IMF solution to depression – more of the same

The G20 economy and finance ministers met in Sydney Australia over the weekend and announced that the G20 would aim to raise the global growth rate by 0.5% pts per year, so boosting world output by 2% or $2.25trn from where it is expected to be in 2018.  In November, the G20 will meet again in Brisbane, Australia to outline the actual measures that are supposed to achieve this faster growth rate.

How is this to be done?  Well, a support paper produced by the IMF outlined the strategy IMF paper for G20 meeting in Sydney.  Basically, it boils down to more neo-liberal policies of deregulation of markets, particularly in services like finance, insurance and business services; labour market ‘reform’ around cutting pension spending, increasing employer power to hire and fire and reducing job rights; and more infrastructure spending, mainly by governments providing work for private sector construction companies to be paid for by cuts in welfare spending.

In other words, it will be more of the same policies that presided over and did not avoid the global financial collapse and the Great Recession in the first place.  The IMF reckon that the world economy grew only 3% last year and is expected to grow 3.75% this year and 4% in 2015.  But as its paper says: “However, five years since the Great Recession, output remains far below the  longer-term trend  level, especially in  advanced economies. In 2013 (per capita) output losses relative to trend amounted to 8 percent for the G-20 as a whole, with a higher loss in advanced deficit economies (11 percent). Trade volumes (real exports and imports) remain well below trends as well. Notably, the recovery has also been much slower than was anticipated in the wake of the crisis: the G-20’s 2013 real GDP level was 2 percent below the downside scenario projection prepared for the 2010 Mutual Assessment Process.”


Worse, the IMF reckoned that the world economy would remain in a very weak recovery and never recover the losses from the Great Recession unless action was taken by governments.  “Importantly, going forward, the WEO baseline  projections for the medium term suggest permanent crisis-related  output losses for the G-20 as a whole, driven by large losses for advanced economies where potential growth is envisaged to remain generally weak.”  Indeed, the graph shows that the output loss for the G20 as a whole is widening not narrowing.

The IMF also confirmed the view expressed many times on this blog that the key factor in the global slump was a collapse in investment rather than the crude Keynesian view that it was the lack of consumer purchasing power.  “A demand-side decomposition of output losses shows  that  investment in the G-20 remains well below  longer-term trend, by 18 percent. The losses are especially large for advanced deficit economies but also significant in advanced surplus and emerging deficit economies. For the G-20 as a whole, consumption is only mildly below trend; however, this masks regional variation, with consumption depressed in advanced deficit economies and above trend in emerging economies.”

The IMF went on to say that the cause of the weak recovery also lay with what appeared to be a permanent slowdown in capital accumulation.  Apparently, the ‘cleansing effect’ of the bankruptcies and liquidation of weaker capitals from the Great Recession had not been enough to restore investment levels:  “the scarring effect of the crisis (for instance, difficult-to-reverse misallocation of capital over pre-crisis booms, reductions in research and development spending) may have dominated its cleansing effect (the fact that  the least productive firms are forced first out of  business). The slowdown in capital accumulation will also affect potential growth negatively .”

Of course, the IMF paper does not explain why the cleansing effect has not been enough.  This blog has argued that it is because profitability in the major economies has not recovered enough and the dead weight of fictitious capital remains as a burden on new investment.  A new slump will probably be necessary to clear this.  Instead the IMF advocates more of the same in economic policy.  First, central bank monetary injections must continue: “Monetary policy should continue supporting demand in advanced economies in  view of the still large output gaps and ongoing fiscal consolidation.” 

The IMF recognises that fiscal consolidation (a nice phrase for policies of austerity in cutting government spending and welfare benefits) has contributed to the slow recovery, but it still goes on to support further austerity: “gradual fiscal consolidation should proceed in the medium term”.

But the main way that the IMF sees the world economy recovering back to trend growth is through ‘structural reforms’ or supply-side reforms that have been pursued in the neo-liberal period up to the Great Recession.  What is needed, says the IMF, is more of the same.  First, “product market reforms can boost productivity by increasing competition and/or  improving the business environment.”  What do these ‘reforms’ consist of?  According to the IMF, product market reform means a “20% reduction in regulation in services industries”, while labour market reform means a “20% reduction in the strictness of employment protection legislation”. It means easing “overly restrictive employment protection legislation”, increasing the labour force participation rate by increases in childcare spending and pension reforms (i.e cuts) and “in some cases reductions in unemployment benefit  average replacement rates”.

As for infrastructure investment, the IMF recognises that there are huge social needs here globally.  But it sees such investment being carried out by the private sector using taxpayer money: “countries could also foster higher involvement of the private sector in the  provision of infrastructure services, including through PPPs, (private and public partnerships)” to raise such investment by just 0.5% pt over two years.  And how is this to be paid for?  Well, by “a reduction  in general transfers”, which means welfare spending and other social subsidies.

So there we have it. The IMF notes that the leading G20 economies have not restored the huge losses in output suffered during the Great Recession and economic growth is still well below previous trend growth.  The main reason is the failure of the capitalist sector to invest enough to get economies going.  The answer that the G20 leaders have adopted to overcome this failure is to increase deregulation, reduce workers’ rights in employment and increase public spending on infrastructure to be carried out by private construction companies and to pay for this by cutting welfare spending further.

