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Tuesday, March 31

Globalization Series: The Neoliberal Puzzle and Whack-a-Mole, Russian style

I received the following question from a reader named Frank in response to the Washington Continues to Play Ostrich about Mexico post:

"When you say neoliberal policies like the one Reagan and Thatcher did, what do you mean by that? I thought they were associated with conservatism?"

Because the question opens onto important foreign policy issues for the USA, I decided to expand on the dictionary definition of neoliberalism for my reply:

Dear Frank:

So many Americans are confused about the meaning of neoliberal that I should have added a Wikipedia link to the word, which generally I do just because of the widespread confusion about the term.

Liberal in this context does not mean 'progressive' or Leftist; it is an economics term that refers to liberalization of capital markets, free trade, and privatization of government-owned businesses and industries.

In other words, neoliberalism "liberally " or "greatly" embraces capitalism, and the kind of government practices that are associated with Margaret Thatcher's economics revolution, which was adopted by Ronald Reagan.

Couldn't the economists have come up with a more descriptive term, one that's less confusing? Why not simply call it capitalism? Because it's not so much about capitalism as about undoing socialist/communist and protectionist government policies through the application of capitalism and liberal ("generous" or "free") trade policies.

It's really a term that refers to implementation of an economic theory, rather than the theory itself.

A term that's closely associated with neoliberalism is the Washington Consensus. The more you know about the consensus, the more you'll understand why neoliberalism became controversial -- and why, by the turn of this century, the American government had become hated in many places around the world. From the Wikipedia article. (There are other articles about the consensus that are even more informative, and which are readily available on the internet, but the Wikipedia one is a good place to start.)
The term Washington Consensus was initially coined in 1989 by John Williamson to describe a set of ten specific economic policy prescriptions that he considered to constitute a "standard" reform package promoted for crisis-wracked developing countries by Washington D.C based institutions such as the International Monetary Fund (IMF), World Bank and the U.S. Treasury Department.

Subsequently, as Williamson himself has pointed out, the term has come to be used in a different and broader sense, as a synonym for market fundamentalism; in this broader sense, Williamson states, it has been criticized by writers such as George Soros and Nobel Laureate Joseph E. Stiglitz.

The Washington Consensus is also criticized by others such as some Latin American politicians and heterodox economists. The term has become associated with neoliberal policies in general and drawn into the broader debate over the expanding role of the free market, constraints upon the state, and US influence on other countries' national sovereignty.
Mr Soros has self-serving reasons for criticizing neoliberalism and the Washington Consensus. But there are valid criticisms of both.

On paper, neoliberal economic policy is a prescription for bringing a sick national economy back to health. But in its application neoliberalism policy does not start with a fresh sheet of paper -- with a new society. It was imposed on countries that had often followed strongly socialist or communist policies for generations. And often the application of neoliberalism in those countries was accompanied by economic Shock Therapy.

The idea of Shock Therapy is 'all or nothing' on the argument that half-way cures for a very sick socialist economy don't work: Either privatize all the biggest state-run industries and open up the country wide to foreign investment, remove all wage and price controls, etc., or have the country continue to fall into ruin.

True. But it's the speed of the fall that Shock Therapy isn't constructed to deal with.

If you have a dirt poor country with very primitive or nonexistent entitlements programs (e.g., social security), only the most rudimentary social safety nets (e.g., big charity networks), what happens when the state-run industry closes its doors and says go find a job in a private sector that we haven't created yet? And when the World Bank doesn't write loans fast enough to stave off disaster?

What happens is that people starve, Frank, or they turn to crime so they can feed their families.

That's what happened to Russia. It happened to a lessor degree in Eastern European ex-Soviet republics. But those countries got tremendous help from the EU, the EU-backed European development bank (EBRD) and to a great extent the government of West Germany, which came rushing into the breach with an open checkbook.

And because Washington was so all-fired intent on peeling those countries away from Russia's sphere of influence, the U.S. government also threw mountains of financial aid at those countries to help them stave off the worst.

But when Shock Therapy was applied it was a disaster in cases where the country didn't have the safety nets that Margaret Thatcher's Britain and Reagan's United States had, and didn't have enough access to outside help.

