FRANK STILWELL and CHRISTOPHER SHEIL. The IMF is showing some hypocrisy on inequality

The IMF should practice what it preaches when it comes to inequality.  

“I hope people will listen now” said Christine Lagarde, the managing director of the International Monetary Fund (IMF), at the World Economic Forum in Davos in January.

Lagarde was alluding to the wave of reactionary populism that’s currently sweeping the developed economies, and was harking back to her speech at Davos in 2013 when she warned that economic “inequality is corrosive to growth; it is corrosive to society”.

The IMF has been expressing public concern about inequality since 2010, but this has not translated into concrete action within the IMF’s own policies and programs, according to new research by British political economists, Alex Nunn and Paul White.

No references to inequality were added in 2014 when the IMF last reviewed the operational guidelines for its annual macroeconomic surveys, the grading of national economies, which it conducts in consultation with each of its member states (including Australia).

In a sample of 11 countries surveyed since the latest guidelines became effective, Nunn and White found little more than “very passing references” to inequality.

Nor has anything significant changed in the requirements that the IMF imposes on countries to which it provides financial assistance. The IMF reviewed the guidelines that shape the conditions on borrowing members in 2011-12 and revisions were introduced in mid-2015. The new “guidance on the guidance” accepts inequality as a concern, but only as secondary and subordinate to its long-established primary concerns with economic growth and fiscal discipline.

Nunn and White’s 11-country sample included all seven member states that have struck new borrowing arrangements with the IMF since the guidelines were updated. In every case, the IMF has continued to recommend fiscal discipline, and very few of the policies that could be used for reducing inequality have even been mentioned.

Challenging Piketty but getting it wrong

Another example of the IMF’s hypocrisy on this issue is its stance on research from French political economist Thomas Piketty. The IMF has criticised Piketty’s evidence and arguments on making the case for reducing wealth inequality.

A widely-reported IMF working paper, released last August, purported to show that there is “no empirical evidence” to support Piketty’s claim that growing inequality results from the return on capital exceeding the economic growth rate.

Less widely reported was Piketty’s patient response, pointing out that the IMF paper made the embarrassing error of confusing labour incomes with the return on capital, and that the latter was incorrectly estimated in any event.

Together, the IMF’s apparent lack of practical action and the sponsoring of this research paper reinforces the suspicion that Lagarde has failed to move “the IMF in the direction of looking at inequality as mainstream and core business”, as she boasted in Davos in 2015.

Why hasn’t the IMF walked the talk?

The IMF has long been criticised for tending to create the inequality it now claims to be tackling. Historically, its “structural adjustment programs” forced many poor countries to scrap welfare policies and pursue privatisations under the so-called “Washington Consensus”, exacerbating economic inequalities. This was the subject of a withering critique by Nobel-prizewinning economist Joseph Stiglitz in the wake of the East Asian financial crisis, and has spawned numerous protests around the world.

One reading of the IMF’s new high-level rhetoric is that it seeks to distance the institution from this history. It offsets the criticism while allowing the IMF to maintain its adherence to neoliberal policies. This is what Nunn and White refer to as “organised hypocrisy”.

A somewhat more sympathetic reading of the situation would be that, while the IMF’s commitment to managing the systemic risks that inequality presents for global economic stability and growth is real, the institutional barriers to implementation are formidable. Large organisations seeking to make a change of direction are often frustrated by internal struggle and institutional inertia.

It might also be inferred that there is a need for greater support from the member states if reducing inequality is really to become a practical policy priority. This is because of changes to the operational guidelines for the IMF’s surveillance activities, including its annual economic surveys, in the wake of the global financial crisis.

The guidelines have been changed so that the IMF is more firmly guided by the economic objectives of its member states, whose social and political policies are supposed to be respected. Perversely, the central global body that many believe exacerbated inequality is now less able to redress the problem.

Implications for Australia

If tackling the general trend to increased inequality is to be a reality, the main political pressure still needs to be on national governments. In Australia, for example, we need a federal government committed to directly implementing policies to reduce inequality.

