June 15, 2016    15 minute read

Is Neoliberalism Oversold?

   June 15, 2016    15 minute read

Is Neoliberalism Oversold?

Recently, in a groundbreaking publication, three of the International Monetary Fund’s top economic economists acknowledged that neoliberalism has been oversold to the developing world. Following WWII, the institutions of Bretton Woods have changed dramatically. The IMF has expanded into areas of development and economic ‘modernisation’ working with the World Bank to restructure the economies of many developing countries – again an expansion of the remit of the World Bank.  It is a widely accepted that these institutions over time, alongside other organisations concerned with global economic governance like the G7/8, and the World Trade Organisation (WTO), have actively pursued a neoliberal, ‘Washington Consensus’ vision of global economics. I will first examine the changing behaviour and role of the international institutions, examining the problems of conditionality alongside the asymmetry in the application of Washington Consensus policies in both trade and capital/financial markets. I argue that institutions of global economic governance have exacerbated international economic inequality, however, it was important to note that these institutions were set up by Western developed economies and even to this day, these economies are the key drivers behind such organisations.

Since the 1980s, the IMF has been concerned with the ‘structural adjustment, ’ i.e., instead of simply concerning itself with economic crisis management it has become with pre-emptive measures to stop crises.  The IMF and World Bank, went into partnership to carry out this structural adjustment via loans to developing countries. The exact relationship between the two organisations was that the IMF was tasked with maintaining the monetary system, whereas the World Bank was aimed at channelling investment into projects within countries to foster reconstruction and development. The Bank was supposed to raise money in capital markets then makes loans to national governments. In practice, this does not seem to be the case. As Stiglitz notes, internally the IMF at the outset made its position as the senior partner very clear. Externally, he argues that the role of the institutions have become conflated, and both the IMF and World Bank are engaged in lending and ‘development’. These loans were intended to ‘aid development, avert crisis and combat poverty’. Over time ‘strict conditionality’ have become an integral part of these policies, i.e., Granting loans on the agreement that the recipient country would adopt a particular set of policies. Such policies reflected the logic of the Washington consensus based on:

  1. Fiscal austerity
  2. Privatisation
  3. Market liberalisation

Conditionality, over time, has become more ‘brutal and stringent’, with the introduction of short-term targets most notably aims to be reached after 30, 60 and 90 days after the receipt of a loan, meeting these aims may culminate in having to change its laws. Failure to meet such conditions results in the withholding of IMF funds and this usually sees the suspension of funding from other donors.

Of course, it is not the case that policies and the Washington Consensus have been forced upon countries. The IMF famously claimed that it is completely within the rights of a national government as to whether they receive a loan. Krasner argues then that although there are inequalities, it is the result of the choices of a given national government as opposed to any given international institution. The problem with Krasner’s analysis is that conditionality plays a significant role in negotiation. Any negotiation between the IMF and a national country becomes very one sided where all the ‘effective’ power is held by one party. The IMF has the power to cut off the supply of its funds, but can use what Stiglitz calls its ‘bully pulpit power’ to stop private investment in a given country, it can result in effect cause a capital flight from a country by expressing concerns about the macroeconomic status of a given country. Thus, we cannot say that countries facing perpetual macroeconomic crises are not faced with a reasonable ‘choice’ as not taking a loan would in the short term mean the closure of essential public services and a huge dip in living standards.  Thus, over time, many countries out of the need for macroeconomic stimulus have been forced into the conditions and clauses stemming from the Washington Consensus.

The rationale of the Washington Consensus is that by removing trade barriers countries can focus economic efforts to export markets to compensate for low domestic demand, privatisation would make domestic industries more efficient and that austerity would over time reduce the dependence on the state and as such shrink the role of central government.  These were justified by the failure of state driven and centralised economies with the collapse of the USSR and its satellite states. As such the Washington consensus reflects a neoliberal agenda and the fact that it is so entrenched into the IMF is problematic. With the one-sided power dynamic, the IMF can very easily assert this neo-liberal agenda on the international stage. SAPs have very much been a ‘one-size-fits-all’ policy guide, to some extent, this is because it was believed on an ideological level that economic liberalism is best for developing countries. However, the staff of these global economic institutions, facing time and institutional constraints, had strong incentives to follow the established template. Where their experience was largely theoretical and not empirical, this offered a risk adverse strategy for the individual. As such we have a situation where a neo-liberal agenda has been asserted aggressively throughout the world.

