Failed model

Print edition : October 19, 2007


The Washington Consensus has undergone a process of unravelling, and its former adherents have gone off in divergent directions.

When two studies last year detailed how the World Banks research unit had been systematically manipulating data to show that neoliberal market reforms were promoting growth and reducing poverty in developing countries, development circles were not shocked. They saw the devastating findings of a study by American University Professor Robin Broad and a report by Princeton University Professor Angus Deaton and former International Monetary Fund (IMF) Chief Economist Ken Rogoff as but the latest sordid episode in the collapse of the so-called Washington Consensus.

Taking off from Margaret Thatchers famous remark, partisans of this development model during its heyday in the 1980s and early 1990s claimed that the alternative to the Washington Consensus was TINA that is, There is no alternative. The Washington Consensus broke with economic strategies involving heavy participation by government and positioned the unfettered market as the driver of development.

Imposed on developing countries in the form of structural adjustment programmes funded by the IMF and the World Bank, the Consensus reigned until the late 1990s, when it became clear that on all key criteria of development sustained growth, poverty reduction and inequality reduction it simply was not delivering. By the first half of this decade, the Consensus had undergone a process of unravelling, although neoliberalism remained the default mode for many economists and technocrats who had lost confidence in it, simply out of inertia.

The former adherents of the Consensus have gone off in divergent directions. Despite frequent references to it, there is, in fact, no Post-Washington Consensus. Mindful of the failures of the Washington Consensus, the IMF and the World Bank are now promoting what Nobel laureate Joseph Stiglitz has disdainfully described as the Washington Consensus Plus approach, or, that market reforms, while crucial, are not enough. Financial reforms, for instance, must be sequenced if we are to avoid such debacles as the Asian financial crisis, which even the IMF now admits was because of massive capital inflows into countries that liberalised without strengthening their financial infrastructure.

Embarrassed by the Russian descent into the hell of mafia capitalism in the 1990s because of its advice, the IMF now also talks about the importance of accompanying market reforms with institutional and legal reforms that can enforce private property and contracts. Other accompaniments of market reforms are good governance and policies to develop human capital such as female education.

This mix of market and institutional reforms was consolidated in the first years of this decade in the so-called Poverty Reduction Strategy Papers (PRSPs). In contrast to what one analyst has described as the bare knuckle neoliberalism of structural adjustment programmes, the PRSPs were more liberal not only in content but in process: they were supposed to be formulated in consultation with the stakeholders, including civil society organisations.

Despite its icing of institutional reforms, the core of the PRSP cake remains the same macroeconomic fundamentals of trade liberalisation, deregulation, privatisation, and commercialisation of land and resources that were at the heart of the structural adjustment programmes. And community consultation has been limited to well-resourced, liberal non-governmental organisations rather than broad-based social movements.

The PRSPs are simply second-generation structural adjustment programmes that seek to soften the negative impact of reforms. As IMF Managing Director Rodrigo de Rato has admitted, the purpose of institutional reforms is to make sure that the fruits of growth are widely shared and the poorest people are protected from the costs of adjustment in order to prevent people from being tempted to give up on orthodox economic policies and structural reforms. A second successor to the Washington Consensus is what one might call the neoconservative neoliberalism. This approach is essentially the development policy of the Bush administration. The inspiration for this strategy was provided by the famous 2000 report of a Congressional commission on multilateral institutions headed by the conservative academic Alan Meltzer, which proposed a radical slimming down of the World Bank. It supports at least rhetorically debt relief for the poorest countries on the grounds that they will not be able to pay the debt and seeks a shift from loans to grants. However, debt relief and grants are conditioned on how governments perform in terms of liberalising their markets and privatising their industries, land and natural resources.

The main reason for preferring grants is that, in contrast to loans channelled through the World Bank, grants, as the United States Undersecretary of the Treasury John Taylor put it, can be tied more effectively to performance in a way that longer-term loans simply cannot. Moreover, grants would allow pro-market reforms and aid policy generally to be more directly coordinated with Washingtons security objectives and with the agenda of U.S. corporations. Compared with the original Washington Consensus, neoconservative neoliberalism is less doctrinaire, but in an illiberal direction, ready as it is to let the market play second fiddle to power.

A third distinctive successor to the Washington Consensus, neostructuralism, moves in a more liberal direction. This is an approach associated with the Economic Commission for Latin America (CEPAL) that produced the structuralist theory of underdevelopment in the 1950s under the leadership of the Argentine economist Raul Prebisch. According to neostructuralism, neoliberal policies have simply been too costly and counterproductive. There is no trade-off between growth and equity, as the neoliberals claim, but a synergy.

