Let’s Review


For almost 20 years an accelerating process many of us now call corporate sponsored globalization has been changing the way the international economy operates. Under the title “neoliberalism” multinational corporations have succeeded in rewriting the rules governing international trade and investment ever more to their liking. But the question, of course, is whether these changes are to the liking of the rest of us.

In the 1980s corporations seeking to rewrite the rules were helped by conservative governments like those of Margaret Thatcher, Ronald Reagan, and Helmut Kohl. In the 1990s they have been helped to an even greater extent by supposedly liberal governments in those same countries like those of Tony Blair, Bill Clinton, and Gerhard Schroeder. And throughout the neoliberal era multinational corporations have been helped by the IMF, the World Bank, and since 1995 the WTO — the Holy Trinity governing the new, neoliberal global economy.

The neoliberal program was and remains: 1) Reduce restrictions on foreign ownership, 2) Reduce restrictions on direct foreign investment. 3) Eliminate all restrictions on the movement of international capital, 4) Thwart any and all economic development “models” other than privatization, export lead growth, and integration into the global economy, 5) Wrap this program in the banner of “Free Trade” and portray any who oppose it as protectionists seeking to preserve unfair advantages for special interests at the expense of the general interest. As beneficial as the neoliberal program has been for multinational corporations and the wealthy, as often as we have been assured that the program was ushering in a post Cold War era of prosperity for all, the fact is neoliberalism has been a disaster for most people and the planet we inhabit.

During the “old” post World War II, Bretton Woods system  — characterized by tolerance for capital controls, restrictions on international investment, and diverse development “models” — the rate of growth of GDP per capita was roughly twice has high as during the recent neoliberal era. If we look at how different regions fared from 1950-73 (the Bretton Woods era) and compare it to how they fared from 1973-92  (the neoliberal era before the East Asian, Russian, and Brazilian crises, every region with the exception of Asia grew much more rapidly before the onset of neoliberalism. GDP per capita in Western Europe grew 3.8% per year under the Bretton Woods system but only 1.8% per year under the neoliberal system. The US, Canada, Australia and New Zealand grew 2.4% per year under Bretton Woods but only 1.2% under neoliberalism. Southern Europe grew 3.3% under Bretton Woods but only 2.6% under neoliberalism. GDP per capita in Eastern Europe grew 4.0% per year from 1950 to 1973 but shrank 0.8% per year from 1973 through 1992. Latin America grew 2.4% per year under Bretton Woods but only 0.4% per year under neoliberalism. Africa grew 1.8% per year under Bretton Woods but shrank 0.4% per year under neoliberalism. Only Asia experienced slightly more rapid economic growth under the neoliberal regime, 3.5% per year, compared to 3.1% per year during the Bretton Woods period. (Source: Angus Maddison, Monitoring the World Economy 1820-1992, OECD 1995.)

And even in East Asia the “miracle” lasted only until 1997. But far from serving as a testament to the benefits of neoliberal policies, the so-called Asian “miracle” consisted largely of rapid growth in Communist China with a growing but limited private sector, with strong restrictions on international investment, and to this day with a non-convertible currency, along with rapid growth in a handful of “newly industrializing countries, or NICs, such as South Korea, Thailand, and Indonesia, who attracted massive inflows of foreign capital prior to 1997 while pursuing a successful Asian development model completely at odds with the laisse faire teachings of the IMF and World Bank. Moreover, with the exception of China, the “miracle” Asian economies were precisely the dominoes who fell one after another in the East Asian financial crisis of 1997-98 when a massive outflow of foreign capital crippled their currencies, stock markets and banking systems, and thereby generated drops in production and employment on a scale worse than anything we had seen since the Great Depression of the 1930s wiping out most of the gains these countries had made in the previous decade. In the words of MIT economist and NY Times columnist Paul Krugman: “Never in the course of economic events – not even in the early years of the Depression – has so large a part of the world economy experienced so devastating a fall from grace.”

At the behest of the US Department of the Treasury, the IMF and World Bank worked hard to create a disaster waiting to happen. In country after country IMF delegations used carrots and sticks to ply amenable governments and force reluctant governments to eliminate restrictions on not only international business investment, but on the inflow and outflow of speculative, short-run liquid capital.  A mushrooming pool of liquid global wealth, created by record profits due to stagnant wages, downsizing and mega mergers, as well as rapid increases in technological innovation, was suddenly free to move wherever and whenever it wished at the click of a mouse on a computer screen. Moreover, financial liberalization and deregulation in the advanced economies meant that much of this liquid global wealth, managed by 30 year old recent MBAs knowing little about the “emerging market” economies they first embraced and then abandoned, was highly leveraged and therefore even more prone to panic and contagion. There are two rules of behavior in any credit system: Rule #1 is the rule all participants want all other participants to follow: DON’T PANIC! Rule #2 is the rule each participant must be careful to follow herself: PANIC FIRST! The neoliberal global managers have literally created the financial equivalent of the proverbial 900 pound gorilla. Question: Where does the 900 pound gorilla — global liquid wealth — sit? Answer: Wherever it wants! And when a derivative tickles, and investors obey Panic Rule #2 – Panic first! – currencies, stock markets, banking systems, and, most importantly for the rest of us, formerly productive economies all collapse in their wake. In 1986 $0.2 trillion per day traded on foreign exchange markets. In 1998 the figure was $1.5 trillion – only 2% of which was needed to finance international trade and productive investment, meaning 98% of the $1.5 trillion traded per day in currency markets was for purely speculative reasons!