So far, we have established the basic operational structure and philosophy that was driving international institutions such as the IMF and World Bank, now I shall examine the impact of this on global economic inequality. We must first note that the Washington Consensus is not directly aimed at reducing inequality. It simply is aimed at realising absolute gains as a result of efficiency improvements stemming from an adherence to free market principles. At the outset, this does not necessarily mean inequality will ensue. Indeed, the modernisation principle would suggest that as states become wealthier by becoming more efficient and integrating into the world economy, they will ‘catch up’ with the developed world in economic terms. The application of the Washington Consensus has been anything but consistent. This can be seen most prominently with WTO ‘negotiations’ which have resulted in barriers being lowered for industrial goods much of which are exported by developed economies. Ironically, rounds of negotiation resulting in similarly developed countries deciding to keep the textiles market closed, even though these such industries are industries where developing countries likely to have a comparative advantage. Indeed, Stiglitz notes that while financial and IT services markets, in which developed nations can outcompete others, have been opened up, construction and maritime service markets have been kept closed and as such Stiglitz notes that income of Sub-Saharan Africa has fallen by 2% as a result of this. Of course, the economic inequality that results is down to the actions of developed states, yet the way the WTO is designed is such that it simply a ‘marketplace’ for trade and has little enforcement power, allowing for the inconsistency in approach by developed countries.

Often, developed nations will artificially prop up national under competitive industries via subsidies which outcompete similar more naturally competitive industries around the world. The nut industries of the US and Senegal are a clear example of the way in which global economic institutions have a varied effect, depending how powerful the country already is. The groundnut industry in Senegal was infantile, and one of the conditions of receiving a World Bank loan was that this industry should be opened up to the market. Similar policies in other developing countries led to a supply boom and a subsequent price crash. While Senegal was forced to borrow more and now spends more servicing its debt than on healthcare or policing, the US was able to subsidise the peanut industry artificially outcompete other global producers for the export market. Thus, we have a situation, especially with trade, that although international economic organisations promote free trade in line with a neoliberal vision of the world, the way they are designed is such that they can do little to ensure consistency of approach by developed countries, which leaves developing nations often worse off.

We then have a situation of contradiction in the application of Washington Consensus policies. The pressure to adopt liberal policies is not even – the developing world is pushed into completely embracing them, whereas the Western world can selectively open up their markets in a way that best serves their interest. Theoretically, efficiency gains will result from comparative advantage and could go some way to reduce inequality, yet the way international economic organisations have integrated developing countries into the global economy (i.e., completely opening up, without the same action by developed countries) has been a large source of inequality between countries. Thus despite the Uruguay Round, coming into force into 1995, promising to liberalise rules for all countries, the negotiations left intact a system which is biassed against developing countries.

The global economic institutions were meant to be technocratic in nature, simply relying on economic expertise. Instead, very quickly these organisations became politicised. Created, in effect by a US hegemon, Sen (2002) argues that globalisation, driven in part by such international organisations has benefitted the developed world and has been wrongly presented as a solution to the economic backwardness of the developing world. Conditionality, alongside the US’s self-endowed veto, means that the US and the developed world has had considerable leverage to advance its global economic agenda. It seems to draw a clear distinction between the developed world, and international global institutions would be wrong. Developed nations having designed these international organisations are now exploiting them for their benefit while as countries observe poverty, they have

“No way to change the rules or to influence the international financial institutions that wrote them”

Joseph Stiglitz

How about the comparable successes in Asia in embracing free market principles? Some argue that they vindicate the IMF and other international organisations key operating principles. Yet, free markets and liberalisation within China and Singapore has not happened indiscriminately. Sen argues that these countries embraced the global markets on their terms, protecting their infant industries and selectively, slowly lowering trade barriers such that they could compete globally. This process reflects how currently developed states have globalised: strategically and considering the individual factors affecting that particular country. The neo-liberal ‘one stop policy bundle’ of the IMF, on the other hand, has the complete reverse effect, by opening developing countries to ‘the cold winds of intensifying world market competition.’ Sub-Saharan Africa and Latin America both had either stagnant GNP per Capita as a percentage of the First World’s GNP per Capita from 1980-1999, despite being those most heavily subjected to IMF trade liberalisation prescriptions and indeed Easterly observed a correlation between greater adherence to Washington Consensus policies and increased deterioration of economic performance, leading to widening gap between the developed and developing world.

Alongside the ‘encouraging’ the opening of industries of developing, the opening up of financial and capital markets became a key policy of the IMF. Again, this is based on neo-liberal logic: inflows of foreign capital will provide financial funds to grow businesses within developing countries.  As was demonstrated in the 1997 Asian financial crisis. Walden argued that IMF ‘encouraged countries in the region down the route of “fast-track capitalism” liberalising the financial sector very quickly, with the maintenance of high domestic interest rates to attract portfolio investment and bank capital, and pegging of the national currency to the dollar to reassure foreign investors against currency risk. As was seen in this case the impact of open financial markets has been problematic with unpredictable inflows and outflows of hot money and causing runs on currency leaving many developing countries with collapsing currencies and seriously weakened financial sectors. In stark contrast, European countries did not allow completely open capital markets till the 1970s at which point they had established sectors and stable currencies.

