How did the IMF "beat the Rand" and excite leftists with the "end of neoliberalism"?

Миналата седмица списанието Finance&Development (F&D), публикувано от Международния валутен фонд,  се превърна в любимо четиво на левичарите по цял свят. Опитвайки се да не забелязват случващото се във Венецуела, почитателите на плановото стопанство започнаха да разнасят статията от F&D, носеща много значителното заглавие “Неолиберализъм: надценен?“[1], доволно потривайки ръце, че видиш ли сега вече я пипнаха тая Айн Ранд.[2]

What's actually in the article?

To begin with, what is written is not an official position of the IMF, it is not a detailed report on the "evils" of the free market, but a short, almost journalistic essay by three left-wing economists working at the Fund. In any case, it is even surprising that the IMF still holds somewhat pro-market positions, given the academic environment in the Western world (from which it draws its economists) and the fact that it is run by a French politician.

The text begins with a definition of neoliberalism as the opening of markets (including financial markets) to international competition and the reduction of the role of the state, combined with smaller fiscal deficits, less debt and privatization. It is correctly noted that the term “neoliberalism” is used mainly by opponents of the above-described ideas of a free market and a minimal state, which we cannot help but perceive as a form of self-admission on the part of the authors.

They continue their exposition with what (in their opinion) we can applaud the market and competition for - little things like: " saving millions from humiliating misery", "transferring know-how and technology to developing economies", "efficient delivery of a range of services thanks to privatization", "reducing the fiscal burden on governments". They then tell us that they will specifically focus their criticism on two aspects of what they define as "neoliberalism" - the free movement of capital and the policy of reducing fiscal deficits (popularly known as austerity). We are left wondering whether an article entitled "Free movement of capital: overrated?" would have pleased the global left so much. Let us consider the two main lines of criticism.

Foreign investments – can they create crises?

It is known from the theory that open international capital markets allow economies to grow significantly faster. Developing economies benefit from borrowed capital, while investors receive a better return on new markets. The main way for rapid economic growth in places like Bulgaria is through maximum openness to capital movements and good conditions for foreign money to remain. And this is without mentioning other valuable imports for long-term economic development (coming with investments) such as human capital, business culture, know-how, technology, etc. This is not disputed in the article.

The authors are concerned about the "fast, speculative capital", which since 1980 (as the study cited in the text shows) can be associated in 20% of cases with some form of financial crisis. There is hardly any room for doubt in the data, but the idea that the crisis (in 1/5 of the cases) is caused by the very free movement of the so-called "hot money" is strange. Financial bubbles do not arise from the ability to freely handle our money - rather, the fault lies with regulatory and especially monetary policy. And the perfect way to avoid the effects of speculative capital (which comes and goes) can be found in North Korean autarky - where there are no investments.

The other problem with the free movement of capital, according to the authors, is the inequality created by the influx of investment into developing countries. In other words, when we are all mired in the misery inherited from the planned economy, some investors come, build enterprises, and those of us who have jobs in the new enterprises are no longer “equal” with our still poor fellow citizens. Calling this “problematic inequality” is acceptable only to people in the leftist ivory tower.

Over-indebtedness – no problem?

The topic of investment and free movement of capital is followed by truly astonishing passages trying to say that the over-indebtedness of Western European countries is not such a problem – despite the situation in Greece, despite the European Central Bank having already fired all its monetary bullets to stop defaults in Italy and Spain, despite the anemic economic growth. It seems that until the situation becomes “Greek” we can calm down and think that everything is fine.

In line in meaning – Great Britain with 90% government debt to GDP, France with 96%, Spain with 100%, Italy with 132%, levels that have been seen in recent centuries only during wars and the size of the first and second world wars. If we also count unfunded liabilities (promises for pensions and social payments) we move to debt levels in the hundreds of percents of GDP.

With evasions like the fact that a drop from 120% to 100% debt/GDP led to a very small reduction in credit risk. With statements that contradict their own thesis – for example, that the markets give a smaller chance of credit default to countries with a better financial history. Or with the claims that instead of budget surpluses, it is better for countries to cover debt with higher economic growth – which will somehow pop up out of nowhere. The authors fail to prove to us in any way that budgetary discipline or even more so the scarecrow of “neoliberalism” are overrated. It would be curious if what is written in the article is really the official position of the IMF – when should we expect the Fund to be withdrawn from the Troika in Greece or the covering of all the obligations of the Greek budget, just like that, without any requirements for reforms.

It is not surprising that leftists (mainly people with poor economic literacy) are rejoicing over the "end of neoliberalism", but it is a little strange that such click-bait headlines are published by a serious institution like the IMF.

[1] Neoliberalism: Oversold?

[2] In fact, the authors of the article are targeting the ideas of Milton Friedman – unlike our leftists, they know the difference between an economist and a novelist.

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