THE WORMS IN THE ENTRAILS OF GLOBAL FREE -MARKET ECONOMICS
The IMF** and World Bank as Agents of the Rich and Nemeses of the Poor
What is this Globalisation?
Globalisation is one of the catch-all icons of our age.
Just think popular music; literature - from Shakespeare to 'World No.1 Blockbuster Bestsellers' - the Internet, fashion, soccer, access to advanced education, international travel and the export of ideas and know-how.
Appreciate the wonders of computers, home entertainment and all manner of consumer electronics - and especially the liberating effects of mobile telephony.
Think MacDonalds, Coke, Pepsi, Nike, Walmart.
Then think offshore financial centres and tax havens - consider money laundering and the movement of trillions of hot money to make instant profits.
Reflect on Union Carbide and 18,000 deaths in Bhopal, GM crops, oil pollution and unaffordable pharmaceutical products in poor countries.
Then feel bad about land mines, arms dealing and corrupt practises to sell defence systems in competitive world markets.
Turn your minds to clandestine operations, financial penalties and sanctions against 'undesirable' regimes which won't toe the line on open markets and less state support for poor people.
Be appalled at the condition of public health in Russia and the billion or so people who can't even subsist on less than $1 a day.
All of these things are facets of globalisation.
The term is used by some politicians, economists, financiers and industrialists to explain or justify pretty well anything they wish.
Those who support 'globalisation' tend to be uncritical and fervent in their praise, almost religious in their support of the doctrines of free, open markets for finance, goods and services. They tend to dismiss the misery of millions as wrinkles in the fabric of globalisation that will be ironed out in time as markets self-adjust - or in some cases as demonstrating that one cannot create a delicious and nourishing soufflé without cracking an odd egg or two in the process. Their stance is that globalisation may be a bit of a blunt weapon, but that the good it brings far outweighs the malign impacts.
Critics of globalisation come in many shapes and sizes, from some top politicians, financiers and academics to wild-eyed revolutionaries. They cite the destruction of subsistence agriculture and nascent industries in Third World countries, the exploitation of children and the poor in economically disadvantaged countries to make cheap consumer products, and the impoverishment of millions to serve the needs of the wealthy. They believe fervently that globalisation is an enormous con set up by wealthy countries to protect their own interests and exploit the disadvantaged. They focus their ire on bodies such as the International Monetary Fund, World Bank, the G7/8 and the World Trade Organisation. The foot soldiers of anti-globalisation turn up at meetings of the bodies above and riot - since the 1999 World Trade Organisation meeting in Seattle, there has been a distinct nervousness about hosting such meetings.
The cacophony set up by these competing groups is enough to give any reasonably intelligent and sensitive person a severe migraine attack. We are bombarded with pro-globalisation spin through the media, many academics and politicians. Opponents are many trades unions, student bodies and environmentalists - and increasingly, populist political leaders in developing countries with oil and other desirable raw materials. We don't hear much from ordinary people in developed countries, perhaps because they are confused as to whether they benefit or not from 'globalisation'. However, what we are seeing in developed countries is alienation and bad feeling towards many of the institutions that can be construed as benefiting from it, and populist uprisings in developing countries - maybe early warning signs of a major backlash.
In times of conflict and confusion turn to someone who knows the issues from the inside and can be relied upon to take an objective view.
Such a man is Joseph Stiglitz, winner of the Nobel Prize for Economics in 2001 who has been a senior White House Adviser, Chief Economist at the World Bank and is currently Professor of Finance and Economics at Columbia University.
Stiglitz, who is a strong advocate of globalisation, has taken a distinctly measured view of the current state of affairs, and published a seminal book, Globalisation - and its Discontents in 2002.
Protestors see globalisation in a very different light than the Treasury Secretary of the United States, or the finance and trade ministers of most of the advanced industrial countries. The differences in view are so great that one wonders, are the protestors and the policy makers talking about the same phenomena? Are they looking at the same data? Are the visions of those in power so clouded by special and particular interests?
