Development Issues

Critical Thinking about the World’s Development

Playing of Markets, Playing with Life

The Hague, 15/Mar/2006 | By Rui Mesquita Cordeiro | rui@cidadania.org.br

Introduction

 

Throughout the international cleverness

The city is not that bad

Its situation is always more or less

Ones with more and others with less

It never stops, it only grows

Those up going up, those down going down

(…)

And in another sunny day Recife woke up

With the same bad smell of the previous day

(Science, 1994a)

 

In the middle of the 1990s, a youth activist cultural group from the city of Recife, in the poorest region of Brazil, composed the above song as a way to make people aware of their situation. Awareness is an import issue when you are busy fighting for your survival. The more important extract of this passage is the one stating that, with such an international system, those who have more tend to go up, while those who have less (or have not) tend to keep going down. It reflects the growing indexes of poverty and inequality that followed Brazilian people throughout the 1980s and 1990s.

 

Along with the above situation were the international pro-market reforms implemented by successive governments in many countries around the globe, under the umbrella of the so called Washington Consensus. They tried to tackle poverty and inequality in the long run; however, they helped to increase poverty and inequality in the short run. Unexpectedly, economical crises stirred the world from Latin America to Southeast Asia; therefore, there was a need to change these policies in order to solve the crises. The floor was open for the called Post-Washington Consensus.

 

This essay will describe the Washington and the Post-Washington Consensus, their differences and similarities, the initial belief in perfect markets and the transformations this belief has suffered, and, finally, their implications to the development policies and the international power structure. Furthermore, it also provokes the question about where the people fit in between the lines of the debate.

 

The Perfect Market

 

Shortly after the World War II capitalist western countries started an ideological dispute with the socialist block in the long lasting Cold War. From the 1940s to the 1970s, strong capitalist states were needed for two basic reasons: to recover the European and Japanese destroyed economies and to be well prepared for the threat of a real war against the strong socialist countries. In my own view, these are the main reasons why Keynesianism prevailed as the main theoretical background to support economical policies in the west. Based on the idea of a mixed public and private economy, it was the basis of the western economical growth during the hottest periods of the Cold War. For instance, continuous administrated public deficits in the United States budget funded the recovery of Western Europe through the European Recovery Program (or Marshall Plan, as it was best known). Nonetheless, Keynesianism was not only used for international aid after the War, but also in national economies. According to Yergin, Cran and Stanislaw (2002), John Maynard Keynes started helping the allied governments to plan their wartime economies, and after that his ideas dominated the economy of the western world for decades.

 

Keynes’ ideas lasted until the decrease of the Cold War, by 1980s, when the menace of real war was slowly being left behind due to profound changes happening in the Soviet Union, like the Mikhail Gorbachev’s Perestroika in June 1987. There was no need anymore for a strong capitalist state; the market itself could perfectly handle the economy by its own internal forces. Yergin and Stanislaw (1998: 14-15) state that:

 

In the postwar years, Keynes’ theories of government management of the economy appeared unassailable. But half a century later, it’s Keynes who has been toppled and Hayek, the fierce advocate of free-markets, who is preeminent.

 

Yergin and Stanislaw (ibid.) refer to the Austrian economist Friedrich von Hayek, whose ideas on free-market economy are in direct opposition to Keynesian ideas on mixed economies. For Peters (1999), Hayek defends the idea of market as a spontaneous product of human action, not predicted by human intelligent design. Furthermore, he says that Hayek’s ideas on free-markets emphasis the methodological individualism, the homo economicus notion – based on assumptions of individuality, rationality and self-interest – and the doctrine of spontaneous order. Therefore, the state should leave the economy management to the market forces; forces which are well described by classical economists such as Adam Smith and his notion about the invisible hand of the market. Those concepts on free-market led economies are based in perfect market econometric analytical models that actually never were experienced in practice in the modern world due to government interference in the market.

 

In the 1980s Hayek’s ideas achieved political power through the hands of Margaret Thatcher (UK[1] Prime Minister, 1979-1990) and Ronald Reagan (USA[2] President, 1981-1989). Both heads of state implemented a series of national policies to reduce the role of the state in their economies. The USA and the UK, being among the most powerful and influential countries in the world, had their national policies driven to many other countries, especially developing ones, through the hands of the WB[3], the IMF[4] and the USA Treasury (Williamson 2002), with notably theoretical support the Chicago School of Economics (Yergin, Cran and Stanislaw, 2002).

