The resurgence of economic orthodoxy is a great example of how declining schools of thought can maintain dominance in the narrative for extended periods of time if the vested interests are powerful enough. In the case of the economics profession, mainstream New Keynesian theory persists because it serves the interests of capital. Recently, the IMF urged the Australian government to engage in ‘fiscal consolidation’ in order to support further interest rate hikes by the RBA aimed at reducing inflation quickly. In general, the IMF is urging nations to engage in fiscal austerity in order to bring their public debt ratios down. The problem is that even their own research shows that these fiscal adjustments on average do not succeed. And, usually, they leave a damaged society where the lower income and disadvantaged cohorts are forced to endure the bulk of the negative effects.
The IMF regularly conduct ‘missions’ to member countries, where a group of highly paid economists trot out to a capital city somewhere, hole up in some luxury hotel, and have a few meetings with Treasury officials and the like and then shoot through after the short visit back to whence they came and produce their report. On October 31, 2023, the IMF published – Australia: Staff Concluding Statement of the 2023 Article IV Mission – which attracted a lot of mainstream press attention in Australia. The message that the public received was summarised in this article – International Monetary Fund says Australia needs higher interest rates. The article carried no qualifications or reflection on the methodology. The journalists who have a high profile in the mainstream national media sanctioned without question the IMFs conclusions. That is what goes for information in these times. It is an assault on our collective intelligence really.
During the – 1997 Asian financial crisis – when the IMF intervened and imposed harsh structural adjustment packages on the impacted countries (cuts in spending and interest rate hikes), we learned that IMF officials would swan in from Washington to, for example, Seoul, for a weekend, hole up in expensive hotels and by the end of the weekend profess to know everything about the country and what was good for it. Austerity followed. This is the way the IMF work. They apply mainstream New Keynesian macro theory on a one-size fits all basis ignoring history, culture, institutional specificity and all the rest of the nuances and complications that should be taken into account when appraising a situation in some nation. So for them, spending a day or so in some expensive hotel was the perfect place for them to ‘know the country’ – good food, good wine, air conditioning – what more is required. The problem is that besides the specifics that always need to be considered, the overriding theory is not fit for purpose, which is why the application of the IMF-model with the SAPs has been a uniform disaster for nations. The IMF though continues to operate in this vein. I read a report yesterday about sub-Saharan Africa written by a series of IMF officials most of whom seem to be French citizens who have gone to the best universities, who advocate harsh fiscal policy shifts in the poorest nations. I am sure none of their jobs or wages are at stake.
In the 1890s, industrial capitalism had reached the point where the pain inflicted on workers in search of private profits by the industrialists reached a point where the workers could no longer tolerate it and they started to realise that in unity they had strength. This was a period of major industrial disputes and a burgeoning of trade union growth beyond the previously restrictive craft union base. The development of broad-based unions and their move into the political domain to give further voice to the concerns of workers marked a turning point and fostered social democratic political movements and the spread of welfare state capitalism, which lasted until the 1970s. The neoliberal period has seen many of the gains made by workers during that period wound back and now we are witnessing the consequences of that retrenchment – massive real wage cuts, profit gouging and central banks determined to further undermine the well-being of workers as they attempt to push up unemployment, in the name of fighting inflation. An inflation that is persistent only because corporations are using this period to solidify the shift in income distribution towards profits at the expense of wages. It is also apparent that the trade union movement has become co-opted and now collaborate with government and corporate bosses to oversee the deliberate cuts in real wages of their members. This is another turning point in history, where the workers’ own representatives give their support to policies that support those cuts, under the pretense that they have to be responsible. Responsible to whom? We are in a defining period at present in the class struggle and it seems that the labour side has swapped teams.
It’s Wednesday and I cover a few topics usually in less depth than usual and provide a musical entree. From tomorrow (June 22 to 23), the so-called world leaders are meeting in Paris for the – Summit for a New Global Financing Pact – which is being hosted by the French president. The aim, apparently, is to build a new global architecture to replace the Bretton Woods system (they left it a while!) to ‘address climate change, biodiversity crisis and development challenges’. The solution that is being proposed is to allow the financial markets to create debt and speculative derivative products to fund the new architecture because, apparently, governments do not have the financial capacity. The whole initiative is about replacing defunct financial architecture but it still proposes to rely on the same (defunct) approach to public infrastructure development and the like that has failed dramatically to reduce inequality and poverty. It has certainly massively enriched the top-end-of-town and the same result will come out of this Pact. I also comment on the latest Brexit claims and provide a brief entree into some Covid research that I found interesting. Then some music.
