The retreat of neoliberalism

By William Gumede

An internal IMF report admitting the destructive nature of neoliberalism may have come too late for many African countries. The neoliberal structural adjustment programmes have led to economic hardships, political instability and conflicts in most African countries where they have been implemented.

This article is reproduced from Pambazuka News, 21 July 2016.
For decades African countries have been forced by the World Bank and the International Monetary Fund (IMF) to implement neoliberal policies, including opening their markets to foreign competition, reducing the role of the state in providing basic services and abolishing subsidies to the poor.

However, an IMF internal paper published in July for the first time admits that the neoliberal reforms prescribed by the Bretton Woods organisations are flawed, have increased inequality and have not necessarily delivered economic growth.

The report, headlined “Neoliberalism: Oversold” is written by three leading IMF economists – Jonathan Ostry, Prakash Loungani and Davide Furceri. The report says new research on the impact of neoliberal policies on recipient countries has led to “disquieting conclusions” for the World Bank, IMF and proponents of neoliberalism.

The IMF report specifically looks at two aspects of neoliberal reforms: the removal of barriers to capital flows, called capital account liberalisation, and reducing public spending aimed at cutting fiscal deficits and public debt, called fiscal consolidation, or more commonly austerity.

The report makes three devastating conclusions: One, that the neoliberal reform programme has not delivered increased economic growth. Secondly, neoliberal reforms have increased inequality. And thirdly, the increased inequality caused by neoliberal reforms has in turn undermined the level and sustainability of economic growth.

The report states that the removal of barriers to capital flows, or financial openness, has often resulted in short-term speculative, so-called “hot” inflows, in developing countries. However, such speculative capital inflows to African and developing countries are often quickly withdrawn by industrial country investors as they seek better returns elsewhere, destabilising African and developing country economies which were initial recipients of such “hot” inflows.

Such speculative inflows neither boost growth nor allow the African or developing country to share the costs of such destabilisation with the industrial countries from which speculators originate.

The IMF report shows that since 1980, there have been 150 incidents of increased volatility in more than 50 developing countries which pursued financial openness strategies involving sudden inflows and outflows of portfolio capital, with about 20% leading to severe financial crises in these economies.

The report concludes that “increased capital account openness consistently figures as a risk factor in these cycles”. It reckons that the benefits of growth from short-term capital flows as a result of financial openness are “difficult to reap”, and the risks associated with such reforms, “in terms of greater volatility and increased risk of crisis, loom large”.

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The authors conclude that there was an increased “acceptance of controls to limit short-term debt flows that are viewed as likely to lead to – or compound – a financial crisis”. They argue that while exchange rates and financial policies could help to alleviate risks of increased financial instability, “capital controls are a viable, and sometimes the only, option when the source of an unsustainable credit boom is direct borrowing from abroad”.

The report says that although high public debt is detrimental to growth and welfare, it would be better for African and developing countries to pay off their public debt over a longer time, rather than cut current productive spending needs. To lower public debt, proponents of neoliberal reforms have proposed that taxes should be raised or public spending cut, or both.

However, the IMF authors argue that 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, the IMF authors argue that “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 IMF report says austerity policies worsen unemployment and increase the cost of welfare through supply-side channels. The IMF authors conclude that the notion that fiscal consolidations could be expansionary – increasing employment and output in the economy, ostensibly by raising private sector investment and confidence, in practice, actually leads to falls in output, rather than boosting it.

The report states that “on average, a fiscal consolidation of 1% of GDP increases the long-term unemployment rate by 0.6% point and this raises by 1.5% within five years the GNI measure of inequality”.

Proponents of fiscal consolidation have underplayed the short-run costs of such reforms in terms of lower output and welfare and higher unemployment. Furthermore the IMF report argues that the “desirability for countries with ample fiscal space of simply living with high debt and allowing debt ratios to decline organically through growth is underappreciated”.

Jonathan Ostry, the lead author of the report, says that he hoped the report would help with a “broader examination” of the effectiveness of neoliberal economic reform strategies.

In a separate interview in the IMF’s in-house Survey Magazine, the IMF’s chief economist Maury Obstfeld says it is important that the IMF “constantly re-evaluate (its) thinking in light of new evidence”.

