The slow transformation of the IMF
Associate Professor, Laurentian University
Co-Editor, Review of Keynesian Economics
In its recent report released in early June, the International Monetary Fund (IMF) has made some startling policy announcements: given the general depressed economic condition in the world economy, now is not the time to pay down the national debt if that implies sacrificing economic growth. This advice was aimed notably at Canada: worry about deficits later.
This is quite a remarkable statement from an institution that is better known for defending austerity and so-called neo-liberal policies of free markets. Indeed, in the 1990s, the IMF tied financial aid to many developing countries to the adoption of a series of specific neo-liberal policies that imposed harsh reforms on them that only worsened their already fragile economies.
Since then, and in light of the disastrous consequences of these policies, and especially in light of the on-going economic and financial crisis, as well as the continued crisis in Europe, many researchers at the IMF have somewhat scaled down their defense of free market economics, recognizing the inherent contradictions of such policies: for instance, cutting back on fiscal expenditures in order to reduce deficits often result in higher deficits.
In recent years, the IMF research department has even espoused and given empirical support to a wide range of socially-oriented economic policies, what many would call left-friendly. Today, there is no doubt the research department at the IMF has drifted somewhat away from its right-of-centre pulpit, in a series of important policy shifts.
Of course, there remain important differences between what trained economists at the IMF are writing (the analysis) and what the political leaders of the IMF, like its director Christine Lagarde, are espousing publicly (the policies). Nowhere is this more evident for instance than the advice given to Greece. We are left with the conclusion that IMF leaders just don’t seem to be reading their own research.
As economist Francesco Saraceno has clearly demonstrated, the IMF has gone on record with the following five analytical conclusions:
1) Expansionary fiscal policy, with a focus on public investment, is basically a ‘free lunch’. Given the large impact of public expenditures, particularly in recessions, austerity programs are harmful and should be replaced by higher government spending. In fact, austerity the IMF argued, could not work. Concern over public debt is overrated;
2) Labor-market flexibility (for instance, reduction in wages; decreases in union participation) do not foster economic growth; they just are another element in a regressive income distributive regime, along with financial globalization;
3) Countries should actively manage their capital accounts, and even reverse the trend for even more deregulated financial flows;
4) Sustained and stable economic growth is achieved through a progressive income distribution, with redistributive efforts having no discernible negative impact on the economic performance. This argument is virtually a rejection of the efficiency-income egalitarianism trade-off behind the neoliberal discourse and ‘trickle-down’ policies.
At first glance, these policies can appear to be quite progressive, and in many respects they are. Ignored by the mainstream of the profession and discarded by leaders and institutions around the globe, these policies have at one time or another, all been actively promoted by progressive economists, as well as by some progressive political parties and organizations.
So what changed? What happened to make even the harshest critics of progressive economics capitulate and share the views of their opponents? Quite simply the emerging realization that the world is broken, and old policies and old theories no longer work, and a new way of thinking about economics is necessary.
This does not mean, however, that the IMF is now suddenly becoming a free-thinker. Far from it; in fact, it suffers from grave internal inconsistencies. For instance, with respect to Greece, the IMF is still espousing austerity as the only way toward growth, contradicting some of its own internal research. This only serves to highlight how political the austerity game has become in Greece and in Europe in general (in a previous post, I argued that austerity had no empirical or scientific support). It also serves to show how political the IMF has become, detached from economic reality and its own research.
Nevertheless, the progressive nature of some of the IMF analysis represents a definite step forward in the worldwide trend toward rethinking economics. It opens the door to some discussion and some dialogue from an authoritative institution. It shows that the established free-market theology is under attack, and not only from outside the halls of power, but more importantly from within. Any possible change in policy must first come from a change in the analysis, and because of the IMF, we are now one important step closer.
**With special thanks to Dr. Pablo Bortz
Associate Professor of Economics, Laurentian University
Founding Co-Editor, Review of Keynesian Economics