Less inequality in fact would enhance, not obstruct, economic growth by increasing political and macroeconomic stability, boosting the saving capacity of the poor, raising educational levels and expanding aggregate demand. The neostructuralists propose progressive transfer payment policies that redistribute income in ways that increase the human capital or productivity of the poor, including higher spending on health, education and housing programmes. These are the kinds of programmes associated with what the Mexican polemicist Jorge Castaneda has called the Good Left in Latin America, meaning the governments of Luis Inazio Lula da Silva in Brazil and the Concertacion alliance in Chile.

Being focussed on managing transfer payments to protect and upgrade the capacity of the poor, the neostructuralist approach does not interfere with market forces in production, unlike the policies of the Bad Left (meaning Venezuelan President Hugo Chavez and friends) that intervene in production, markets and wage policies. The neostructuralists also embrace globalisation, and they say that a key objective of their reforms is to make the country more globally competitive. Simultaneously they alleviate income disparities, upgrade the capacity of the poor and make the workforce more globally competitive. Neostructuralist reforms are thus said to hold out the prospect of making globalisation more palatable, if not popular. Neostructuralists proudly proclaim that their approach is the high road to globalisation, in contrast to the low road of the neoliberals.

Presidents Nestor Kirchner (Argentina), Evo Morales (Bolivia), Luis Inazio Lula da Silva (Brazil) and Hugo Chavez (Venezuela) at a 2006 meeting in Iguazu, Argentina. Chavez has launched a plan for regional integration based on genuine economic cooperation instead of free trade.-

The problem is that neostructuralist reforms have led to what one of its most thoughtful critics, the Chilean economist Fernando Leiva, calls the heterodox paradox. In other words, in the quest for systemic or comprehensive competitiveness, the carefully crafted neostructuralist policies have actually led to the politico-economic consolidation and regulation of neoliberal ideas and policies.

Neostructuralism, like the Washington Consensus Plus approach, does not fundamentally reverse but simply mitigates the poverty- and inequality-creating core neoliberal policies. The Lula governments targeted anti-poverty programme may have reduced the ranks of the poorest of the poor but institutionalised neoliberal policies continue to reproduce massive poverty, inequality and stagnation in Latin Americas biggest economy.

The more than residual attachment to neoliberalism or neostructuralism is less evident in the case of what we might call global social democracy, an approach that has become identified with people such as the economist Jeffrey Sachs, the sociologist David Held, Stiglitz, and the British charity Oxfam. Unlike the three previous approaches, this perspective acknowledges that growth and equity may be in conflict, and it ostentatiously places equity above growth. It also fundamentally questions the central thesis of neoliberalism: that for all its problems, trade liberalisation is beneficial in the long run. Stiglitz says that in the long run, trade liberalisation may, in fact, lead to a situation where the majority of citizens may be worse off.

Moreover, global social democrats demand fundamental changes in the institutions and rules of global governance such as the IMF, the World Trade Organisation (WTO) and the Trade-Related Aspects of Intellectual Property Rights Agreement (TRIPS). David Held, for instance, calls for the reform, if not outright abolition, of the TRIPS Agreement, while Stiglitz says that rich countries should simply open up their markets to poorer ones, without reciprocity and without economic or political conditionality. Also, middle-income countries should be allowed to extend preferences to one another without extending them to the rich countries, so that they need not fear that imports might kill their nascent industries.

Global social democrats even see the anti-globalisation movement as an ally, with Sachs thanking it for exposing the hypocrisies and glaring shortcomings of global governance and for ending years of self-congratulation by the rich and powerful. But globalisation is where they draw the line. Like classical neoliberalism, the Washington Consensus Plus school and neostructuralism, global social democracy sees globalisation as necessary and fundamentally sound and, if managed well, as bringing benefits to most.

Indeed, global social democrats see themselves as saving globalisation from neoliberals. This is all the more important because, contrary to an assumption that was gospel truth just a few years ago that globalisation was irreversible global social democrats worry that contemporary globalisation is, in fact, in danger of being reversed. They hold up as a cautionary tale about the consequences of such a development the turbulent reversal of the first wave of globalisation after 1914.

To Sachs, Held and Stiglitz, the benefits of globalisation outstrip the costs, and what the world needs is a social democratic or enlightened globalisation where global market integration proceeds but is managed fairly and is accompanied by progressive global social integration. The aim, as Held puts it, is to provide the basis for a free, fair, and just world economy, where the values of efficient and effective global economic processes function in a manner commensurate with self-determination, democracy, human rights and environmental sustainability.

There are several problems with global social democracys attachment to globalisation. First of all, it is questionable that the rapid integration of markets and production that is the essence of globalisation can really take place outside a neoliberal framework whose central prescription is the tearing down of tariff walls and the elimination of investment restrictions. Slowing down and mitigating this inherently destabilising process, not reversing it, is the global social democratic agenda. That global social democrats have come to terms with the fundamental tendency of global market forces to spawn poverty and inequality is admitted by Sachs who sees social democratic globalisation as the harnessing [of] the remarkable power of trade and investment while acknowledging and addressing limitations through compensatory collective action.

