Saturday, 28 June 2008
Why the Washington Consensus does not work.
In the same way that revolutionary socialists argue that Stalin betrayed Lenin or Marx, moderate advocates of capitalism like Soros and Stiglitz argue that the IMF et al have abandoned Keynes’ original vision. It isn’t that capitalism doesn’t work; it is more the case that it hasn’t been tried. According to Stiglitz:
In its original conception, the IMF was based on a recognition that markets often did not work well – that they could result in massive unemployment and might fail to make needed funds available to countries to help restore their economies. The IMF was based on the belief that there was a need for collective action at the global level for economic stability[…]Keynes would be rolling over in his grave if he could see what has happened to his child. (Independent on Sunday, 9 November 2003)
Since the 1980s the IMF, WTO and World Bank have advocated the so-called ‘Washington Consensus’ of fiscal austerity (government spending cuts), privatisation and market liberalisation. Swept along by the neo-liberal counter-revolution against Keynesian economics the consensus argues that for development to occur barriers to the market should be swept away. The policies that failed in 1930s Europe have been exported to almost the entire globe. The Washington consensus argues that the poorest countries in the world should cut government spending and increase taxes to reduce indebtedness. The tax burden should, of course, fall on ordinary citizens; taxes on profits would discourage investment and enterprise. State assets should be privatised as thoroughly as possible, while barriers to free trade should be swept away. Export led growth is also advocated along with the removal of controls on capital. Multinationals are to be welcomed and government regulation slashed to the minimum.
While Soros and Stiglitz are by no means naturally hostile to the US, given their close links with previous American governments, they believe that the Washington consensus, rather than being based purely on market ideology, is also inspired by the interests of an essentially US corporate elite. The Bretton Woods institutions have massive power to impose their free market medicine because if they refuse to give a country a clean bill of health, foreign capital floods out, leading to economic chaos. If a country rejects free market approaches, money floods out, forcing a rethink. By insisting that barriers to the movement of financial capital are removed the Bretton Woods institutions make it difficult for countries to act independently and they become more closely tied to the whims of global financial markets. Indebted countries that reject the consensus are refused financial stabilization deals by the IMF and aid from the World Bank. Even countries that are independent of IMF financial aid are influenced by the institution’s prescriptions. Typically, British Chancellors of the Exchequer and Japanese finance ministers take close interest in the IMF’s annual report of their countries’ financial health.
Stiglitz believes that the emphasis on fighting inflation and reducing debt advocated by the IMF can be appropriate in some circumstances. He suggests that some Latin American countries during the 1980s attempted to print money to spend their way of crisis with predictable results in terms of high inflation, ‘Countries cannot persistently run large deficits; and sustained growth is not possible with hyperinflation. Some level of fiscal discipline is required’. Neither does he reject all privitisation, ‘Most countries would be better off with governments focussing on providing essential public services rather than running enterprises that would arguably perform better in the private sector, and so privitization often make sense’ . Equally, ‘When trade liberalization – the lowering of tariffs and elimination of other protectionist measures – is done in the right way’, so that inefficient sectors of the economy are removed and replaced with more competitive ones, there can be ‘significant efficiency gains’ (Stiglitz 2002: 53). Soros argues that in an ‘ideal world’ the complete removal of capital controls would be beneficial, noting that restrictions to prevent money moving across national borders creates ‘evasion, corruption and the abuse of power’ (Soros 1998: 192). Suggesting that the collapse of the Soviet economy demanded significant change including major privatisation, Soros notes ‘The fact that radical reforms are often radically misconceived does not obviate the need for radical reforms’ (1998: 226).
However both he and Stiglitz argue that these radical market-based policies have been applied in an inflexible and inappropriate way. Stiglitz argues that the Washington Consensus’s obsession with reducing inflation is particularly damaging because it means that some of the poorest countries in the world have to cut spending to prevent prices rising when problems of joblessness and low growth are likely to be far more damaging. In Indonesia, to pick just one example, Stiglitz notes how IMF-inspired cuts to food and fuel subsidies for the poor led to rioting (Independent on Sunday, 9 November 2003).
