New paper by three IMF economists finds that policies of capital account liberalization and austerity fuel inequality, which in turn hurts growth—”the very thing that the neoliberal agenda is intent on boosting.”
In what may be a sign of a “shifting zeitgeist,” a new paper published this week by economists with the International Monetary Fund questions the very neoliberal policies the body has imposed.
Entitled “Neoliberalism: Oversold?“ (pdf) the IMF’s Jonathan Ostry, Prakash Loungani, and Davide Furceri focus their analysis on two policies of what British writer George Monbiot dubbed the “zombie doctrine”: “removing restrictions on the movement of capital across a country’s borders (so-called capital account liberalization); and fiscal consolidation, sometimes called ‘austerity,’ which is shorthand for policies to reduce fiscal deficits and debt levels.”
An evaluation of these two neoliberal policies, the authors write, leads to “three disquieting conclusions.” As they note in the paper:
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.
They go on to note that “since both openness and austerity are associated with increasing income inequality, this distributional effect sets up an adverse feedback loop. The increase in inequality engendered by financial openness and austerity might itself undercut growth, the very thing that the neoliberal agenda is intent on boosting.
The authors add: “The evidence of the economic damage from inequality suggests that policymakers should be more open to redistribution than they are.”
While the authors write “There is much to cheer in the neoliberal agenda,” they conclude that “the benefits of some policies that are an important part of the neoliberal agenda appear to have been somewhat overplayed.”
Or, as political economist Richard Murphy charges: “the IMF may now be realizing that it has been involved in a massive exercise in redistributing wealth upwards in society.”
But “In some ways,” argues financial observer Yves Smith at her Naked Capitalism blog, “the fact that this article was written at all, and that it is apparently fomenting debate in policy circles is more important than the details of its argument, since it does not break new ground. Instead, it takes some of the findings and analysis of heterodox and forward-thinking development economists and distills them nicely.”
The publication of this IMF paper is a sign that the zeitgeist is, years after the crisis, finally shifting. It is becoming too hard to maintain the pretense that the policies that produced the global financial crisis, which are almost entirely still intact, are working. And the elites and their economic alchemists may also recognize that if they don’t change course pretty soon, they risk the loss of not just legitimacy but control. With Trump and Le Pen at the barricades, the IMF wake-up call may be too late.