Globalization and its discontents

IMF programs are typically dictated from Washington, and shaped by the short missions during which its staff members pore over numbers in the finance ministries and central banks and make themselves comfortable in five-star hotels in the capitals. There is more than symbolism in this difference: one cannot learn about, and love, a nation unless one gets out to the countryside. One should not see unemployment as just a statistic, an economic "body count", the unintended causalities in the fight against inflation or to ensure that Western banks get repaid. The unemployed are people, which families, whose lives are affected --- sometimes devastated --- by the economic policies that outsiders recommend, and, in the case of IMF, effectively impose. Modern high-tech warfare is designed to remove physical contact: dropping bombs from 50,000 feet ensures that one does not "feel" what one does. Modern economic management is similar: from one's luxury hotel, one can callously impose policies about which one would think twice if one knew the people whose lives one was destroying. (p. 24)

It seemingly would not listen to others, no matter how well informed, no matter how disinterested. matters of substance became subsidiary to matters of process. ... The fact that outside experts were not called in to help arbitrage what was clearly a contentious issue is consonant with the style of the IMF, in which the fund cast itself as the monopoly supplier of "sound" advice. (p. 33)

But to the IMF the lack of detailed knowledge is of less moment, because it tends to take a "one-size-fits-all" approach. (p. 34)

Comment: Our theory will distinguish individual cases.

In some of the universities from which IMF hires regularly, the core curricula involve models in which there is never any unemployment. After all, in the standard competitive model --- the model that underlies the IMF's market fundamentalism --- demand always equals supply. IF the demand of labor equals supply, there is never any involuntary unemployment. Someone who is not working has evidently chosen not to work. In this interpretation, unemployment in the Great Depression, when one out of four people was out of work, would be the result of a sudden increase in the desire for more leisure. It might be of some interest to psychologists why thee was sudden change in the desire for leisure, or why those who were supposed to be enjoying the leisure seemed so unhappy, but according to the standard model these questions go beyond the scope of economics. (p. 35)

But even if the training of a typical IMF macroeconomist had been better suited to the problem of developing countries, it's unlikely that an IMF mission, on a three week trip to Addis Ababa, Ethiopia's capital, or the capital of any other developing country, could really develop policies appropriate for the country. Such policies are far more likely to be crafted by highly educated, first rate economists already in the country, deeply knowledgeable about it and working daily on solving that country's problems. Outsiders can play a role, in sharing the experience of other countries, and in offering alternative interpretations of the economic forces at play. But the IMF did not want to take on the mere role of an advisor, competing with others who might be offering their ideas. (p. 36)

Comment: People who promote the idea of competitive market do not want competition.

But the IMF is not particularly interested in hearing the thoughts of its "client countries" on such topics as development strategy or fiscal austerity. All too often, the Fund's approach to developing countries has the feel of a colonial ruler. A picture can be worth a thousand words, and a single picture snapped in 1998, shown throughout the world, has engraved itself in the minds of millions, particularly those in the former colonies. The IMF's managing director, Michel Camdessus (the head of the IMF is referred to as its "Managing Director"), a short, neatly dressed former French Treasury bureaucrat, who once claimed to be a Socialist, is standing with a stern face and crossed arms over the seated and humiliated president of Indonesia. The hapless president was being forced, in effect, to turn over economic sovereignty of his country to the IMF in return for the aid his country needed. In the end, ironically, much of the money went not to help Indonesia but to bail out the "colonial power's" private sector creditors. ...

Defenders of Camdessus claim the photograph was unfair, that he did not realize that it was being taken and it was viewed out of context. But that was the point --- in day to day interactions, away from cameras and reporters, this is precise the stance that the IMF bureaucrats take, from the leader of the organization on down. To those in the developing countries, the picture raised a very disturbing question: Had things really changed since the "official" ending of colonialism a half century ago? When I saw the picture, images of other signings of "agreements" came to mind. I wonder how similar this scene was to those marking the "opening up of Japan" with Admiral Perry's gunboat diplomacy or the end of the Opium Wars or the surrender of maharajas in India. ...

A quarter of a century ago, those in the developing countries might rightly have given some deference to the "experts" from the IMF. But just as there has been a shift in the military balance of power, there has been even more dramatic shift in the intellectual balance of power. (p. 41)

It is important to restructure state enterprises, and privatization is often an effective way to do so. But moving people from low-productivity jobs in state enterprises to unemployment does not increase a country's income, and it certainly does not increase the welfare of the workers. The moral is a simple one, and one to which I shall return repeatedly: Privatization needs to be part of a more comprehensive program, which entails creating jobs in tandem with the inevitable job destruction that privatization often entails. Macroeconomic policies, including low interest rates, that help create jobs, have to be put in place. Timing (and sequencing) is everything. These are not just issues of pragmatics, of "implementation": these are issues of principle. (p. 58)