This is a continuation of the policies that have already failed.  Moreover, there is little likelihood that they will even be adopted in any coordinated way by the world’s governments.  For labour, that is just as well.  In the meantime, the misery will continue.

10 Responses to “IMF solution to depression – more of the same”

  1. Luka Astral Lujan Says:

    IMF is right. What is your solution for global economical problems? And why profit rates drop(and this is causing recession) ?

    In my country Croatia, most economists agree that we need to decrease government spending (social transfers, wages in public sector etc) and cut corporate taxes to increase GDP growth.

    Do you have an alternative view and solution?

  2. Choppa Morph Says:

    Luka, “most economists” and the stupid schooling they have received in wishful-thinking blindfold vulgar bourgeois economics are to blame for the theoretical imbecility and feebleness of the bourgeois governments and institutions. Not just in Croatia, though I’m sure your economists are at least as stupid as elsewhere (and probably a lot more stupidly enthusiastic about neo-liberal policies into the bargain).
    As Mike has repeatedly pointed out, there is crushing unanimity among mainstream economists on the range of policy choices open to governments. These range from timid Keynesian to rabid neo-liberal austerity. None of them advocate even a modest integration of labour’s class interests into government, let alone management of a country’s production by workers’ organizations in the interests of the working class nationally and internationally. Their stupid schooling tells them this is an impossible absurdity so they refuse to countenance it. Like the geo-centrist astronomers of the seventeenth century regarding the theory of helio-centrism.
    The most fundamental interest of the working class economically is the removal of bourgeois relations of production, that is the removal of private ownership and decision-making, and the removal of private profit as the prime goal of the economy.
    So there, in a nutshell, is your answer.
    The reasons why this is an historical imperative (no socialist transformation of society, no human society left – socialism or barbarism) are discussed intensely worldwide in the workers movement and among allied economists, sociologists and theoreticians generally.
    You might have no interest in this, but it’s where you’ll find the “alternative view and solution” you’re asking about.
    You can turn your back on history, but it won’t turn its back on you.

  3. Whitney Says:

    So they plan to make the infrastructure better as they make the population too poor to use it (cars, gas, etc.)? Idiots.

  4. Edgar Says:

    “IMF is right. What is your solution for global economical problems?”

    Depends what you mean by economic problems. In the UK workers wages have gone down and the wealth at the top has gone up. You would think this would be seen as an economic problem but, no, this is seen as a resolution of economic problems!

    The IMF represent the global elite, i.e. 1% of the global population who own more than half the worlds population. So, naturally, for the IMF, the problem isn’t that most of the wealth is directed toward the 1% but that the poorest have too much!

    This is a confidence trick and people are gullible, we try to expose the con.

    From this you hope concrete proposals to transform this state of affairs can be found.

    But, you can only really do it at a global level I think. In some respects the race to the bottom and pandering to the 1% does make economic sense, but only within the narrow parameter that you accept the status quo and that the problems of the 1% are our problems.

    To solve the economic problems of those outside the 1% the status quo needs destroying.

    That is my argument.

  5. vallebaeza Says:

    Reblogged this on Alejandro Valle Baeza.

  6. Luka Astral Lujan Says:

    @ Choppa Morph
    “that is the removal of private ownership and decision-making, and the removal of private profit as the prime goal of the economy.”

    but no thx.. we in Croatia had remove private ownership and profits from economy in period 1945-1990 and i dont want anyone to live in such a conditions. You from western Europe dont know what really socialism is like – nepotism, corruption , poverty, hyperinflation, bankrupt and war…

    Hm top 1%… will the world be better if will take everything from top 1%? Will economic problems cease to exist? do you think so?

  7. Edgar Says:

    “will the world be better if will take everything from top 1%”

    I would say absolutely yes.

    “Will economic problems cease to exist? do you think so?”

    What do you think I think. I mean, seriously.

  8. Henry Says:

    “You from western Europe dont know what really socialism is like – nepotism, corruption , poverty, hyperinflation, bankrupt and war”

    I thought the war started once the Soviet Union had collapsed and you were brought into the capitalist sphere? In other words the war was your gentle introduction to capitalism. As ort of, welcome aboard party.

    “You from western Europe dont know what really socialism is like ”

    You don’t really know what capitalism is like yet, I guess. You will learn – nepotism and corruption are the fabric of capitalism, I guess you won’t even notice it because it is so ingrained!

  9. Don Sutherland Says:

    Reblogged this on Don Sutherland's Blog and commented:
    “Worse, the IMF reckoned that the world economy would remain in a very weak recovery and never recover the losses from the Great Recession unless action was taken by governments.” The Australian government’s actions will do pretty well what the IMF is proposing: amounting to a tsunami-like assault on the Australian working class with spill over effects to aid programs that provide some sort of support to the most impoverished and vulnerable in some other countries.
    To my knowledge there has been no comparable analysis of what happened in Sydney at the G20 under Joe Hockey’s chairing.

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