Are free market policies always right?

For decades governments that dared to challenge the IMF model swiftly found themselves out of favor in Washington and other Western capitals.

Capital inflows are not always beneficial for a country, the IMF concludes.

But the financial crisis that started in 2008 prompted a new debate over free market policies and IMF ideology. So now after sixty years of zealously insisting on free market economic policies, the International Monetary Fund has traded its dogmatism for pragmatism, it seems.

IMF admits mistakes

It recently admitted that their policies for bailing out Greece has caused a lot of damage to the country. The IMF estimated that unemployment would go as high as 14% but it has now gone as high as 27%.

Capital controls cab be beneficial

The IMF has acknowledged that in some instances, developing countries might actually benefit from controlling how much foreign capital enters their economies — and how it’s used. After examining the experience of governments that have regulated capital flows, the IMF concluded that such policies helped reduce “financial fragility.

There is no surefire one-size-fits-all way to deal with the impact of potentially destabilizing short-term capital inflows. While controls can be helpful to individual countries under certain conditions, their widespread use could have deleterious effects on the efficient allocation of investment across countries, and harm prospects for global recovery and growth.

Glad to note that the IMF seems to have adapted a more flexible approach. Governments all over the world have complained to me about the inflexibility of the institution. Maybe in this respect something good came out of the global crisis? Plans are important, but we always have to be flexible about how to reach our goals. Do you think the new IMF flexibility will have a positive impact on global recovery and growth? Or is it just  temporary and sooner  or later they will become dogmatic again? Maybe it’s actually your opinion that all countries should stick to free market policies no matter what? Even when, as in Greece and Spain, unemployment hits 27 %?

Photo: Flickr – businesspictures

19 thoughts on “Are free market policies always right?

  1. I don't think any one policy is always right, but more often than not free markets are probably more helpful than not.
    My recent post Motivational Monday: Quote

    1. Pat the US economy is not doing as badly as Europe because the Obama administration did stimulate it a bit. Unfortunately far from enough. If that had not been done you would have suffered the same faith as Europe. Economies don't grow thanks to austerity. For a private person austerity can do the trick but not for countries. Unless of course it wants to increase poverty enormously.

  2. It''s interesting to me to see the cause and affect of a free market given these economic times. Now that we are seeing a modicum of recovery, I do hope that the lessons that were learned are not lost. Controls are always a good thing as long as there is some flexibility built in to allow for common sense adjustments when needed. However, it still gets down to using good judgement. Time will tell what we've learned from it all 🙂
    My recent post Melon Mint Wine-sicles: Recipe

    1. True, Susan. If they don't start stimulating Western economies the bad times will last a long time. The US tried to stimulate the economy but the effort was far too small. But you would have been in the same shoes as Europe is today if that stimulation had not been done.

  3. Sorry Catarina, with all due respect (and I am a great admirer of your sophisticated intellect, and your depth and breadth of knowledge), I beg to differ: I don't think IMF policies are going to change, any time soon.
    As I see it, based on an observation of IMF’s role in the last fifty years, the IMF policies are not always made on purely economic grounds, or with the interest of the client states in mind. IMF is an instrument of Western imperialism that is used by the West to keep the developing countries economically backward, socially destabilized, infra-structurally undeveloped, and , as a result, under West's economic subjugation. And they have achieved a remarkable success, so far; thanks to the nauseatingly corrupt, inept, incompetent, and undemocratic political leadership of these countries, mostly foisted by the West on them. Most of these helpless and hopelessly poor nations are now groaning under the unbearable burden of massive external debt, —a gift of IMF policies, that has enslaved these nations’ for generations and generations to come. A case in point is my native Pakistan.
    Well, imperialism continues in a different guise. IMF carries on the crusade, on behalf of its imperialist masters. Long live imperialism!
    I thank you for creating this forum to exchange ideas freely.
    S. Zafar Iqbal

      1. Yes Catarina, let's hope IMF changes its way of helping the developing countries. Unfortunately, they continue to follow the same old discredited policies in a number of developing countries , as of this writing.

  4. Flexibility is critical in my opinion. Making the parallel to business…businesses that are inflexible to dynamic market conditions tend to fail over the course of time. If flexibility is paramount to business sustainability than why would it not be critical for international monetary policy?

    Where policies are inflexible there are thousands of situations where extraordinary circumstances call for flexibility. Is it better to bend a bit and provide better service and stability or to be firm and support uncertainty in the market? I tend to prefer the flexiblity and stability than the alternative.

  5. Guy,

    Agree with your post, though I am curious what measures you think could be taken to ensure a long-term focus rather than short-term greed? In free markets, especially equity markets, short-term expectations provide the overriding direction for executives and managers to focus. Those expectations combined with compensation geared toward the same timeframe do little to ensure long-term stability. I struggle with what alternatives are available to promote a longer-term vision over short-term results.

  6. While I believe wholeheartedly in capitalism as being the most successful model for business, it is clear that unbridled capitalism – where greed overtakes long-term business sense – is not good. Capitalism needs a measure of control to stop greed destroying it.

    Likewise, I believe most strongly in free trade of all types, but it does seem that, like capitalism, free trade needs to have parameters in place so that it can function most effectively for the longer-term and not be destroyed by a short-term, opportunistic approach.

  7. This good news to me. I strongly believe that the free market policies really contributed to the global financial melt down. Because if the developing countries had control the in-flux of foreign capital,most of the developing countries wouldn't have been affected that much during the global crisis. However, we must put into consideration the stability of the market.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.