An IMF internal paper published this month for the first time conceded the neo-liberal package policies prescribed by the Bretton Woods organisations are flawed, have increased inequality and not necessarily delivered economic growth.
The report, titled “Neo-liberalism: Oversold”, has the potential to open the space for African and developing countries to come up with alternative policies.
It was written by top IMF economists Jonathan Ostry, Prakash Loungani and Davide Furceri. Their research had led to “disquieting conclusions” for the World Bank, IMF and proponents of neo-liberalism.
The report specifically looked at two aspects of the neo-liberal strategy – the removal of barriers to capital flow, called capital account liberalisation, and cutting public spending to reduce fiscal deficits and public debt, called fiscal consolidation – or austerity.
It came to three devastating conclusions. First, the IMF/World Bank neo-liberal reform strategies have not boosted economic growth. Second, they have increased inequality. Third, “the increased inequality in turn hurts the level and sustainability of growth”.
The report said the removal of barriers to capital flow, or financial openness, has often resulted in short-term speculative, so called “hot”, inflows in developing countries, which could be quickly withdrawn by industrial country investors as they sought better returns, in the process destabilising economies. Not surprisingly, this did not boost growth or allow the developing country to share the costs of such destabilisation with the industrial countries.
The authors argued while exchange rates and financial policies could help to alleviate the risks of short-term capital outflows, “capital controls are a viable, and sometimes the only, option when the source of an unsustainable credit boom is direct borrowing from abroad”.
The IMF report said although high public debt was detrimental to growth and welfare, it would be better for countries to pay off debt over a longer time, rather than cut current productive spending needs.
It said neo-liberal reformers had argued to lower public debt, taxes should be raised or public spending cut or both. However, the authors reckoned the “costs of the tax increases or expenditure cuts required to bring down the debt may be much larger than the reduced crisis risk engendered by the lower debt”.
Furthermore, it argued, “faced with a choice between living with the higher debt – allowing the debt ratio to decline organically through growth – or deliberately running budget surpluses to reduce the debt, governments with ample fiscal space will do better by living with the debt”.
The authors said austerity policies worsened unemployment and increased the cost of welfare through the supply side channels. They argued that fiscal consolidations could be expansionary, that is increasing employment and output in the economy, ostensibly by raising private sector investment and confidence, many in practice actually lead to the opposite.
“On average, a fiscal consolidation of 1 percent of GDP increases the long-term unemployment rate by 0.6 percentage points and raises by 1.5 percent within five years the GNI measure of inequality.”
Ostry said he hoped the report would help with a “broader examination” of the effectiveness of neo-liberalism reform strategies.
The neo-liberal policies, called structural adjustment programmes in Africa, essentially consisted of two pillars. One, recipients of development assistance had to open their markets to foreign competition – mostly from firms from industrial countries and former colonial powers, who dominate decision-making in the World Bank and IMF.
Second, they had to reduce the role of the state in the economy. This included privatisation of state-owned companies – often bought by firms from industrial countries and former colonial powers. Alternatively, many African governments sell the privatised entities to local cronies, often cheaply, ostensibly as part of black economic empowerment or indigenisation programmes.
Ironically, in both cases, these privatised entities often remain burdens on the state as they are heavily subsidised to remain viable.
The neo-liberal reform package also includes countries having to abolish subsidies to the poor.
The World Bank and IMF take over supervision of the monetary and fiscal policies of the recipient country. They must also accept advisers from these institutions, who are often not knowledgeable about the countries they advise on, yet are dismissive of local expertise.
Recently, many African countries have again turned to the IMF and World Bank for financial assistance, following the end of Africa’s decade-long commodity-fuelled economic boom.
The report on the destructive nature of neo-liberalism may have come too late for many African countries. The impact of neo-liberal structural adjustment programmes has already led to economic hardship, political instability and conflict in many of them.
Neo-liberal reforms may have in some cases lifted economic growth, but brought little equity, jobs or social security, and the irony has been that the structural adjustment often enriched the already well-off political and economic elites, autocratic regimes and leaders – and impoverished ordinary citizens.
World Bank and IMF-inspired economic reforms have often led to political and social instability, as was seen during the 2011 North African youth uprisings.
Former Malawian President Joyce Banda was forced to implement structural adjustment programmes in return for development aid from the Bretton Woods institutions. The reforms caused such unemployment and anger, she was voted out.
African governments negotiating development assistance from the World Bank and IMF must fight to secure their right to come up with their own policies. African and developing countries must collectively fight for greater influence on decision and policy making in the World Bank and IMF. This should be high on the agenda of the AU and Brics.
Nevertheless, it will matter little if the IMF and World Bank are reformed, and African countries finally secure the policy space to come up with their own policies, if they do not manage their public finances more prudently and keep borrowing irresponsibly.
During the decade-long “Africa Rising” economic boom, they often did not maintain fiscal discipline, reduce budget deficits and keep public debt at bay. Many have also not tackled corruption, cut wasteful spending and inefficiency.
Many growing economies also did not diversify fast enough to bring in new streams of income, beyond exporting raw materials. Neither did many save surpluses for rainy days.
If African countries do not come up with quality policies or, if they do, allow them to be abused by corrupt elements, or they are half-heartedly implemented, they won’t be able to take advantage of the seeming retreat of the four-decade long globally dominant “neo-liberalism”.
William Gumede is chairman of the Democracy Works Foundation. His latest book is South Africa in Brics: Salvation or Ruination? Tafelberg (http://amzn.to/1UmFvdK)