Chang & Grabel on The End of The Neoliberal Approach To Development

The following is an extract from Ha-Joon Chang and Ilene Grabel's new book Reclaiming Development: An Alternative Economic Policy Manual :

We should take note of what we see as the beginning of the end of the neoliberal approach to development. The process of discrediting that development model begins in the aftermath of the east Asian financial crisis of 1997–98. At the time there appeared to be nothing new in the nature of the east Asian crisis or in the crisis response. But, in fact, the east Asian crisis marked the gradual beginning of the end of the neoliberal consensus in the development community. The severe constraints on policy space that followed the east Asian crisis created momentum behind a new vision – that developing countries had to put in place new strategies and institutions to prevent a repeat of the events of the late 1990s. Policymakers in a number of Asian countries and in other successful developing countries sought to insulate themselves from the hardships and humiliations suffered by east Asian policymakers at the hands of the IMF. Indeed, as a consequence of the crisis, the IMF suffered a loss of purpose, standing and relevance. In the early 2000s, demand for the institution's resources was at a historic low. In 2005, just six countries had standby arrangements with the fund, the lowest number since 1975. From 2003 to 2007, the fund's loan portfolio shrank dramatically: from $105bn (£63bn) to less than $10bn. The fund's loan portfolio contracted even further after the loans associated with the east Asian crisis were repaid, as those countries that could afford to do so deliberately turned away from the institution. This trend radically curtailed the geography of the IMF's influence. In this context, the IMF began to soften its traditional opposition to policies that regulate the international movement of capital (ie policies called "capital controls"). At the same time, the World Bank also began to show signs of grudging change in its traditional opposition to industrial policy.

Read the rest here.

Note: Chang & Grabel's book has an introduction written by Robert Hunter Wade. Although I could not transcribe parts of his intro into this post, let it be known that much of Wade's position with respect to the topic at hand is illustrated here.

G-24 Policy Brief: Capital Flow Management and the Trans-Pacific Partnership Agreement

A recent Global Economic Governance Initiative (GEGI) G-24 policy brief by Kevin P. Gallagher, Anna Maria Viterbo, and Sarah Anderson asses the degree to which the final draft of Obama's TPP (Trans-Pacific Partnership) deal must include significant safeguards to prevent and mitigate financial crises. The authors provide an alternative legal language that could be incorporated in future trade deals such that nations have the space and flexibility requisite to ensure financial stability. In my view, however, it is perhaps highly unlikely that the power brokers of TPP would even consider or critically reflect on the far-reaching proposals. From the Intro:

The Trans Pacific Partnership (TPP) being negotiated by 12 governments represents an important opportunity for a fresh approach to the treatment of capital flow management measures in trade agreements. Most regional and bilateral free trade agreements (FTAs) and bilateral investment treaties (BITs) enacted in the past two decades have encouraged capital account liberalization based on the view that this policy choice would facilitate more efficient international allocation of resources and spur foreign investment and growth in developing countries. In recent years, however, there has been a major re-thinking on the issue of capital account liberalization. In December 2012, the International Monetary Fund (IMF) issued a new “institutional view” that endorses the regulation of cross-border finance in some circumstances. The IMF also pointed out that many trade and investment treaties do not provide the appropriate level of policy space to regulate cross-border finance when needed. While the IMF’s new position was the outcome of many years of analysis, it was no doubt influenced by the 2008 financial crisis and the fact that a number of governments have used various forms of capital flow management measures (CFMs) in recent years to address financial volatility. The Trans-Pacific Partnership, as the first major trade negotiations since the 2008 crisis, presents an important arena to ensure coherence between current thinking on CFMs, including the IMF’s “new view," and trade and investment agreements.

Read rest here.

IMF's New View on Capital Controls

By Kevin P. Gallagher and Jose Antonio Ocampo

"Weeks before the spring meetings of the International Monetary Fund (IMF) in Washington next month, GDAE Senior Researcher Kevin P. Gallagher and Colombia University economist Jose Antonio Ocampo offer a critical analysis of the IMF's new view on capital account liberalization and the management of capital flows. The article, “The IMF’s New View on Capital Controls,” appears in India's Economic and Political Weekly (see here).

In the 1970s the International Monetary Fund became an advocate of capital account liberalization, and in 1997 it tried to change its Articles of Agreement to include capital account convertibility among its mandates. In contrast, the IMF embraced in December 2012 a new "institutional view" on this issue. While it remains wedded to eventual financial liberalization, it now acknowledges that free movement of capital rests on a weak intellectual foundation. Gallagher and Ocampo claim that this is a step in the right direction, but that the new institutional view still suffers from a number of shortcomings that will need to be addressed in national capitals and in other international fora.

Although a significant step forward, the new institutional view is still out of step with country experience and economic thinking in many respects. In particular, it continues to insist on eventual capital market liberalization despite the lack of evidence supporting it, is too narrow concerning the sanctioned use of capital account regulations on inflows and outflows, and does not deal with the implications for multilateral aspects of regulating cross-border finance."