Privatisation breeds corruption when assets are sold off. Even when clean it often enriches an elite of corporate fat cats. Privatisation during a debt crisis when an economy is in chaos can mean that assets are sold at knock-down prices, which may simply mean that they can be bought up by US corporations who become stronger at the expense of developing countries. In Russia, according to Stiglitz, the swift privatisation of state assets led to their purchase by a criminal class who thereby gained massive political power. Capital liberalisation has reinforced the tendency for democratic decision making to become subordinated to the demands of financial markets. Soros notes that tax burdens have been shifted from firms and financial operators to citizens increasing inequality:
Interestingly, the state’s share of GNP has not declined perceptibly. What has happened instead is that the taxes on capital and employment have come down while other forms of taxation particularly on consumption have kept increasing. In other words, the burden of taxation has shifted from capital to citizens. That is not exactly what had been promised, but one cannot even speak of unintended consequences because the outcome was exactly as the free-marketers intended. (Soros 1998: 112)
A country implementing policies that the financial markets find distasteful may find that they take their hot money and emerging share market portfolio funds elsewhere, causing slump and currency collapse. As well as tying developing countries to the free market agenda of the Washington consensus, capital liberalisation means that such states are more susceptible to movements in global currency markets that can cause sudden shocks to fragile economies:
It has become an article of faith that capital controls should be abolished and the financial markets of individual countries, including banking, opened up to international competition. The IMF has even proposed amending its charter to make these goals more explicit. Yet the experience of the Asian crisis ought to make us pause. The countries that kept their financial markets closed weathered the storm better than those that were open. India was less affected than the Southeast Asian countries; China was better insulated than Korea. (Soros 1998: 192)
Free trade is theoretically beneficial, but opening up an underdeveloped economy to trade has several major drawbacks. It may force down the price of commodities such as sugar or coffee, wrecking the livelihoods of peasant farmers who have little possibility of alternative employment. It can also destroy ‘infant industries’, new industries that have yet to mature and become efficient and will be killed by unprotected exposure to foreign competition. Stiglitz notes that to achieve growth the successful Asian economies such as Hong Kong, Japan and South Korea initially used selective protectionism to allow their industries to take off.
Soros and Stiglitz feel that the advocates of the Washington consensus are remote from the problems of the developing world, act arrogantly and are consistently biased to the needs of the rich.
[M]odern high-tech warfare is designed to remove physical contact: dropping bombs from 50,000 feet ensures that one does not ‘feel’ what one does. Modern economic management is similar: from one’s luxury hotel, one can callously impose policies about which one would think twice if one knew the people whose lives one was destroying. (Stiglitz 2002: 24)
The institutions promoting the Washington consensus act as if they continue to bear the ‘[w]hite man’s burden’ persisting according to Stiglitz with the notion that they always know what is best (2002: 25). Stiglitz and Soros argue that the arrogance of the Washington institutions means that developing countries have little say in their own economic development and policies are imposed from above. Such arrogance inevitably breeds discontent and even where globalisation has the potential to bring benefits; the Washington consensus has fuelled a hostile counter movement. Discontent is met by repression: rubber bullets against starving rioters. As Stiglitz observes:
A common characteristic is: We know best, and the developing countries should do what we tell them to […]They really see themselves as a harsh doctor, giving them the cod liver oil they need, even if they don’t want it. The problem, of course, is that quite often the medicine […] kills the patient. (Independent on Sunday, 9 November 2003)
It is difficult to think of a single example of a country that has gained from the IMF model of structural adjustment. Botswana is often mentioned but commentators but despite enjoying one of the globe’s fastest economic growth rates the Washington consensus has not delivered sustainable prosperity:
The richest twenty per cent of the population earned more than twenty-five times as much as the poorest twenty per cent.[…] Botswana, at twenty-two per cent, has the world’s sixth highest unemployment rate […] One of the few products of Botswana’s increased economic activity which has been widely shared by its poorer inhabitants is AIDS. Women driven into prostitution by poverty are purchased by the truck drivers delivering goods to the elite. (Monbiot 2003: 214)
Argentina, the Washington consensus exemplar from South America, plunged into severe recession after following the model rigorously, with resulting mass unemployment, poverty and chaos.
The nice cartoon is from the Global Policy Forumwho have lots of material on the Washington Consensus worth a click