Kochi: IMF paper may boost Thomas Isaac stance

Deccan Chronicle.  | K P Sethunath

Nation, Current Affairs

A recent IMF research paper debunks its old favourites of capital account liberalisation and fiscal consolidation.

CDS director Amit Shovon Ray, Income Tax Commissioner R. Mohan and finance minister T. M. Thomas Isaac. (File Photo: DC)

Kochi: The International Monetary Fund (IMF), the multilateral agency championing neo-liberal economic agenda of ‘one size fits all’ approach to economic growth, singing a different tune may give the right ideological background for Finance Minister T.M. Thomas Isaac to set a new development agenda for the state.

A research paper by three top IMF staffers named ‘Neo-liberalism: Oversold’ released under the Finance and Development section in June 2016 has debunked the efficacy of capital account liberalisation and fiscal consolidation, two pet themes of IMF in the past 40 years.

It was under the hubris of fiscal consolidation IMF and other agencies expounded that the ability of state governments to borrow for undertaking development projects has been severely restricted as the Centre insisted on fiscal debt reduction targets under Fiscal Responsibility Acts.

Dr. Isaac, a persistent critic of this policy, is likely to flaunt the latest from the IMF as vindication of his long-held position that the state governments should have flexibility and freedom to fix their borrowing requirements.

The IMF paper written by Jonathan D Ostry, deputy director, Prakash Loungani, a division chief and economist David Furceri says instead of delivering growth “some of neoliberal policies have increased inequality, in turn jeopardising durable expansion.” The paper, already received worldwide attention, has been mainly focusing on the flaws in the free flow of finances and on fiscal consolidation which often termed as austerity.                 

Terming the link “between financial openness and economic growth” as complex, the paper said some capital inflows, such as foreign direct investment—which may include a transfer of technology or human capital—do seem to boost long-term growth. “But the impact of the other flows—such as portfolio investment and banking and especially hot, or speculative, debt inflows—seem neither to boost growth nor allow the country to better share risks with its trading partners.”

Similarly, the paper said the need for fiscal consolidation in some countries cannot be taken as a model for all countries. “It is surely the case that many countries (such as those in southern Europe) have little choice but to engage in fiscal consolidation because markets will not allow them to continue borrowing. But the need for consolidation in some countries does not mean all countries—at least in this case, caution about ‘one size fits all’ seems completely warranted,” the paper said.

The paper concludes that the experience of Chile and other countries “suggests that no fixed agenda delivers good outcome for all countries for all times. Policy-makers and institutions like IMF that advise them must be guided not by faith, but by evidence of what has worked.”