The IMF is questioning elements of the “neoliberal agenda”. As a headline that’s big news and the article that appeared on the Fund’s website yesterday evening is well worth taking the time to read.
But how big is this news?
The authors warn against the damage that can be done by rising inequality. That’s not new — here’s Christine Lagarde making that same point, or here’s a 2010 paper explicitly making the link between rising inequality and financial fragilities.
The article warns that too much austerity can be damaging. Again, that’s not new. Olivier Blanchard made much the same point during his time at Chief Economist. Indeed the October 2010 World Economic Outlook had a full chapter warning that the global turn to austerity was likely to be damaging.
There’s a warning that open capital accounts can destabilising. Which pretty much echoes a paper published by the Fund earlier this year which argued that restrictions on capital imports (as opposed to exports) can be a useful policy tool.
The article is really just the latest in a series of moves from the Fund that can be seen as step away from the pre-2008 vintage “Washington consensus”. The latest WEO for example has a chapter on structural reform which is a million miles away from the simple caricature of what people tend to believe the IMF recommends. It argues that some labour market reforms will tend to increase supply but hit demand — a problem for economies stuck in a low demand situation.
In fact a paper on labour market reform published a few years back took a very nuanced view of collective bargaining arrangements that reflects lessons learned during the crisis.
All of which is a long way of saying the IMF — or at least the output of its research department — has moved along way. It is no longer the demon of left wing imaginations.
On the other hand there is a very legitimate criticism that can be made that for all the progress made in the research department, the actual design of IMF programmes hasn’t moved as far.
So why is the Fund moving in this direction? Specifically why is it turning against excessive austerity and more open capital accounts for emerging economies?
The first part of that question is easier to answer — excessive fiscal tightening in countries that still have fiscal space simply hasn’t worked as promised. There are plenty of countries with ample fiscal space that haven’t used it and the world economy has suffered as a result.
The answer to the second part is partially a result of the first. The damaging self-restraint shown by fiscal policy makers across much of the advanced world has forced an ever greater reliance on monetary policy to carry the burden of kick starting growth. And that monetary easing in the USA, the UK, the Eurozone and Japan has had consequences in the emerging economies.
The Fed’s view on those consequences is pretty clear (Bernanke and Fischer amongst others have spelled it out): the Fed considers the impact on its monetary policy on the rest of the world only in as much as it effects the US outlook.
In other words, the only monetary spill overs it worries about are those that spill back.
The Fund’s leadership would clearly likely more international co-ordination of monetary policy. Lagarde recently called for what she termed a “global policy upgrade”.
But co-ordinating monetary policy across jurisdictions in a multi-lateral manner is difficult.
If that isn’t possible, then the Fund recommends what is: individual countries should take actions to shield themselves from spill overs by disincentivising inflows.
In this respect the Fund; move towards backing capital controls is a consequences of the failure of Western fiscal policy makers to do enough to support growth and the unwillingness of Western monetary policy makers to take into account the global consequences of their actions.
This the world the policy mix of the advanced economies has built.
And if the term “capital controls” is too much for emerging economy policymakers trained in the advanced world before the crisis, that’s fine, there’s a new term now: “macro prudential policy”.