Globalization’s True Believers Are Having Second Thoughts

Foroohar is an assistant managing editor at TIME and the magazine’s economics columnist. She’s the author of Makers and Takers: The Rise of Finance and the Fall of American Business.

Early this month, the International Monetary Fund seemed to proclaim that neoliberalism, an economic philosophy that advocates allowing capital to flow where it will (and usually where labor is cheapest), may have been “oversold.” This was rather like hearing the Pope say that catechism may have been “oversold.”

The IMF, after all, has been the primary vehicle for spreading Western, neoliberal economics to emerging markets over the last 40 years. Such policies have helped pull billions of people out of poverty, mainly by opening global trade. But it’s also the reason that financial crises around the world have grown bigger and more damaging. When capital can flow in and out of countries at will, bubbles grow large enough to imperil entire economies. (Russia, a number of Latin American nations and, to a lesser extent, China have struggled to contain hot money flows in recent months.)

Three IMF researchers released a paper arguing that there was substantial evidence that free flows of global capital, and other neoliberal policies like the push for indebted nations to cut deficits quickly, may be hindering economic development. As the researchers put it “the benefits [of such policies] seem fairly difficult to establish when looking at a broad group of countries.”

Meanwhile, the costs–most notably higher inequality within countries–“hurt the level and sustainability of growth.” The brief noted that since 1980 (which is when neoliberal economics started to really take off) there have been about 150 episodes of massive capital inflows to countries, and that 20% of the time these resulted in major financial crises and recessions. That’s because a lot of the money isn’t useful investment, but rather speculative inflows from big global banks and portfolio funds.

Not surprisingly, the paper raised eyebrows. On June 2, the IMF’s chief economist Maury Obstfeld said the paper had been “widely misinterpreted.” Obstfeld framed the issue less as a rejection of neoliberal economics and more of a re-examination in the wake of the financial crisis. “I would describe the process as evolution, not revolution,” he said. Obstfeld added that the paper “does not signify a major change in the Fund’s approach.”

Still, there is good reason this struck a cord. The world’s most prominent banking institution is saying that a major part of globalization as we have known it–the free flow of capital–isn’t working properly. More over, the IMF is affirming that not all investment is created equal—and that a lot of financial flows across countries aren’t about allocating capital to where it’s most needed, but rather are part of a process of what I call “financialization,” that ends up enriching the 1%.

Both of these statements underscore the reason behind the populism we are seeing sweep around the world–from the triumph of Donald Trump, to the possibility of a “Brexit” from Europe, to the rise of nationalism in Germany, France and elsewhere. The paper’s ideas aren’t new–people like former World Bank chief economist Joseph E. Stiglitz have been arguing for years that emerging markets shouldn’t be copying neoliberal policies wholesale. But the fact that they are being heard and debated within the IMF is hugely significant.

Ultimately, it reinforces the notion that we are, as I have argued, at the end of a 40 year cycle of markets-know-best thinking. That puts us also at the beginning of a new paradigm that has yet to be defined–economically or politically.