John Cavanagh and Robin Broad, Foreign Policy in Focus, 25 September 2008
Beginning in the 1980s, a “Washington Consensus” that free markets were the solution to poverty dominated development theory, policy, and practice around the world. Today, just as faith in deregulated markets has evaporated in the nightmare on Wall Street, so too is the long reign of market fundamentalism (or neoliberalism) ending in the development arena. And, a debate over the best route to development — a debate that was vibrant in the 1970s and earlier — has returned. Various phenomena account for this. We highlight these below, along with some of the alternative approaches that are springing up around the world.
Crises at the World Bank, IMF, and WTO
In mid-2007, a New York Times article started with words that would have been unimaginable in the mainstream press even a half-decade earlier: “[T]he entire international economic architecture established after World War II — the World Bank, the International Monetary Fund and what is now called the World Trade Organization — is buckling under the weight of globalization, trade disputes and the ambitions of rising economic power in Asia and elsewhere.”
Why are the multilateral financial and trade institutions that have served as the key public levers of the Washington Consensus so significantly weakened? As chronicled in our new book Development redefined: How the market met its match, adverse impacts of their policies — and the arrogance and recalcitrance of these institutions — over these past decades have sparked public opposi tion around the world. This became even more widespread after their spectacular failure in the Asian financial crisis. In addition to their crises of credibility and legitimacy, the World Bank and the IMF are now experiencing financial difficulties as countries bypass their resources and turn instead to China, Venezuela, and other new donors for loans, often less encumbered by onerous conditions.
The World Bank, desperate to keep middle-income clients from which it earns income, has announced plans to reduce interest rates on its loans to them. The Bank liberally deploys the rhetoric of its critics, from poverty reduction to more consultation with the public to an acknowledgment of the necessity of governments. Its structural adjustment loans have been relabeled “anti-poverty loans” and “development policy support” loans. But those changes are largely cosmetic. A report by the European Network on Debt and Development, for example, discovered that — contrary to the Bank’s claim that Washington Consensus polices no longer dominated its conditionality — the Bank “is still making heavy use of [such] economic policy conditionality, especially in sensitive areas such as privatization and liberalization.” In addition, the Bank has suffered stinging external critiques about the objectivity and reliability of its research — especially that related to economic globalization and its purported undisputed proof that liberalization causes economic growth.
In 2007, the World Bank’s self-advertisement that it stands with the poor and against corruption came under particularly heavy public ridicule during a protracted internal dispute (turned media frenzy) over then president Paul Wolfowitz’s overly generous pay packages for his partner (a World Bank employee) and his top deputies (most, like himself, neoconservatives who came out of the Bush administration). This scandal heightened the criticism of U.S. power in the Bank, the inequitable voting structure, and the 60-year-old “tradition” whereby the U.S. government selects the Bank president and Europeans pick the head of the IMF.
The International Monetary Fund is in even more dire shape than the Bank. After the disasters of the Asian financial crisis demonstrated the Fund’s ineptitude, the Fund’s next moment of truth began in 2001-2002, when its long-time model client Argentina faced economic collapse, defaulted on many of its debts, changed course as it rejected IMF prescriptions, and went on to grow rapidly in the ensuing years. As USA Today phrased it, “by defying the conventional economic wisdom…and shunning the…International Monetary Fund,” Argentina became “Exhibit A for those who doubt globalization’s one-size-fits-all policy prescription.” Other IMF clients became so keen to get out of the Fund’s grasp that they are paying back in full and in advance. Indeed, in 2007, the bulk of the Fund’s outstanding loans were to Turkey, leading The Economist to call it the “Turkish Monetary Fund.” The irony of the long-time lender-of-last-resort and manager of financial crises being in its own financial crisis has not been lost on observers.
Thus both the Bank and Fund stand today as significantly weakened institutions, but both are desperately trying to regain credibility, legitimacy, and power.
