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.