Is the Pope still a Catholic? This is the question provoked by a new article by three International Monetary Fund (IMF) economists—Jonathan Ostry, Prakash Loungani, and Davide Furceri—headlined “Neoliberalism: Oversold?”
During the 1980s and 1990s the IMF, alongside the World Bank, was one of the main engines for the internationalisation of a neoliberal economic agenda.
This agenda was pioneered by the Chilean military junta, Margaret Thatcher in Britain and Ronald Reagan in the US.
Strongly backed by the US, they used first the Third World debt crisis and then the collapse of the Soviet Union to force states to adopt free-market policies.
This meant opening up to foreign trade and investment, cutting government spending, and privatising state industries and public services.
But now Ostry, Loungani, and Furceri call for “a more nuanced view of what the neoliberal agenda is likely to be able to achieve”. The Financial Times complained, “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.’”
But the IMF economists aren’t calling for neoliberalism to be dumped altogether. They focus on “the effects of two policies: removing restrictions on the movement of capital across a country’s borders (so-called capital account liberalisation); and fiscal consolidation, sometimes called ‘austerity’, which is shorthand for policies to reduce fiscal deficits and debt levels.”
Behind this lie conflicts within the main capitalist classes provoked by the crises of the past two decades.
Free movement of capital has been under fire since the late 1990s. Then, countries such as South Korea found their economies devastated by massive outflows of speculative money. Ostry, Loungani, and Furceri concede that the neoliberal era has been one of financial boom and bust fed by inflows and outflows of capital.
They also acknowledge that “in addition to raising the odds of a crash, financial openness has distributional effects, appreciably raising inequality.”
Their second thoughts about austerity reflect the intense debates provoked by the eurozone crisis. The IMF has forced many indebted states—for example, South Korea in the late 1990s—to implement massive cuts in public spending. Alongside the European Central Bank and the European Commission—the hated Troika—it imposed similar policies on Greece, Ireland, Portugal, and Spain after 2010.
They had terrible economic and social consequences.
But the IMF soon developed doubts about the neoliberal dogma that shrinking the public sector increases economic growth. Ostry, Loungani, and Furceri summarise research showing that “episodes of fiscal consolidation have been followed, on average, by drops rather than by expansions in output. On average, a consolidation of 1 percent of GDP increases the long-term unemployment rate by 0.6 percentage point and raises by 1.5 percent within five years the Gini measure of income inequality.”
These arguments are surely related to divisions that have developed within the Troika over Greece. During last summer’s confrontation between the European Union and Greece the IMF argued that Greece could never repay its foreign debt and should be given relief.
German finance minister Wolfgang Schauble has strongly resisted this argument. He fears that if Greece receives debt relief, this will weaken the pressure on all EU member states to continue implementing neoliberal “reforms”.
Last week’s deal to release some of the funds promised last July to keep Greece afloat postponed a decision on debt relief till after next year’s German elections.
The IMF’s partial retreat from full-on neoliberalism is a sign of the pressure the dominant ideological consensus has come under thanks to the global economic crisis.
But to break this consensus will need more struggles like those we see in France today.
Crises are on the horizon