The publication of a study by the International Monetary Fund (IMF) criticising certain aspects of neoliberalism has led to a lot of told-you-sos from the political Left and apologetic parsing from the Right. While not the outright rejection or condemnation some are making it out to be the research document does represent a remarkable admission of fallibility from the belly of the free market beast. Oddly it begins with some praise for the neoliberal economic policies imposed under the brutal dictatorship of Chile’s General Augusto Pinochet in the 1970s and ’80s. Given the IMF’s long-fingered role in lending respectability and resources to the American-backed regime in Santiago one would imagine that to be a subject best avoided.
There is much to cheer in the neoliberal agenda. The expansion of global trade has rescued millions from abject poverty. Foreign direct investment has often been a way to transfer technology and know-how to developing economies. Privatization of state-owned enterprises has in many instances led to more efficient provision of services and lowered the fiscal burden on governments.
All of which is highly debatable, and in most cases demonstrably untrue. However here is an important point for Irish politicians and economists:
The pervasiveness of booms and busts gives credence to the claim by Harvard economist Dani Rodrik that these “are hardly a sideshow or a minor blemish in international capital flows; they are the main story.” While there are many drivers, increased capital account openness consistently figures as a risk factor in these cycles. In addition to raising the odds of a crash, financial openness has distributional effects, appreciably raising inequality (see Furceri and Loungani, 2015, for a discussion of the channels through which this operates). Moreover, the effects of openness on inequality are much higher when a crash ensues.
The mounting evidence on the high cost-to-benefit ratio of capital account openness, particularly with respect to short-term flows, led the IMF’s former First Deputy Managing Director, Stanley Fischer, now the vice chair of the U.S. Federal Reserve Board, to exclaim recently: “What useful purpose is served by short-term international capital flows?” Among policy makers today, there is increased acceptance of controls to limit short-term debt flows that are viewed as likely to lead to—or compound—a financial crisis. While not the only tool available—exchange rate and financial policies can also help—capital controls are a viable, and sometimes the only, option when the source of an unsustainable credit boom is direct borrowing from abroad (Ostry and others, 2012).
In other words, the boom-bust cycle is not necessarily an aberrant effect of “pure” neoliberlism but is arguably a systemic outcome of the theory in practice. As for “austernomics”:
Austerity policies not only generate substantial welfare costs due to supply-side channels, they also hurt demand—and thus worsen employment and unemployment. The notion that fiscal consolidations can be expansionary (that is, raise output and employment), in part by raising private sector confidence and investment, has been championed by, among others, Harvard economist Alberto Alesina in the academic world and by former European Central Bank President Jean-Claude Trichet in the policy arena. However, in practice, episodes of fiscal consolidation have been followed, on average, by drops rather than by expansions in output. On average, a consolidation of 1 percent of GDP increases the long-term unemployment rate by 0.6 percentage point and raises by 1.5 percent within five years the Gini measure of income inequality (Ball and others, 2013).
Read the whole thing here.