Imagine: You've been living from paycheck to paycheck, and suddenly you're out of a job because the state-run industry you work for closed its doors with no warning. There are no food stamps, unemployment checks, soup kitchens run by the Red Cross, homeless shelters, or job retraining programs. No nothing. And your relatives, friends, and neighbors are in the same boat destined for starvation.

Here's a metaphor to summarize the downsides of badly-applied neoliberalism particularly when applied via Shock Therapy: Think of a man who was chained to his desk job for years. Then he develops a host of illnesses that are related to lack of exercise. When his doctor orders him to exercise, the first thing he does is run a mile, then he drops dead.

Many poor countries that followed socialist policies can be likened to the man. And neoliberalism can be likened to a doctor's orders to help him improve his health. But applied thoughtlessly, the prescription can kill a society.

One of the downsides is that bad application of neoliberal policies gave capitalism a bad name. But of course life is more than an economic model. So the general rule should be that the more radical and rapid the change, the more that social services should be expanded to cushion the shock and help smooth the transition from a state-owned economy to a privatized one.

Often that rule wasn't followed. Instead, the economic prescription was applied across the board, no matter what the circumstances. Yet implementing the policies was the price tag for bailout loans arranged by the IMF and international development banks that followed the Washington Consensus. You can look at the Wikipedia article on SALs -- Structural Adjustment Loans -- to get an idea of how the price tag worked in practice.

To make matters worse, as foreign investors rushed to snap up former state-run companies that fell to privatization, starving people saw their country being overrun by rich foreigners who were making fortunes from the country's most precious resources -- and who were not returning any of that wealth to the people who were starving.

So, the people who were suffering greatly as a result of inappropriately applied neoliberal policies came to see neoliberalism as a dirty trick by the rich countries to rob them. And so, many threw the baby out with the bath water; that happened in several Latin American countries that threw aside neoliberalism and turned sharply Left.

And because the mainstream U.S. news media had always greatly ignored reporting on IMF-World Bank policies and how they affected the poorer countries, the vast majority of Americans were unaware of the situation.

That also explains why the term neoliberalism, for all it's impact on peoples outside the United States, is either unknown to many Americans or misunderstand to mean a Liberal in the political sense of the word.

I don't wish to demonize neoliberalism or the Washington Consensus; they've done much good in the world. But when by a few strokes of a pen a handful of people can radically alter the lives of millions in a country distant from theirs, those pen pushers had better be sure they are in control at the implemental level of their economic prescription. Often they weren't, and tragedies spun out from there.

Then, confounded Americans asked, 'Why are so many people around the world angry at us?'

Has the United States government learned its lesson? If reason were the only standard by which to measure the question, I'd say, 'I think so.' I think it was the Iraq experience that began to break up the ice floes of thinking about neoliberalism among its champions. The more greatly insulated we are from the consequences of our actions, the harder it is to see our mistakes. The worst downsides of the Washington Consensus were always at great remove from the American society. But when the Green Zone became an American society in microcosm, suddenly the feedback loop for mistakes was very short.

Paul Bremer is a big fan of neoliberalism. While he was acting as the de facto viceroy of Iraq he got it into his head that a top priority was to privatize Iraq's state industries: get rid of the bloat, where thousands of Iraqis collected a paycheck from the state for the work of sitting around and drinking tea all day.

On paper Bremer was right. But getting rid of the bloat with a stroke of the pen put many Iraqis out of a paycheck -- in a country that was in chaos, where jobs in private industry couldn't be found, and where unemployment checks weren't available.

So the unemployed turned to crime or joined the insurgency. When rockets started landing inside the Green Zone, suddenly the downsides of badly applied neoliberal theories were brought home to Bremer.

A short feedback loop: it's a wonderful thing.

I can't remember whether Bremer actually cried uncle and admitted the folly of his prescription for rapid economic prosperity in Iraq. Probably not. But some American advisors went to war with him over the issue, or completely circumvented him -- I can't remember which -- and if I recall they got at least some of the state-run factories started up again.

Somewhere in my archives I have a post that quotes a Washington Post report on that episode of the Iraq operation; I'll try to find it when I have time and repost it.