 

The set of international policies oriented by the above institutions was named, by themselves, Structural Adjustment Program, and by others Washington Consensus. It was basically a consensus among these Washington based international financial institutions in order to reform governments everywhere in the planet, aiming to create a national and a global free-market economic system, and to retreat the state from economy matter.

 

Williamson (2002) summaries this set of policies in ten economic policy instruments, as follows:

(1)      Fiscal Deficits: Governments should have fiscal discipline and austerity, not allowing its expenditure to be higher than its income. Williamson alerts about the different viewpoints on how to calculate the deficit, differing in terms of nominal, operational and primary deficit.

(2)      Public Expenditure Priorities: If you need to cut your fiscal deficit, you need to establish a public expenditure priority in order to know where to reduce it. He highlights three major expenditure categories: subsidies, education and health, and public investment. Education and health are in higher priority of maintenance, described as “quintessentially proper objects of government expenditure” (ibid:4). Subsides are the first to be cut (helping the free-market logic), even if they are strategic for the country somehow. Public investment is also an aim of the budget cuts, especially if linked to the usually large public sector companies.

(3)      Tax Reform: Increased tax revenues are seen as one of the means to avoid budget cuts and to achieve fiscal balance; nevertheless, it has been avoided by USA national policies, being argued by Williamson to be a contradiction in itself.

(4)      Interest Rates: There are two main trends here; one says that interest rates should be market-determined; the other says that real interest rates should be positive. Williamson alerts that in times of crisis market-determined interest rates would be extremely high and that “segmented credit markets provide a prime environment for corruption to flourish” (ibid:5).

(5)      The Exchange Rate: It should also be market-determined, in competitive equilibrium with the interests of the exporters and the importers of the country. This is one of the most important points of the Structural Adjustment stabilization policy (Toye 1994 and Williamson 2002), due to its importance to export oriented policies.

(6)      Trade Policy: Market-oriented exchange rate and trade policy are essential elements for an export oriented economy. National markets should be open at the maximum possible for global trade improvement.

(7)      Foreign Direct Investment: It is seen as a way to attract capital to the country’s economy, directly contributing to generate growth and know-how, for both the internal market and the exports.

(8)      Privatization: Williamson says that “the main rationale for privatization is the belief that private industry is managed more efficiently than state enterprises”. But undoubtedly, free-market logic needs free competition and consequently the government out of the way; then, privatisation is a natural way to make it happen.

(9)      Deregulation: The legal economic system of a country should allow easy mechanisms for creating and closing business and trade. It is, then, another important element in the argumentation for more market competition.

(10)   Property Rights: Rights toward property security must be improved through legal systems that guarantee similar standards of property right as those observed in North America, including intellectual rights and patents.

 

Altogether, these are policies dealing with fiscal austerity, monetary stabilisation, deregulation of investment, trade and finance, and property rights guarantees; they were expected to facilitate markets to operate without government interference, in a search for a belief: a perfect market model to operate and generate economic growth.

 

 

 

 

 

 

 

The Imperfect Market

 

The 1990s was the decade of the Structural Adjustment Programs in most of the developing world in order to make free-market perfect model a global reality. You can also call it the decade of globalisation, especially when the information and communication technology issue is added. And this is not all; the 1990s is also known by a number of economic crises worldwide, remarkably in Mexico in 1995, Thailand, Philippines, Indonesia and Malaysia in 1997, Russia and Brazil in 1999 and Argentina in 2001. What have these countries in common? All of them were involved in negotiations with either the IMF or/and the WB, and their Consensus, along the decade.

 

The 1997 Southeast Asia crisis brought a tremendous impact for the Washington’s policies. For both Stiglitz (2000) and the IMF (1999) these Asian countries were experiencing several decades of constant improvements in income, health and poverty reduction. This is generally explained by many due to the fact of their Developmental State economies and policies, meaning a good level of mixed public and private economic system in each country (Woo-Cumings, 1999). On the one hand, the IMF (1999:1) states that the crisis was due to “weaknesses in financial systems and, to a lesser extent, governance”. On the other hand, Stiglitz (2000:1) highlights that “in the early ’90s, East Asian countries had liberalized their financial and capital markets–not because they needed to attract more funds (savings rates were already 30 percent or more) but because of international pressure, including some from the U.S. Treasury Department”, and that “these changes provoked a flood of short-term capital” in their economies. Precisely this volatility of short-term capital flow, in and out, provoked a crisis on the currency exchange rate of these countries, throwing them in their first economic recession in decades.

