the failures were seldom acknowledged, except by critics on the left.

Now, in a remarkable rebuke to the prevailing orthodoxy, three IMF researchers have concluded that the neoliberal consensus has often done more harm than good.

In an article entitled “Neoliberalism: Oversold?”, the authors stated that after analysing the impact of the main policies underpinning global free-market economics, they reached “disquieting conclusions”:

“Instead of delivering growth, some neoliberal policies have increased inequality, in turn jeopardising durable expansion.” 

As Felix Martin notes on page 28, the IMF’s “mea culpa” is a major landmark in its thinking and could have a significant impact on future practices. 

The IMF researchers focused on two neoliberal policies: the removal of restrictions of capital flowing across borders and fiscal consolidation (or “austerity”) measures.

Surges of money into emerging economies increased the capital available for development but often resulted in boom and bust, as occurred in east Asia in 1997 and Argentina in 2001. 

At the time, the IMF insisted that these crashes were not the result of liberalisation but rather the consequence of inadequate reforms. 

Looking back at the data now, the researchers disagreed. 

Not only is there little proof that open capital accounts lift growth rates, there is evidence that they increase inequality and raise the risk of a financial crisis. 

In some cases, imposing capital controls – once a heretical idea in the Washington institutions – is the only viable solution, the authors concluded. 

For David Cameron and George Osborne, fixated with welfare cuts, Budget surpluses and reducing borrowing, the researchers’ conclusions on austerity and the size of the state will make for uncomfortable reading. 

“Is there really a defensible case for countries like Germany, the United Kingdom or the United States to pay down the public debt?” they asked. 

“No” was their answer, rejecting the theory that austerity is good for growth because it boosts the confidence of the private sector to invest. 

In practice, “episodes of fiscal consolidation have been followed, on average, by drops rather than expansions in output” and increases in unemployment and inequality rates. 

Faced with a choice between living with higher debt or deliberately running surpluses to reduce it, governments should live with the debt, the authors wrote. 

“Policymakers, and institutions like the IMF that advise them, must be guided not by faith, but by evidence of what has worked,” they concluded. 

Mr Osborne, are you listening?