However, what continues to prop up support for indiscriminate application of neoliberalism is not bad reasoning; it's the vast amount of money to be made by foreign investors who buy into privatized industries and who, because they're foreigners, don't have to live with the downsides of fast privatization.

I wish Vladimir Putin would write a book; that would explain everything wonderfully to Americans. Putin's struggles with the foreign investors who were intent on getting control of Russia's energy and mineral wealth became a game of Whack-a-Mole. Every time he whacked them, they'd pop up in a different way.

They used to go to the governors of the different provinces and bribe them to sell off various businesses. So Putin said, Okay, I'll suspend elections of the provincial governors and I'll appoint them myself and make them accountable.

Cut off from that avenue of plunder, the scoundrels went howling to their government to demand that the government lodge protests against Putin. And they ordered flunkies to blitz the financial papers and major press in Europe and the U.S. with op-eds saying that Putin was a dictator.

Then they started in with fronting NGOs (Non-governmental not-for-profit organizations) to attack Putin's policies. So he threw all the foreign NGOs out of Russia. Undaunted, the scoundrels began funneling money to Russian NGOs -- which made it really tough on the legitimate Russian NGOs when Putin went after them.

From a long distance, it was almost funny. Every time he blocked them, they'd go running to the financial papers and wail about the erosion of freedom in Russia. Then they'd find a way to fox him again. Then he'd figure out their newest ploy, and so the whole cycle of op-eds and diplomatic protests would start up again.

The game is still in play because there's a lot of money to be made if they can get control of Russia's government. And that game doesn't even speak to the more deadly one that the Russian Oligarchs played when he took their power away from them. They wanted to run Russia again, at any cost.

The deadliest game of all was the one played by the old Cold War Warrior crowd, which thought that the only safe Russia was a Russia reduced to the size of a postage stamp. Yes indeed; Vladimir Putin was the world's busiest President.

The tragedy is that all those games to capture power and vast wealth really did result in an erosion of freedoms for Russians. But many Russians have no complaints about life in a fortress. That's because they still remember the neoliberal days, when a few fabulously rich Russians ran the country along with their foreign investor buddies.

That gang's motto was, 'If the Russian people are hungry, let them eat snow in winter and grass in the summer.'

Their only interest in development was building up the chi-chi shopping - hotel - restaurant zones. There was a lot of freedom back then for ordinary Russians: freedom to starve, freedom to get shot up on the streets by gangs of thugs.

On paper there's nothing wrong with foreign investment, but the types I'm talking about are not really intent on investing. They're intent on plunder, which requires getting control of a government. When caught red-handed they mumble about the trickle-down theory, while millions go hungry waiting for the trickles. So they aren't even Carpetbaggers. The Carpetbaggers were ruthless, but they went to the American south after the Civil War and moved in, and helped reconstruct the society.

Not so for the kind of people Putin was fighting. Such characters, who are best described as pirates without a ship's deck under their feet, are not interested in the locals in the countries they target.

And they're not moved by reasoned arguments. They don't give a flying fig about how best to implement neoliberalism. They just want their government to get them access to a foreign government that can be bribed or bullied into privatizing lucrative industries, and to help them shove out local competition.

The upshot? These self-described friends of free enterprise, who back phoney democracy and human rights organizations and political parties as a means to pressure governments they've targeted, have done more to hurt democracy and capitalism than all today's socialist dictators combined.

In the globalized era of trade, how does a government protect itself against predatory foreign investors while staying democratic? And while avoiding a reversion to isolationism and the massive corruption that goes with state ownership of a nation's key industries?

In other words, how does a country reap the benefits of neoliberalism without the scoundrels among us using the very instruments of neoliberal policy to rob the citizens?

Vladimir Putin and his band of technocrats have been discussing and debating that puzzle for years and years. So if you figure out the answer, mail it to the nearest Russian embassy.
Ok, Putin had a lot on his plate, including the foreign media blaming him from stopping plunder.

1) Was GWB right about Putin??

2) Did Geithner simply do the Washington Consenus thing in Indonesia and it created predictable chaos, or did Geithner screw up there??
DocJim -- I wish I could drop everything and answer your questions because this the kind of the stuff I could talk about all day. But I'm going to have put this off until, say, Friday morning (keeping my fingers crossed). Bu I will reply.
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