In this post I will concentrate on the consequences of the application of the neoliberal economic philosophy to the economies of low-income countries, i.e. those that are in the early stages of development and industrialization. The crisis is not over, as it is a systemic one; it will be repeated more frequently in the future unless the system, and the theory behind it, is modified. The recent crisis is to be a wake-up call for poor countries, in order to change their development strategies, based on neoliberal thinking and “Washington consensus” ideology imposed on them. In this and my next post, after clarifying a couple of concepts, reference will be made to the origin and the root causes of the systemic crisis, and the context in which the recent crisis emerged. A third post will be devoted to the events in the recent crisis. In the last part, I will make a few proposals as remedial measures.
The root cause of the systemic crisis is the application of the neoliberals’ economic philosophy and ideology, which has been gathering momentum since the inception of the Bretton Woods system, particularly as of the early 1980s. This philosophy is not only based on arbitrary assumptions, but it also confuses the “ends” with the “means.” As defined by the Nobel Prize winner Gunnar Myrdal, development is “the movement upward of the whole social system.” If we accept this definition, the objective of development is, inter alia, to raise the standard of living of the citizens and provide them with employment. The end is development; market enterprises, international trade, and economic policies are the means. By contrast, according to the neoliberals’ thinking, profit maximization of firms (producers) and utility maximization of consumers will achieve “growth” (not development), and will maximize the welfare of the society at large.
The assumptions behind this hypothesis — such as perfect operation of market forces, absence of unemployment, and political and enterprise power in domestic and international economic relations — are unrealistic and arbitrary. Purely market-based economic activities and universal free trade become “ends” per se. Ironically, the neoliberals focus on the allocative function, thus allocative efficiency of the market, to the exclusion of its creative functions (as a means to growth).
It is within this theoretical framework that international financial institutions (IFIs), proponents of the “Washington Consensus,” and bilateral donors have been advocating, or imposing, market-oriented strategies and universal trade liberalization on developing countries, based on the theory of static (rather than dynamic) comparative advantage.
The aforementioned framework was behind the initiation of the Bretton Woods system, established after the Second World War, covering the World Bank, IMF and WTO. Based on Harry Dexter White‘s proposal, this system was chosen in preference to the proposal made by Keynes and reflected in the Havana Charter which was development-oriented. The main, stated objective of the Charter, was to attain “… the higher standards of living, full employment, and [the realization of] conditions of economic and social progress and development envisaged in the article 55 of that [UN] Charter”. In the language of late Hans W. Singer, the Bretton Woods System was established through “incomplete and distorted” institutions which have remained under the strong influence of the First World.
Eventually, trade liberalization has become an “end” of the Bretton Woods system, including WTO, particularly since the early 1980s. Neoliberal thinking took more momentum in the early 1970s. It became the official policy of IFIs, after Anne Krueger became an important figure in the World Bank in the early 1980s. It was pushed further, in the early 1990s, with the advocacy of “Washington Consensus.” Since then market-based, export-oriented strategies and across-the-board universal trade liberalization have been imposed on most developing countries, suppressing the real economy in poor countries. Yet, hypocrisy has continued: developed countries continue to protect their agricultural sectors and technological development, and the power and weight of transnational corporations in international trade, global production, distribution and financial systems has increased.
In the meantime “Thatcherism” and “Reaganism” have prevailed in developed countries, leading to the de-regulation of the market. The financial system, which is supposed to provide means of finance for the expansion of supply capacity, has become more and more detached from the real economy. The speculative activities of transnational corporations have increased the frequency of boom and bust cycles.