Secondly, it is likewise questionable that, even if one could conceive of a globalisation that takes place in a socially equitable framework, this would, in fact, be desirable. Do people really want to be part of a functionally integrated global economy where the barriers between the national and the international have disappeared? Would they not prefer to be part of economies that are susceptible to local control and are buffered from the vagaries of the international economy? Would they really want new centralised global bureaucracies that is, an alternative IMF, World Bank and WTO? Are not centralised structures of global governance themselves the problem, prone as they are to develop authoritarian hierarchies?

Indeed, the backlash against globalisation stems not only from the inequalities and poverty it has created but also from the sense of people that they have lost all semblance of control over the economy to impersonal international forces. One of the more resonant themes in the anti-globalisation movement is its demand for an end to export-oriented growth and the creation of inwardly-oriented development strategies that are guided by the logic of subsidiarity, where the production of commodities takes place at the local and national levels whenever possible, thus making the process susceptible to democratic regulation.

The fundamental problem with all four successors to the Washington Consensus is their failure to root their analyses in the dynamics of capitalism as a mode of production. Thus they fail to see that neoliberal globalisation is not a new stage of capitalism but a desperate and unsuccessful effort to overcome the crises of over-accumulation, overproduction and stagnation that have overtaken the central capitalist economies since the mid-1970s. By breaking the social democratic capital-labour compromise of the post-Second World War period and eliminating national barriers to trade and investment, neoliberal economic policies sought to reverse the long-term squeeze on growth and profitability. This escape to the global has taken place against the backdrop of a broader conflict-ridden process marked by renewed inter-imperialist competition among the central capitalist powers, the rise of new capitalist centres, environmental destabilisation, heightened exploitation of the South what David Harvey has called accumulation by dispossession and rising resistance all around.

Globalisation has failed to provide capital an escape route from its accumulating crises. With its failure, we now see capitalist elites giving up on it and resorting to nationalist strategies of protection and state-backed competition for global markets and global resources, with the U.S. capitalist class leading the way. This is the context that Sachs and other social democrats fail to appreciate when they advance their utopia: an enlightened global capitalism that would both promote and humanise globalisation.

Globalisation is a spent force that has evoked tremendous reactions that continue to grow in strength. Todays multiplying economic and political conflicts resemble, if anything, the period following the end of what historians refer to as the first era of globalisation, which extended from 1815 to the eruption of the First World War in 1914. Our urgent task is not to engage in the futile task of steering corporate-driven globalisation in a social democratic direction by reforming the WTO and the IMF and promoting corporate social responsibility, but to manage its retreat so that it does not bring about the same chaos and runaway conflicts that marked its demise in that earlier era.

That is one challenge. The other big challenge is not to be waylaid into promoting a benign globalisation but to transcend it that is, to create a truly equitable international order of independent national societies where domestic and local economies will be revived along with the transformation of class relations and the achievement of a healthy balance between community and the environment.

In this connection, the radical initiatives in Latin America initiatives moving in a regional or national rather than global direction and with a strong dimension of class and ethnic equality take us more decisively in the right path than the enlightened globalisation alternative proposed by the global social democrats. Long exploited by foreign energy giants, Bolivia under the indigenous President Evo Morales has nationalised its energy resources.

Nestor Kirchner of Argentina gave an example of how developing country governments can face down finance capital when he forced northern bondholders to accept only 25 cents of every dollar Argentina owed them. Hector Correa of Ecuador is taking the bold move of keeping the oil in the ground rather than exploiting it for short-term gains, thus showing how a Third World country can contribute creatively to addressing global warming. Chavez has launched an ambitious plan for regional integration, the Bolivarian Alternative for the Americas (ALBA), based on genuine economic cooperation instead of free trade, with little or no participation by northern transnational corporations, and driven by what Chavez himself describes as a logic beyond capitalism.

There may not be a well-articulated philosophy or even a coherent strategy guiding these moves except that of people trying to gain control of their future. But they are exciting steps in the right direction and deserve our support. They also provide us lessons on how we can begin the process of striking out on different roads to the future in our own countries.

For so many of us in the anti-globalisation movement, the Hungarian thinker Karl Polanyi has served as a great inspiration. Polanyi talked about capitalism being a process of disembedding the market from its social matrix and eventually making it the force that drives society. Globalisation has been the climactic point in this process of disembedding the market. The task is to re-embed the market in society, to discipline and subordinate it to the overarching goals of justice, equality, solidarity, and not to forget national sovereignty.

Walden Bello is Professor of Sociology at the University of the Philippines and senior analyst at the Bangkok-based research and advocacy institute Focus on the Global South.

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