IMF economists put ‘neoliberalism’ under the spotlight

27/5/2016

By Shawn Donnan in Washington

Is the fund throwing darts at wider area of economic orthodoxy?

First it questioned capital controls, then inequality and fiscal austerity. Is the International Monetary Fund now throwing darts at an even broader area of economic orthodoxy?

In a piece published on Thursday in its flagship magazine, three of the IMF’s top economists take on the “neoliberal agenda” of which critics have long accused the IMF of being a leading practitioner.

Headlined “Neoliberalism: Oversold?”, the article is more a reflection of the vigorous debates under way inside the IMF than an official takedown of the free market policies the fund has long advocated. Its release also comes in the same week in which David Lipton, the fund’s number two, argued for the merits of free trade and globalisation to be sold more forcefully. This comes in a political climate where many candidates and voters are treating the IMF’s traditional call for more open economies with protectionist disdain.

But even the use of the term “neoliberalism” is provocative. It is normally used by critics of the free market economics advocated by Friedrich Hayek and Milton Friedman. A more common usage would be that of this week’s “Socialist Worker” newspaper: “The IMF uses debt as a weapon to force vicious neoliberal reforms onto elected governments.”

The new IMF work examines two specific elements of the so-called neoliberal agenda: capital account liberalisation, or removing barriers to the flows of capital; and fiscal consolidation, or what is now more commonly called austerity.

“There is much to cheer in the neoliberal agenda,” its authors write. “However, there are aspects of the neoliberal agenda that have not delivered as expected” and their work had led to “disquieting conclusions” including that they resulted in increased inequality that undermined economic growth.

In an interview, Jonathan Ostry, deputy director of the IMF’s research department and the article’s lead author, said the new piece was not meant as an attack on “the entire neoliberal agenda or the Washington consensus”. But he hoped it would set the stage for a broader examination of “neoliberalism” that would come out this year.

It also fitted, he argued, with work on everything from austerity and inequality to debt and the desirability of open capital accounts that he and others have been publishing since the 2008 financial crisis — and with a growing sentiment in the broader economics community.

“There are a lot of people thinking the same thing at this point, that basically some aspects of the neoliberal agenda probably need a rethink,” he said. “The crisis said: ‘The way we’ve been thinking can’t be right’.”

Mr Ostry conceded that the new article did not reflect “mainstream culture” at the IMF and would never have made it into a fund publication as recently as five years ago. “But cultures are slow moving things,” he said.

Fabio Ghironi, an Italian economist who teaches at the University of Washington, tweeted that the new paper amounted to a “disservice to many who’ve been working on other policies”.

“This! The IMF joins the critique of neoliberalism,” Robert Went, a Dutch economist with a more sceptical take on globalisation, added via Twitter.

“What the hell is going on?” Dani Rodrik, a Turkish economist who teaches at Harvard University and is known for his questioning of globalisation’s benefits, said in an interview.

Mr Rodrik, who is profiled in the same issue of the IMF’s “Finance & Development” by one of the neoliberalism piece’s authors, Prakash Loungani, said what has been a persistent change in tone at the fund was welcome. There were also signs the work being done by Mr Ostry and other mavericks in the research department in recent years was seeping into broader IMF policy, as reflected by the fund’s push for debt relief for Greece.

However, Mr Rodrik said, “there is definitely a gap” between the IMF’s research arm and other parts of the institution. “The operational side of the IMF, which is really where things happen, where country programmes are designed, where loan terms are negotiated is typically much more orthodox,” he said. “There the change is slower and is lagging behind the thinking.”

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