[ Maurizio Franzini]
Jonathan Ostry – deputy director of the economic department of the International Monetary Fund formed Oxford, the LSE and the University of Chicago – after product, with several co-authors, important empirical studies on the relationship between inequality and growth, a few weeks ago published on the IMF’s quarterly magazine , Finance and Development, a short paper written with Prakash Loungani and David Ferceri, entitled neoliberalism: Oversold? Their main conclusion is that some distinctive policies of neo-liberalism – strongly supported in the past the IMF – have yielded effects opposite to those which were expected. Not surprisingly, the paper caught the attention of the world media have widely interpreted as a denial of himself by the IMF. Maurice Obstfeld, the chief economist of the IMF, has responded to these interpretations, talking about evolution, not revolution of the Fund.
Everyone can evaluate how convincing his arguments. These notes are not dedicated to the IMF’s consistency – which is of course not a question of who can be disinterest – but the contents of the paper and their link with previous analyzes conducted by the same Ostry with other co-authors. The argument is that these jobs provide, overall, a very interesting interpretive framework of links between the policy, inequality and growth can affect if not on concrete policies adopted at least on the apparatus conceptual and empirical, in a rational world, should inspire them.
I will begin by recalling that the two neoliberal policies on which Ostry and his coauthors linger are: the liberalization of international capital movements (specifically those of short-term), obtained by removing the obstacles to their free movement, and fiscal consolidation, or how frequently says the austerity policies. These two policies are linked to those of our authors consider the dominant themes of neo-liberalism, which, as we know, there may be multiple interpretations and definitions and rarely convergent (see, among others, R. Venugopal, Economy and Society , in May 2015). These issues are: i) increased competition to be achieved through deregulation and the opening of national markets; ii) the reduction of the role of the state through privatization and the imposition of strict rules on public deficits.
In the paper (which in turn is based on the works of other authors) it is argued that these two policies It has largely failed to achieve the goal – which was taken for granted they would reach – to raise the rate of economic growth in a context of substantial stability. With regard to liberalization, the effect that is emphasized is that the instability introduced by short-term capital movements, which further effect would be to determine, since 1980, about 150 waves of capital inflows in emerging countries tradottesi, in 20% of cases, in financial crises which often was followed by a real economic crisis. The phenomenon is so extensive that it can not be considered a “minor impact” and secondary to that policy.
With regard to fiscal consolidation, Ostry, Prakash and Ferceri while moving carefully and drawing distinctions between different situations, argue the lucky thesis expansionary austerity – that is, essentially, the idea that the reduction of public spending will follow an increase in demand and income – has little foundation since episodes of fiscal consolidation more frequently by contractions were followed not by expansions of production and output. According to their estimates a magnitude of consolidation of 1 percentage point of GDP leads to a deterioration of 0.6 percentage points in the long term unemployment rate.
These elements are enough to take the first important conclusion, namely which it is not easy to identify the benefits of these policies in terms of increased growth. So, this is their first fault and therein lies the first mistake of those who – to start right by the IMF – has called for their adoption.
The second point is no less important but perhaps the biggest news regards attention to the effects of these policies on inequality. With reference to the austerity policies, the paper states that a consolidation of the already assumed size of 1 percentage point worsens the Gini index by 1.5% in the space of five years (an effect anything but mild) . The effects of waves of capital inflows on inequality are more substantial, particularly when lead to a crisis: in this case the worsening in the Gini can exceed 3% over the next 5 years. Therefore, the second conclusion is that these policies, so ineffective in delivering growth, cause a worsening of inequality. The note (and very little solid) of the trade-off theory that the price to have more growth would be a greater inequality is completely invalidated by these policies that seem to have assured the worst in both of these dimensions. Is a certain nostalgia for the trade-off.
But there is more. Our authors argue that the greater inequality has contributed itself to the reduction of growth exacerbating the effects of the “worst of all” these policies have produced. In draw attention to this aspect, the paper refers to previous and important works of Ostry with various co-authors which show, in fact, that, in general, the greater inequality harms growth and, furthermore, that a reduction of the first, especially if it comes from minor differences in market income and not by more sustained redistributive action, it can have significant positive effects on the second. Therefore, no trade-off, and that means that if the inequality even worse growth worsens. Exactly what seems to have happened because of the two neoliberal policies mentioned above.
Hard to deny that we are looking at results of great interest and it must also be recognized that the latter contribution Ostry with his co-authors should be to complete an interpretive mosaic initiated in previous works. The first step was to deny the trade-off between inequality and growth (also in line with a large number of previous theoretical and empirical contributions) stating, as Ostry and Berg made already in 2011, that this trade-off does not exist. The growing inequality was due to less sustained growth and hence also lower in the long run.
Then, you tried to give an account of this report arguing that inequality promotes financial crises, it creates instability policies weaken investment and may make it more difficult for governments to make unpopular but necessary decisions in the presence of shocks, such as cutting public spending or raising taxes to avoid a debt crisis. These interpretations seem a bit ‘too limited due to the lack of a precise assessment of policy and their responsibilities. In this sense, the latest paper marks a step forward because it allows, in various ways, to draw the most complete and most complex links between policies, inequality and growth.
This breakthrough allows, however, for come to a conclusion that can be summarized as follows: the neoliberal policies (or at least some of them) have been due to greater inequality without ensuring higher growth and, due to the lack of trade-offs, have also contributed to the slowdown in growth. Again, this is not a small achievement. It is also important that you begin to assess the impact that policies have on inequality; these assessments become especially necessary in the absence of trade-off, that is, whether to reduce inequality is a means to sustain growth and, therefore, to achieve what should be two goods (less inequality and more growth).
A positive sign in this direction is also the OECD. An entire chapter of the last Economic Outlook is in fact dedicated to this issue, too long overlooked. The effort is to verify the effects that different policies have on inequality in incomes and productivity, the dynamics of which, in the interpretation of the OECD, is closely linked to that of inequality. Policies to which you refer are not only redistributive and attention is paid to the effects they can have on inequality in market incomes. You could say that we try to determine the pre-distributional effects of policy, at least implicitly recognizing the importance of pre-deployment, on which we have recently focused on the Dummy .
OECD policies are examined, for example, those relating to the composition of public spending, the adjustment of labor markets, the innovation and those of taxation. The results in many cases are not robust, and further analysis is needed. But it is clear the importance of the specific design of individual policies and the fruitfulness of this line of analysis. I quote one interesting example: the innovation policies can have strong effects of reducing inequalities if they are favoring productivity growth of more distant companies from the technological frontier and where wages are, on average, and in a generalized way, lower.
These job open, therefore, new perspectives and identify two factors that can lead to abandonment of the worst neo-liberal policies, which may have resulted in the aggravation of two evils. The two factors are a revision of the importance to be assigned to the reduction of inequality, greater knowledge and awareness of the effects that the policies (not only redistributive) exert on inequality.
Of course it’s a possibility. The certainty that this will happen we are not allowed to feed her. And there is, in fact, one wonders how the IMF and the OECD will be able politically to spend the precious treasure of knowledge that are helping to create. For example, there is wonder how you combine all this with the role that the IMF is playing in the greek debt management (and the consequent compliance). Daniel Gros recently documented some paradoxical aspects of this role, that they are, despite the statement by the IMF to be in favor of a reduction in greek debt. Particularly significant is the fact that the IMF is a particularly onerous lender in terms of interest rates. The terrible doubt that it can take direct advantage from the application of policies that generate the evils that have been widely discussed in these notes. And that other, who knows how many, can continue to impose its benefits now that the theories can justify these advantages seem to bare as the king.
Published Ethics and Economics 19 June 2016
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