A paper from three IMF economists was recently published in the IMF’s Finance & Development online magazine (F&D) which is primarily aimed at non-economists. It examines neoliberalism in terms of success and failure.The paper defines neoliberalism as follows:
The neoliberal agenda—a label used more by critics than by the architects of the policies—rests on two main planks.
- The first is increased competition—achieved through deregulation and the opening up of domestic markets, including financial markets, to foreign competition.
- The second is a smaller role for the state, achieved through privatization and limits on the ability of governments to run fiscal deficits and accumulate debt.
It’s marvellous stuff – and quite balanced in showing that there may be some benefits. But there are also severe risks, depending on how the agenda is carried out.
Free movement of ‘capital’ across borders, in the opening up of financial markets, for example, can carry very severe risks – depending on what capital and where (as Greece and Spain can well attest):
- Some capital inflows, such as foreign direct investment—which may include a transfer of technology or human capital—do seem to boost long-term growth.
- But the impact of other flows—such as portfolio investment and banking and especially hot, or speculative, debt inflows—seem neither to boost growth nor allow the country to better share risks with its trading partners.
- This suggests that the growth and risk-sharing benefits of capital flows depend on which type of flow is being considered; it may also depend on the nature of supporting institutions and policies [My emboldening]
It concludes that:
- The benefits [of the neoliberal approach] 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. [My emboldening]
In sum – shrinking the state is far from an unqualified good in itself, and where it leads to increased inequality, as it usually does, this is very bad – not only ethically, but also in terms of reducing national growth. And, as for financial deregulation, it can lead to… well, we’ve seen what it can lead to.
But don’t take my word for it. Here is the complete paper…
Oh, and by the way, I’ve been banging on for ages about the need for more government spending (housing, NHS, defence, education, wotevah). And now even the OECD has called for it as a matter of urgency (urgency, I tell you…)
Actually ‘Rick’ at flipchartfairytales gives a neat summary and analysis of the OECD call for action here…