IMF economists question neoliberalism

Neoliberalism is a term mostly used by critics to describe the laissez-faire economic ideology which supports privatizing state industries, deregulation, free trade, reducing the role of the government in the economy, promoting private sector ownership and austerity i.e. reducing government debt and deficits.

For the IMF, which is one of the leading organisations to promote such policies to allow for an article titled Neoliberalism: Oversold? to be published in its Finance and Development magazine by three of its own economists is a significant move. Even more surprising, the economists used the term neoliberal agenda several times in the article. A term one would only expect to find in left-wing publications.

The economists criticize two of the main tenets of neoliberalism: free movement of capital and fiscal consolidation (austerity).

On the movement of capital they say:

The link between financial openness and economic growth is complex. Some capital inflows, such as foreign direct investment—which may include a transfer of technology or human capital—do seem to boost long-term growth. But the impact of other flows—such as portfolio investment and banking and especially hot, or speculative, debt inflows—seem neither to boost growth nor allow the country to better share risks with its trading partners (Dell’Ariccia and others, 2008; Ostry, Prati, and Spilimbergo, 2009).

That sounds like something Ghana can relate to and should be wary of, as I explained in this post.

On austerity they argue that countries like the USA and the UK which markets attach little risk of default on their debt harm themselves by imposing austerity through spending cuts and tax hikes. They argue that it is much better for them to be caught in crisis with a high debt to GDP ratio than to suffer needless distortions through taxes and spending cuts.

They also point to the self-defeating nature of neoliberalism’s attempt to create growth by showing how it creates inequality which then harms growth.

•The benefits in terms of increased growth seem fairly difficult to establish when looking at a broad group of countries.­

•The costs in terms of increased inequality are prominent. Such costs epitomize the trade-off between the growth and equity effects of some aspects of the neoliberal agenda.­

•Increased inequality in turn hurts the level and sustainability of growth. Even if growth is the sole or main purpose of the neoliberal agenda, advocates of that agenda still need to pay attention to the distributional effects.­

This article comes in the wake of the admission of the IMF that their support for austerity was wrong and they breaking with the EU by demanding out right and unconditional debt relief for Greece. Could it be the IMF is slowly reforming or are these just minor happenings we should not read much into? Time will tell.

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Jerome Kuseh

Accountant | Economist-in-Training | Private Investor
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