Academic journal article Journal of Australian Political Economy

Policy Advice in Crisis: How Inter-Governmental Organisations Have Responded to the GFC

Academic journal article Journal of Australian Political Economy

Policy Advice in Crisis: How Inter-Governmental Organisations Have Responded to the GFC

Article excerpt

Since the 1970s, key Inter-Governmental Organisations (IGOs), notably the International Monetary Fund (IMF) and the Organisation for Economic Cooperation and Development (OECD), have subscribed to neo-liberal orthodoxy. This was evident, for example, in the labour market and macroeconomic policy prescriptions of the OECD Jobs Study (1994) and the IMF's imposition of structural adjustment policies during the Asian Financial Crisis (Feldstein, 1998).

Has the Global Financial Crisis (GFC) made a fundamental difference to the policy advice of these IGOs? The GFC heralded the worst recession since the Great Depression (IMF, 2009) and continues to pose a major challenge to policymaking. Most developed economies have been adversely affected through sustained below-trend or even negative growth accompanied by rising unemployment. Budget deficits have grown significantly mainly due to the operation of automatic stabilisers, but also marginally as a consequence of modest fiscal stimulus measures in countries, including Australia, the U.S., Japan, Korea and China and also Eurozone members, including Spain and Luxembourg.

Since the advent of the crisis there has been a flood of policy documents, from the OECD, IMF, World Bank and also the European Union (EU), concerning the conduct of macroeconomic and labour market policy. By 2009, these institutions had all acknowledged that short term fiscal stimulus measures were appropriate in some countries, albeit with some qualifications, but sound public finance was advocated through the medium term pursuit of fiscal consolidation (ECB, 2009; Freedman et al., 2009; OECD, 2009a,b,c, 2010a,b; IMF, 2010a,b,c; World Bank, 2011). (1) In addition, the IMF has been actively involved with the EU in the provision of bailout funds to Eurozone countries, including Greece, Ireland and Portugal.

In this article we provide a synthesis of these policy documents which serves as a basis for addressing two questions: 1) to what extent have these IGOs departed from neo-liberal principles in constructing their policy advice during the GFC? and 2) irrespective of the answer to the first question, is their policy advice based on a coherent theoretical framework? Our answer to 2) will be informed by the principles of modern monetary theory.

Notwithstanding a brief period in 2008-2009 when fiscal stimulus measures were advocated for some advanced economies, we argue, first, that the IGOs, in particular the OECD and IMF, have adhered closely to neo-liberal principles by advocating fiscal consolidation measures, albeit with some qualifications in 2011 in the light of poor growth projections for Eurozone and some advanced economies, including the U.K. and U.S.A.. These IGOs also continue to advocate structural reforms of labour markets, despite these policies, which were articulated in the OECD Job Study (1994), being largely discredited.

Second, our analysis indicates that there are serious flaws in the policy advice of these IGOs, which in part reflect their collective failure to differentiate in their policy documents between Eurozone countries and those (sovereign) countries which operate with their own fiat currency and flexible exchange rates, and face no ex ante fiscal budget constraint. Eurozone countries are subject to fiscal budget constraints through the Stability and Growth Pact (SGP) (which will be strengthened under the new EU Treaty forged in late 2011) and are required to borrow Euros to fund their deficits. Since the advent of the GFC, the operation of automatic stabilisers has undermined these budget rules, forcing many Eurozone economies to adopt pro-cyclical fiscal policy, which is an extreme form of neo-liberal economic policy. Also, member countries have limited capacity to influence monetary policy and, for small countries, in particular, the nominal exchange rate is insensitive to their economic circumstances.

Notwithstanding the seriousness of the GFC with respect to the long term welfare of citizens of developed and developing economies, the conduct of fiscal policy and, in particular, the imperative for fiscal consolidation is viewed as an accounting exercise by these international organisations, rather than being guided by clearly defined principles of public purpose (Mitchell, 2010a). …

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