In the June issue of the International Monetary Fund’s publication Finance and Development, there was a very interesting article written by staff from IMF’s Research Department highlighting that neoliberal policies have increased inequalities and jeopardised growth. Revisiting the neoliberal agenda that has aimed to increase competition (notably through the opening of financial markets) and reduce the role of the state, the authors argue that implementing this agenda over the past few decades has had perverse effects. Eurodad's Conditionality Watch shows however that the IMF continues to attach neoliberal policy conditions to its programmes.
Liberalisation of capitals flows raises the odds of a crash and austerity policies jeopardise growth – both increasing inequalities
According to its promoters, the liberalisation of cross-border capital flows allows the market to allocate world savings to the most productive places in the world, as well as allowing developing countries to access financing. However, according to the data analysed by the IMF Research Department, while some capital inflows – such as foreign direct investments – do seem to boost long-term growth, others – such as portfolio investments and banking debt inflows – don’t. Overall, the authors argue that the outcome of the growth of capital movement liberalisation is uncertain. What their analysis does find is a clear link between financial openness and vulnerability to crises: “increased capital account openness is … raising the odds of a crash,” they write. In addition, free movement of capital tends to raise inequalities, the authors find.
A reduced role for the state is another priority of the neoliberal reforms analysed by the authors. The privatisation of government functions, or the limitation of public spending through limiting the size of the fiscal deficit or the capacity for the government to accumulate debt, are all strategies that aim to reduce the size of the state.
The authors argue that limiting public spending in some countries is inevitable, as these countries would otherwise lose access to capital markets. However, this doesn’t mean that all countries should engage in these efforts. In particular, countries with sound public finances and a good track record in terms of finance management should avoid reducing their public spending, the authors find, as the benefits might be lower than the costs. Reducing public spending may indeed have a negative impact on economic growth. The authors note that, on average, fiscal consolidation policies are followed by drops in output and increasing inequalities.
Overall, the authors make three assessments of the neoliberal reforms they have analysed:
1) The benefits for economic growth are difficult to assess.
2) The costs in terms of increased inequality are significant.
3) The increased inequalities hurt both the level and the sustainability of economic growth.
The role of the IMF in promoting the neoliberal agenda
The authors of the article believe that the IMF is changing and now recognises that capital controls can be useful to control the volatility of capital flows. Also, the IMF would now be in favour of less fiscal consolidation for countries that can afford it.
However, Eurodad’s regular monitoring of IMF programmes shows that the IMF continues to promote neoliberal reforms. Analysing the IMF programmes agreed or reviewed since the beginning of the year, Eurodad notes that IMF conditionalities continue to be numerous and still involve neoliberal reforms.
Here are just a few examples:
The pursuit of a neoliberal agenda by the IMF has also been highlighted by a recent paper published by the Review of International Political Economy.
According to the article published by Finance and Development, the IMF needs to stop promoting neoliberal one-size-fits-all reforms. Instead, the authors suggest that the IMF should protect the policy space of borrower countries to increase the local ownership of economic reforms. This is a commitment already made by the IMF as a signatory of the Paris Declaration on Aid Effectiveness and reaffirmed in the Busan Partnership for Effective Development Cooperation.
We can only hope that the design of IMF programmes will better take into consideration the arguments developed by the Fund’s research department and will respect its commitment towards aid effectiveness.