There is something deeply wrong with the world under Capitalism when the poorest countries in the world pay more out on debt servicing to loans that the wealthy countries have provided than they do on maintaining their health care services. I have been examining data derived from the World Bank WDI database and the IMF WEO database pertaining to the debt sustainability of the poorest nations in the world. Using 2019 data (most recent) 64 nations, for which coherent data is available, spend more on external debt services than they do on health care (Source). At the same time, the most recent assessment from the IMF and the World Bank, under their Debt Sustainability Program (DSA) shows that debt distress is rising fast across the low-income bloc of countries. The response of the multilateral institutions is to enter ‘agreements’ with these nations that impose fiscal austerity and enforce a range of changes such as privatisation, outsourcing and more. This strategy does not work and only serves to protect the assets of the rich countries and corporations. A debt jubilee is the only way low-income nations will escape the penury of debt distress and the austerity-obsessed clutches of the IMF and the World Bank.
Last week (April 11, 2023), the IMF released their half-yearly update – World Economic Outlook: A Rocky Recovery, April 2023 – which excited the headlines in the media with predictions of gloom and calls for fiscal austerity and more interest rate hikes. The only good thing about these reports every six months is the accompanying datasets, which allows for fairly quick comparative analysis across nations. Other than that, the textual narratives are pure mainstream economics Groupthink and demonstrate how if one starts from a particular and flawed set of principles, everything else that follows undermines the stated goal. This is a recurring story – we have seen this with these multilateral agencies over and over again. The point to understand is not to try to interpret these IMF reports as being knowledge-based or compiled as if they are pursuing knowledge. They are parts of the ideological weaponry that seeks to sustain and advance neoliberalism and the power relations inherent in that ideology while purporting to be expert commentary.
We kid ourselves when talking about change. I see a lot of Op Ed material recently from the so-called Left that seems to suggest, for example, that those concerned about climate change are really just handing the keys to capital who will use the appetite for ‘change’ to impose punitive policy shifts that will damage the poorer households and communities, while at the same time, strengthen the elite control over income distribution and governments. There are elements on the Left that also think we can ‘heal’ Capitalism – somehow by redefining what ‘capital’ means. This morphs into an assertion that the major problem is that private banks can create credit at will such that we have allowed ‘allowed the credit commons to be privatised’, which in turn drives an unsustainable need for growth to continue to pay interest. I will comment more on that idea in another post – as part of my Degrowth series. But the relevant point here is that Capitalism has created institutions that work to perpetuate the power relations that define who owns capital. These institutions extend to the multi-lateral, government funded organisations such as the IMF and the World Bank, who now function quite differently to the way they were originally conceived. I was thinking about that while reading the latest World Bank publication – International Debt Report 2022 (released December 6, 2022) which captures what is really wrong with Capitalism and leads one to conclude that ‘healing’ requires killing the patient!
The IMF published a new blog the other day (November 21, 2022) – How Fiscal Restraint Can Help Fight Inflation – which demonstrates that the organisation is still stuck in a New Keynesian world and despite all the empirical dissonance that has been building over the last decades to militate against that economic approach, little evolution in thinking is apparent. The battle to dispense with the mainstream approach is going to be harder and longer than many thought.
The Eurozone is currently in a period of ‘temporary’ hiatus – by which I mean that to deal with the obvious system-ending implications of the pandemic (increasing fiscal deficits etc) the European Commission invoked the special clauses to suspend the application of the fiscal rules outlined in the Stability and Growth Pact (SGP) and related Excessive Deficit Mechanism procedures and the European Central Bank introduced an even larger bond-buying program to ensure the resulting deficits would be funded without bond yields rising. Result: fiscal deficits rose well beyond the SGP limit of 3 per cent in 2020 and have remained at elevated levels relative to the rules in 2021. The overall Eurozone deficit is 4.7 per cent of GDP and 11 of the 19 Member States remain in ‘violation’ of the Excessive Deficit Mechansim should that be reinvoked. It is clear that unless the ECB continues funding the deficits across the union (even though it claims otherwise), then the European Commission will tempt disaster if it tries to reassert the Excessive Deficit Mechansim. Already so-called ‘reform’ proposals are emerging and many more will come in the months ahead. The first major effort from the IMF is really just more of the same and fails to deal with the dysfunction at the design level of the monetary union. The proposals so far are just advocating putting band-aids over the mess – and they are weak bandages at best. But how this dilemma is resolved will be interesting for sure.