 

The orthodoxy of the free-market belief in the Washington Consensus policies led to a crisis caused by the same market forces, once believed to be perfect. It revealed that market forces are not as perfect as assumed before by Hayek and the Chicago School of Economics. Once markets can fail, states still have a lot of work to do in order to address the problem.

 

Fine (2001) explains the policy reform discourse by Joseph Stiglitz in early 1998, in what he calls a move towards a Post-Washington Consensus. He says that Stiglitz, as Senior Vice President and Chief Economist to the World Bank, started to be a critic of the IMF policies, especially in relation to the Southeast Asia crisis. For Fine, Stiglitz acknowledges market imperfections and proposes a broader analytical and policy scope, however, bypassing all criticism and all alternatives by civil society and social scientists. The intellectual foundation of Stiglitz’s proposal lies on the assumption that market imperfections can justify state intervention to rectify them, and that state failure should be no worse than market failure. Stiglitz bases his assumption in an information-theoretic approach to micro and macro economics. He explains that market imperfections are due to lack of information between economic players, especially in the micro-economics field. It is, therefore, a break from neo-classical economists, who worked upon perfect economic models.

 

In essence, Stiglitz’s proposal emphasises two main points: (1) making markets work better and (2) broadening the goals of development (Stiglitz, 1998). On his first point, he addresses the need for macroeconomic stability (by inflation control, managing the budget deficit and the current account deficit and stabilizing output and promoting long-run growth), the process of financial reform (via transparency, prudential regulation and focus on the microeconomic), fostering competition (by promoting free trade, facilitating privatization, establishing regulation and forging competition policy), governments as a complement to markets (by building human capital and transferring technology), and more effective governance (to increase the productivity of the economy, using market-like mechanisms and making use of government aid agencies, NGOs[5], and community participation for decentralisation purposes). On his second point, he addresses the accomplishment of multiple goals by improving education (human capital), through joint implementation of environmental policy (with variation of action from country to country), by recognising the tradeoff involved in investing in technology (even if it increases inequalities by the loose of jobs), and the tradeoff between protecting the environment and increasing participation (“participation is essential but is not a substitute for expertise” [ibid.: 33]). These points are addressed by Stiglitz are the basis of what he calls a new “emerging consensus, a post-Washington consensus consensus” (ibid.: 34).

 

Visually, this is the Post-Washington Consensus:

 

 

 

Back to Fine (2001), in a broader analytical context, Stiglitz’s view is reductionist to individual behaviour and to market imperfections based on information imperfections. Furthermore, he says that economics is trying to colonise other social sciences, through concepts such as human capital; the same methodological individualism of the old consensus is used in the latter one, not explaining the division between the economic and the non-economic, for instance, social structures and institutions. In addiction, Fine also says, in a broader policy context, that the Post-Washington Consensus is a way to justify the policy change of the WB and the IMF for extended interventions beyond economic policy. For Fine, there are dangers in this view because, first, of the low consideration to the vast critique towards the old consensus, and second, for the claim and attraction in setting development agenda through the latter consensus.

 

By comparison, we can clearly see that there are important differences between the two consensuses; nonetheless, these differences are basically on the means to achieve their end. When comparing the ends, there are few, or even no, changes. Basically, both consensuses seek to improve market economies in the first place, as a way to generate economic growth; the first one strict to the market forces, while the second one acknowledges the role of governance, civil society and social safety nets, beyond the marketplace (Jayasuriya and Rosser, 1999). Stiglitz’s critiques toward the old consensus are worthy for the development of economic and political history; however, Williamson’s and Fine’s (and many, many others’) critiques are either commendable, but, unfortunately, they have not been taken into consideration by the policy makers.

 

 

 

 

 

Theories, Policies and Power

 

Theories themselves do not come into policy automatically after written. Just like Hayek’s ideas on free-market economics, theories need to get into power to become a policy. Hayek’s ideas achieved a strong political power through the hands of Margaret Thatcher and Ronald Reagan, as previously argued. It is crucial to realise that these reforms promoted (and under promotion) by Washington institutions are not necessarily made under voluntarily basis, country by country, bottom-up; otherwise, they were part of a clear top-down theoretical agenda and belief. In order to enforce the theories and beliefs on free-markets into policy they have been largely using their financial power, mainly because more then just policy makers, Washington institutions are power holders.

