An article in the June edition of the fund’s quarterly Finance & Development magazine said some neoliberal policies have increased inequality and this is jeopardising durable expansion.
The article was written by three economists in the IMF’s research department.
They say the neoliberal wave started with the launch of Chile’s public spending squeeze and deregulation programme in the 1970s. Milton Friedman declared Chile to be an “economic miracle” in 1982.
The article examines the effects to two policies central to the neoliberal project:
- The lifting of restrictions on cross-border capital movements
- Fiscal consolidation, which encompasses cuts in deficits and debt.
The policies are connected: space created by cutting state spending would be filled by private capital, including inflows from overseas. But this would only come if an economy was deemed to deliver competitive returns on investment.
A study of countries that applied the neoliberal agenda shows that it was difficult to discern the benefits of these policies, though they definitely led to higher inequality, the article says. Direct foreign investment inflows “do seem to boost long-term growth,” the article says. “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 share risks with its trading partners.”
The report says about 20 per cent of 150 episodes of capital inflow waves recorded in 50 emerging market economies since 1980 have ended in a financial crisis. Many of these crises have been associated significantly lower output.
“In addition to raising the odds of a crash, financial openness has distributional effects, appreciably raising inequality…,” the article says.
It says the IMF view has changed- from one that considered capital controls as almost always counterproductive to greater acceptance of controls to deal with the volality of capital flows
The article also challenges the idea that paying off government debt is always beneficial.
“Austerity policies not only generate substantial welfare costs due to supply-side channels, they also hurt demand- and thus worsen employment and unemployment,” it says.
“(Experience) suggests that no fixed agenda delivers good outcomes for all countries for all times,” the article concludes. “Policymakers, and institutions like the IMF that advise them, must be guided not by faith, but by evidence of what has worked.”
For the FT’s comment on the article, see this.