Like all big bureaucracies, the IMF shifts its operational doctrines slowly, rewriting its own history as it does so in order to avoid admitting past errors. We are currently witnessing another episode of this glacial move in relation to two issues: budget austerity and foreign capital flows.
EIMF Chief Economist Maurice Obstfeld and World Economic Studies Division Chief Oya Celasun, 12 April 2016 (Flickr/IMF)
The current debate was triggered by some Young(ish) Turks in the Fund's research department asking whether economic 'neoliberalism' had been oversold. For the authors, 'neoliberalism' is typified by two elements:
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.
Neoliberalism is a big canvas, and they actually wanted to discuss just two elements: capital flows and budget austerity (aka 'fiscal consolidation').
What did the maverick Young Turks have to say about capital flows?:
The mounting evidence on the high cost-to-benefit ratio of capital account openness, particularly with respect to short-term flows, led the IMF's former First Deputy Managing Director, Stanley Fischer, now the vice chair of the U.S. Federal Reserve Board, to exclaim recently: 'What useful purpose is served by short-term international capital flows?' Among policymakers today, there is increased acceptance of controls to limit short-term debt flows that are viewed as likely to lead to—or compound—a financial crisis.
On budget austerity, the Fund has always been a strong proponent of fiscal rectitude. The common quip is that 'IMF' stands for 'It's Mostly Fiscal'. While the 2008 financial crisis was not caused by budget profligacy, deficits did expand in response to falling GDP and the need to shore up the financial sector. The resulting impact on government debt became a major policy issue during the recovery phase. The Fund was part of the chorus of international economic institutions (including the OECD and the Bank of International Settlements) that urged a quick return to budget balance after the brief G20-endorsed fiscal expansions of 2009. By 2012, however, some Fund staff (notably then-Chief Economist Olivier Blanchard) saw that the attempt to get budget deficits back to balance quickly was constraining the recovery: the fiscal multiplier was much larger than had been thought. [fold]
Thus the Fund's advocacy of universal fiscal austerity was modified, although the moment for the Fund to have a useful voice in this debate had passed. Policy in the main crisis countries — the US, UK and Europe — was determined by the domestic debate.
On both capital flows and austerity, the Fund has shifted its position in recent years, and has debated these issues extensively. The shift, however, may be more in the rhetoric than in the Fund's actual operations. The IMF's Chief Economist Maurice Obstfelt quickly entered the current debate to downplay any notion that the Fund is shifting much – this is 'evolution not revolution':
Countries need credible medium-term fiscal frameworks that leave markets confident the public debt can be repaid without very high inflation. Countries with such frameworks will typically have room to soften economic slumps through fiscal means, including automatic stabilizers. Unfortunately, some countries let public debt rise to such high levels that they risk losing market access, and have no choice but to tighten their belts even when their economies are doing badly...Of course, there are limits to the pain economies can or should sustain, so in especially difficult cases we recommend debt re-profiling or debt reduction, which require creditors to bear part of the cost of adjustment.
So it looks like the Fund hasn't moved much at all on fiscal advice: build up fiscal space with budget surpluses so that the budget can soften a downturn by allowing the automatic stabilisers to operate when budget revenue falls and unemployment benefits rise. Even the hard-core proponents of fiscal rectitude would find nothing to disagree with here. But this says nothing about whether the US, the UK and Europe (which clearly were not threatened with loss of market access) were right to impose austerity in the recovery phase from the 2008 crisis.
The shift on capital flows may also be more rhetorical than operational. In 2012 the Fund recognised the role for capital flow management in certain limited cases. It's not clear, however, what this means in practice. The Fund still has its technical assistance teams actively promoting international integration of financial markets which encourage greater short-term flows – the very flows now being questioned.
Obstfelt was quick to point out that budget austerity and capital flows are just two elements in the much broader context of economic neoliberalism and that the Fund's re-examination of these two issues 'has not fundamentally changed the core of our approach, which is based on open and competitive markets, robust macro policy frameworks, financial stability, and strong institutions.'
It was probably unhelpful that the Young Turks put these two issues into the broader context of neoliberalism. It triggered a vitriolic response from the Financial Times editorial writers ('childish rhetoric...in seeking to be trendy, instead the IMF looks as out-of-date as a middle-aged man wearing a baseball cap backwards').
In fact, the broad parameters of the neoliberal debate were settled long ago: centrally planned economies all fail (the Soviet Union, China before 1980 and Cuba), and market-based economies succeed if they can find the right institutions and rules. The transition from one to the other is painful (as it was in Russia and Poland) and often gives away too much to individual private interests.
The sensible debate is at the operational level, in the detail. The devil, of course, is also in the detail.
China is a successful economy with a lot of government interference and ownership. South Korea has been stunningly successful with very dirigist policies, especially initially. Sensible economic policies don't come out of doctrinal debates, but out of measures which recognise the existing conditions (institutions, administrative competence, physical infrastructure and so on), and the limited capacity to change these over time.
