There is clearly confusion among mainstream economists as the fractures in their paradigm are being revealed on an almost daily basis. And the more venal ideological motivations are also becoming clearer, that is, if they weren’t already completely transparent. On January 21, 2021, the World Bank published a Policy Research Working Paper – Does Central Bank Independence Increase Inequality? – which demonstrated that the way central banking has been conducted in this neoliberal era has been instrumental in the increasing income inequality that has manifested. A month earlier (December 21, 2020), we read that the IMF is waging a campaign against the democratically elected Ecuadorian government to further restrict its fiscal discretion as it struggles with a terrible pandemic situation, and set in place rules that will allow further resource plunder by foreign corporations. The latter really tells you that despite claims by mainstream economists that they have shifted away from the mainstream austerity bias, the truth is different. A quite remarkable juxtaposition that just demonstrates how confused this lot must be at present. Their attempts to cover their motivations in technical authority are clearly failing.
First to Ecuador
On December 21, 2020, the IMF issued a press release (No 20/387) – IMF Executive Board Completes First Review of the Extended Fund Facility Arrangement for Ecuador – which outlined the conditions under which the organisation would extend “US$2 billion for budget support” as a reflection of the “worst contraction on record as a result of the pandemic”.
The IMF talks about “further reprioritization of spending” by the government that will “reduce public debt as a share of GDP” and force tax rises.
All this is couched in standard ‘sound finance’ terms – credibility, reducing the “debt burdens on future generations” – all code for austerity.
For those who are not aware, Ecuador was forced in to abandoning its own currency and using the US dollar in 2000.
The free-market think tank, the Instituto Ecuatoriano de Economía Política (IEEP) was a key player in pressuring for dollarisation.
I won’t go into the details of that process except to say that the nation lost control over monetary policy and the government then had much less room to use fiscal policy to advance public good.
Despite the loss of currency sovereignty, the government of Rafael Correa (2007-2017) made progress in abandoning the neoliberal agenda of its predecessors and improving the lot of the citizens.
But it was strongly opposed by the elites and foreign corporations who wanted to get their hands on the oil reserves.
Which is what the current controversy with the IMF is all about.
The IMF is now demanding that the government accept amendments to the so-called “monetary and financial code (COMYF)” which would further restrict what the central bank can do and place strict rules on fiscal policy – limiting its scope.
On November 18, 2019, the President Lenin Moreno tried to push these amendments through the National Assembly of Ecuador (the parliament) which were aimed at accomplishing a IMF-coup-style tax rises and changes that would outlaw the central bank from being able to be a “direct source of government financing”.
It was interesting because the opposition came not just from the “indigenous movement and social organizations” but also from the local “business sector” (Source).
The IMF had also tried to force the abandonment of fuel subsidies which particularly impacted the indigenous communities in the Andean regions but after a social uprising the government was forced to relent.
The IMF were clearly miffed that their ‘authority’ had been challenged by ordinary citizen movements.
The Human Rights Watch – World Report 2020 – documents the struggle against the austerity policies of the Moreno government, which led to a state of emergency being imposed.
HRW documents “chronic human rights challenges, including weak institutions, poor prison conditions, laws that give authorities broad powers to limit judicial independence, violence against women, far-reaching restrictions on women’s and girls’ access to reproductive health care, and disregard for indigenous rights” in Ecuador.
Ecuador was also one of the first Latin American nations to be severely hit by the coronavirus.
The IMF continued to pressure the Moreno Government and the new credit arrangements agreed in September 2020 were made contingent on accepting the COMYF changes.
Moreno is deeply unpopular with the electorate and is unlikely to succeed at the next Presidential election later this year. He was initially supported by the outgoing President, Rafael Correa, but then reneged on his policies and plunged the nation into a neoliberal disaster after cosying up to the IMF.
Ecuador’s former foreign minister called him a “Shakespearean traitor” (Source):
I think Lenin Moreno is a Shakespearean traitor in a number of ways. I really do. He betrayed Correa, he betrayed his party, he betrayed his electorate. He actually said a few weeks after being elected and being sworn into power that he hated the people who voted for him. I don’t know a lot of heads of states that have used the expression… ‘starting to hate’ the people who voted for him. Unbelievable… So I think he betrayed Ecuadorians, and he betrayed democracy, and he certainly betrayed Assange.
