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The IMF’s Line on Sound Economic Policy: Build up Counter-Cyclical Policy Capacity, and Tackle Inequality

by Ben Clift on May 3, 2018
Blog

In a curtain raiser speech for the recent IMF & World Bank Spring Meetings with finance ministers and central bankers, Managing Director Christine Lagarde noted better prospects for global growth, but also the need to build up counter-cyclical monetary and fiscal policy buffers ‘creating more room to act when the next downturn inevitably comes’. These policy tools, the IMF points out, can greatly limit the loss of output in future economic crises and recessions. This captures a consistent IMF theme since the global financial crisis—increased emphasis on counter-cyclical macroeconomic policies.

The Spring meetings are one key forum where the IMF performs its mandated role as conduit of international economic co-ordination, and its self-appointed role as global arbiter of ‘sound’ economic policy. Lagarde also advocated guarding against fiscal risks by ‘placing public debt on a gradual downward path … in a growth-friendly way through more efficient spending and progressive taxation.’ Her other key clarion call was to ‘Foster Long-term Growth that Benefits Everyone’. The advanced economies, in particular, need policy actions to tackle ‘disappointing medium-term growth’, which ‘would worsen economic inequality, debt concerns, and political polarisation’.

Advocating tackling inequality, progressive taxation and counter-cyclical fiscal and monetary policies are perhaps somewhat surprising elements of the IMF’s prescriptive policy agenda. A Staff member once noted that the IMF really means ‘its mostly fiscal’, an allusion to the Fund’s reputation for harsh loan conditionality involving spending cuts, fiscal retrenchment and budget deficit reductions as standard responses to economic difficulties and financial crises.  Some interpretations argue that the Fund, after a brief flirtation with Keynesianism in 2008, reverted to pre-crisis fiscally conservative orthodoxy. In fact, as my new book details, the Fund’s role within the politics of austerity has been much more critical and heterodox than that.

Not your grandmother’s IMF

My book substantially revises our understanding of the IMF’s economic policy thinking. The Fund’s reputation for conformity with one-size-fits-all neo-liberalism and ‘Washington Consensus’–style fiscal and intellectual conservatism belies its ideational innovation and more differentiated approach since the crash. The IMF has worked to redefine ‘sound’ fiscal policy and expand policy space for certain advanced economy governments, countering hawkish voices in economic policy debates.

The IMF has used its intellectual authority to challenge important elements of the pre-crisis economic orthodoxy. For a decade now, the IMF has consistently rejected the singular focus on cutting public expenditure to bring debt and deficits down, and has advanced the case for tackling inequality using macroeconomic policy – including increased social transfers and augmented progressivity of income taxes. The Fund has also recognised the instabilities and shortcomings of financial markets, calling for and operationalising stronger, more counter-cyclical financial regulation.

Back in 2008, Fund leadership articulated a ‘Keynesian’ market failure understanding of the crisis, focusing on deficiencies of aggregate demand, and on the destabilising properties of financial markets. The Fund’s re-emphasising of Keynesian insights into higher fiscal multipliers sat outside the normal policy ideas of most advanced economy governments. These had high policy salience given the conjuncture, yet they were not the lessons policy-makers had drawn from academic economics up until the crisis.

The IMF advocated coordinated global fiscal stimulus and then made a series of carefully targeted interventions in the ‘growth ‘versus’ austerity’ debate, deploying its intellectual authority and scientific reputation to advocate policies to escape threats of protracted deflation and ‘secular stagnation’.

Along the way, the IMF put down a series of intellectual markers, spelling out flaws in the ‘expansionary fiscal contraction’ thesis, highlighting the increased potency of expansionary fiscal policy and public investment under recessionary conditions, and underlining how fiscal consolidation can be self-defeating.

Economics and Ideology

As my book explores and reveals, economic ideas are always rooted in ideological assumptions about how the economy and policy work. Various techniques have been developed in economics to attempt to assess fiscal policy effects, but none is perfect. There are well documented difficulties of isolating specific fiscal policy effects, since factors other than fiscal policy have an impact on the economy, and growth has effects on fiscal policy as well as vice versa. No ultimate ’scientific’ judgement is possible and the economics profession is and always will be divided on this. In the background are underlying economic ideological views on the efficacy and desirability of public spending, state intervention, and public power playing a major role in the market economy.

There is a breadth, along a surprisingly wide continuum, of policy approaches reconcilable to ‘mainstream economic thinking’ – in the wake of the global financial crisis. Thus there is no one single ‘lesson from economics’ that policy elites can imbibe. Rather, there is a cacophony of voices, and a range of respectable academic economic opinion.

The ideological spectrum from advocates of ‘expansionary fiscal contraction’ to fulsome supporters of counter-cyclical fiscal activism covers a vast array of policy positions and prioritisations. Those seeking to adopt positions anywhere along this spectrum can seek and find corroboration from holders of Nobel prizes.

This gives sources of authoritative economic policy commentary such as the IMF scope to select, prioritise and choose within this menu of respectable economic thinking. This makes the selection of which economic ideas and insights are afforded primacy a highly significant and a deeply political process.

In this light we can better appreciate the political role played by the Fund in seeking to shape understandings of sound economic policy conduct in selecting and foregrounding particular rationales, insights and prioritisations when making policy recommendations. All of which is uncomfortable territory for a Fund keen to retain a non-political character removed from such ideological considerations, and to assert its intellectual authority as a source of scientific, technocratic economic policy wisdom. Whilst Lagarde’s speeches and Fund surveillance and commentary are always cloaked in scientific and technocratic parlance, how economic theory is invoked in economic policy recommendation is inherently political.

Yet since the high point of its post-crash influence in 2008-9, the IMF has struggled to sustain this level of ‘traction’ over policy-makers. This indicates limits to Fund efforts to wield ideational power through its surveillance activities.

Ben Clift
Ben Clift is Professor of Political Economy at the University or Warwick, UK. His latest book, The IMF and the Politics of Austerity in the Wake of the Global Financial Crisis has recently been published with Oxford University Press. His wider research interests lie in comparative and international political economy, and he has published widely on the IMF, French and comparative capitalisms, the politics of economic ideas, capital mobility and economic policy autonomy.

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