World Economy

Neoliberal policies have led to inequality: IMF

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Instead of delivering growth, some neoliberal policies have increased inequality and have not delivered as expected, according to a recent report from the International Monetary Fund (IMF).

Neoliberalism, a policy model that advocates the control of economic factors to the private sector from the public sector, has been a dominant ideology since the 1980s. It rests on two main planks. Firstly, by increased competition that is achieved through deregulation and the opening up of domestic markets and, secondly, through privatization and limits on the ability of government to run fiscal deficits and accumulate debt, the paper – dated June 2016 - explained.

While the paper, authored by Jonathan Ostry, the deputy director of the IMF's research department; Prakash Loungani, its division chief; and Davide Furceri, an economist, applauds the neoliberal agenda for a number of things, it also outlines two aspects of the neoliberal agenda that have failed to deliver. These include capital account liberalization, also known as removing restrictions on the movement of capital across borders and fiscal consolidation, sometimes referred to as austerity.

"There is much to cheer in the neoliberal agenda. The expansion of global trade has rescued millions from abject poverty. Foreign direct investment has often been a way to transfer technology and know-how to developing economies. Privatization of state-owned enterprises has in many instances led to more efficient provision of services and lowered the fiscal burden on governments," according to the paper.

Here's how we tackle inequality

Discussing the IMF paper in a research note, Rabobank's financial markets research team has said the two aspects outlined are directed to specific countries.

"It argues for the reintroduction of some capital controls...and abandoning fiscal austerity policies...which is directed at Germany, the U.K., and the U.S. in particular," the bank said.

Costs of inequality

The IMF authors also state that the costs in terms of increased inequality are prominent and such costs epitomize the trade-off between the growth and equity effects of some aspects of the neoliberal agenda. They further argue that increased inequality in turn hurts the level and sustainability of growth.

"Even if growth is the sole or main purpose of the neoliberal agenda, advocates of that agenda still need to pay attention to the distributional effects."

The report highlights that since both openness and austerity are associated with increasing income inequality, this distributional effect may have an impact on economic growth.

"The increase in inequality engendered by financial openness and austerity might itself undercut growth, the very thing that the neoliberal agenda is intent on boosting. There is now strong evidence that inequality can significantly lower both the level and the durability of growth."

In order to deal with this economic damage, the authors suggest that policymakers should be more open to redistribution than they already are. It recommends designing new policies in order to mitigate some of the impacts in advance, for example, through increased spending on education and training which in turn could expand equality of opportunity.

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