Three economists with the International Monetary Fund (IMF) recently raised concerns about the neoliberal or “free market” agenda that has dominated economic policy-making since the collapse of Keynesianism in the late 1970s. A key component of their critique questions the effectiveness of IMF loans to countries in need.
In an assessment published by the IMF, economists Jonathan Ostry, Prakash Loungani, and Davide Furceri focused on capital account liberalization and fiscal consolidation — two elements of policies closely associated with Milton Friedman and his Chicago School of monetarists — as aspects of the neoliberal agenda that have not delivered as expected. Capital account liberalization refers to removing barriers to money flowing between countries, and fiscal consolidation (commonly known as austerity measures) occurs when governments cut back spending, often impacting already disadvantaged members of society.
In both these cases, the economists note “three disquieting conclusions.” First, they argue that IMF assistance has not necessarily led to increased growth for a broad group of countries. Second, the IMF policies lead to increased inequality. Third, this inequality negatively affects the level and sustainability of growth.
In the IMF loan process, a country applies for financial support, similar to a bank loan but at cheaper-than-market interest rates. Importantly, IMF support usually results in the IMF’s sister organization, the World Bank, also providing concessionary loans. Investors view IMF support as beneficial and are more willing to commit funds to the country.
IMF lending practices always have conditions, requiring countries to meet certain terms in order to borrow money. IMF conditionality typically includes “structural adjustment” programs, or policy changes that may incorporate state-owned-enterprise privatizations, alter economic regulations, and require labor market reforms, essentially reducing state involvement and pushing the country towards a more free-market-oriented (neoliberal) economy.
According to the neoliberal agenda, the lower the state involvement in the economy, the better. But, according to the critics, it appears that, in the short term at least, the policies promoted by the IMF can exacerbate the economic difficulties in the country.
Companies in countries seeking IMF aid were previously protected against the ravages of global competition but must suddenly face competition from more-efficient foreign companies. New competition will cause a deteriorating business environment, at least in the short term, as domestic companies experience curtailed investment, worsening cash flows and payments performance, lower profitability, and increased bankruptcy. Thus, when the IMF becomes involved in a country, risks for cross-border trade and investment can increase significantly.
The critique from Ostry, Loungani, and Furceri may not be a game changer for the IMF, as their roles as researchers do not impact policy. However, any review of IMF lending does bring attention to a process in need of reform.
Dr. Warwick Knowles is the Deputy Chief Economist on D&B’s Global Data, Insight & Analytics team. Based in Marlow, UK, he covers global issues and the Middle East and North Africa for D&B Macro Market/Country Insight Products. Previously he taught Middle East politics and political economy for almost a decade at both Newcastle and Durham universities and has published widely on regional issues and the hydrocarbon sector.
Photo courtesy of the International Monetary Fund.