Is IMF distancing itself from neo-liberalism? (fwd)

[Robert Weissman <rob@essential.org>]

GUARDIAN (London)  Monday September 27, 1999

A Fund of wisdom rediscovered

	By Larry Elliott
                      
The International Monetary Fund is confused. That's a surprise in itself,
because the IMF is a body that thrives on certainty. It has firm views
about everything, even if most of them are wrong.

Still, it's worth finding out exactly what the Fund is confused about,
because that goes to the heart of the way the global economy is being
governed. Or rather, not governed.

Stuck away in its half-yearly document, the world economic outlook, the
Fund has a section called "macroeconomic stability and the forces of
globalisation: lessons from the 1990s". You might expect a paean to the
values that the IMF has championed, namely that freeing up capital flows
has led to a more efficient use of resources and therefore aided global
growth and stability.

However, as the Fund admits, the 90s have been marked by "unstable
macroeconomic conditions", with global output growing by 3% a year on
average, against 3.5% in the 80s and 4.5% back in the bad old 70s.

"The instability has included a large number of currency crises;
substantial swings in exchange rates among the major currencies,
especially the yen/dollar rate; run-ups in asset prices followed by
pronounced asset price deflations; and banking crises in almost all
regions of the world- often, though not always, linked to asset price
collapses."

Well, yes, absolutely. Couldn't put it better myself. But there's more.
"It is unclear whether macroeconomic instability generally has been
increasing. However, the mere fact that it has remained pervasive may be
considered surprising given the general improvement in macroeconomic
policies in most countries compared with the two preceding decades -
suggested, in particular, by declines in inflation and better containment
of fiscal imbalances - and the substantial progress worldwide with
structural reforms that have increased the scope for market forces to
guide the allocation of resources within and across countries."

The report then lists four recent developments in the global economy.
First, there is the trend towards lower inflation, which the IMF believes
is largely due to trade liberalisation, privatisation, and the conduct of
monetary and fiscal policy.

Second, there is the rapid integration of financial markets in the 90s
following the liberalisation of the 70s and 80s. This has resulted in
"private capital flows to emerging countries unprecedented in scale at
least since the first world war". The IMF says the large flows into
developing countries in the build-up to the recent crisis in part
reflected "unsustainable developments in the recipient countries".

Third, economic and financial linkages and policy transmission mechanisms
across countries have become more complex in the 90s, with a tendency for
capital to flow into dynamic countries and regions. "However, as
experience shows, large net capital flows into strongly expanding
economies may exacerbate risks of overheating and asset market bubbles,
while reversals of such flows can severely strain weak financial systems
and lead to destabilising currency movements."

Finally, flexible exchange rates have become increasingly prevalent. "In
the 90s, short-term exchange rate volatility has remained high with no
clear trend, which is somewhat surprising in view of the decline in
worldwide inflation." Surprising? There are trillions of dollars zipping
around the world every day without let or hindrance so is it surprising
that there is exchange rate volatility?

The IMF sums things up like this: "Taken together, developments in the
global economy in 90s and the hypotheses to which they give rise are not
particularly reassuring. They point to a global economic and financial
system with great potential for allocating resources more efficiently
within and among countries, but also with a potential for excesses to
develop in asset markets and the private sector, and therefore for
recurrent macroeconomic instability even when macroeconomic policies are
reasonably well disciplined."

So, there you have it. The economic system so cleverly constructed over
the past 25 years has resulted in lower levels of growth, asset price
bubbles, foreign exchange volatility and permanent macro-economic
instability. But inflation is lower, so what the hell.

Of course, not everybody has been surprised by these developments. Keynes
argued that flexible exchange rates and free international capital
mobility are incompatible with global full employment and rapid economic
growth in an era of free trade.

Professor Paul Davidson, the keeper of the sacred Keynesian flame, says
the problem was that Keynes's analytical system was not incorporated into
orthodox theory. Instead, the idea was implanted that either markets were
efficient, which was the view of people such as Milton Friedman, or were
only temporarily inefficient and could be made efficient, which was the
view of a group known as neo-Keynesians.

Davidson argues that the logic of true Keynesianism is that the primary
func tion of financial markets is to provide liquidity.

"Since a liquid market must be an orderly one, rules and institutions must
be developed to guarantee orderliness," he says.

"If Keynes's liquidity preference theory of orderly financial markets is
relevant, then financial markets can never deliver, in either the short or
long run, the efficiency promises of efficient market theory. In the real
world, efficient markets are not liquid and liquid markets are not
efficient."

In strategic terms, Davidson argues that there needs to be a complete
overhaul of the international financial system along the lines that Keynes
wanted at Bretton Woods. However desirable that might be, the reality is
that there is no political constituency - even among the parties of the
left - for such reforms.

However, one thing that could be achieved is to ensure that the
development strategies of poorer countries are not jeopardised by a
continuation, and even an intensification, of the policies which have
failed in the past.

Caning the speculators

In a study of the Asian crisis, Jeffrey Henderson of the Manchester
Business School found that there were distinct differences between those
nations which felt the full heat of the meltdown and those - like Taiwan
and Singapore - which emerged relatively unscathed.

"Taiwan and Singapore have so far remained largely outside the web of the
crisis because they continue to have effective (though very different)
developmental states.

"As a consequence they have been able to construct more robust economies
than the others, partly by withdrawing property and stock markets as foci
for speculative investment, partly by maintaining the institutional
capacity and bureaucratic skill to - in the Singaporean phrase - 'cane the
speculators', and partly by continuing to practise strategic economic
planning."

Henderson's point is that there is something inimical between the
long-term capital commitments and the patience needed for "late
industrialisation", and the speculative and short-term portfolio flows
induced by the sort of capital-market liberalisation traditionally urged
on developing nations by bodies such as the IMF.

This is what bodies such as Oxfam have been saying for some time. Debt
relief, they say, is not an end in itself, but should be channelled into
laying the foundations for development through investment in the basic
social infrastructure.

What this means is a more restricted role for the IMF, which should advise
on the right conditions for macro-economic stability, but should do so
within a framework that makes poverty reduction a priority.

What it does not mean is countries being force-fed structural adjustment
programmes and being bullied into ill-timed and self-defeating capital
liberalisation.

The Fund says that structural adjustment programmes are to be given an
anti-poverty focus, with even the name being changed from Esaf (enhanced
structural adjustment facility) to the "poverty reduction and growth
facility".

But, as we found with Sellafield, changing the name is one thing, changing
the way things are done is quite another.

Gordon Brown and Clare Short believe that the IMF can be changed, that it
can be weaned off neo-liberalism.

It is encouraging that, inside the IMF, people are having second thoughts
about the wisdom of the prevailing orthodoxy. If that means the Fund
returns to doing what it was set up to do - creating the macroeconomic
conditions for growth and the advancement of human welfare - it will be
good news for all of us, even if long overdue.