 

The IMF likes to go about its business without outsiders asking too many questions. In theory, the fund supports democratic institutions in the nations it assists. In practice, it undermines the democratic process by imposing policies. Officially, of course, the IMF doesn’t “impose” anything. It “negotiates” the conditions for receiving aid. But all the power in the negotiations is on one side–the IMF’s–and the fund rarely allows sufficient time for broad consensus-building or even widespread consultations with either parliaments or civil society. Sometimes the IMF dispenses with the pretense of openness altogether and negotiates secret covenants.

Stiglitz (2000:3)

 

Stiglitz strongly criticizes IMF practices, but he forgets to reflect upon the practices of the WB, where he had been serving for a while in the past, and its agenda. Both the IMF and the WB are overpowered institutions. Upon this, Fine (2001) argues that Stiglitz’s critiques give no space of analysis for a deep discussion on class and power relations, due to his reductionism of the real world to economic models. Jayasuriya and Rosser (1999:1) state that the “East Asia’s economic collapse has exposed fractures within the orthodoxy” of the first Washington Consensus, generating disputes about the future of the policies between the WB and the IMF.

 

This dispute, however, is merely a dispute between different approaches among the big fishes of Washington, all believers of a free-market economics; nevertheless, there are plenty more fish in the sea, with different beliefs and theories. Together they could help each other in promoting life betterment to people all around the world, but would suppose share of power, decentralisation and democratisation of these institutions. By share of power, I mean a stop in the financial concentration of power with these few organisations based in a single city and the financial empowerment of developing countries worldwide; one of the ways for that would be the discussion on the debt relief for poor countries. By decentralisation, I mean an internal less technocratic and more bottom-up decision making processes, having the less developed member countries more influence then in the current quotas logics. Finally, by democratisation, I mean more direct people-centred democratic systems within and towards those institutions which tend to concentrate power to affect ultimately people’s life, opening them for other theories and approaches other then these on free-markets. I recognise, however, these are very difficult tasks.

 

 

 

 

 

 

 

 

 

 

Conclusions (or simply where are the people?)

 

Power share, decentralisation and democratisation are part of the broader agenda by international social movements for a fairer world. Many authors, such as Brown and Fox (1999), Kaene (2001), and Souza Santos (2003), already explain the rise of an international civil society in a counter-hegemonic movement, bringing alternatives to our international scenario, like for instance, what is known by Global Justice Movement, Anti-Capitalism Movement, Transnational Civil Society Coalitions, Global Civil Society, and the World Social Forum, among others.

 

These are all people’s movements, realising how much the power holders are playing with the markets in such way they affect directly people’s life everywhere in the world; therefore, they are also playing with life, and not only with markets. The increasing poverty and inequality in Latin America, Africa and Asia is making people aware of their role in this play, and they are seeking more international organisation to be empowered to reclaim a fair and just world for all. In the short-run, there is huge need of respect to people’s life, and not only to investors’ money.

 

The Post-Washington Consensus is certainly exercising a lot of influence in international development policies, especially these from the WB, but also from the IMF. However, back to Recife, in Brazil, one of the implications of this continuity is described by the same youth activist cultural group in another song representing this early moment of people’s organisation and empowerment in order to defend their life. It goes like this:

 

I can leave this situation to organise [ourselves – people]

I can leave this situation to disorganise [the system]

(…)

With an empty stomach I can’t sleep

And with it fuller I started to think:

If I organise I can disorganise,

If I disorganise I can organise,

If I organise I can disorganise!

(Science, 1994b)

 

 

 

 


References

 

·         Brown, L. David and Fox, Jonathan (1999) “Transnational Civil Society Coalitions and the World Bank: Lessons from Project and Policy Influence Campaigns”. Hauser Center for Nonprofit Org. Working Paper No. 3. http://ssrn.com/abstract=254272 (14/03/2006)

·         Fine, Ben (2001) “Neither the Washington nor the Post-Washington Consensus”. In: Ben Fine, Costas Lapavitsas and Jonathan Pincus (eds.) Development Policy in the Twenty-First Century: Beyond the Post Washington Consensus. London: Routledge. Pp. 1-27. http://www.networkideas.org/featart/sep2002/Washington.pdf (08/Mar/2006)

·         IMF, International Monetary Fund (1999) “The IMF’s Response to the Asian Crisis”. Washington: IMF. http://www.imf.org/external/np/exr/facts/asia.htm (07/Mar/2006).

