Revolution in the IMF?


The International Monetary Fund (IMF) recently caused much excitement when they published an article criticizing neoliberal economic politics titled “Neoliberalism: Oversold?”. In it, three economists criticize the consequences of Austerity politics and global financial openness with unfamiliar clarity. The publishing of this article is an indicator for a broader political discourse within the IMF, whose politics have long been criticised. Policy papers like this one offer important impulses and well-grounded arguments for the urgently needed debate on the economic aims of our society.

What is the IMF?

The IMF is a central organization of the global economic system. Originally founded to monitor the Bretton Woods monetary system, it has functioned as a point of contact for economic advice and credit lending to crisis-ridden developing countries ever since the breakdown of Bretton Woods in the 70s.  The IMF quickly established itself as a neoliberal economic organization, campaigning for the universal opening to global trade and the decrease of state influence on the economy and people. It gives out credits to countries which are conditional upon strict Austerity- and privatization reforms. Many of these IMF credit programmes predicted economic growth which often didn’t become true with the prescribed reforms. Quite the contrary, many IMF programmes had enormous social consequences such as increased inequality and poverty, slowing economic growth. Overall, the IMF contributed greatly to a global economic liberalization at the expense of the poorest countries.

The outbreak of the financial and economic crisis in 2008 increased the influence of the IMF, as European states were in need for financial support. The IMF also has more subtle effects through advisory programs for countries and the production of renowned economic analyses and recommendations. The IMFs work is determined by the internal power constellations, where the economic powers of the US and EU have come to dominate due to an unequal voting rights distribution. Through the IMF they influence, together with its bureaucrats and economists, the global economic discourse.

A critical U-Turn?

Considering the neoliberal history of the IMF, the recently published article titled “Neoliberalism: Oversold?” attracted much attention. The authors, three IMF economists Ostry, Loungani and Furceri, state that the negative consequences of the neoliberal agenda have been underestimated. They come to three conclusions: Firstly they show that a clear positive correlation between capital account liberalization and economic growth is difficult to establish. They critically note that, in contrast, the link between removing trade barriers and crisis frequency is more robust. This leads to their second argument, which says that the recurring boom-bust-cycles lead to higher inequality which damages the sustainability of growth. Thirdly they argue that the prescription of austerity as a universal way out of the crisis has not been questioned enough. In some cases, so the authors, allowing debt to decline organically through economic growth are better than quick programmes of budget cutting. These often dramatically worsen the economic and social situation as a result of weak economic output and the increase of unemployment and inequality.

 

This graph shows that austerity does not necessarily lead to more growth, a conclusion also drawn by the IMF authors. Economic growth is actually strongest in those states, where less austerity policies were implemented. Source: Varoufakis
This graph shows that austerity does not necessarily lead to more growth, a conclusion also drawn by the IMF authors. Economic growth is actually strongest in those states, where less austerity policies were implemented.
Source: Varoufakis

„Evolution not revolution“

This IMF article is a significant critique of unlimited global capital flows and austerity policy. Even though many other scientists, politicians and activists have long pointed to the negative consequences of these politics, such clearly articulated critique by the IMF came unexpectedly. Critical voices have been given more room within the IMF for a while though, especially since the outbreak of the global financial and economic crisis. The IMF World Economic Outlook of 2012, in which Blanchard, then chief economist, corrected earlier predictions of growth under austerity downwards, is seen as an important sign of a beginning ideological opening of the IMF. The reason for such an opening lie in learning from earlier IMF programmes and the shock of the crisis, as well as more open staff in the IMF. Selective Keynesian insights are now combined with the classical post-crisis neoliberal orthodoxy of the IMF, which infrequently leads to inconsistencies. This manifests itself in selective recommendations for investment programmes instead of budget cuts during crises. The great power of the IMF in economic debates means that such an opening has significant impact.

However, critical publications by the IMF are always formulated in vague and ambivalent ways, reciting that “there is no one-way-fits-all”. A good example of this was the fact that soon after the publication of “Neoliberalism: Oversold?” the current chief economist Obstfeld emphasized that the criticism of neoliberalism was overinterpreted and does in no way represent  a revolutionary change  of the IMF. He added that the IMF has not changed its core commitment to open and competitive markets, robust macro policy frameworks, financial stability and strong institutions. Hasty euphoria over a change in the IMF mind-set was thus blown away.

Meaning for the politics of the IMF

The slight opening of the IMF had already been indicated in the past credit programmes. In the Troika negotiations on how to deal with the most affected states of the Euro crisis, run by the EU commission and European Central Bank together with the IMF, it was noticeable that the IMF showed a less strict approach to austerity. It argued for a haircut of Greek debt, for example, but in the end didn’t prevail. The resulting reform packages of the negotiations had exactly those devastating effects on Greece as criticised by the authors of „Neoliberalism: Oversold?“, namely a drastic increase in poverty and inequality as well as a deteriorating economy.

The often varying positions of the IMF indicate inner ideological conflicts. This can be partly explained by the technical mandate and organization of the IMF, which gives negotiating staff room to move. That is also one of the reasons why critical publications like “Neoliberalism: Oversold?” can be produced in the research department. However, the real IMF usage of such publications is difficult to predict and it is worth remembering what chief economist Obstfeld said: No ground-breaking change in the IMF is to be expected any time soon.

Using the momentum

Despite the inconsistencies, such critique by an important economic organization like the IMF can be used politically to increase the political pressure on those who still believe in neoliberal Austerity politics as a way out of the crisis. This would strengthen critical voices within as well as outside the IMF. The article “Neoliberalism: Oversold?” also shows that the influence of critique of open trade and the politics of austerity has increased, as it is taken up and reproduced in works of the IMF. This gives both hope and good arguments for the opposition to Neoliberalism.

Info: The Jahoda-Bauer Institute sends a clear signal against neoliberal Austerity politics and for a Europe of the people with the #StopAusterity campaign. We celebrate the International Day against Austerity on the 19th of September. Join and take action!

Further information:
Original article: Jonathan D. Ostry, Prakash Loungani, and Davide Furceri: Neoliberalism: Oversold http://bit.ly/28N6M7Y, IMF June 2016

A detailed academic description of the IMF can be found by Bird (2007): The IMF: A Bird’s Eye View of its Role and Operations, Journal of Economic Surveys Vol. 21, No. 4, pp. 683-745