Dovetailing with these concerns is the more mundane matter of improving the distributional economic data. The aggregate income statistics in the standard national accounts need to be augmented by distributional measures, as recently modelled by a group of leading inequality scholars.

The current disconnect between national accounts and inequality data makes it difficult to know what fraction of economic growth accrues to the bottom 50% and the top 10%, and the relative income that goes to workers and owners. Nor do policymakers have a comprehensive view of how government programs designed to ameliorate the worst effects of inequality succeed.

This data should be of interest to any government that is serious about eschewing populism in favour of effective policies to head off the wave of discontent and destabilisation.

As a report for the Evatt Foundation last year showed, the distribution of wealth in Australia is dramatically and increasingly unequal. There’s no basis for thinking this country is immune from the corrosive effects of inequality on economic growth, society and politics.

So people should listen now, both in Australia and worldwide, as Christine Lagarde urges — including those who have apparently remained deaf in the IMF.

Christopher Sheil is a Visiting Fellow in History at University of New South Wales. Frank Stilwell is Emeritus Professor of Political Economy at the University of Sydney. The authors are also executive members of the Evatt Foundation, which has focused on inequality as a major theme since 2014. This article was originally published by The Conversation on 13 February 2016. 


John Laurence Menadue is the publisher of Pearls & Irritations. He has had a distinguished career both in the private sector and in the Public Service.

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2 Responses to FRANK STILWELL and CHRISTOPHER SHEIL. The IMF is showing some hypocrisy on inequality

  1. Avatar michael lacey says:

    The IMF and there neoliberal mantra is an has always indicated they do not give a sh##t!

    The con by the rich! “1% gets richer, the whole economy is getting richer – or when GDP goes up, everybody is improving – then the people, the 95% who did not improve their position from 2008 to 2016 somehow can be made to suffer from the Stockholm syndrome. They’ll think, “Gee, it must be my fault. If the whole economy is growing, why am I so worse off? If only we can give more money to the top 5% or the 1%, it’ll all trickle down. We’ve got to cut taxes and help them so they can give me a job”
    Michael Hudson ‘J is for junk economics’

  2. Avatar Malcolm Crout says:

    The problem the IMF and OECD have is their absolute belief in the mantra of balanced budgets with respect to sovereign fiat currency printing economies that have a floating exchange rate. Australia is one of these and the prescription the IMF propose for Australia is the deficit-lite variant where the national accounts are balanced over the long term. As anyone with an intermediate level of macroeconomics would understand, this pursuit of a surplus is entirely spurious and in fact works against the capability of an economy to utilise the real resources of the economy. Consequently the continuum of business cycles is structured into their model ad -infinitum. Until the IMF, OCED and the rating agencies understand this, their one size fits all meme will continue to disrupt economies world wide.
    In relation to the pernicious bent of the IMF, this has been displayed not only in emerging third world economies, but particularly in Greece, where as a member of the Troika, they with their partners Germany and the ECB have completely tore apart the social and economic fabric of Greece which will take several generations to correct, if at all. Out of the ridiculous structure of the Eurozone, they assisted with the nasty ideological objective to visit severe and economically damaging austerity to the Greek economy to the point where it is close to failed State status. They actively and wilfully assisted with the raiding of Greece’s assets which enriched the oligarchs delivered windfalls to other EU members who made no attempt to hide their plundering opportunism. The rules they impose on Greece with gusto are regularly broken by member states and even by Germany and France, but the IMF make no comment on these facts. The ECB could have and still can use it’s monetary capacity to stop this austerity misery overnight, but the unelected bureaucrats have no elections to vote them out, so continue on their merry way while Europe falls into disarray around them. The so called rise of populism should be of no surprise to, but clearly the IMF choose to turn a tin ear to all of these realities.
    I would go so far as to say the view of LaGarde in regard to Australia through the mouthpiece of the IMF is irrelevant, as is the view of the rating agencies and the OECD. They have predicted nothing which has been realised, but like the Central Banks, keep changing their vague statements and relative positions according to their optics in the rear view mirror. They should be disbanded.

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