What is this phenomenon of globalisation that has been subject, at the same time, to such vilification and such praise?
Fundamentally, it is the closer integration of the countries and the peoples of the world which has been brought about by the enormous reduction in the costs of transportation and communication, and the breaking down of the artificial barriers to the flow of goods, services, capital, knowledge, and, (to a lesser extent), people across borders.
Globalisation has been accompanied by the creation of new institutions that have joined with existing ones to work across borders. In the arena of international civil society, new groups, like the Jubilee movement pushing for debt reduction for the poorest countries, have joined long-established institutions like the International Red Cross. Globalisation has led to renewed attention to long-established international intergovernmental institutions: the United Nations, which attempts to maintain peace, the International Labour Organisation, (ILO), originally created in 1919, which promotes its agenda across the world under the banner 'decent work'; and the World Health Organisation, which has been especially concerned with improving health conditions in the developing world.
Many, perhaps most, of these aspects of globalisation have been welcomed everywhere. No-one wants to see their child die, when knowledge and medicines are available somewhere in the world.
It is the more narrowly defined economic aspects of globalisation that have been the subject of controversy, and the international institutions that have written the rules, which mandate or push things like liberalisation of capital markets (the elimination of rules and regulations that are designed to stabilise the flows of volatile money into and out of the country).
To understand what went wrong, it's important to look at the three main institutions that govern globalisation, the IMF, the World Bank and the WTO.
The IMF and the World Bank
** The IMF has changed its mind in 2019!
Stiglitz goes on to deliver a powerful critique of the World Bank (currently the subject of much controversy due to the nepotistic antics of its American neo-con head, Paul Wolfowitz), and the IMF. The IMF and the World Bank were founded as a result of the UN Monetary and Financial Conference at Bretton Woods, New Hampshire in July 1944, part of a concerted effort to finance the rebuilding of Europe after the devastation of World War 2 and to save the world from future economic depressions.
The proper name of the World Bank - the International Bank for Reconstruction and Development - reflects its original mission - Development was added almost as an afterthought. In the early days, the World Bank's remit was seen to mainly affect the ex-colonies of European countries.
The founding philosophies of the IMF, much influenced by John Maynard Keynes, were based on a recognition that markets often did not work well - that they could result in massive unemployment and might fail to make funds available to countries to help them restore their economies.
Stiglitz describes the IMF in a particularly telling passage:
The IMF was founded on the belief that there was a need for collective action at the global level for economic stability.
The IMF is a public institution, established with money provided by taxpayers all round the world. This is important to remember because it does not report directly to either the citizens who finance it or those whose lives it affects.
Rather, it reports to the ministries of finance and the central banks of the governments of the world. They assert their control through a complicated voting arrangement based largely on the economic power of the countries at the end of World War 2. There have been some minor adjustments since, but the major developed countries run the show, with only one country, the United States, having an effective veto.
The subversion of the IMF.
Over the years since its inception, the IMF has changed markedly. Founded on the belief that markets often worked badly, it now champions market supremacy with ideological fervour. Founded on the belief that there is a need for international pressure on countries to have more expansionary economic policies - such as increasing expenditures , reducing taxes, or lowering interest rates to stimulate the economy - today the IMF typically provides funds only if countries engage in policies like cutting deficits, raising taxes, or raising interest rates that lead to a contraction of the economy. Keynes would be rolling over in his grave were he to see what had happened to his child.
The most dramatic change in these institutions occurred in the 1980's, the era when Ronald Regan and Margaret Thatcher preached free market ideology in the United States and the United Kingdom. The IMF and the World Bank became the new missionary institutions, through which these ideas were pushed on the reluctant poor countries that often needed their loans and grants. The ministries of finance in poor countries were willing to become converts, if necessary, to obtain funds, though the vast majority of government officials, and, more to the point, people in those countries often remained sceptical.
