When a report from the research wing of the International Monetary Fund entitled Neoliberalism: Oversold? was published at the end of May, many critics of the institution felt both vindicated and perplexed. After all, here was one of the key pillars of the international financial system they opposed seeming to renounce, or at least undermine, the case for the policy program they had been most closely associated with in the public mind. Though it must be stressed that this report was from the research side of the IMF, which is separate from the monetary lending and policy formulation wings, it nevertheless did scan as remarkably consistent with the writings of progressive critics of the IMF and the related Bretton-Woods institutions on the broad questions.
The report did praise what it defined as “neoliberal” policy for creating efficiencies in government service delivery and supporting poverty reduction in developing nations via free trade, but was highly critical of the effects of two key policies in particular. The paper found that reductions in government expenditure with the goal of reducing deficit and debt levels (in effect, austerity policies) and removing controls on capital movement into and out of a country’s borders did not have clear positive effects on growth and led to increased inequality in the nations which practiced them. In other words, on average, the promised benefits of these policies did not materialize and the negative effect of increased inequality on growth greatly outweighed short term benefits provided by increased foreign direct investment.
The story was presented by major media outlets as a bastion of neoliberalism abandoning its previous commitments, an appealing headline for any business news provider. Similar to the recommendations coming out of the OECD for governments to leverage low interest rates to borrow for growth-boosting investments, the paper was taken to signal a potential turn in the policies of international institutions. Of particular note is the focus on inequality both as an outcome of the policies and as a drag on the goal of sustainable growth the policies are meant to encourage. In short, it may seem to some that the establishment has taken on the arguments of its critics, such as Paul Krugman and Joseph Stiglitz. However such an impression is too simplistic, both in its reading of the IMF’s history and the reality of “neoliberal” politics as they have been and continue to be practiced. As much as it may be tempting to see international institutions as a group of all-powerful string pullers, foisting ill-suited policies onto helpless nation-states, this understanding gives these institutions at once too much and too little credit.
The first problem is one of definition. “Neoliberalism” is a term with an inconsistent meaning, almost always introduced as a pejorative rather than a self-description. The most prominent colloquial definition of the term as invoked by critics is that it is a broad transfer of economic power and control from the public to the private sector. This, the critics allege, comes in a variety of forms, from direct privatization of state functions, to lowering government spending, reduction of restrictions on business and an overall “shrinking” of the state. However, scholars have noted that neoliberalism is “very much a critic’s term”, and is used to describe sets of policy practices as well as political discussions and alleged world views, making it hard to pin down exactly what the term is meant to signify beyond political disapproval.
It is true that some libertarian-inclined economic thinkers in the late 1930s and immediate post-WWII period, mostly those associated with the Mont Pelerin Society whose ranks included Fredrick von Hayek and Ludwig Erhard, did define their project as “neoliberalism”. What they meant by this, though, seems to have been a reassertion of classical liberal economic principles, taking into account the contemporary realities. What these ideas might have looked like in practice, however, is unclear as, among these thinkers, the only politician was Erhard, who, in his stint as German finance minister, largely avoided strict free markets in favour of constructing the post-war German welfare state.
If one looks closely though, it is possible to see the ideas proposed by Mont Pelerin as similar to later developments that would be termed “neoliberal” by their critics, at least in their notional allegiance to laissez-faire economics. The IMF paper mentions the rule of Augusto Pinochet in Chile as being an exemplar of this new “neoliberalism”, along with the governments of Ronald Reagan in the United States and Margaret Thatcher in the United Kingdom. The policies of Reagan and Thatcher are often seen as having produced a realignment of politics in the Western world, away from the larger role for the state in the post-WWII period and towards and more market-based approach. It is true, whatever one might think of the consequences of these policies, that they were not adopted on the basis of institutional pressure, but rather in response to national political and economic conditions (in particular the sluggish economic growth and high inflation of the late 1970s) .
Of course, the root causes of the prominent “stagflation” of that decade can be traced to a variety of factors, most obviously the 1973 OPEC oil embargo, which had more to do with geopolitics than economics per se. It is also the case that the agenda of these governments was wide ranging, involving not just a reduction of state spending and liberalization of capital flows but, most prominently, greater labour market flexibility and the rolling back of business regulation at all levels. The IMF’s investigation of “neoliberal” drawbacks is silent on these features, often seen as key components by critics.
Certain kinds of “neoliberalism”, most notably market-based reforms to public services and privatization of state-owned enterprises, are indeed areas where the IMF has been active in conditioning loans on “structural adjustment” programs. There are worthy criticisms to be made of these programs. They often involved immediate measures to achieve quick budget surpluses, most notably the cutting of food and fuel subsidies and mass reductions in public sector workforces, that should have been phased in over time. Though it is important to note that countries seeking IMF aid were in genuinely dire fiscal straits, the net effect of these programs tended to be civil unrest in the short term and increased poverty and inequality in the medium term. However, portraying the Fund as inherently miserly on this basis is misleading. It is important to note that the most cited examples of particularly harsh terms in these areas are largely from the 1980s, predating significant lending reforms later enacted, such as the addition of Poverty Reduction Strategy Papers (PRSP) as part of loan agreements.
The IMF has more recently encouraged, for instance, greater investment in health and education by developing countries it has loaned to, and has been a voice for debt reduction in the saga of the Greek bailout. To the extent that the IMF’s own past actions directly contradict the findings of the paper, and other research, they are mainly on the question of capital controls. Most infamously, the IMF conditioned loans for several Asian nations in 1997 on the removal of capital controls, only to see how those who retained, compared to imposed, controls(e.g. Malaysia), would recover from the financial crisis more quickly. In subsequent years, the Fund has admitted its earlier position was a mistake and now articulates a position in favour of capital controls to contain market volatility in developing countries in particular.
This more balanced, skeptical approach to questions of capital account liberalization and fiscal consolidation from the IMF should be welcomed by both its supporters and critics. Though the research wing is not responsible for setting Fund policy, a similar reconsideration of certain previous positions appears to be occurring throughout the organization. One hopes that this dedication to evidence over ideology will come equally to the IMF’s partnering governments and organizations, as well as to its critics.
Photo: IMF Acting Director External Relations Gerry Rice (2011), by RIA Novosti via Wikimedia Commons. Licensed under CC BY-SA 3.0.
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