Back to the complete issue
Sunday, 8 December 2019

Is the IMF rethinking the shock therapy formula?

Is the IMF rethinking the shock therapy formula? Comments made recently by IMF bigwigs suggest that the fund may be relenting on its neoliberal formula as a one-size-fits-all prescription for distressed emerging economies, Steve Johnson writes in the Financial Times.

Why the shift in thinking? There’s a growing recognition within the IMF that the unrestricted movement of capital across borders brings with it its own deleterious effects. The fund is currently concerned capital inflows into emerging economies are putting them at risk of inflation contagion from developed countries, which have seen low price inflation become a permanent feature of their economies. Low inflation spreading to the developing world, in the words of Deputy Managing Director David Lipton, will “cause them to stagnate.” On top of this, the lower borrowing costs that accompany inflows have the capacity to significantly increase the debt burden of emerging economies

Is “capital account fundamentalism” ending? In a departure from IMF orthodoxy, both Lipton and IMF chief economist Gita Gopinath have suggested that governments in developing economies can use FX intervention and capital controls to mitigate the impact of excessive capital flows. Rather than insisting on maintaining a liberalized currency regime, Gopinath says that currency intervention can be a “desirable part of the policy mix in stressed times.” And to limit the problem of excessive borrowing, she recommends that governments preemptively impose capital controls “in normal times” — a particularly surprising corrective that implies that the fund may now endorse state intervention not just in emergencies but as a regular policy tool.

Enterprise is a daily publication of Enterprise Ventures LLC, an Egyptian limited liability company (commercial register 83594), and a subsidiary of Inktank Communications. Summaries are intended for guidance only and are provided on an as-is basis; kindly refer to the source article in its original language prior to undertaking any action. Neither Enterprise Ventures nor its staff assume any responsibility or liability for the accuracy of the information contained in this publication, whether in the form of summaries or analysis. © 2022 Enterprise Ventures LLC.

Enterprise is available without charge thanks to the generous support of EFG Hermes (tax ID: 200-178-385), the leading financial services corporation in frontier emerging markets; SODIC (tax ID: 212-168-002), a leading Egyptian real estate developer; SomaBay (tax ID: 204-903-300), our Red Sea holiday partner; Infinity (tax ID: 474-939-359), the ultimate way to power cities, industries, and homes directly from nature right here in Egypt; CIRA (tax ID: 200-069-608), the leading providers of K-12 and higher level education in Egypt; Orascom Construction (tax ID: 229-988-806), the leading construction and engineering company building infrastructure in Egypt and abroad; Palm Hills Developments (tax ID: 432-737-014), a leading developer of commercial and residential properties; Etisalat Misr (tax ID: 235-071-579), the leading telecoms provider in Egypt; and Industrial Development Group (IDG) (tax ID:266-965-253), the leading builder of industrial parks in Egypt.