Hot off the presses, this month’s edition of the journal “Finance and Development” has been generating both heat and light – and is helping propel a welcome reconsideration of some central elements of the long-dominant but now-disputed Washington Consensus.
The always-thought-provoking journal from the International Monetary Fund, the World Bank’s Bretton Woods sibling, sparked some unusually intense debate recently by publishing a well-documented analysis that poses a succinct and straightforward question — “Neoliberalism: Oversold?”
That line of inquiry is surely familiar to all those who have been following the debate — supported by meticulous data from such scholars as Thomas Piketty (“Capital in the 21st Century”), Chrystia Freeland (“Plutocrats”) and Branko Milanovic (“Global Inequality: A New Approach for the Age of Globalization”) — over the intensifying economic inequality that is now corroding many societies, in both the developed and developing worlds. Yet the very invocation of the inflammatory term “neoliberalism” seems to have triggered an intense, if brief, summer storm.
Granted, the word “neoliberalism” is somewhat ill-defined, and, as the article’s authors point out, it is “a label used more by critics than by the architects of the policies.” And, true, it’s unusual to see such a freighted question being asked by the IMF, which has often been seen as a main driver of the Washington Consensus. Yet, no doubt about it, putting “neoliberalism” in the headline makes for a mighty arresting article.
The authors — three members of the IMF’s Research Department — carefully note that their research, for this particular article, focused on two specific elements of international financial institutions’ playbook: “removing restrictions on the movement of capital across a country’s borders (so-called capital account liberalization)” and “fiscal consolidation, sometimes called ‘austerity,’ which is shorthand for policies to reduce fiscal deficits and debt levels.”
The authors even-handedly aver that “there is much to cheer in the neoliberal agenda.” They point to the poverty-fighting effects of increased trade, the job-creating and knowledge-sharing benefits of foreign direct investment, and the service-delivery efficiencies of well-designed privatization initiatives.
The researchers also discern, however, three factors that they see as “disquieting”:
• “The benefits in terms of increased growth seem fairly difficult to establish when looking at a broad group of countries.”
• “The costs in terms of increased inequality are prominent. Such costs epitomize the trade-off between the growth and equity effects of some aspects of the neoliberal agenda.”
• “Increased inequality in turn hurts the level and sustainability of growth. Even if growth is the sole or main purpose of the neoliberal agenda, advocates of that agenda still need to pay attention to the distributional effects.”
These judicious research findings seem well within the mainstream of the current economic-policy debate. Indeed, the IMF’s Research Department, in its reflections on the IMF’s policy advice since the global financial crisis of 2008 and 2009, has explored such questions in many papers.
Thus it seemed surprising to see a forceful editorial in the esteemed Financial Times on May 30, chiding the researchers for even deploying the term “neoliberal” — dubbing their article “a misplaced mea culpa”:
“As an all-purpose insult, ‘neoliberalism’ . . . has become the catch-all criticism of unthinking radicals who lack the skills of empirical argument. The greatest insult of all, however, is that to our intelligence when august international institutions hitch their wagon to these noisy criticisms. This sorry spectacle befell the IMF . . . when it published an article in its flagship magazine questioning its own neoliberal tendencies.”
Although it’s always invigorating to see a vivid debate on the opinion pages, the vehemence of the FT’s denunciation seemed (at least to this reader) woefully overheated. The IMF article, after all, explores a legitimate avenue of policy analysis — a line of reasoning that (as an FT news story on May 26 pointed out) has long been an IMF concern. Moreover, scholars worldwide have published many analyses (including many in the FT itself) lamenting one of the factors that the IMF researchers identified: the risk that policymakers may, instinctively, focus excessively on austerity, just at the moment when many fragile economies need breathing room as they emerge from a financial crisis.
Reassuringly, since that brief if intense downpour of criticism, the controversy seems to have ebbed.
Perhaps the initial shock of seeing the word “neoliberalism” featured in an IMF publication has worn off somewhat. Or perhaps critics have had time to consider the analyses that back up the heavily-footnoted article — including a deft quotation from former IMF chief economist Olivier Blanchard, in 2010, about the danger of enforcing excessive austerity policies: “What is needed in many advanced economies is a credible medium-term fiscal consolidation, not a fiscal noose today.”
The criticism may also have been eased by a calming letter to the editor from Prof. Robert H. Wade of the London School of Economics: “You are right that these papers are not the first in the wider intellectual community to query the truth of these and other propositions in the orthodoxy. But by dismissing the paper in question . . , you downplay the significance of the IMF itself allowing some of its staff publicly to question parts of its orthodoxy.”
Summer storms often strike suddenly, and, thankfully, they can also clear up after a quick cloudburst. Let’s hope that the summertime tempest over the IMF article has abated.
In any case, scholars on both sides of 19th Street NW will find it well worthwhile to read the well-researched “Finance & Development” article, which explores some of the policy prescriptions that, if taken to excess (as often occurred during the reign of the Washington Consensus), can enforce draconian austerity policies on struggling economies.
The IMF researchers wisely conclude their analysis with an even-handed call for evidence-based policymaking: Countries’ experience “suggests that no fixed agenda delivers good outcomes for all countries for all times. Policymakers, and institutions like the IMF that advise them, must be guided not by faith, but by evidence of what has worked.” That’s surely a fact-based approach that policymakers, academic economists and editorial writers can all join in applauding.