Troika Kleptocracy

From the Guardian (see here):

"The imposition of a levy on savers in Cypriot banks marks a new turn in the European crisis. Savings of over €100,000 will be subject to a 10% tax, and those under €100,000 one of 6.7%, although it's reported these levels may change. The raid has been instructed by the "Troika" – the European commission, the IMF and the European Central Bank – as part of a characteristic "take it or leave it" ultimatum to the Cypriot government. The parliament in Nicosia is being pressed to ratify the deal with the threat that without it there will be no bailout funds and the ECB will withdraw all liquidity support to the stricken banks.

The Troika and its supporters have justified the levy by arguing that the state could not support the debt burden of a bank bailout. But this simply means the debt burden has been transferred from the banks, where it properly belongs, to households, who had no part in their lending decisions.

 ...
But it is foolish of the Troika to assume that its confiscation of Cypriot savings will have no international implications. Savers all across Europe will look on in horror, and are bound to wonder whether it could happen in their own countries. It is entirely possible they will respond by shifting their savings into state or postal savings banks at the very least, even if outright bank runs are avoided. If this happens on sufficient scale, it could further undermine the fragile banking system in a number of countries.

To prevent Troika raids, deposits need to be put into protective custody to preserve both savings and the domestic banking sector. For anti-austerity governments, these funds could then be used to support state-led investment and reverse the European depression."

Read the full piece here.

Fiscal consolidation, what does it mean really?

There are a few ways you can look at the term fiscal consolidation. Fiscal consolidation is often (in IMF-speak) equated with lower spending and higher revenues, which are policy instruments not outcomes. A more rational way of looking at consolidation is that it is about lower deficits and debt, which are outcomes. The point is that in general it is expansionary fiscal policy (higher spending and lower taxes) that lead to fiscal consolidation (lower deficits and debt), since expansionary policies increase income and revenue.

Hence, lower spending and higher taxes should be properly called fiscal austerity. And austerity, even if you do not follow functional finance, is contractionary. Mind you, it is not just the IMF that confuses consolidation with austerity.

Larry Summers in his recent op-ed on British economic policy says that:

"Britain must change the pace of fiscal consolidation to stand a chance of avoiding a lost decade. Rather than starving public investment, now is the time to add to confidence by making plans for structural reforms to contain the growth of public consumption spending over time. It is also time to take overdue measures to promote exports and, after years of appropriately low investment, to restart housing investment. But when demand is needed for growth and the private sector is hanging back, the first priority must be for the public sector to stop exacerbating the contraction."

Yes, he wants more spending (or lower taxes, God knows). But not much. Note that this continues to be the position of the IMF, even if the IMF has sort of admited that fiscal multipliers are larger than they previously thought (something that has made Krugman very happy; here too). In the last IMF Fiscal Monitor (October, 2012) you can read:

"With downside risks to the global economy mounting, policymakers must once again tread the narrow path that will permit them to continue strengthening the public finances while avoiding an excessive withdrawal of fiscal support for a still-fragile economic recovery."

I for one think that Europe and the US need a huge fiscal stimulus, and forget about consolidation. Consolidation is the result of economic growth and fiscal expansion is the best way to get it.

PS: And by the way, that's what was said in the Trade and Development Report 2011, which basically was a reply to the IMF's lukewarm pro-austerity views.

More on the "New IMF"

More evidence for the changes in our NIMF (New International Monetary Fund). In the executive summary to the last WEO, it argues that:

"Fiscal adjustment has already started, and progress has been significant in many economies. Strengthening medium-term fiscal plans and implementing entitlement reforms are critical to ensuring credibility and fiscal sustainability and to creating policy room to support balance sheet repair, growth, and job creation."

That is, not only they want continuing fiscal adjustment, but also cuts to entitlement programs like pensions (in IMF-speak its entitlement reform; one more for the English-IMF/IMF-English dictionary). Because fiscal consolidation (they mean austerity, cutting spending and increasing taxes) will lead to growth and job creation. Sounds new, doesn't it?

So does the IMF think that the periphery of Europe should not continue to tighten fiscal policy? Here is what they have to say:

"In the economies of the periphery [of Europe], a major task will be to find the right balance between fiscal consolidation and structural reform on the one hand and external support on the other, so as to ensure that adjustment in these economies can be sustained."

So external support yes, and of course continue with the adjustment. And yes in IMF-speak structural adjustment means cuts in social programs, or entitlement reform. Again nothing like the fresh new approach at the Fund.

And in Latin America? Well no worries they also have a new approach. For them:

"Some emerging market economies are contributing more domestic demand than is desirable (for example, several economies in Latin America); ... [Latin America] needs to restrain strong domestic demand by considerably reducing structural fiscal deficits and, in some cases, by further removing monetary accommodation."

Yes, more contractionary fiscal and monetary policies. The NIMF is full of 'new' ideas! Uhm, that nice smell of new policy measures!