Stiglitz describes how the missions of the IMF and World Bank have become increasingly entwined. The World Bank is supposed to provide lending for projects in developing countries like infrastructure, roads and dams. But over time, it has progressed to providing broader based support in the form of structural adjustment loans, but it did this only when the IMF gave approval - and with that approval came IMF-imposed conditions on the country. The IMF was supposed to focus on crises; but developing countries were always in need of help, so the IMF became a permanent part of life in most of the developing world.
The fall of the Berlin wall provided a new arena for the IMF: managing the transition to a market economy in the former Soviet Union and the Communist bloc countries in Europe. More recently, as the crises have gotten bigger, and even the deep coffers of the IMF seemed insufficient, the World Bank was called in to provide tens of billions of dollars of emergency support, but strictly as a junior partner, with the guidelines of the programme dictated by the IMF.
In principle, there was a division of labour. The IMF was supposed to limit itself to matters of macro-economics in dealing with a country, to the governments budget deficit, its monetary policy, its inflation, its trade deficits, its borrowings from abroad; and the World Bank was supposed to be in charge of structural issues - what a country's government spent its money on, the country's financial institutions, its labour markets and trade policies. But the IMF took an imperialistic view of the matter: since almost any structural issue could affect the performance of the economy, and hence the government's budget or trade deficit, it viewed almost everything as falling within its domain. It often got impatient with the World Bank, where even in the years when free market ideology reigned supreme, there were frequent controversies about what policies would best suit the conditions of the country.
The IMF had the answers (basically the same ones for every country), didn't see the need for all this discussion, and while the World Bank debated what should be done, saw itself as stepping into the vacuum to provide the answers.
The disastrous failure of the IMF and economic globalisation.
A half century after its founding, it is clear that the IMF has failed in its mission. It has not done what it was supposed to do - provide funds for countries facing an economic downturn, to enable a country to restore itself closer to full employment.
In spite of the fact that our understanding of economic processes has increased enormously during the last 50 years, and in spite of IMF's efforts during the past quarter century, crises around the world have been more frequent and (with the exception of the Great Depression), deeper. By some reckonings, close to a hundred countries have faced crises.
Worse, many of the policies that the IMF pushed, in particular, premature capital market liberalisation, have contributed to global instability. And once a country was in crisis, IMF funds and programmes not only failed to stabilise the situation, but in many cases actually made matters worse, especially for the poor. The IMF failed in its mission of promoting global economic stability; it has also been no more successful in the new missions that it has undertaken, such as guiding the transition of countries from communism to a market economy.
.....It has become increasingly clear not just to ordinary citizens but to policy makers as well, and not just those in developing countries but those in developed countries as well, that globalisation as it has been practiced has not lived up to what its advocates promised it would accomplish - or to what it can and should do. In some cases, it has not even resulted in growth, but when it has, it has not brought benefits to all; the net effect of the policies set by the Washington Consensus has all too often been to benefit the few at the expense of the many, the well-off at the expense of the poor. In many cases commercial interests and values have superseded concern for the environment, democracy, human rights, and social justice.
Globalisation itself is neither good or bad. It has the power to do enormous good, and for the countries of East Asia, who have embraced globalisation under their own terms, at their own pace, it has been an enormous benefit, in spite of the setback of the 1997 crisis. But in much of the world it has not brought comparable benefits. For many, it seems closer to an unmitigated disaster.
What has happened?
The ideas and intentions behind the creation of the international economic institutions were good ones, yet they gradually evolved over the years to become very different. The Keynsian orientation of the IMF, which emphasised market failures and the role of government in job creation, was replaced by the free market mantra of the 1980's, part of the new 'Washington Consensus' - a consensus between the IMF, the World Bank, and the US Treasury about the "right" policies for developing countries - that signalled a radically different approach to economic development and stabilisation.