The disaster struck in Thailand and spread to Malaysia, Indonesia, and South Korea. Soon after a separate disaster (created by no-holds-barred neoliberal policies in Russia) spread from Russia to Brazil. But the disaster could have, and still can, happen anywhere, because thanks to the neoliberal global managers, there is plenty of tinder to catch fire and most fire breaks have been removed. The neoliberal export lead growth model contains a fatal flaw: the fallacy of composition. Not all less developed countries can grow through rapid expansion of labor intensive manufactured exports to the advanced economies. This provided all the tinder necessary to trigger the East Asian crisis as fears from drops in export profitability in early NICs materialized as new countries started to implement export lead growth strategies. And there is plenty of tinder still in dozens of  other “emerging market” economies. Tinder also takes the form of stock markets, like the NY Stock Exchange and NASDAQ, which are increasingly subject to speculative bubbles waiting to burst as the Japanese Nikkei did in the late 1980s losing more than 30% of its value – if more tinder is needed. And the highly leveraged international credit system is totally lacking in fire walls. It is unregulated, lacking a lender of last resort, and rife with regional rivalries that prevent timely emergency measures.

Having created an accident waiting to happen one might expect the IMF to at least play the role of fireman when fire broke out. But instead of throwing water, the IMF insisted on throwing kerosene on East Asia’s fires. And instead of taking the blame, the IMF insisted on blaming the victim. As conditions for receiving IMF bail out loans – which in reality bail out international investors not crisis-plagued countries – the IMF insisted on further liberalization of ownership, investment, and trade, draconian budget cuts, tax increases for the middle class, tight monetary policy pushing interest rates through the ceiling, and shut downs followed by fire-sales to foreign banks for troubled financial systems. These policies predictably aggravated recessions in the East Asian (and Russian and Brazilian) economies stunting growth and development, and cut gaping holes in meager social safety nets protecting the poor while they increased the likelihood that international investors would be paid back. In other words, the IMF behaved like a knuckle breaker for ghetto loan sharks – sacrificing the interests of the most vulnerable in afflicted economies to the interests of their well-heeled international creditors. IMF officials Michel Camdessus and Stanley Fischer were quick to explain that the afflicted economies had only themselves to blame. Crony capitalism, lack of transparency, accounting procedures not up to international standards, and weak-kneed politicians too quick to spend and too afraid to tax were the problems according to IMF and US Treasury Department officials. The fact that the afflicted economies had been held up as paragons of virtue and IMF/World Bank success stories only a year before, the fact that neoliberalism’s only success story had been the NICs who were now in the tank, and the fact that the IMF and Treasury department story just didn’t fit the facts since the afflicted economies were no more rife with crony capitalism, lack of transparency, and weak-willed politicians than dozens of other economies untouched by the Asian financial crisis, simply did not matter.

Not only has neoliberalism failed to deliver more growth and dramatically increased economic instability, it has predictably aggravating global inequality. When constraints are removed on capital the predictable effect is that the strong will get relatively and absolutely better off while the weak get relatively worse off, and only better off if trickle down really happens. Between 1950 and 1972 under the Bretton Woods system the spread between GDP per capita in the richest and poorest of the seven world regions increased only from 10:1 to 11:1. But between 1973 and 1992 under the neoliberal regime the spread increased from 11:1 to 16:1. In the Bretton Woods era the spread between the richest and poorest country increased only from 35:1 to 40:1. But during the neoliberal era the spread increased from 40:1 to 72:1. Moreover, neoliberalism has dramatically increased economic inequality within countries. Economists are unanimous that both income and wealth inequality has increased dramatically in the neoliberal era inside the advanced economies such as the US, Japan, and Europe, inside the former socialist countries, and inside almost all third world countries as well.

The “race to the bottom” effect, whereby trade and capital liberalization puts downward pressure on first world wages, labor standards, and environmental standards as companies leave or threaten to relocate where wages, and labor and/or environmental standards are lower has predictably put downward pressure on wages and working conditions and accelerated environmental degradation in most countries. Moreover, as liberalization in agriculture destroys peasant farmers in third world countries swelling the ranks of the urban unemployed we have seen declining real wages even in countries like Mexico since NAFTA as 10 former peasants compete for every 1 new job in labor intensive manufacturing leading to growing inequality within third world economies as well as the advanced economies.

The fact is for every NIC (Newly Industrializing Country) there have been 10 FEBs (countries Falling Evermore Behind) under neoliberalism. And for every wealthy beneficiary of rising stock prices, rising profit shares, and rising high-end salaries, there were 10 victims of declining real wages, decreased job security, and lost benefits. The neoliberal experiment has indeed been both “the best of times and the worst of times.” But unfortunately it was the best of times for only a few, and the worst of times for most.

One of the hallmarks of capitalism is supposed to be that people who make mistakes get fired and replaced by people whose advice turned out to be correct. Instead, the only head to fall has been Joseph Stiglitz, former Chief Economist for the World Bank, who was the lone critical voice within the neoliberal establishment of IMF policies during the East Asian Crisis. In stark contrast, the chief architect of further liberalization in East Asia, counter productive, recession-aggravating conditionality agreements, and blame the victim pontificating, Stanley Fischer, was recently nominated for a promotion from second to top gun at the IMF by US Treasury Secretary Lawrence Summers and President Clinton! With no sign of meaningful reform at the IMF or World Bank in sight, the place to start is to weaken the power of these institutions to do harm.  And the next step will be to revitalize and re-empower UNCTAD and the United Nations as a major player in any attempts to reorganize the international economy — as recommended by Walden Bello, professor of economics at the University of the Philippines and long-time spokesperson for the Global South. UNCTAD and the UN are much more responsive to the interests of the global majority than the IMF/WB/WTO holy trinity. Until the IMF/WB/WTO holy trinity is succeeded by UNTAD/UN as the center of reform efforts we cannot even begin to replace the economics of competition and greed with the economics of equitable cooperation.


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