Development of crisis and crisis in “development”

Mehdi Shafaeddin

The recent global economic crisis has affected the poor in developing countries most, in part because they are the weakest to deal with such a crisis. Their weakness is partly due to the practices of neo-liberal ideas imposed on them by international financial institution (IFI) during the last couple of decades. The emergence of the crisis raises a fundamental question: is there any hope that the lessons learned will lead to a turning point in favour of “development”? It should, but I doubt whether it will, and the danger is that the next global crisis would emerge in the trading system.

The great depression of 1930s was a turning point as the Keynesian macroeconomic policies dominated the scene for a couple of decades. By contrast, Keynes’ ideas on international development policies, presented after the Second World War, were turned down. So was his proposal for the creation of ITO in favour of the Bretton Woods institutions and WTO.

Meanwhile, two schools of thought were propagating ideas on development theory: neo-classical economists, (e.g Jacob Viner, I. Little, A. Krueger, Bhagwati); and their opponents, i.e. the developmentalists. The neo-classical view was simple, but hypothetical and “mechanical”; their ideology was based on their belief in “laissez-faire” and “laissez-passer”. Further, they disregarded the important role of socio-political factors in economic development; considered man only as a factor of production rather than the ultimate beneficiary of growth; made no distinction between growth and development.

The developmentalists (e.g  Prebisch, Kalecki, Myrdal, Streeten, Kaldor, and the Latin American structuralists, etc.) tried to deal with the real, rather than hypothetical, world: in any country, economic activities take place in an environment, with its particular socio-economic, structural and institutional characteristics and international setting; international trade is influenced by power relations of the trading partners; market failure is rampant, hence there is a need for government intervention. In two respects, however, they are in an inferior position than the neoliberals: their real world is of course more complicated than the hypothetical world of neoliberals, so they cannot easily provide a simple solution for economic problems; unlike neoliberal institutions, they have not been in a power position.

A couple of events have shifted the pendulum in favour of neoliberals further since the early 1970s.  The energy crisis in early 1970s, the consequential increase in indebtedness of developing countries and their need for external finance, the emergence of Reaganism and Thatcherism and the involvement of  a number of neoliberals (e.g. I. Little and A. Krueger and in the international financial institutions (IFIs)). Market-oriented development and universal trade liberalization became the religion of neoliberals and IFIs; it was intensified with the emergence of “Washington Consensus” and trade liberalization during the Uruguay Round. The USA’s interest in pushing for universal trade liberalization was based on the belief that it would remedy the current account deficits of the country.

In practice, the USA’s deficits have grown further; financial activities have taken over productive activities, the world economy has become more unstable, leading to one financial crisis after another. The recent crisis has been the worst since the Great Depression.

The crisis did not stop “hypocrisy” which had prevailed by the IFIs and governments of developed countries in both trade and macroeconomic policies. Not only had developed countries agreed partially with liberalization of international trade by continuing agricultural protectionism, but they also paid little respect to the rules on which they had agreed through GATT-WTO. Regarding the financial crisis, their “market fundamentalism” ideology would dictate that the crisis should have been left to be sorted out by the “market”. But suddenly the intervention in the market in developed countries became fashionable and was also endorsed by the IFIs. The USA alone injected over one trillion dollars into the economy, mostly to rescue the banks from bankruptcies. By contrast, IMF continued putting pressure on poor countries to cut government expenditure! Most of these countries are located in Sub-Sahara Africa where according to the World Bank in 2005, 51% of their population (about 391 million) lived under $1.25 a day. Further, most recently the Managing Director of IMF recommended that developing countries should shift to a “consumption-led growth”.  His recommendation contradicts not only IMF’s advocacy of export-led growth in the past, but also the IMF policy of putting pressure on poor countries to cut government expenditure!

The Sub-Saharan African countries, and many other ACP countries, are also under the pressure of the EU to liberalize trade in manufactured goods on a reciprocal basis, but the EU would like to maintain its own protectionist policies in agriculture. Neither the USA nor the EU appreciate the fact that ultimately imports by the poor countries have to be paid for by export earnings which, in turn, depends on supply capabilities, i.e. the level of development of the countries. And acceleration of development of the poor countries will not be achieved by pursuing “market fundamentalism”.

The pressure on these countries for universal trade liberalization, through EPA and/or WTO, will lead either to further de-industrialization, human misery and/or rebellion to undermine the global trading system-even if the USA did not break away from the system. Will neo-liberals and neo-liberal institutions hear this wake-up call?

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