The politics of austerity remains the central economic policy debate of our age. How far should governments restrain public spending given increased deficit and debt levels? Which economic policy targets warrant the highest prioritisation – reducing national debt to secure economic credibility, or using fiscal and other policy levers to bolster economic growth? The IMF, as a key source of authoritative economic policy expertise, has taken a somewhat surprising stance – seeking to reshape how these austerity-related economic policy questions get understood. Some argue that the Fund, after a brief flirtation with Keynesianism in 2008, reverted to pre-crisis fiscally conservative orthodoxy. In fact, as my new book details, the Fund’s role within the politics of austerity has been much more critical and heterodox than that.
The IMF & World Bank’s Spring meetings with finance ministers and central bankers are one key forum where the IMF performs its mandated role as conduit of international economic co-ordination, and its self-appointed role as global arbiter of ‘sound’ economic policy. Christine Lagarde set out the IMF’s policy priorities for the 2018 meetings, warning of the dangers of rising protectionism. Departing from the Fund’s customary under-statedness, Lagarde ominously warned that the multilateral trade ‘system of rules and shared responsibility’ was ‘in danger of being torn apart’.
For the liberal-oriented IMF to urge all to ‘redouble our efforts to reduce trade barriers and resolve disagreements without using exceptional measures’ is perhaps not surprising. However – other elements of the Fund prescriptive policy discourse indicate clearly that the IMF is not what it used to be. Key departures include increased enthusiasm for counter-cyclical economic policy, a more sceptical view of financial markets and their causal links to instability and systemic risk, and heightened appreciation of ‘non-linear’ threats such as deflation and hysteresis (ratcheting up long-term unemployment). Gone, too, are the days of ‘one-size fits all’ policy recommendation. The post-crash Fund offers more differentiated policy advice, and betrays much less fiscal and intellectual conservatism than it used to. This, as Ilene Grabel put it, is ‘not your grandfather’s IMF’.
The IMF and the Politics of Austerity substantially revises our understanding of the IMF’s economic policy thinking. The IMF has worked to redefine ‘sound’ fiscal policy and expand policy space for certain advanced economy governments, countering hawkish voices in politics of austerity debates. Fund intellectual authority has been used to challenge important elements of the pre-crisis economic orthodoxy, highlighting the damaging folly of all countries pursuing fiscal consolidation at once. Its crisis-defining economic ideas, and crisis legacy defining ideas, were important in constructing particular interpretations of the global financial and Eurozone crises in ways which prioritised particular policy responses.
For a decade now, the IMF has consistently challenged the singular focus on cutting public expenditure to bring debt and deficits down, and has advanced the case for tackling inequality using macroeconomic policy – including increased social transfers and augmented progressivity of income taxes. This unearths an important but under-explored potential linkage between Fund ideas, and ideational influence, and policy space enjoyed by governments.
The Repertoire of IMF Economic Ideas
Back in 2008, Fund leadership articulated what one might term a ‘Keynesian’ market failure understanding of the crisis, focussing on deficiencies of confidence and aggregate demand, and on the destabilising properties of financial markets. The Fund’s re-emphasising of Keynesian insights into liquidity traps and higher fiscal multipliers sat outside the normal policy ideas of most advanced economy governments. These had high policy salience given the conjuncture, yet they were not the lessons policy-makers had drawn from academic economics up until the crisis. The IMF advocated coordinated global fiscal stimulus, and then deployed its scientific reputation to make a series of carefully targeted interventions in the ‘growth ‘versus’ austerity’ debate. Along the way, Fund economists put down a series of intellectual markers, spelling out flaws in the ‘expansionary fiscal contraction’ thesis, highlighting the increased potency of expansionary fiscal policy and public investment under recessionary conditions, and underlining how fiscal consolidation can be self-defeating.
Tackling inequality, surprisingly, is also now a major IMF policy priority. The Fund urges advanced economy governments to ensure that the burdens of adjustment and benefits of economic recovery are distributed equitably. Social spending and social transfers should be targeted on lower earners. This issue is justified as central to the Fund’s core mandate because IMF Research has unearthed a link between higher inequality and lower growth. The Fund’s repeated advocacy of redistributive fiscal policy, and greater progressivity of income tax, contrasts starkly with the pre-crash IMF’s reputation for austerity.
