Constructing continuity in economic ideas in the IMF By: Gary Lowery A thesis submitted in partial fulfilment of the requirements for the degree of Doctor of Philosophy The University of Sheffield Faculty of Social Sciences Department of Politics April 2016 2 Acknowledgements To Cheryl and Bruce who, for entirely different reasons this would never have happened. To every other family member who has helped along the way, particularly Dave for taking the time to read and offer comments. 3 4 Contents Abstract 9 Introduction 11 Chapter 1: Theoretical approach 31 Chapter 2: The IMF in historical context 57 Chapter 3: Contextualising the failure of neoliberal economic ideas 85 Chapter 4: Economic policy I 109 Chapter 5: Economic policy II 135 Chapter 6: Financial sector liberalization I 163 Chapter 7: Financial sector liberalization II 191 Conclusion 233 Bibliography 5 6 Abbreviations AFC Asian Financial Crisis BIS Bank for International Settlements BWS Bretton Woods System FAD Fiscal Affairs Department FSAP Financial Sector Assessment Programme FSB Financial Stability Board FSF Financial Stability Forum GFSR Global Financial Stability Report GDP Gross Domestic Product IMF International Monetary Fund IPE International Political Economy IR International Relations MacPR Macro-prudential regulation MCMD Monetary and Capital Markets Department MicPR Micro-prudential regulation NDB New Development Bank UMPs Unconventional Monetary Policies VAR Value at Risk WEO World Economic Outlook ZLB Zero Lower Bound 7 8 Abstract In 2008 the neoliberal economic ideas steering the course of global economic governance seemingly collapsed as the world entered into the greatest financial and economic crash since the Great Depression. Initially a range of precipitating causes were offered including lax monetary policy and a miss-pricing of risk, common to which was an assumption that although severe, the downturn was limited to policy failures in a relatively stable economic framework, and therefore constituted a crisis for neoliberal global economic governance. As the downturn intensified however, there developed a consensus that the situation facing policymakers was not simply a crisis for neoliberal global economic governance, but more fundamentally a crisis of neoliberalism which was now interpreted as a major precipitating cause. Therefore just as the failure of Keynesianism presaged a shift to neoliberalism, so too was there an expectation that its failure would exert a similarly transformative dynamic. Against this backdrop this research investigates the extent to which the neoliberal economic ideas steering the course of global economic governance are characterised by change or continuity. This is explored through the examination of an institution commonly assumed a bastion of neoliberalism, the IMF, and with specific reference to two areas synonymous with neoliberal economic ideas, monetary and fiscal policy, and financial sector liberalization. The research points to two reasons to suggest the potential for change. Firstly, many of the neoliberal economic ideas advocated by the IMF were cognitively falsified by the severity of the economic downturn. Secondly, as the downturn unravelled, the IMF advocated a range of policy interventions that had been considered largely anathema only months previously. Nevertheless, the key finding of this research is that to suggest this was the beginnings of a major shift was to miss-read the intentions of those tasked with responding to the crisis who were more concerned with preserving, as opposed to altering, the status quo. As a result, it is demonstrated that the IMF remains committed to the neoliberal economic philosophy (assumptions made regarding the efficacy of the market as opposed to state intervention) which has vital implications for the way in which economic problems continue to be interpreted and responded to, and the kinds of policies considered appropriate. 9 10 Introduction In 2008 the neoliberal economic ideas steering the course of global economic governance – a set of assumptions regarding the appropriate means by which to organise economic activity – appeared to collapse as the world witnessed what has been broadly contextualised as the worst financial and economic downturn since the Great Depression (Hay, 2011:2). Beginning initially in the sub-prime mortgage market of the US financial sector, the downturn quickly precipitated a broader credit crunch which spilled over into the real economy, negatively affecting economic growth and employment the world over. Initially, the collapse was variously conceptualised as the result of lax monetary policy (Carmassi et al, 2009), a values crisis (Friedman and Friedman, 2008), or a mispricing of risk worldwide (Greenspan, 2008). Although clearly saying something different, common to these diagnoses was an assumption that, although serious, the downturn was the result of flawed policies deployed in an otherwise effectively functioning overall framework. As time progressed however, there developed something of a consensus that its implications were far more fundamental; that is, a major failure of neoliberal economic ideas and policies. This rendered as fallacy the assertion that neoliberalism provided the sole, inevitable, most efficacious, one best way by which to steer the global economy, and instead, drew our attention to actual existence of the potential for a range of political-economic alternatives, with each characterised ‘by divergent interpretations of the opportunities or constraints presented, a view of what should and should not be subject to discussion or regulation, and ideas as to how best to strategically organize the direction of collective action’ (Cerny, 2008:5). Certainly, with the downturn increasingly recognised as one of the three great crises of capitalism along with the Great Depression of the 1930s and Great Inflation of the 1970s, (Gamble, 2009:452), both of which precipitated substantive change, it was not uncommon to assume that the present downturn would exert a similarly transformative dynamic in the economic ideas steering the course of global economic governance. Indeed, Blyth (2012:10) suggested that ‘if there was ever a perfect case for a “paradigm shift”... surely this was it’. In light of this discussion this research addresses two key questions. Given their evident failings, to what extent are neoliberal economic ideas characterised by change or continuity? 11 In answering this question, this research draws on the IMF as a case study to demonstrate how - although the failure of neoliberal economic ideas provided the pre-conditions from which to enact a major transformation in the economic ideas steering the political economy, the ways in which economic problems continue to be interpreted and responded to, and therefore the kinds of policies considered necessary - change has not been forthcoming. This claim is substantiated through reference to two policy areas synonymous with neoliberal economic ideas in the IMF. Firstly, the research draws on the example of economic policy to demonstrate how during the most acute phase of the downturn the IMF broke with orthodoxy by calling for substantial fiscal stimulus in order to shore up aggregate economic demand, a move considered at the time as having the potential to exert a transformative dynamic in economic policymaking in the IMF. This potential notwithstanding, this research suggests that such a shift never materialised as calls for fiscal stimulus, from their earliest inception, were couched in orthodox assumptions of the need for fiscal sustainability. Therefore as the most acute phase of the downturn passed, the IMF called for major fiscal adjustment through the enactment of a range of policies consistent with as opposed to those provided by neoliberal frames of reference. Secondly, the research draws on the example of financial sector liberalization and deregulation, and in doing so, demonstrates how the hands-off regulatory approach was interpreted by senior officials within the IMF as a major precipitating cause of the downturn (Strauss-Khan, 2008c). As a result, space seemingly opened up for more significant government intervention into the functioning of financial markets through the enactment of a range of policies considered off-the-table only months prior. This raised expectation of the potential for a major transformation in the manner in which the efficacy of government interventions into banking and financial sectors were once again understood. Nevertheless, just as was the case with economic policy, this research suggests that such a shift never materialised. Rather, banking and financial sector reforms continued to be couched within the broader context of continuing adherence to belief in the efficacy of neoliberal economic ideas. As a result, there was no major change in the manner in which 12 economic problems were interpreted and responded to as the IMF, once the most acute phase of the downturn had passed, called for caution in the regulatory debate. Why did the monumental failure of neoliberal economic ideas not lead to a broader crisis of the neoliberal order? The starting point here, in light of the preceding discussion, is that the failure of neoliberal economic ideas did not lead to a crisis in the constructivist sense in which the moment of failure is inter-subjectively interpreted by actors as requiring altered structures (change). Indeed, for it to be seen as such would require that adherence to neoliberal economic ideas be interpreted