Key parts of neoliberal economic policy have increased inequality and risk stunting economic growth across the globe, economists at the International Monetary Fund (IMF) have warned.
Neoliberalism – the dominant economic ideology since the 1980s – tends to advocate a free market approach to policymaking: promoting measures such as privatisation, public spending cuts, and deregulation.
It is generally antipathetic to the public sector and believes the private sector should play a greater role in the economy.
The ideology was initially championed by Margaret Thatcher and Ronald Reagan in Britain and America, but was ultimately also adopted by centre-left parties worldwide, under “third way” figures like Tony Blair.
The approach has long been the target of criticism from the radical left and parts of the reactionary right – but has been endorsed as common sense by centrist parties across the world for decades.
Now a paper published in June 2016’s issue of the IMF’s Finance and Development journal warns that, after nearly forty years of neoliberalism, the approach is jeopardising the future of the world economy.
“Instead of delivering growth, some neoliberal policies have increased inequality, in turn jeopardising durable expansion,” the senior IMF economists who drew up the paper said.
The authors say that while the liberalisation of trade has helped lift people out of poverty in the developed world and some privatisations have raised efficiency, other aspects of the policy platform had seriously misfired.
“There are aspects of the neoliberal agenda that have not delivered as expected,” they said, focusing specifically on austerity and the freedom of capital to move across borders.
“The benefits in terms of increased growth seem fairly difficult to establish when looking at a broad group of countries.
“The costs in terms of increased inequality are prominent. Such costs epitomize the trade-off between the growth and equity effects of some aspects of the neoliberal agenda.
“Increased inequality in turn 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.”
The paper was authored by Jonathan Ostry, the deputy director of the IMF’s research department; Prakash Loungani, its division chief; and Davide Furceri, an economist there.
They go on to say that throwing open national borders to multinational corporations has had “uncertain” growth benefits but quite clear costs – due to “increased economic volatility and crisis frequency” which they say is more evident under neoliberalism.
On the issue of austerity, the authors say there is strong evidence that there is no reason for countries like Britain to inflict austerity on themselves.
“Austerity policies not only generate substantial welfare costs due to supply-side channels, they also hurt demand – and thus worsen employment and unemployment,” they say.
“In sum, the benefits of some policies that are an important part of the neoliberal agenda appear to have been somewhat overplayed.”
Shadow chancellor John McDonnell told The Independent the report reflected a “growing consensus” among economists.
“The International Monetary Fund has summarised what a growing consensus amongst economists across the globe now think, that Osborne-style austerity economics increases inequality and instability, and undermines growth,” he said.
“It's time for the Chancellor to listen to the experts, change course and put an end to his failed policy of austerity with a solid commitment by government to deliver an industrial strategy backed up by investment to create the high-tech, high-wage economy of the future."
The IMF itself has long been regarded as one of the key international proponents driving neoliberalism in the developing world, often only giving financial assistance and loans on the condition that neoliberal reforms would be implemented in the target country.
In recent years the organisation has appeared to equivocate more on the issue, however. In 2013 director Christine Lagarde admitted that the IMF failed to foresee the damage that austerity policies would do, particularly in Greece.
A long-term analysis by the Office for National Statistics published in 2013 found that the rate of UK recessions has increased since the 1970s, when neoliberalism started to influence policymaking.
“Between 1948 and 1973, GDP increased consistently on an annual basis. On a quarterly basis, there were a number of contractions. However, these were generally isolated and did not result in annual downturns in output in these years,” the analysis said.
By contrast, it noted: “There has been one downturn in annual output in every decade since the 1970s, the most pronounced of which is the current economic downturn which started in 2008.”
The Institute for Economic Affairs, a think-tank that was instrumental in shaping the direction of neoliberal policy in the 20th century, told The Independent the approach had a good record overall.
“In a context of weak institutions and greedy governments, there may be a point in controlling short-term capital flows to prevent acute crises – although capital controls have not saved Venezuela from economic collapse,” Diego Zuluaga, the organisation’s financial services research fellow said.
“Moreover, international bodies such as the IMF may worry about rising inequality as economic growth rewards some more than others within an economy.
“But even a superficial look at the evidence from the past 35 years shows the amazing progress made – especially by poorer countries – under the so-called ‘neoliberal agenda.’ This progress is sadly overlooked in the article.”
Neoliberalism’s adherents do not tend to self-identify as neoliberals themselves because the ideology is almost a given in most establishment policymaking circles.
A Treasury spokesperson said: “This report does not represent an official IMF view of UK economic policy. In fact, the IMF’s most recent formal assessment of the UK economy two weeks ago supported the government’s economic plan.
“The UK economy is growing, our employment rate is at a record high and the deficit has been cut by almost two-thirds as a share of GDP. At the same time, inequality is falling and living standards reached their record highest level last year.
“But the job of building a resilient economy is not done - that’s why we must stick to the plan that is delivering economic security across Britain.”
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