One important finding from the research is that there is a breadth, along a surprisingly wide continuum, of policy approaches reconcilable to ‘mainstream economic thinking’ in the wake of the global financial crisis. Thus there is no one single ‘lesson from economics’ that policy elites can imbibe. Rather, there is a cacophony of voices, and a range of respectable academic economic opinion. The ideological spectrum from advocates of ‘expansionary fiscal contraction’ to fulsome supporters of counter-cyclical fiscal activism covers a vast array of policy positions and prioritisations. Those seeking to adopt positions anywhere along this spectrum can seek and find corroboration from holders of Nobel prizes.
This gives the IMF scope to choose and prioritise within this menu of respectable economic thinking. The selection of which economic ideas and insights are afforded primacy is highly significant. In this light we can better appreciate the political role played by the Fund and other actors seeking to shape understandings of sound economic policy conduct. They can foreground particular rationales, insights and prioritisations when making policy recommendations. Whilst Fund surveillance and commentary is cloaked in scientific and technocratic parlance, how economic theory is invoked in its recommendation is inherently political.
The Malleability of Economic Orthodoxy
Analysing how the IMF contributes to prevailing understandings of sound or appropriate fiscal policy in this way reveals the malleability of economic policy credibility, and the contingent, changeable nature of economic policy orthodoxy. How prevailing views of ‘sound’ policy change is a deeply political process in which the Fund, for all the emphasis the institution places on the technocratic, scientific nature of its work, is intimately involved. As such, the IMF’s interpretive framework for evaluating economic policy is a key site of power in world politics.
The book’s analysis explores and reveals how economic ideas are always rooted in normative positions and ideological assumptions about how the economy and policy work. Isolating specific fiscal policy effects is difficult because factors other than fiscal policy have an impact on the economy, and growth has effects on fiscal policy as well as vice versa. Various techniques have been developed in economics to attempt to assess fiscal policy effects, but none is perfect. No ultimate ‘scientific’ judgement is possible and the economics profession is and always will be divided on this. In the background are underlying ideological views on the efficacy and desirability of public spending, state intervention, and public power playing a major role in the market economy.
Talking to lots of IMF economists, one discovers that the Fund is not uniform and singular, but rather contains various subcultures of economic thinking. This begets an internal politics of economic ideas with which IMF innovators have to contend. Social norms within the IMF need to be navigated by IMF staff and leadership seeking to advance or promote new economic policy understandings or positions. My research establishes institutionally constituted cognitive filters, such as operating within the Fund’s scientific and technocratic culture and its sedimented body of existing economic policy knowledge, through which IMF staff make sense of their role as pragmatic policy economists. This generates internal ‘hoops’ through which new ideas need to pass if they are to gain acceptance widely within the organisation and get taken up. To capture this I outline mechanisms of internal ideational change at the IMF: reconciliation (to existing Fund ideas), corroboration (using the IMF’s knowledge bank), and authoritative recognition (by leading economists). Also crucial is operationalisation – to achieve maximum longevity and increase their chance of shaping ‘how the Fund gets done’, ideas need to be, as one insider put it, ‘baked into guidance’. That is, incorporated into technical notes circulated to Fund desks as a guide to their day-to-day work. Provided these important ‘form’ conditions are met, the actual content of new post-crash IMF thinking is surprisingly open given the relatively broad repertoire of Fund thinking, past and present.
Yet once ideas gain acceptance internally, the real challenge comes when Fund leadership and surveillance missions seek to gain ‘traction’ for its new thinking with member governments. Whilst the IMF enjoys a privileged position in constructing economic rectitude, it has little direct leverage over countries not borrowing from it. For example, IMF entreaties to make income tax more progressive and use more social transfers to reduce inequality may, in some cases, fall on deaf ears. Thus, in seeking to reshape the politics of austerity, the IMF’s reforming reach exceeds its grasp.
Ben Clift is Professor of Political Economy at the University or Warwick, UK. His latest book, The IMF and the Politics of Austerity in the Wake of the Global Financial Crisis has recently been published with Oxford University Press. His broader research interests lie in comparative and international political economy, and he has published widely on the IMF, French and comparative capitalisms, the politics of economic ideas, capital mobility and economic policy autonomy.