Trade liberalization is supposed to enhance a country's income by forcing resources to move from less productive uses to more productive uses; as economists would say, utilizing comparative advantage. But moving resources from low-productivity uses to zero productivity does not enrich a country, and this is what happened all too often under IMF programs. It is easy to destroy jobs, and this is often the immediate impact of trade liberalization, as inefficient industries closed down under pressure from international competition. IMF ideology holds that new, more productive jobs will be created as the old, inefficient jobs that have been created behind protectionist walls are eliminated. But that is simply not the case --- and few economists believe in instantaneous job creation, at least since the Great Depression. It takes capital and entrepreneurship to create new firms and jobs, and in developing countries there is often a shortage of the latter, due to lack of education, and of the former, due to lack of bank financing. The IMF in many countries has made matters worse, because its austerity program often also entails such high interest rates --- sometimes exceeding 20, sometimes exceeding 50%, sometimes even exceeding 100% --- that job and enterprise creation would have been in impossibility even in a good economic environment such as the United States. The necessity capital for growth is simply to costly. (p. 60)

The western countries pushed trade liberalization for the products that they exported, but at the same time continue to protect those sectors in which competition from developing countries might have threatened their economies. ... Protestors pointed out, quite rightly, that the earlier rounds of trade negotiations had lower barriers of on industrial goods, from automobiles to machinery, exported by the advanced industrial countries. At the same time, negotiators for these countries maintained their nations' subsidies on agricultural goods and kept closed the markets for these goods and for textiles, where many developing countries have a comparative advantage.

In the most recent Uruguay Round of trade negotiations, the subject of trade in services was introduced. In the end, however, markets were opened mainly for the services exported by the advanced countries --- financial services and information technology --- but not for maritime and construction services, where the developing countries might have been able to gain a toehold. ... Bolivia not only brought down its trade barrier to the point that they were lower than those in the United States but also cooperated with the United States in virtually eradicating the growth of coca, the basis of cocaine, even though this crop provided a higher income to its already poor farmers than any alternative. The United States responded however, by keeping its market closed to the alternative agriculture products, like sugar, that Bolivia's farmers might have produced for export --- had America's markets been open to them.

Developing countries get especially angry over this sort of double standard because of the long history of hypocrisy and inequalities. In the nineteen century the Western powers --- many of which had grown through using protectionist policies --- had pushed unfair trade treaties. The most outrageous, perhaps, followed the Opium Wars, when the United Kingdom and France ganged up against a weak China, and together with Russia and the United States forced it, in the Treaty of Tientsin in 1858, not just to make trade and territorial concessions, ensuring it would export the goods the West wanted at low prices, but to open its markets to opium. so that millions in China would become addicted. (p. 62)

The US Trade Representative or the Department of Commerce, often prodded by  special interests within the United States, brings an accusation against a foreign country; there is then a review process --- involving only the US government --- with a decision made by the United States, after which sanctions are brought against the offending country. The United States set itself up as prosecutor. judge, and jury. (p. 62)

But in Asia other theories abound, including a conspiracy theory that I do not share which views the policies either as a deliberate attempt to weaken East Asia --- the region of the world that had shown the greatest growth over the previous forty years --- or at least to enhance the incomes of those on wall Street and the other money centers. One can understand how this line of thinking developed: The IMF first told the countries in Asia to open up their markets to hot-short run capital. the countries did  it and money flooded in, but just as suddenly flowed out. The IMF then said interest rates should be raised and there should be a fiscal contraction, and a deep recession was induced. As asset prices plummeted, the IMF urged the affected countries to sell their assets even at bargain basement prices. It said the companies needed solid foreign management (conveniently ignoring that these companies had a most enviable record of growth over the preceding decades, hard to reconcile with bad management) and this would only happen if the companies were sold to foreigners --- not just managed by them. The sales were handled by the same foreign financial institutions that had pulled out their capital, precipating the crisis. These banks then got large commissions from their work selling the troubled companies or splitting them up, just as they had large commissions when they had originally guided the money into the countries in the first place. As the events unfolded, cynicism grew even greater: some of these American and other financial companies didn't do much restructuring; they just held the assets until the economy recovered, making profits from buying at he fire sale prices and selling at more normal prices.

I believe there is a simpler set  of explanations --- the IMF was not participating in a conspiracy, but it was reflecting the interest and ideology of the Western financial community. (p. 130)

They studiously ignored the advice of Russian scholars, whether they were experts in its history, economics, or society, for a simple reason: they believed that the market revolution which was about to occur made all the knowledge available from these other disciplines irrelevant. What the market fundamentalists preached was textbook economics --- an oversimplified version of market economics which paid scant attention to the dynamics of change. (p. 138)

Comment: Economic theory matters. What taught at schools are simply wrong!