Such unstable flows are in fact detrimental to fragile developing economies and serve to perpetuate inequality, as speculative attacks on currencies can build up huge foreign debt. Indeed, foreign debt-to-GDP ratios rose from 100% to 167% in the four large ASEAN economies in 1993–96, then increased beyond 180% during the worst of the crisis. Alongside this, the IMF’s financial liberalisation followed by a weakened financial sector indirectly allowed foreign (largely Western) firms to dominate the market. Stiglitz (2002) argues that the presence of these large financial conglomerates in developing reduced the lending to small business, with most of it going to TNCs. The result is that a reduced share of the income from the domestic economy stays within in that economy, with much of it going back to already wealthy states, again increasing economic inequality.

The opening up of financial and capital markets has increased the activity of TNCs. The actions of these actors have been barely checked by international institutions. Thomas suggests they can easily exert pressure on national governments about trade union behaviour and wage determination. The example he gives is Coca-Cola Company and its record of labour relations in Colombia, environmental damage in Rajasthan, anti-competitive practices in Mexico and Peru and use of child labour in El Salvador. The lowering of capital and financial markets driven by organisations such as the IMF has driven Coca-Cola and other TNCs to expand into these markets, yet their activities have gone unchecked by international institutions. The actions of TNCs often do exacerbate inequality, with most of the profit from operations flowing back to developed countries and leaving local labour forces often crippled with health problems arising from the unsafe working conditions TNCs create to maximise profit.

Over time, the ultimate scar that has been left on developing countries are the substantial debt crisis. Even with the very long maturities and very low-interest rates, many countries have severe difficulties in servicing their external debts. As is the case with Senegal, many countries have spent more on debt servicing than on health or education. Maintenance of this debt has sucked op domestic saving needed for investment and the maintenance of capital stock, as such we have a situation of a ‘debt overhang’ where the debt of a country exceeds its future ability to pay it. Recognising this, the IMF and World Bank, launched a programme to allow for debt relief for HIPCs-ie. Those countries that faced an unsustainable burden which could that could not be addressed through traditional debt relief mechanisms. The rationale behind this programme was that it would help alleviate poverty in these poorest countries, allowing them to spend more on social security.

At face value, it seems that debt relief in many cases. The example of Zambia is often cited where in 2003 Zambia was forced to spend twice as much on debt payments as on health care. A partial debt cancellation, however, allowed the government to grant free basic healthcare to its population in 2006. It seems this initiative is problematic and has, in essence, become politicised with its intrusive nature. Indeed, to qualify for the programme countries have to commit to poverty reduction through policy changes and have a continuing good track record through IMF and World Bank programmes over time. As such, in reality, very few countries have completed the programme. By 2003 only 8 out of the projected 21 countries had benefited from debt reduction and despite ongoing campaigning by the Jubilee 2000 and the ONE campaign, there has been very little progress made, due to the indirect conditionality clauses.

Perhaps we are moving into a new chapter of global economic governance in a post 2008/9 crash world. Global economic governance, it could be argued is changing with developing countries been increasingly included in discussions of global economic policy, most clearly demonstrated by the G20 replacing the G8 as the driving force in global economic matters. Indeed, the emergence of the BRIC economies has almost acted as a counterbalancing force, the Basel the presence of Brazil, India and China in the G20 has helped the global drive towards better regulation by preventing some of the back-sliding that may have happened within the G7 when faced by powerful financial institutions. More interestingly, Wallerstein suggests that there has been a ‘remarkable’ softening of the pro-market ideology that dominated the decade following the end of the Cold War. Since, the financial crisis Strange argues the IMF has moved away from its monetarist battle against inflation and more commonly stressing the need for Keynesian counter-cyclical government spending, supporting the EU’s fiscal response to stabilise the Eurozone and rejecting American demands to pressure China into abandoning its exchange rate management. It may be that this marks a move toward an equal world. It may be that ‘a leopard never changes its spots’, and that behind closed doors the IMF remains a ruthless organisation. Indeed, in an exclusive article in The Times, it was suggested that the IMF ‘in effect forced Greece to take the stringent bailout package’ behind closed doors in the Summer of 2015.

There can be no doubt that since their conception the institutions of economic governance have expanded their remit, becoming more and more interventionist. Alongside the G7/8 and the WTO, the IMF and World Bank has actively pursued a neoliberal, ‘Washington Consensus’ vision agenda. Within this essay, I first examined this transition to aggressive interventionism alongside conditionality policies.  Indeed, in examining the impact Washington Consensus policies in both trade and capital/financial markets on inequality, I argue that institutions of global economic governance have exacerbated international economic inequality. It is crucial to note that these institutions do not sit detached, above nations. These institutions were set up by Western developed economies and to this day remain driven by them, both in terms of management and funds (e.g., in 2013 96% of funds available to the IMF came from Western developed economies) and as such when we say that global economic institutions have exacerbated global economic inequality, we must be aware that at least some blame for this inequality must be borne by (Western) advanced economies.

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