A Comment on IMF Article “Neoliberalism: Oversold?”

Jonathan D. Ostry, author of the article along with Prakash Loungani, and Davide Furceri, is a Deputy Director of the International Monetary Fund

Firstly, for those interested I sincerely recommend reading the IMF’s recent post on Neoliberalism policies. In brief summary, the article discusses two major topics of “neoliberal policies” since the 1980’s:

  1. Capital Liberalization or effectively the level of deregulation of international exchanges, particularly financial capital markets, opening them up to foreign competition.
  2. The size of the State based on a mix of privatization of services, and limits of budget deficits and debt accumulation.

By and large this appears to be an extended caption on the discussions taking place between some of the World’s most esteemed economists on striking the right balance of neoliberal policies, especially in today’s highly globalized world. Without over generalizing the authors’ comments, perhaps the greatest takeaway in my mind is perfectly summarized by the last sentence “Policymakers, and institutions like the IMF that advise them, must be guided not by faith, but by evidence of what has worked.”

Scattered throughout the article are various research accounts, though in full disclosure a number are by the authors themselves of colleagues, which in essence fly in the face of much of traditional neoliberal economic theory. “In addition to raising the odds of a crash, financial openness (in terms of increasing capital account liberalization) has distributional effects, appreciably raising inequality.” “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.­” “In sum, the benefits of some policies that are an important part of the neoliberal agenda appear to have been somewhat overplayed.”

These are both striking and extremely important indications of a shifting view that the best path for international economic regulation may be to try and strike a better balance rather than to go hog wild on the ideas of the late Friedrich Hayek or Milton Friedman. While current research about whether any upsides of highly neoliberal fiscal policies have been realized, the evidence appears to be slightly more conclusive about many negative side-effects namely wealth inequality and market volatility.

More so, the primary objective of such policies, as regularly stated in the article, is to increase economic growth. This of course begs the questions, why are we striving for economic growth when such a perpetual goal is clearly unsustainable from a global resources standpoint? Additionally, the notion that economic growth will inherently drive up incomes has not proven to be consistently true and has in fact increased inequality according the the evidence pointed to the in the article and by research from famed economist Thomas Piketty. Finally, even if all the chains in this train of thought were to hold absolutely, the link between increased income and increased overall happiness has high diminishing returns as I discussed in my previous article “GDP vs. True Societal Success”.

Perhaps it is time to begin shifting our focus on international economic policies but at the end of the day in our continuous strive of endless growth, let’s also keep in mind what the true economic objectives should be, a mix of global prosperity and happiness.

 

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