The neoliberal reform policies pushed by the IMF and the World Bank, called structural adjustment programmes, in Africa, essentially consists of two pillars. One, recipient African countries have to open their domestic markets to foreign competition – mostly from firms from the industrial countries and former colonial powers who dominate decision-making in the World Bank and IMF.

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Secondly, African recipients of development assistance have to reduce the role of the state in the economy. This includes privatising state owned companies – often bought again by firms from industrial countries and former colonial powers dominant in the World Bank and IMF.

Alternatively, many African governments sell the privatised entities to politically well-connected cronies – often cheaply, supposedly as part of black empowerment or indigenisation programmes. Ironically, in both cases these privatised entities more often than not remain burdens on the state as they, to remain viable after their sell-off, often continue to be heavily subsidised by the state.

The neoliberal reforms also include recipients abolishing subsidies to the poor, unemployed and vulnerable. The World Bank and IMF in many cases take over supervision of the monetary and fiscal policies of the recipient country.

African recipients must also accept World Bank and IMF advisors who are often totally clueless about the countries they advise, yet they are in many cases arrogant, sneering and dismissive of local expertise.

More recently, many African countries have again turned to the IMF and World Bank for assistance, following the end of Africa’s decade-long commodity-fueled economic boom.

The IMF report on the destructive nature of neoliberalism may have come too late for many African countries. The neoliberal structural adjustment programmes have led to economic hardships, political instability and conflict in most African countries where they have been implemented.

These conditions 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 enriches the already well-off African political and economic elites, autocratic regimes and leaders – and impoverishes 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, where countries had before the popular explosions implemented structural adjustment programmes.

For instance, 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 economic pain, unemployment and popular outrage that she was ousted in the next elections.

Nigeria and Angola, Africa’s two biggest oil producers, have more recently turned to the World Bank and IMF to seek help following low oil prices, falling currencies and widening budget deficits. Nigerian Finance Minister Kemi Adeosun said that the country is looking for $5bn to fund its budget deficit caused by the fall in the oil price.

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Christine Lagarde, the IMF’s managing director, has already said Nigeria must devalue its currency, introduce a free float exchange rate for the local currency, the Naira, and abolish capital controls.

Angola is in discussions with the World Bank and IMF for financial aid. Angola needs at least $1.5bn to cover its budget deficit. It is reckoned that Angola will have a fiscal shortfall the equivalent of 7% of GDP in 2016.

Angola in 2015 was asked by the World Bank to cut its budget by 26 percent. The World Bank wants Angola to cut fuel and other subsidies, strengthen public finance management and find new revenue sources.

In January this year, the World Bank unveiled details of a $3bn loan to Egypt, on condition the country implements a structural adjustment programme which includes reducing the public service wage bill, abolition of energy subsidies to poorer communities, and raising electricity prices and taxes.

African governments taking loans from the World Bank and IMF must fight to secure their policy-making independence. But African and developing countries must collectively fight for greater representation, influence on decisions and policy making in the World Bank and IMF. This should be a key part of the agenda of the African Union, and developing country formations, such as BRICS (Brazil, Russia, India, China and South Africa).

Nevertheless, it may matter little if the IMF and World Bank are reformed and African countries secured the policy space to come up with independent policies; if they do not manage their fiscal positions prudently or borrow irresponsibly.

As a case in point, African countries during the past decade-long “Africa Rising” economic boom often did not maintain fiscal discipline, reduce budget deficits or keep public debt at bay. Many have also not cleaned up their public finances, cut wasteful spending, duplication and inefficiencies.

Many African countries during the boom times also rarely saved surpluses for a rainy day. Many growing African economies also did not diversify quickly enough to bring in new streams of income, beyond exporting raw materials.

Similarly put, if African countries do not come up with quality policies, or if they have them, but the policies are captured by corrupt elements, or half-heartedly implemented, or not implemented at all, they won’t be able to take advantage of the seeming retreat of the four-decade long globally dominant “neoliberalism”.
Author: William Gumede is Chairman of the Democracy Works Foundation.