So I think there are a number of reasons why he did this: one of the fundamental reasons is realignment in the US sphere of influence… And, of course, all sorts of security and foreign policy doctrines that have changed. Assange is a consequence, I would say, of the new pro-US doctrine.
Of the contenders, the Right have thrown their support behind, one – Guillermo Lasso – who is a big banker and would reinforce the IMF austerity agenda.
The popular, former Left President Rafael Correa is in exile in Belgium after being sidelined as a result of various prosecutions, which, in one case, even Interpol refused to assist in because they considered the charges to be “obviously a political matter” (Source).
His ten-year tenure as President saw poverty rates fall dramatically, as minimum wages and living standards rose.
He also obviously upset the powers to be by giving Julian Assange haven in London.
He also upset indigenous communities by favouring Chinese mining interests and also was socially conservative (opposing same-sex marriage).
So while he was no uniformly supported he did resonate with the citizens because he was true to his opposition to neoliberalism and neocolonialism.
His Left-wing off-sider – Andrés Arauz – will now stand against Lenin Moreno in the upcoming general election.
He enjoys the support from the ‘correísta’ movement and is not part of the financial elite that has become so unpopular in Ecuador.
His problem is that the elites in the financial and media sectors could not stand the prospect of a return to ‘Correísmo’, which would resume the anti-IMF stance and seek to introduce policies that favour the broader population.
With that background you can see why the IMF is pushing the tightening of the COMYF, which includes the establishment of a private governing body for the central bank which would take it out of any governmental control.
The organisation, Progressive International, which seeks to “unite, organise, and mobilise progressive forces behind a shared vision of a world transformed” has published a statement – The IMF’s austerity drive comes for the Central Bank of Ecuador – which confirms that this move “violates the Ecuadorian constitution”.
Under the Constitution, the central bank must “implement” the economic policy that the “executive branch of government” defines.
They also want to force the newly constructed central bank to “guarantee” any foreign currency investments, which is an impossibility given the lack of currency sovereignty.
This will amount to a raid on Ecuadorian public assets from foreign interests.
And the central bank would be prevented from allocating any currency “resources to state entities, public companies and local governments”.
The IMF move is deliberate and designed to retard any possibility that the ‘correísta’ movement would have to return to policies that allowed the central bank to support equity-based policies.
Moreno and his stooges have been doing everything they can to undermine a return of the ‘correísta’ movement under the leadership of Andrés Arauz.
A Reuters report (January 20, 2021) – Ecuador bonds fall after presidential hopeful Arauz says would scrap IMF program – tells us that Andrés Arauz would resist the IMF impositions on the country if elected.
He wants to stand against further privatisations (particularly in the mining sector), increase spending on health and education, impose capital controls, and to restore the health agreement with Cuba (first-class medical support that Moreno scrapped).
He is committed to Keynesian-style anti-austerity – just the thing the IMF hates.
And if he is elected it will provide a signal to other Left movements in South America who have been in a difficult place since the Venezuelan problems.
World Bank Report
The IMF’s behaviour in Ecuador is obviously transparent.
It cannot claim any authority in the research literature which is consistently showing that the organisation of central banks at arms length from politicians only makes them independent of democracy.
I am often asked about ‘independence’ by journalists.
I explain that in an operational sense, central banks in a well run monetary system cannot be independent of the treasury. Every day the two arms of government have to coordinate their policy positions to maintain orderly conditions in the system.
Treasury policies impact on bank reserves which are managed by central banks to give coherence to their monetary policy position. The two arms are thus intertwined.
So even if you ignore the fact that politicians appoint central bank governors and boards, operationally they cannot be independent.
But what ‘independence’ really is about is depoliticisation.
The New Keynesian macroeconomics has crafted a scenario where monetary policy is preferred as the counter-stabilisation tool to ‘fight’ inflation and fiscal policy is biased towards austerity.
That has maintained elevated levels of unemployment, sluggish growth rates in output, productivity and real wages, and resulted in rising inequality.
