A chal­lenge to eco­nomic or­tho­doxy

Pakistan Observer - - EDITORIALS & COMMENTS -

THE pil­lars of eco­nomic or­tho doxy are shak­ing as the econo mists at the In­ter­na­tional Mon­e­tary Fund ques­tion the mer­its of ne­olib­er­al­ism. A re­cent ar­ti­cle in the IMF’s quar­terly mag­a­zine Fi­nance & Devel­op­ment asks sim­ply “Ne­olib­er­al­ism: Over­sold?” and con­cludes that in some cases the an­swer is “yes.” The re­assess­ment is im­por­tant, as it shows a readi­ness among the faith­ful to ques­tion con­ven­tional wis­dom. At the same time, how­ever, this new anal­y­sis is not a re­pu­di­a­tion of all ne­olib­eral tenets. A sen­si­ble bal­ance, it seems, is the proper re­sponse to cri­sis, not prin­ci­ple di­vorced from re­al­ity.

Ne­olib­er­al­ism is cap­i­tal­ism in its purest form. It calls for the small­est pos­si­ble gov­ern­ment, the open­ing of do­mes­tic mar­kets to for­eign competition, and al­low­ing cap­i­tal to go to where it will (os­ten­si­bly) be used most ef­fi­ciently. In prac­tice, this means shrink­ing the state and lift­ing the hand of bu­reau­cra­cies, pri­vatis­ing en­ter­prises, bal­anc­ing bud­gets, open­ing do­mes­tic mar­kets to in­ter­na­tional competition and per­mit­ting money to move across bor­ders with min­i­mal re­stric­tions. The poster boy for ne­olib­eral suc­cess is Chile, which im­ple­mented such re­forms un­der dic­ta­tor Au­gusto Pinochet in the early 1970s and en­joyed 5 per­cent an­nual growth in per capita real in­come from 1985 to 1996, which set the pace for Latin Amer­ica. That suc­cess, along with sup­port from Ron­ald Rea­gan and Mar­garet Thatcher, pulled ne­olib­er­al­ism from the fringes of eco­nomic dis­cus­sion into the main­stream.

For decades, ne­olib­er­al­ism has pro­vided the in­tel­lec­tual frame­work for in­ter­na­tional fi­nan­cial in­sti­tu­tions like the IMF, and has been a core com­po­nent of “the Wash­ing­ton Con­sen­sus.” It guides the lend­ing be­hav­iour of those in­sti­tu­tions, of­fer­ing a vi­sion of the ide­al­ized eco­nomic or­der that should pro­mote pros­per­ity, growth and sta­bil­ity. This frame­work was no mere ab­strac­tion, how­ever: Ne­olib­eral poli­cies were im­posed on bor­row­ers when they turned to the IMF for help in a cri­sis, as hap­pened in In­done­sia in 1998 dur­ing the Asian fi­nan­cial cri­sis and again as Greece strug­gled through its most re­cent eco­nomic cri­sis. Yet, to­day IMF econ­o­mists ap­pear no longer con­vinced of the salu­tary value of the en­tire pack­age of ne­olib­eral re­forms. While “there is much to cheer in the ne­olib­eral agenda,” the “ben­e­fits of some poli­cies that are an im­por­tant part of the ne­olib­eral agenda ap­pear to have been some­what over­played” and “some parts of the ne­olib­eral agenda have not de­liv­ered as ex­pected.”

Two poli­cies in par­tic­u­lar are prob­lem­atic. The first is the re­sort to aus­ter­ity, or the de­mand that gov­ern­ments re­strain spend­ing (and usu­ally si­mul­ta­ne­ously in­crease taxes) in an at­tempt to bal­ance the books. While bud­get sur­pluses are de­sir­able — es­pe­cially for smaller coun­tries that are at the mercy of in­ter­na­tional cred­i­tors — they are not nec­es­sar­ily good in and of them­selves. Most im­por­tantly, aus­ter­ity that de­mands big cuts in gov­ern­ment spend­ing and the gut­ting of so­cial ser­vices, in tan­dem with the im­po­si­tion of new taxes, re­duces growth, which re­in­forces a down­ward eco­nomic spi­ral. Rather, the au­thors con­clude, it is bet­ter for debt to “de­cline or­gan­i­cally through growth” than through im­posed aus­ter­ity. The sec­ond prob­lem­atic pol­icy is the call for un­re­stricted flows of cap­i­tal. While in­ter­na­tional in­vest­ment can be used to spur devel­op­ment when used for in­vest­ment, the IMF econ­o­mists con­cluded that such flows can also be danger­ous as they can and of­ten do lead to fi­nan­cial crises in emerg­ing economies. The chief cul­prit is the “hot money” that flows in and out of coun­tries’ stock mar­kets and is sub­ject only to the whims of in­ter­na­tional fi­nanciers. Money moves in and out in boom and bust cy­cles.

The re­sult, said the IMF re­searchers, yields “three dis­qui­et­ing con­clu­sions.” First, ne­olib­eral poli­cies re­sult in “lit­tle ben­e­fit in growth.” Sec­ond, they in­crease in­equal­ity, and third this “in­equal­ity can sig­nif­i­cantly lower both the level and the dura­bil­ity of growth.” The bot­tom line is that pol­i­cy­mak­ers must be more con­cerned about rising lev­els of in­equal­ity and take ac­tive mea­sures to re­dis­tribute in­come, even if that in­cludes taxes and boost­ing gov­ern­ment spend­ing. The au­thors con­clude that “the fear that such poli­cies will them­selves nec­es­sar­ily hurt growth is un­founded.” — The Japan Times

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