Many of the ideas incorporated in the consensus were developed in response to the problems of Latin America, where governments had let budgets get out of control while loose monetary policies had led to rampant inflation.
The policies adopted under the Washington Consensus - removal of government involvement in nurturing or protecting industry, capital market liberalisation and tight budgetary controls - have been applied piecemeal to all developing countries as a 'one size fits all' solution to economic ills.
Says Stiglitz: ..... Most advanced industrial countries, including the United States and Japan, had built their economies by wisely and selectively protecting some of their industries until they were strong enough to compete with foreign companies. While blanket protectionism has often not worked for countries that have tried it, neither has rapid trade liberalisation. Forcing a developing country to open itself up to imported products that would compete with certain of its industries, industries that were dangerously vulnerable to competition from much stronger counterpart industries in other countries, can have disastrous consequences, socially and economically. Jobs have systematically destroyed- poor farmers in developing countries simply couldn't compete with the highly subsidised goods from Europe and America - before the countries' industrial and agricultural sectors were able to grow strong and create new jobs. Even worse, the IMF's insistence on developing countries maintaining tight monetary policies has led to interest rates that made job creation impossible, even in the best of circumstances.
What can we learn from Stiglitz?
Let us leave Professor Stiglitz at this point and see what we can learn from the experiences of the last 25 years.
- First, globalisation is inevitable and has mostly occurred already. We live in a world where in the main, information, technology, ideas, fashions and products can move easily around the world. Even governments bent on sealing their borders can only do so by grossly impoverishing their people. North Korea has succeeded in doing this at a terrible cost; the Chinese government is giving ground rapidly as their economy grows. This can be termed 'natural' globalisation and its effects are generally positive to neutral - depending on whether you like Coke and Burgers!
- Second, economic globalisation has caused as many, maybe more, problems for the ordinary people of the developing world, several billion people, than it has improved their lives. And a lot of the misery has been unnecessary, caused by crass and inappropriate dogmas and policies, smeared over all by international bureaucrats, especially those in the IMF.
So many of the problems of economic globalisation are man-made - and created in the finance ministries of the rich and powerful countries, led strongly by the United States.
What lies behind the current problems?
- Free-market dogma run riot. In the beginning, world economic institutions had the mission to improve the lot of people across the world by the best means available. This meant taking a developmental growth-oriented and evidence - based approach to problems.
The emergence of free-market dogmas under Reagan -Thatcher, driven by dogmatic, missionary academics and publicists took governments and economic institutions by storm. Once installed on the commanding heights, they have proved mightily difficult to dislodge, despite mounting evidence that their diagnoses and solutions create more problems than they solve.
The root problem is that the dogmas and their proponents are grossly elitist - that is uncaring of the effects on the poor and defenceless - as long as the interests of the rich and powerful are well served.
- Alignment of rich countries, global corporations and governments.
The alignment of the IMF, World Trade Organisation and the World Bank with the narrow interests of rich Western countries has been clear to all with eyes to see.
What lies behind this is a complex web of interlocking interests and influences. The free movement of senior staff between governments, global banks and corporations and the IMF and World Bank ensures that it is impossible for poor countries interests' to have a look-in. This collusion is truly anti-democratic and destructive. It means that the interests of the rich and powerful are ruthlessly pushed, never mind the impact on the poor and powerless. Stiglitz, who has been on the inside, describes top staff in the IMF travelling first class and staying in expensive hotels when they visit client countries - ensuring that they never meet or experience the problems of the people in countries on which they impose their 'solutions'.
- Solutions imposed by international bodies are simply exploitation of the poor by the rich and powerful.
The Washington Consensus emphasises certain policy imperatives.
They contain a mix of capital market liberalisation, opening of local markets to free competition from the global economy and a religious hatred of government involvement in shaping the economy. If these prescriptions are ignored, punitive measures are taken against recidivist countries.