·         Jayasuriya, Kanishka and Rosser, Andrew (1999) “Economic Orthodoxy and the East Asian Crisis”. In: Third World Quarterly (2001), Working Paper No. 94. Perth: Murdoch University. http://wwwarc.murdoch.edu.au/wp/wp94.pdf (14/Mar/2006).

·         Keane, J. (2001) “Global Civil Society?”. In: Anheier et al. Global Civil Society. Oxford: Oxford University Press, pp.23-47.

·         Peters, Michael (1999) Neoliberalism. http://www.vusst.hr/ENCYCLOPAEDIA/neoliberalism.htm (15/Jan/2005)[6]

·         Science, Chico (1994a) “A Cidade”. In: Chico Science and Nação Zumbi (1994) Da Lama ao Caos. Recife: Chaos/Sony Music. http://chico-science.letras.terra.com.br/letras/45205/ (06/Mar/2006) [7]

·         Science, Chico (1994b) “Da Lama ao Caos”. In: Chico Science and Nação Zumbi (1994) Da Lama ao Caos. Recife: Chaos/Sony Music. http://chico-science.letras.terra.com.br/letras/108267/ (14/Mar/2006) [8]

·         Souza Santos, Boaventura (2003) “The World Social Forum: Toward a Counter-Hegemony Globalization”. Coimbra. http://www.ces.fe.uc.pt/bss/documentos/wsf.pdf (14/Mar/2006).

·         Stiglitz, Joseph (1998) “More Instruments and Broader Goals: Moving Toward the Post-Washington Consensus” Annual Lectures 2. Helsinki: United Nations University – World Institute for Development Economics Research (UNU/WIDER). http://www.wider.unu.edu/publications/annual-lectures/annual-lecture-1998.pdf (08/Mar/2006)

·         Stiglitz, Joseph (2000) “What I Learned at the World Economic Crisis”. The New Republic Online. http://www.mindfully.org/WTO/Joseph-Stiglitz-IMF17apr00.htm (07/Mar/2006)

·         Toye, John (1994) “Structural Adjustment: Context, Assumptions, Origins and Diversity”. In: van del Hoeven and van der Kraaij (eds.) Structural Adjustment and Beyond in Sub-Saharan Africa. London: James Curry. Pp. 18-35.

 

·         Williamson, John (2002) “What Washington Means by policy Reform”. In: John Williamson (ed.) (1990, updated 2002) Latin American Adjustment: How Much has Changed?. Washington: Institute for International Economics. http://www.iie.com/publications/papers/paper.cfm?ResearchID=486 (07/Mar/2006)

·         Woo-Cumings, Meredith (1999) “The Developmental State”. Ithaca: Cornell University Press.

·         Yergin, Daniel; Cran, William and Stanislaw, Joseph (2002) “Commanding Heights – Episode One: The Battle of Ideas”. Boston: Heights Productions Inc. http://www.pbs.org/wgbh/commandingheights/shared/minitext/tr_show01.html (07/Mar/2006)

·         Yergin, Daniel and Stanislaw, Joseph (1998) “The Commanding Heights: The Battle Between Government and the Marketplace that is Remaking the Modem World”. New York: Simon & Schuster.

 


[1] UK: United Kingdom of the Great Britain and Northern Ireland.

[2] USA: United States of America.

[3] WB: World Bank – http://www.worldbank.org/

[4] IMF: International Monetary Fund – http://www.imf.org/

[5] NGO: Non Governmental Organisation.

[6] The link only works with the capital letters on for “ENCYCLOPAEDIA”.

[7] This original text is in Portuguese. All translations were done by the author. Reference in English as follows: Science, Chico (1994) “The City”. In: Chico Science and Nação Zumbi (1994) From the Mud to Chaos. Recife: Chaos/Sony Music. http://chico-science.letras.terra.com.br/letras/45205/

[8] This original text is in Portuguese. All translations were done by the author. Reference in English as follows: Science, Chico (1994) “From the Mud to Chaos”. In: Chico Science and Nação Zumbi (1994) From the Mud to Chaos. Recife: Chaos/Sony Music. http://chico-science.letras.terra.com.br/letras/108267/

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15 March, 2006 - Posted by | Economics

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