Neoliberalism & austerity: revisiting economic policy—II

Lower exports and FDI, together with an elevated conflict situation, overall slow down, and can even lower foreign exchange reserves. This, in turn, does not allow laying the basis for sustaining, or even further building on the three-month import cover.

Moreover, as an important caveat, the extent of net foreign exchange reserves still includes a substantial proportion of borrowed resources from bilateral development partners.

At the same time, higher interest payments at the back of monetary austerity policies also add to debt distress, and take away from foreign exchange reserves.

Seen through this lens, finance minister’s (FM’s) confidence with regard to performance of broad economic indicators, including exports growth, three-month import cover build-up remains on weak grounds; not to mention apparent euphoria with regard to remittance inflow in particular needs a revisit, given the negative impact on oil exports of middle east countries – where export earnings being a significant indicator of economic growth of these countries – in the wake of the conflict, which are a significant source of remittances.

Moreover, floating of bonds to raise foreign debt is after all foreign portfolio investment (FPI), which is not only volatile during normal times, but such source of investment current comes with a lot of uncertainty, given the fragile situation of the middle east (ME) conflict. This elevated level of volatility, in turn, increases competition for FPI, coming from much more stable western economies, including the US, in particular, in terms of substantial demand for investment in high tech assets, in particular in the artificial intelligence (AI) sector. Competing for these resources comes at a huge cost of deterring foreign direct investment (FDI), and domestic investment due to higher cost of capital (monetary austerity) being an important determinant to attract FPI.

Monetary austerity – along with fiscal austerity –even after squeezing aggregate demand is unable to sustainably resolve the problem of inflation, given the underlying primarily supply-side nature of inflation keeping significantly active imported, and cost-push inflationary channels. Together with wrongly paying high growth sacrifice, inflation is at best curtailed over the short-term, given supply-side bottlenecks receive little attention in an environment of high cost of capital, and diminished public expenditure/investment; not to mention the limited, and reactive – rather than larger and proactive – role of public sector under the influence of neoclassical/neoliberal influenced policy being followed, both in, and outside of the International Monetary Fund (IMF) programme.

Also read: Neoliberalism & austerity: revisiting economic policy—I

Moreover, there should be greater effort in orienting the economy towards higher exports, and creating larger FDI attractiveness, as a more sustainable basis for foreign exchange reserves build-up, in increasing debt repayment capacity, in reducing debt generating needs in the first place, and saving the economy from very likely stagflationary consequences.

Hence, rather than being apparently quite content with performance of the economy, there should be high level of concern with regard to reining-in austerity policies so as to create much more inducive environment for the economy to move out of an otherwise medium-term low growth equilibrium situation through adopting non-neoliberal, and non-austerity policies. That would also mean government coming together with the private sector and formulating an industrial policy; importance of which is also being felt by IMF and World Bank, for instance. Policymakers, both domestic and at Bretton Woods institutions, therefore, need to think on the lines of revisiting the underlying philosophical underpinnings of economic policy.

It is strange that many policymakers, including FMs in general, have come and gone over the years, yet what remains common is their significant inclination to neoliberal, and austerity-based policy mind-set. Perhaps this has to do with lack of pluralistic experience that most of them seem to share in terms of education, and job experience that are apparently grounded in mainstream economics, and have had little space for economic traditions, like institutional economics, or which have been virtually closed to criticisms of neoclassical economics, or related to neoliberal/austerity consensus.

Hence, even though there has been a lot of support for economic policy moving away from this consensus, finance ministers, and more broadly economic policymakers in general, both domestically and in multilateral institutions like IMF and World Bank, have had little revisionist mind-set even as acute misgivings of neoliberal/austerity policies have come to the fore, particularly since GFC 2007-08.

Therefore, economic policy continues to see the role of public sector mainly as a ‘fixer’ of market failures, and only as a ‘facilitator’ to the private sector. This has had serious negative outcomes in terms of reaching meaningful level of productive-, and allocative efficiencies, and in turn, to weak supply chains, poor price discovery, rise in inequality, and lack of significant transition to green, resilient economy.

Instead, noted economist, Mariana Mazzucato – who ‘is Professor in the Economics of Innovation and Public Value at UCL where she is the Founding Director of the UCL Institute for Innovation and Public Purpose’ – calls for public sector taking a more pro-active role in co-creating markets with the private sector, in a mission-oriented way. While there has been a shift in both the thinking of IMF, and World Bank more recently in terms of seeing a greater role of public sector in terms of working more closely with the private sector through an industrial policy, Professor Mazzucato in her April 30, Project Syndicate (PS) published co-authored article ‘A new economics for the 21st century’ called for more broad-based, and deeper collaboration in terms of not using approach as an exception, or as a ‘tool’, but rather as a wholesome economic philosophy.

She indicates in this regard in the article: ‘In the run-up to this year’s International Monetary Fund and World Bank Spring Meetings, the one story that cut through the noise was that the World Bank had embraced industrial policy after decades of advising against it. …But new conclusions do not automatically produce new economics. The Bank still treats the state as a mere fixer of market failures, rather than as a market creator and shaper. The question is not whether governments should intervene after markets have failed. It is what kind of economy we want to build in the first place. Which public purposes should guide investment, and how can institutions govern the public-private bargain so that value is created collectively and shared fairly?’

These are the questions – as being increasingly posed globally in the wake of serious misgivings of neoliberal, and austerity policies, which limit the role of government, and overall public purpose – finance ministers should have been looking to answer, yet their lack of revisionist attitude seem to signal a strong path dependency in terms of their education, and professional training over the years. To add to the problem, multilateral institutions seem to support their apparently little-revisionist consensus. This can be ill-afforded in a world of ‘polycrisis’, with fast un-folding nature of climate change crisis, and the frequent, and more intense catastrophes they bring, calling in turn for a more resilient economy that cannot be left mostly to the decision-making of private sector, which looks to profit as the primary motivation. Governments can no longer remain complacent and continue to mainly socialize the risks, and privatize the rewards; which, anyways, was never an option, but apparently increasingly strengthening influence of vested interest over public policy over the years seemed to have perpetuated this.

Moreover, in the same article, Mariana Mazzucato pointed towards the need for adopting a mission-oriented approach that calls for all of government approach, and development partners coming together to pursue big goals, rather than focussing on isolated projects at the sectoral level. She pointed out in this regard: ‘Viewed in these terms, the Bank still falls short, because it treats fiscal-policy space as a fixed constraint within which to optimize, rather than as a set of institutional capacities that can be developed. As a result, the Bank would still organize industrial policy only around specific sectors and considerations of comparative advantage. But the energy transition, water and food security, public health, and economic resilience are not sectoral issues. They call for economy-wide missions.’

Hence, policymakers – in both developing, and developed countries – should stop taking cue from quite dangerous neoliberal, and austerity policies, originating from so-called ‘sound’ economics, or mind-set of ‘Chicago boys’-styled policymakers. The same article pointed out in this regard: ‘Nor is the World Bank an isolated case. The IMF’s own economists have similarly documented how austerity and liberalization fail to deliver. Yet these findings have yet to translate consistently into new operational practices. That needs to change.’

(Concluded)

Copyright Business Recorder, 2026