Is IMF backing away from neoliberalism?

It seems reasonable that governments should balance budgets, and not spend in excess of what they earn


Dr Asad Zaman September 04, 2016
The writer is vice-chancellor of the Pakistan Institute of Development Economics. He holds a PhD in Economics from Stanford University

The IMF has been among the principal architects, executors and enforcers of the neoliberal agenda all over the globe for several decades. This is why an IMF publication with an article entitled “Neoliberalism: Oversold?” is as surprising as an ISIS article entitled “Violence: Oversold?” would be. Has neoliberalism become so unpopular that even the IMF does not want to be associated with it? In this essay, we study the lessons that the IMF claims to have learnt from experience with its single-minded drive to enforce the neoliberal agenda throughout the globe.
The article by Ostry, Loungani, and Furceri, starts out by praising the neoliberal agenda for getting many things right. The authors write that they will confine their critique to two aspects. The first is capital account liberalisation, which means freely allowing capital flows across national borders. The second is “austerity”, which requires tight control of budget deficits, raising taxes, lowering expenses and making borrowing costly for the government.

While the rest of the world learnt this lesson after the East Asian Crisis in 1997, the IMF took two additional decades to catch on to the fact that free flows of capital across national boundaries are destabilising. Ostry et. al. write that growth benefits from capital flows are negligible, while the costs in terms of volatility and financial crises are high. They calculate that since 1980, there have been 150 episodes of surges in capital inflows with more than 30 resulting in crises. Many of these crises have resulted in large and sustained losses in economic output. They conclude that capital flows often create financial crises, and adversely affect economic growth, contrary to neoliberal theory. In addition, capital flows create increasing income inequality. In the era when capital account liberalisation was taken as the gospel truth, “capital controls” were taboo, considered akin to the suggestion of bloodletting for medical problems. Therefore, it is surprising that Ostry et. al. conclude their discussion by suggesting that direct capital controls may sometimes be the only effective method to prevent booms and busts due to short term capital flows. In the era of financial liberalisation, mechanisms for capital controls were dismantled all over the world, including Pakistan. To follow IMF advice, based on bitter experience, we will need to restructure capital controls, in a manner suitable to the substantial advances in electronic financial flows, which are characteristic of the modern age.
The question of 'austerity' is more subtle and complex. Thinking intuitively, it seems reasonable that governments should balance budgets, and not spend in excess of what they earn. This is called fiscal responsibility, and is strongly urged by advocates of austerity. In the aftermath of the Great Depression of 1929, JM Keynes revolutionised economics, and created the field of macroeconomics by showing that recessions are caused by shortfalls in aggregate demand. The anti-austerity measures of printing money, and government spending, financed by deficits if necessary, could make up for the shortfall in demand, and lift the economy out of recession. In the post-Depression era, President Roosevelt was defensive about the deficit spending required to carry out New Deal programmes. Keynes visited him in 1934 to try to convince him to increase deficit spending, but was only partially successful. The recession was substantially prolonged because of Roosevelt's timid and hesitant anti-austerity measures, running deficits of only around three per cent. It was more aggressive deficit spending necessitated by the war that finally lifted the US out of depression.
Why was this basic Keynesian lesson forgotten by the IMF, an institution which was created by Keynes? Although top level decision-making at the IMF lacks transparency, one can guess at the motive by following the money. Austerity helps richer countries, since scarcity of money allows them to lend at higher interest rates and extract greater concessions from poorer countries. The massive flows of interest payments from the poorest countries to the richest provides evidence for this view.
Among US Army generals who were the most brutal and savage in the persecution of Native Americans, many would become their strongest defenders after retirement. Perhaps the mea culpa of the IMF is motivated by guilt and remorse. However, it is more likely that they are backing away from an unpopular position.

Published in The Express Tribune, September 5th, 2016.

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COMMENTS (2)

Noman | 5 years ago | Reply Success has many fathers, failure is an orphan. This fractional reserve based, consumption-led, debt-based system has lived its life - less than a hundred years. The system is unfolding and Ivy League Doctorates have no clue why, since they are not taught this in their syllabi. RIP Keynes.
Naeem | 5 years ago | Reply Sir, thank you so much for sharing this wisdom with us. Just when one start getting tired of Pakistan, along comes a piece of gem from within, which shakes your despondency in the people. I have been following your articles for some time now. As a humble lay-specialist doctor who is so disillusioned with the country, reading your articles gives me reassurance that I am not completely fool to have returned to the country. Evidently much smarter and cleverer people like myself have come back and spreading wisdom in the jungle.
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