development economics growth

The IMF on the downsides of neoliberalism

For several decades, there has been a shared understanding of how development works among the world’s biggest financial institutions, governments and economists. The shorthand for it has been the ‘Washington consensus’, or neoliberalism. The central tenets have been open markets, privatization, small government and balanced budgets, and the primacy of economic growth.

Since this philosophy took hold in the early 80s, a counter movement has been pointing out the flaws. This model serves the rich better than the poor, tends to drive inequality, and that can in turn undermine development. That’s not to say there’s nothing good about its ideas, but that it cannot be pursued blindly. When it becomes dogma, applied as a ‘one-size-fits-all’ set of principles, it can do all kinds of damage.

And it was applied in exactly that way. Thomas Friedman, who popularised the philosophy, described it as a “golden straitjacket” in his book The Lexus and the Olive Tree. “This Golden Straitjacket is pretty much ‘one-size fits all'” he wrote. “It is not always pretty or gentle or comfortable. But it’s here and it’s the only model on the rack this historical season.” IMF advisers wrote up ‘structural adjustment’ plans for poor countries, rigidly applying the same recommendations everywhere as a condition for loans or debt relief. We know how literally these were copied over, according to Joseph Stiglitz, because sometimes they forgot to change the name of the country as they hit copy and paste.

Economists such as Stiglitz, Ha-Joon Chang and many others had pointed out the problems, arguing not for a return to planned economies or protectionism, but for more nuanced free trade – gradual development of markets, a balance of private and public finance, and flexibility.

I’ve written before about how inequality has risen up the agenda in the last decade, from being a sideshow to an acknowledged global problem. This year we have seen what we could consider the consummation of that movement: an admission from the IMF that neoliberalism didn’t work as well as hoped.

It’s not a big public mea-culpa, I’ll grant you. It’s an article in their quarterly magazine, Finance & Development. The article even has a question mark at the end of it to avoid making it to definitive – Neoliberalism: Oversold? Still, I suspect this is as much as we will ever get. And the article doesn’t pull its punches. “Instead of delivering growth,” it begins, “some neoliberal policies have increased inequality, in turn jeopardizing durable expansion.”

This model created inequality and has been prone to boom and bust. When trouble came, the recommended austerity measures can actually be counterproductive. Together, that means neoliberalism often fails on its own terms: “the increase in inequality engendered by financial openness and austerity might itself undercut growth, the very thing that the neoliberal agenda is intent on boosting.”

For years opponents of neoliberalism have been calling attention to inequality, arguing that growth without fairer distribution is hardly progress. And here the authors from the IMF’s research team finally recognising that inequality “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.­”

Indeed.

As always, that doesn’t mean that globalization has been a bad thing, or that we need to turn out backs on free markets and return to some imagined previous age. What these realities should alert us to is the dangers of ideological policy-making, of academic arrogance, of the idea that ‘there is no alternative’.

There must always be room for debate, for compromise and common ground. If our politics was more cooperative rather than competitive, we’d find this came naturally and there would be less talk of winners and losers. There needs to be more room for humility and grace in politics.

Think of the successes of neoliberalism in opening up the world and accelerating development. And now think of how much more good the Washington institutions could have done if they were able to hear criticism and adapt. What are we missing today because of ideological blindness?

7 comments

  1. Neoliberalism has got laissez-faire economics a bad name, unjustly so. NL is a travesty of laissez-faire. It is like a Monopoly game were all the squares are “owned”. At that stage, a newcomer has no chance and will only survive a few rounds of the board.

    Unfortunately, the wrong conclusion has always been drawn.

  2. The IMF has been gradually finessing it’s policies on neoliberalism for a while. It has been more flexible on monetary controls since the Asian crash 20 years ago and it has been the main player calling for debt relief for Greece, against the EU’s demands that every pfennig is repayed, as they see the need for the Greek economy to recover and that Austerity only takes you so far without reform.

    So they have been evolving and adapting rather than as portrayed here sticking to a dogma.

    But while they may be changing they still don’t think tariffs are ever a good idea. Competition, global free trade, privatisation, foreign direct investment and sound public finances are still, correctly, the building blocks the IMF see as essential for prosperity.

    1. Sure, there was twenty years of dogma through the 80s and 90s, a few lessons learned from the Asian tigers and a few more from the most recent financial crisis.

      I would broadly agree with the IMF on most of those key elements of prosperity, but with two very important caveats. 1) Free trade is a process to work towards, not something you adopt overnight. And 2) unless steps are deliberately taken to make growth inclusive, it’ll drive up inequality in ways that can begin to undermine development.

      1. Given in the 1980s and early 90s the Washington consensus was pushing against the dogma of socialist economic thought it is hardly surprising it had to be a bit uncompromising to being with.

        Reforming economies is hard. There is lots of resistance to freeing up trade from vested interests so while gradual opening up might be preferable the IMF often had to seize on crises to get essential changes done before the forces of reaction could stop them. They live in the real world where you can’t always get consensus.

  3. It all depends on what is meant by ‘development’. There are many definitions. It needn’t just mean more buildings, people, trade and GDP. Personally, I like the definition of ‘more equal distribution of power’…not just political power but also financial and social power.
    Also neoliberalism assumes ‘growth’ (of what?) is the goal. That cannot continue for ever with just one planet. So ultimately the NL philosophy will lead us to disaster and if climate change and the other global tipping points are anything to go by, quite soon…

    1. Absolutely, and neoliberalism has championed economic growth as the most important measure of progress in ways that we will look back on with incredulity. Is the growth shared? Is it delivering higher wellbeing? Are those in the lowest incomes getting a look in? If not, what’s the growth good for?

      As you say, the environment has also been completely invisible in the neoliberal paradigm.

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