But the beneficiaries are obvious – it has also redistributed national income towards profits away from wages.
It hasn’t been accidental. It was a planned reversal of the social democratic gains for workers (the vast majority) in favour of privileging the corporate and financial sectors.
And it has been very successful, except that it has produced the conditions that are leading to its own demise.
It redistributed income but has been unsustainable because of the damage it has cause the majority, which is now in revolt.
That is why we are now in a period of fiscal dominance.
Even the politicians have been forced to increase fiscal deficits and central banks have been forced to facilitate those increases with massive public bond purchases – the anathema of the mainstream neoliberal orthodoxy.
As noted in the introduction, the World Bank is even recognising this.
The recent report – Does Central Bank Independence Increase Inequality? – written by Michaël Aklin, Andreas Kern, and Mario Negre, further blows the cover on the mainstream claims that depoliticising monetary policy and eschewing fiscal policy discretion is the best way to run a society.
They note that the central bank arrangements that New Keynesians advocate have helped increase inequality because:
1. “Since the 1980s, income inequality has increased substantially in several countries.”
2. “Central bank independence indirectly constrains fiscal policy and weakens a government’s ability to engage in redistribution.”
3. “central bank independence incentivizes governments to deregulate financial markets, which generates a boom in
asset values. These assets are predominantly in the hands of wealthier segments of the population”.
4. “to contain inflationary pressures, governments actively promote policies that weaken the bargaining power of workers.”
They start by noting that rising inequality is a bad thing – “a source of many social woes”.
Interestingly, they implicate in increasing “the risk of financial crises”, reducing “investments”, lower growth and more
And then it spills over into increased social unrest, which creates damaging political instability.
Neoliberalism started with an attack on the poor, and, then to really advance its ends, started hollowing out the middle class.
The authors find that with fiscal policy severely constrained under neoliberalism, governments have focused on microeconomic policies – deregulation, privatisation, cuts to pensions etc – which have increased inequality but have not generated commensurate growth dividends.
Those who own financial assets have become wealthier, while those who rely on labour income have become relatively worse off.
The central banks have also overseen tighter interest rate settings which have generated elevated levels of unemployment.
Franco Modigliani Modigliani (2000: 3), one of the economists who coined the term NAIRU, reflected on his legacy in 2000:
Unemployment is primarily due to lack of aggregate demand. This is mainly the outcome of erroneous macroeconomic policies … [the decisions of Central Banks] … inspired by an obsessive fear of inflation … coupled with a benign neglect for unemployment … have resulted in systematically over-tight monetary policy decisions, apparently based on an objectionable use of the so-called NAIRU approach. The contractive effects of these policies have been reinforced by common, very tight fiscal policies.
The World Bank authors conclude that:
… institutional reform such as CBI as a contributing factor to secular trends toward inequality.
You will not find a complete rejection of the New Keynesian framework in this paper.
This is the state of affairs as the paradigm shift in macroeconomics unfolds.
Many of the orthodox practitioners can see the flaws but just cannot make the complete break.
The World Bank authors are clear that “rising inequality” undermines “the social contract” and that the “emergence of CBI … introduces substantive constraints on policymakers to steer overall macroeconomic outcomes, respond to adverse shocks, and impact distributional outcomes.
But then, realising they are on unsteady ideological ground, they revert to norm “Central bank independence, per se, is not bad.”
The reality is that CBI is bad per se because it undermines government volition and is demonstrably producing bad outcomes.
It undermines democratic quality.
Public Lecture – Tuesday, January 26, 2020
I will be giving my annual public lecture for the Helsinki Centre for Global Political Economy (as part of my professorial role at the University of Helsinki) on Tuesday, January 26, 2021.
The topic will be “Political Economy Thought and Praxis Post Pandemic” and I will explore familiar themes.
All are welcome.
It will be a live stream on YouTube – https://youtu.be/O9l3sbJ1wNI. Below you may find the full invitation.
The Stream will begin at
18:15 Melbourne time (Australia)
9:15 Finnish time (GMT+2)
and whatever for Japan, US etc.
I will speak for around 40 minutes and then take questions and discussion.
That is enough for today!
(c) Copyright 2021 William Mitchell. All Rights Reserved.