Most of this is logically quite bizarre - it inevitably leads to destabilisation of the banking system as huge flows of money are able to wash in and out of poorer countries, destruction of weak and nascent local industries as huge global banks and companies roll over indigenous companies. The free-market ideologies behind the policies denigrate government as getting in the way of free-market forces (global banks and corporations) and grossly impede the necessary role of governments in providing a degree of shelter for indigenous agriculture and industry.
Even more bizarre is the fact that it is well known that the powerful industries now established in East Asia, Japan, the US and Europe were founded on heavy government involvement and protection. Worse still, the hypocrisy of grossly protectionist governments and their agents in pressing poor nations to 'free trade' is clear for most with eyes to see.
So, the roots of the problems are not rational, they are grounded in blind dogma and much more sinister, on the raw exploitation of the world economy by rich and powerful governments - and just behind in the shadows, global banks and corporations.
- No sauce for the Gander.
It would be reasonable for an innocent observer to expect that the US and Europe were applying the medicine doled out to others to their own economies. Not a bit of it! Led by America, rich Western countries indulge in rampant protectionism, blocking home markets to goods from developing countries, clearing the way for global companies to destroy local markets, pushing expensive products, systems and drugs, using 'aid' as a spearhead for all of this.
Also, the neo-liberal solutions peddled by the IMF are totally ignored when it comes to problems in the US, which tends to stimulate its economy by reducing interest rates, propping up failing industries and indulging in rampant government protection - all the opposite of the IMF prescriptions.
The US is a leader in the field - after all, it has more global banks and corporations to satisfy, it has an ingrained 'Pork Barrel' system of politics, with politicians comprehensively 'recruited' by finance and industry and local representatives pushing the narrow interests of their constituents.
So, international institutions that fail to meet the test of promoting US interests are sidelined, ignored and vilified.
The European Union must also carry its share of the blame for rampant protectionism, especially in the field of agricultural subsidies. It is interesting to behold the World Trade Organisation, supposed to promote free trade, acting as a battleground for the opposing sectional protectionist interests of the US and EU, while the poorer nations, which suffer most, stand helplessly on the sidelines.
The negative impacts of the Washington Consensus and the activities of the IMF/World Bank are legion. Here are a few:
- The collapse of the Russian economy and the health and social support systems as a result of over-zealous 'liberalisation' f the financial and industrial systems. Ordinary Russians suffered horribly, a few oligarchs stole the assets of the Soviet economy and Russia is now in the process of an anti-democratic backlash with increasing re-centralisation of political and economic power.
- The near meltdown of the SE Asian economies when the IMF intervened to 'help' by imposing punitive conditions for loans to support the financial systems of South Korea, Hong Kong, Indonesia and Malaysia. The IMF overrode the views of governments, introduced 'Structural Adjustment Packages' as a condition for economic assistance. These SAPs were based on classical neo-liberal economics, forcing actions such as cutting government spending, allowing banks and financial institutions to go bust and aggressively raising interest rates to encourage foreign investors to stay in. The effects were to turn a crisis into a disaster.
- The WTO, in conjunction with the IMF and the World Bank, persuaded the government of the Phillipines to 'liberalise' its agricultural markets and open them to free trade and external competition.
The effects were disastrous - imports flooded in, by legal and illegal means, the balance of trade in agricultural products shifted from a surplus of about $660 million to a deficit of $700 million. Local small producers were impoverished or destroyed and the free market suffered from huge gluts and famines of product.
The beneficiaries were mainly US agribusinesses, which enjoyed protected home markets.
- Many of the impacts of the IMF, World Bank and WTO policies are not just economic, but social and environmental as well. Examples are the collapse of the Vietnamese health system as a result of economic reforms, the damage wrought on the environments of many developing countries by global oil companies, the Bhopal disaster wrought by Union Carbide in India, famine in Somalia and the wrecking of local economic and subsistence activities by allowing multi-national banks and business free access to local markets.
