Beyond neoliberal and pro-cyclical policy

‘It is well known that the old model of austerity does not work. Not only does it cause the economy to contract and inflict excessive hardship on the population; it also fails to meet even the narrow objectives of reducing deficits and increasing a country’s capacity to repay creditors.’ – An excerpt from a recent Project Syndicate (PS) published article ‘The IMF’s agreement with Argentina could be a game changer’ by Joseph E. Stiglitz and Mark Weisbrot

Research has amply indicated that the International Monetary Fund (IMF) programmes have been at most growth neutral for programme countries. For instance, a 2005 published study ‘The effects of IMF and World Bank lending on long-run economic growth: an empirical analysis’ by Butkiewicz and Yanikkaya, and another published in 2010 titled ‘IMF and economic reform in developing countries’ by Abbot, Andersen, and Tarp both point towards this. Moreover, Kuncic in his 2014 published study ‘Institutional quality dataset’ point towards the need for IMF programmes to move away from their underlying basis of neoclassical economics; which is virtually another name for Washington Consensus/neoliberal policies’, and sees, among other things, a little role of public sector, and policy framework that is both pro-cyclical and is focused on austerity.

Discussing Neoliberalism, George Monbiot in his April 2016, Guardian published article ‘Neoliberalism – the ideology at the root of all our problems’ pointed out: ‘The term neoliberalism was coined at a meeting in Paris in 1938. …At first, despite its lavish funding, neoliberalism remained at the margins. The postwar consensus was almost universal: John Maynard Keynes’s economic prescriptions were widely applied… But in the 1970s, when Keynesian policies began to fall apart and economic crises struck on both sides of the Atlantic, neoliberal ideas began to enter the mainstream. …After Margaret Thatcher and Ronald Reagan took power, the rest of the package soon followed: massive tax cuts for the rich, the crushing of trade unions, deregulation, privatisation, outsourcing and competition in public services. Through the IMF, the World Bank, the Maastricht treaty and the World Trade Organisation, neoliberal policies were imposed – often without democratic consent – on much of the world.’

Hence, instead of making the workings of public sector more efficient and elaborate through navigating towards an effective form of state capitalism (China is a case in point) and through a combination of state capitalism, and social democracy (Scandinavian countries), many countries under neoliberal reform agenda drifted towards greater financial crises, increasing inequality and eroding state’s welfare character. Limited public sector, along with a private sector under weak regulations has meant diminishing capacity to provide sustainable and inclusive growth on the one hand, and on the other, led to little preparedness to deal with such crises as pandemic and climate change.

That is why Joseph Stiglitz and Mark Weisbrot appreciate in the same PS published article the IMF for negotiating a programme with Argentina that does not focused on austerity. Moreover, they ask the IMF to take this policy focus and replicate in other programmes with countries. In this regard, the article argues: ‘A new draft agreement between Argentina and the International Monetary Fund has eschewed austerity. Pending approval by Argentina’s congress and the IMF board, it will allow the Argentine economy to grow while the government continues its efforts to reduce poverty and gradually bring down inflation. With so many countries facing debt distress from the pandemic, the IMF will need to adopt similar changes to its policies elsewhere.’

Pakistan, for instance, is in an IMF programme, which has a pro-cyclical focus of policy prescription/conditionalities, and recommends austerity, which means the country will have to curtail aggregate demand. Moreover, the programme leaves little space for public investment, especially at a time when pandemic has already put a damper on growth. Hence, rather than allowing the country to increase taxes at the basis of increased growth, and instead of asking country to increase taxes and increase fiscal space through that, an enhanced special drawing rights (SDR) allocation, which is separate from the current programme, is made — in addition to allocation made in last August by IMF, which was close to $3 billion

Moreover, in addition to the economic implications of neoliberal reform agenda, the rising level of inequality — income and wealth — has meant that the influence of voters has been losing weight, with consequences in terms of loss of interest of demos in the political process, and in turn resulted in the perpetuation of the extractive institutional design of the politico-economic elites.

(The writer holds a PhD in Economics from the University of Barcelona; he previously worked at the International Monetary Fund)

He tweets@omerjaved7

Copyright Business Recorder, 2022