Neoliberalism oversold? Inequality throttles growth, say IMF economists

June 02, 2016 (LBO) - Instead of delivering growth, some neoliberal policies increase inequality which in turn jeopardize sustainable development, three IMF economists say in a recent article. Neoliberalism refers to capitalism in its purest form where privatization, deregulation, and the “freeing of the market” are keys to a flourishing economy. The senior IMF economists say their studies provide some contrary evidence. "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." But costs of short-term capital flows and boom and bust cycles requires a nuanced view of neoliberalism. "On capital account liberalization, the IMF’s view has also changed—from one that considered capital controls as almost always counterproductive to greater acceptance of controls to deal with the volatility of capital flows." "The IMF also recognizes that full capital flow liberalization is not always an appropriate end-goal, and that further liberalization is more beneficial and less risky if countries have reached certain thresholds of financial and institutional development." Policymakers should be more open to redistribution than they are, they add. "Of course, apart from redistribution, policies could be designed to mitigate some of the impacts in advance—for instance, through increased spending on education and training, which expands equality of opportunity (so-called predistribution policies)." "And fiscal consolidation strategies—when they are needed—could be designed to minimize the adverse impact on low-income groups." In the case of fiscal consolidation, the short-run costs in terms of lower output and welfare and higher unemployment have been underplayed, they note. Since 1980, there have been about 150 episodes of surges in capital inflows in more than 50 emerging market economies.

About 20 percent of the time, these episodes end in a financial crisis, and many of these crises are associated with large output declines. 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.

” Although Milton Friedman in 1982 hailed Chile as an “economic miracle,” many economists have now come around to the more nuanced view expressed by Columbia University professor Joseph Stiglitz that Chile “is an example of a success of combining markets with appropriate regulation,” they write The full article can be viewed here.