Neoliberalism
is increasing inequality and stunting economic growth, IMF says
After
forty years the international organisation warns that parts of the
economic approach are not delivering
Jon Stone @joncstone
/ 27-5-2016
Key parts of
neoliberal economic policy have increased inequality and risk
stunting economic growth across the globe, economists at the
International Monetary Fund (IMF) have warned.
Neoliberalism –
the dominant economic ideology since the 1980s – tends to advocate
a free market approach to policymaking: promoting measures such as
privatisation, public spending cuts, and deregulation.
It is generally
antipathetic to the public sector and believes the private sector
should play a greater role in the economy.
The ideology was
initially championed by Margaret Thatcher and Ronald Reagan in
Britain and America, but was ultimately also adopted by centre-left
parties worldwide, under “third way” figures like Tony Blair.
The approach has
long been the target of criticism from the radical left and parts of
the reactionary right – but has been endorsed as common sense by
centrist parties across the world for decades.
Now a paper
published in June 2016’s issue of the IMF’s Finance and
Development journal warns that, after nearly forty years of
neoliberalism, the approach is jeopardising the future of the world
economy.
“Instead of
delivering growth, some neoliberal policies have increased
inequality, in turn jeopardising durable expansion,” the senior IMF
economists who drew up the paper said.
The authors say that
while the liberalisation of trade has helped lift people out of
poverty in the developed world and some privatisations have raised
efficiency, other aspects of the policy platform had seriously
misfired.
Margaret Thatcher
championed neoliberal policies in Britain in the 1980s (PA)
“There are aspects
of the neoliberal agenda that have not delivered as expected,” they
said, focusing specifically on austerity and the freedom of capital
to move across borders.
“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.”
The paper was
authored by Jonathan Ostry, the deputy director of the IMF’s
research department; Prakash Loungani, its division chief; and Davide
Furceri, an economist there.
They go on to say
that throwing open national borders to multinational corporations has
had “uncertain” growth benefits but quite clear costs – due to
“increased economic volatility and crisis frequency” which they
say is more evident under neoliberalism.
On the issue of
austerity, the authors say there is strong evidence that there is no
reason for countries like Britain to inflict austerity on themselves.
“Austerity
policies not only generate substantial welfare costs due to
supply-side channels, they also hurt demand – and thus worsen
employment and unemployment,” they say.
“In sum, the
benefits of some policies that are an important part of the
neoliberal agenda appear to have been somewhat overplayed.”
Shadow chancellor
John McDonnell told The Independent the report reflected a “growing
consensus” among economists.
The costs in terms
of increased inequality are prominent
IMF paper
“The International
Monetary Fund has summarised what a growing consensus amongst
economists across the globe now think, that Osborne-style austerity
economics increases inequality and instability, and undermines
growth,” he said.
“It's time for the
Chancellor to listen to the experts, change course and put an end to
his failed policy of austerity with a solid commitment by government
to deliver an industrial strategy backed up by investment to create
the high-tech, high-wage economy of the future."
The IMF itself has
long been regarded as one of the key international proponents driving
neoliberalism in the developing world, often only giving financial
assistance and loans on the condition that neoliberal reforms would
be implemented in the target country.
In recent years the
organisation has appeared to equivocate more on the issue, however.
In 2013 director Christine Lagarde admitted that the IMF failed to
foresee the damage that austerity policies would do, particularly in
Greece.
A long-term analysis
by the Office for National Statistics published in 2013 found that
the rate of UK recessions has increased since the 1970s, when
neoliberalism started to influence policymaking.
“Between 1948 and
1973, GDP increased consistently on an annual basis. On a quarterly
basis, there were a number of contractions. However, these were
generally isolated and did not result in annual downturns in output
in these years,” the analysis said.
By contrast, it
noted: “There has been one downturn in annual output in every
decade since the 1970s, the most pronounced of which is the current
economic downturn which started in 2008.”
Government quietly
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The Institute for
Economic Affairs, a think-tank that was instrumental in shaping the
direction of neoliberal policy in the 20th century, told The
Independent the approach had a good record overall.
“In a context of
weak institutions and greedy governments, there may be a point in
controlling short-term capital flows to prevent acute crises –
although capital controls have not saved Venezuela from economic
collapse,” Diego Zuluaga, the organisation’s financial services
research fellow said.
“Moreover,
international bodies such as the IMF may worry about rising
inequality as economic growth rewards some more than others within an
economy.
“But even a
superficial look at the evidence from the past 35 years shows the
amazing progress made – especially by poorer countries – under
the so-called ‘neoliberal agenda.’ This progress is sadly
overlooked in the article.”
Neoliberalism’s
adherents do not tend to self-identify as neoliberals themselves
because the ideology is almost a given in most establishment
policymaking circles.
A Treasury
spokesperson said: “This report does not represent an official IMF
view of UK economic policy. In fact, the IMF’s most recent formal
assessment of the UK economy two weeks ago supported the government’s
economic plan.
“The UK economy is
growing, our employment rate is at a record high and the deficit has
been cut by almost two-thirds as a share of GDP. At the same time,
inequality is falling and living standards reached their record
highest level last year.
“But the job of
building a resilient economy is not done - that’s why we must stick
to the plan that is delivering economic security across Britain.”
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