IMF solution to depression – more of the same

by Michael Roberts

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.