Inequality? The IMF? This sort of language was never used when global economic policymaking was governed by the dictates of the Washington consensus: liberalise markets; privatise industry; reduce the power of trade unions; cut public spending. To the extent that inequality merited a mention, it was assumed that free markets would lead to faster growth, the benefits of which would trickle down to the poor.
Judging by Ms Lagarde and the World Bank’s Jim Yong Kim, the assumption might now be that the Washington consensus is dead, killed off by the deepest slump since the 1930s and a weak recovery unaccompanied by rising living standards. It is, in truth, far too early to say that. For while its shortcomings have been highlighted, the Washington consensus still has plenty of powerful supporters. And it is by no means clear that there is a new post-Washington consensus to take its place.
The good news, though, is that a rethink seems to be under way. Earlier this year, the IMF published a paper – Redistribution, Inequality and Growth – which challenged the notion that policymakers had to make a choice between tackling inequality and achieving faster growth. On the contrary, the IMF economists said, reducing inequality led to faster, more durable growth. What is more, they argued, only excessive redistribution led to slower growth.
This fits neatly with events in the 25 years since the term Washington consensus was first coined. Those economies, such as the UK and the United States, that have become progressively more unequal have also become progressively more debt-sodden and more vulnerable to financial crises. Why is this? Because individuals have sought to compensate for the squeeze on earnings by resorting to increased borrowing. The economy that has seen both the strongest growth and the biggest fall in poverty has been China, which does things its own way.
Some policy changes are happening all the same. The IMF rolled the clock back to its pre-Washington-consensus roots last week when it encouraged member governments to take advantage of historically low borrowing costs to boost spending on public investment. John Maynard Keynes would have approved of Ms Lagarde saying that public works would pay for themselves by supporting demand in the short term and building the supply-side capacity of economies in the medium term.
This is a start; but only a start. For a new consensus to emerge, three things need to happen. First, the policies of individual governments have to change. The IMF and the World Bank are not autonomous bodies; they are international bureaucracies controlled by member states. In effect, this means policy is dictated by the United States, where economic policy under Barack Obama has moved in a slightly more progressive direction, and by Europe, where it hasn’t.
Second, the Fund and the Bank need to make sure that what they say is matched by what they do. Mr Kim has won plaudits for his pledge to eradicate poverty in a generation and to boost the incomes of the poorest 40%. But behind the scenes, the bank’s annual Doing Business report has been the cheerleader for cutting corporate taxes, minimising labour protections and cutting minimum wages. Under Ms Lagarde, the Fund’s rhetoric has become warmer, but the policy advice has been familiar: austerity, and plenty of it. Old habits die hard, in part because the two organisations seem riven by factions at ideological war with each other.
Finally, therefore, there is a need for symbolic policy changes. If the IMF thinks equality is good for growth, it should propose tax and spending policies that redistribute from rich to poor. And if it thinks excessive risk-taking in the financial sector is harmful and needs to be actively discouraged, it should back a financial transactions tax. Until it does so, reports of the death of the Washington consensus, like those about Mark Twain, will have been much exaggerated.
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