Once the unabashed advocate for cutting government regulation and liberalizing economies worldwide, there have been recent murmurings from the International Monetary Fund moving in a dramatically different direction. This is not to suggest that critics of the IMF—most notably Joseph Stiglitz—have run out of ammunition. Rather, as Duncan Green has been reporting on his Oxfam blog, the IMF appears to be opening up to new proposals. For most, the concession that the state may have a role to play in development is hardly a dramatic finding. But from the organization that promoted cuts in government spending and liberalization of capitalism markets as the solution to nearly every economic and financial crisis from Asia to the United Kingdom, from Russia to Brazil, it’s quite a concession.
We’re specially looking at three developments, all covered by Duncan. First, in early February, the IMF began to rethink its traditional focus on inflation. In a paper co-authored by the IMF’s chief economist, Olivier Blanchard, the organization conceded that it had become too focused on inflation at expense of other goals, like fiscal policy, interest rate stability, and—wait for it—preventing global financial crises like the one that rocked the world beginning in 2008.
Later the same month, responding to increasing pressure from countries like Brazil, the IMF began to rethink its traditional opposition to capital controls. For years, the IMF had promoted open financial markets as a central component of development strategies. But such openness carried significant risk of fostering financial instability. We saw this, for example, during the 1997 Asian financial crisis. In 1997, the IMF prescribed cutting capital flows as part of its reform package. But in 2010, it reversed course, conceding that capital controls, under certain circumstances, may be an effective part of the policy toolkit to manage capital flows.
In April, the IMF announced its most dramatic change to date, announcing its support for establishing a “Robin Hood Tax” intended to force banks to pay for the direct and indirect costs associated with government interventions to bail out the banking sector following the global financial meltdown. While this initiative has stalled amid strong divisions between major players—particularly between the United States and France—the willingness with which the IMF embraced the proposal stood in stark contrast to its earlier positions on financial deregulation and lowering tax rates.
Now, in a new working paper published this month, two IMF economists draw a connection between inequality and the outbreak of financial crises, concluding that higher levels of inequality make an economy more prone to the kinds of crises that have rocked the global economy in recent years. They conclude that preventing future economic crises may depend on reducing the total level of inequality in any given society.
Duncan Green is right. They must be putting something in the water at IMF headquarters. How else do we explain the dramatic shifts taking place there?