It is pretty clear that the financial and economic facets of globalisation - those that are most affected by supposedly helpful institutions like the IMF and World Bank - simply aren't working. Despite the bullish assertions of the neo-liberal economics disciples, the philosophies of unfettered free-market capitalism and the institutions that enforce them do not work and need deep reform. Rather than marking the 'end of history' (the flowering of an economic system that is as good as it can get), the current state of economic thinking is more like a garden overwhelmed by a poisonous and invasive weed. There is an urgent need for more practical, grounded and bespoke economic and financial solutions to the multifarious challenges faced by developing and developed countries alike.
Deep down, neo-liberal economics is based on restriction and punishment, rather than development and support. It seems to be the modern equivalent of the medieval belief that original sin, guilt and mortification of the flesh were the only routes to salvation.
It now seems that the weight of evidence shows Keynes was more accurate in his diagnoses and prognoses than the current dogmas that dominate the world economic institutions.
Of course, we should never forget that these same institutions have been hi-jacked by global banks and corporations, working through national governments.
So, currently we have the noxious combination of greed, self-interest and dogmatic economic philosophies working in harness to serve the interests of a few and to disadvantage the majority.
Solutions are obvious - at a general level!!
Democratise the formulation and execution of policy.
First, the recipients of globalised economic solutions need a powerful voice in the formulation and execution of policy. The dominant role in determining policy must be wrested from the rich and powerful and shared more equally with the recipients in less developed countries - after all, they know the problems intimately and the globalisation of education means that there are many capable economists and financiers who are citizens of those countries. So, no longer any need to treat them as ignorant colonies.
How might this be done? Those who hold the reins of policy and those who bankroll them are not going to roll over easily. In the end, rioting and widespread unrest will not be enough. It will require some real pain to get governments, institutions and powerful financial and business lobbies to listen.
Clues to the way forward may lie in the collaboration of developing countries with scarce resources like oil and metals to put pressure on the rich countries by restricting supply unless the global economic playing field is levelled. There are signs of this happening, but we should not underestimate the lengths to which countries such as the US will go to push their interests. The struggle is likely to be long and hard.
Excise neo-liberal economic and financial dogma
Through the democratisation of policy formulation and implementation must also come the destruction of the poisonous flowers of dogmatic 'free-markets-solve-all-problems' economics. Markets have their place, but so does government support and public policy - especially in situations needing complex strategies. Markets are not intelligent or strategic and their self-correcting tendencies are so crude and slow that they do huge damage. George Soros was right to describe market forces as more like a wrecking ball than a self-correcting system.
The likely forces for change are going to be evidence that neo-liberal solutions can cause more damage than good and that Keynesian thinking and approaches are more positive. Again, the strength of conviction and the power in the media and government of dogmatic free-marketeers should not be under-estimated , especially as there are huge vested interests driving this movement.
Education and wider understanding.
Authors like Stiglitz, Soros, Galbraith and their ilk need to receive wider currency, so that more people can put their fingers on the sources of their misery and discontents. The populations of developed countries need to have access to education and support in handling their financial affairs and in understanding how they can help people in poorer nations. The growth of Fair Trade movements is an encouraging sign, as is the British government initiative to set up a free and widely accessible public available source of advice to people in handling their financial affairs.
It's not just the poor nations who suffer. Some of the same dynamics are evident in the economies of developed countries
By now the dynamics of exploitation and impoverishment will be familiar:
- Control over economic policy exercised by powerful economic institutions bent on furthering their ambitions.
- Strong propagandist messages about the general benefits of activities that in reality favour the rich and powerful
- Politicians 'recruited' by the financial 'system' and promoting its interests
- A dearth of democratic influence over global financial and business interests.
- Long-term destruction of the underlying economy in the name of value creation - which is really value extraction favouring the few.
These similarities are not surprising - it's the same politicians and global institutions that dominate economic globalisation working at a national level.