Readers of my earlier posts will know that I fundamentally disagree with the prevailing economic policy I call “free market fundamentalism”. Well, a new report by the “High Church” of economic policy, the International Monetary Fund, gives me some slight hope for a change. The report was written by Ostri, Loungani and Furceri of the IMF’s research department. Its sub-headline states “Instead of delivering growth, some neoliberal policies have increased inequality, in turn jeopardizing durable expansion”.
To be fair to the authors, they do acknowledge that some reforms under the neoliberal agenda have been beneficial. For example, the increase in global trade and foreign investment has “rescued millions from abject poverty” and helped to transfer skills to developing countries. But the report highlights two specific areas with a far more critical eye.
Free Movement of Capital
The first area concerns the widely adopted policy of removing restrictions on the movement of capital around the world. Proponents of this policy state this enables capital to move to where it will be most productive. But in practice, a great many of these capital flows take the form of portfolio investment or speculative trading. There is no discernible benefit in terms of growth from such flows. What’s worse, there is strong evidence that it leads to much greater instability: “boom and bust”. This instability, in turn, damages growth and hurts poorer people most. In other words, it decreases stability and increases inequality. Increased inequality, in its turn, reduces growth. (See my earlier post Inequality Damages Your Wealth.)
The upshot is that freedom of capital movement does more harm than good.
Incidentally, it’s worth noticing the lopsided nature of Free Market Fundamentalism policy in this respect. Capital is allowed to flow freely across borders; people are not. (Look at the frenzy that the Brexiteers – über-free marketeers to a man – are whipping up about free movement of labour in the EU.) The link to inequality is obvious. The rich have capital to spare to move around the world. The poor have just their own skills, their own labour. Extra freedoms for the former and none for the latter are bound to increase inequality in the longer term.
Austerity policy is everywhere: it’s been George Osborne’s mantra for the last six years. Its stated aim of reducing government debt is always used as a cover to shrink the state. The report concedes that reduced levels of debt, all other things being equal, are helpful to growth. But the means of getting there is more damaging to growth than the benefits. It concludes: “Faced with a choice between living with the higher debt—allowing the debt ratio to decline organically through growth—or deliberately running budgetary surpluses to reduce the debt, governments with ample fiscal space will do better by living with the debt.” (The report states that the UK is a country “with ample fiscal space”.)
Two International Institutions
In summary, the IMF said that the discredited policies did not boost growth, that the downside in terms of increased inequality was “prominent” and this in turn damaged growth.
As well as the IMF, the OECD, the other main respected international body on economic matters, also weighed into the subject in February. Its report recommended that countries like Britain should reduce austerity and invest more public money in infrastructure.
The IMF report ends with these words: “Policymakers, and institutions like the IMF that advise them, must be guided not by faith, but by evidence of what has worked.” Quite: the FMF sacred cow is overdue for slaughter.
Sadly, the continuing misfortune for Britain is that we have a government, elected on just 37% of the popular vote, but over 50% funded by City organisations and finance companies – many specialising in the corrosive, speculative end of the business. Cameron and company will continue to take the City’s interests as the same as the nation’s. (My earlier post, The City: Paragon or Parasite? shows those interests are not the same – and more like opposites.) The necessary lessons from this new understanding will be learnt very belatedly, if at all.
But the good news is that the two main economic institutions in the world are now seriously questioning the orthodoxy of the past 35 years’ economic policies. There is a glimmer of hope that, one day, even the British government will realise the errors of its ways. Let’s hope we don’t have to wait for the next crash before things start to change.