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In a recent Finance & Development piece, several IMF economists came together to criticize neoliberal reforms made by governments across the globe. Their main argument is that, “Instead of delivering growth, some neoliberal policies have increased inequality, in turn jeopardizing durable expansion.” More specifically, they criticize “capital account liberalization” and austerity reforms. These measures can harm both the economy and society as a whole.
Really, the problem lies in short-term financial investments, not in long-term or foreign direct investments. Short-term capital flows can add volatility to exchange rates, affect financial sector balance sheets, and even produce a sudden stop. Austerity reforms, on the other hand, can produce effects ranging from welfare costs to negative supply shocks. According to the authors, both capital account liberalization and austerity reforms, increase inequality.