THE SUDDEN DEMISE OF NEO-LIBERAL ECONOMICS

By Roberto Savio Reprint | | Print |

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ROME, Aug 17 2009 (IPS) - The Washington Consensus, the neo-liberal economic prescription presumed to be universally and permanently valid, was broadsided by the current world recession together with other "one size fits all" formulas.

The name "Washington Consensus" was given in 1989 to a convergence of economic policies that the International Monetary Fund (IMF), the World Bank, and the US Treasury imposed on the world as the new model of economic development just as the Berlin Wall was coming down. The political implications were profound.

Numerous studies, including some by the World Bank itself, have convincingly shown how structural adjustment programmes, the primary instrument of the Washington Consensus, caused serious damage to the weakest economies and to the most vulnerable sectors throughout the Third World, though they were supposed to be the main beneficiaries. The decision to dismantle the state and its regulatory capacity wherever possible led to a reduction in all social spending and in turn to shortcomings in health care and education, the elimination of safety nets. At the same time borders were being opened and all tariff intended to defend national products were eliminated in the hope that major foreign private sector investment would pour in once the market was finally freed.

Ex-president of Tanzania Benjamin Mkapa nicely summed up his experience and that of many other countries: "We privatised everything the state had. Everything was bought by foreign capital because we had no national capital to compete. The foreign companies almost always closed local businesses, which were not competitive, transforming them into distributors of foreign products and driving up unemployment. The experts of the World Bank and the International Monetary Fund (IMF) predicted that this would happen, but they told us: now the influx of foreign investment will lead to the creation of new, competitive and technologically current businesses that will provide the foundations for a lasting, modern development. None of this happened for us."

Nobel economist Joseph Stiglitz observes in his memoirs of his time as Vice President and Chief Economist of the World Bank how decisions were made on the basis of an abstract economic model without any consideration of local realities. The former president of Haiti, Jean-Bertrand Aristide, found it incomprehensible that the missions of the international financial organisations proposed as the economic model for his very poor country Mexican-style industrialisation and the creation of conditions for "maquiladoras" or assembly shops, like those along the Mexico-US border, so that Haiti could take advantage of its proximity to the US. In response Aristide would repeat: Industrial development is only possible after a minimum of educational and infrastructural development, for which Haiti would need economic aid, not loans.

In the history of economic and political theories, not one had as rapid an ascent or as precipitous a decline as the neo-liberal theory of the free market as panacea and its political cosmogony, so-called neo-liberal globalisation, which was pushed by economists hungry to update their old liberal theories, responding to the challenge that global integration posed for the markets.

Today we are seeing considerable back-pedalling by many long-standing champions of the invisible hand of the market. After Stiglitz, the most well known is Jeffrey Sachs, architect not only of the severe structural adjustment programme for Bolivia but more dramatically of the brutal process of privatising the Soviet economy, which led to the birth of savage Russian capitalism. Today Sachs works for the United Nations and the fulfilment of the Millennium Development Goals and stresses the importance of the state as an essential element for social, educational, and health policy and for the regulation of economic development.

The World Bank has also changed its tune. It now insists on the central role to be played by the state, having wasted a decade bankrolling its disappearance. It is remarkable how the appointment of a politician, Dominique Strauss-Kahn, as director general of the IMF, whose perception and vision are very different from members of the traditional financial world, has brought the organisation into a surprising process of change.

Of course, it took a crisis almost as massive as that of 1929, with a global impact on employment and growth, to induce the preachers of neo-liberal globalism towards cautious silence. Its costs have been too massive to ignore. We have seen an avalanche of recriminations, also coming from those who were part of the failure. Thus is it certainly curious to see Gordon Brown -who as Chancellor of the Exchequer pulled out all the stops to make the City of London into the world hotspot for financial speculation- announce the burial of the Washington Consensus.

Meanwhile, we are far from finding a new consensus on an economic model. Nobel economist Paul Krugman, a neo-Keynsian and columnist for the New York Times, writes regularly that some controls will finally be put in place, but this will not reach the root of the problem. What must happen is this: on the basis of our own experience, we must to stop believing in the theory of the free market and adopt a regulatory system that would restore the human being and the social to the centre of the economy and of society. (END/COPYRIGHT IPS)

(*) Roberto Savio is founder and president emeritus of IPS news agency.