In 2007, in a shrewd move, the Bush administration chose Washington Consensus backer and former U.S. trade representative Robert Zoellick to head the Bank. Zoellick already has at least one victory for the Bank under his belt, having successfully convinced governments to put new resources into its lending facility for the very poorest nations (the International Development Association). More controversially, he has broached the idea of accepting contributions from corporations and foundations — a move that would call into question the public character of the Bank. And the Bank is attempting to place itself center stage as the public institution to address the climate crisis, notwithstanding the hypocrisy that it still pours billions of dollars annually into fossil-fuel loans.
So too is the IMF trying to remake itself. Soon after Dominique Strauss-Kahn took over as IMF managing director in 2007, he admitted that the institution is struggling with relevance and mandate (“[I]t is a factory to produce paper”) and announced plans to deal with the Fund’s financial shortfall, in part by a large-scale cut of staff. Fund officials are deeply worried that when the next financial crisis erupts, poorer nations might bypass the Fund altogether and turn to emerging regional institutions for short-term finance. As Strauss-Kahn acknowledged to The Wall Street Journal: “The legitimacy of the IMF relies upon the capacity to have everybody on board, including those countries with which there have been problems in the past.”
This recent weakening of the Bank and Fund is correlated with a weakened ability to use the Third World debt crisis to impose Washington Consensus conditions on poorer nations — a decided change from a quarter-century ago. Indeed, many larger and faster growing poorer nations have escaped Bank and Fund surveillance by building up foreign exchange reserves and finding alternative sources of finance. But, one has to be careful not to generalize. Many smaller, indebted, poorer nations, especially in Africa, are still burdened with external debt and remain dependent on Bank and Fund loans and subject to their strictures. That is especially true of countries dependent on importing increasingly expensive fossil fuels and food. Even here, however, there are notable exceptions: some of the poorest countries have qualified for debt relief (but with conditionality attached); others have found alternative sources of funding (witness Bolivia).
And some have dared to challenge Bank dictums. In a case that is subjecting the Bank to criticism and embarrassment akin to what the Fund faced on Argentina, Malawi has reacted to a crisis in its domestic corn crop and impending famine by reinstating fertilizer subsidies that the Bank had pressed it to slash. The result? In 2007, Malawi is not only feeding its own population but also exporting corn to Zimbabwe.
Additionally, the global trade body, the WTO, stands on the verge of failure to complete a new round of trade rules. Negotiations have broken down many times since the 2001 launch of the so-called Development Round (or Doha Round), including in late 2007. What is clear is the inability of the United States, Europe, and Japan to control trade negotiations as they once did. Part of the challenge comes from the strengthened voice of some Southern governments. Part is from the growing sophistication of civil society groups in critiquing the proposals. The WTO’s credibility as an institution representing interests of rich and poor alike is also under broad attack, with growing acknowledgement by insiders and outsiders that the likely gains from a new trade round are less than previously hyped, and that most of the gains will likely stay in the North. A Tufts University study brought attention to World Bank data showing a “likely scenario” from the negotiations of Southern “gains” of only $6.7 billion versus Northern gains of $31.7 billion — or, in more stark terms, an average of “less than a penny a day for those in the developing world.”
The waning power of the Bank and Fund and the paralysis of the WTO negotiations have re-created some of the policy space that the Consensus had taken away. The debate is out in the open; more are acknowledging that the emperor has no clothes.
The Development Debate Returns
Let’s be very clear: market fundamentalism has not disappeared. There are still some stalwart defenders of the Washington Consensus, and Jeffery Sachs’s and Thomas Friedman’s new offshoots of the religion still attract converts. There are some who still feel that markets are the sole route to prosperity; these individuals argue for minor tinkering of the Consensus, but want to leave it largely intact. Nor is it easy for Southern governments to break with the Consensus or its institutions: Brazil, led by a former metalworker and union leader, has shown how hard it is to shake neoliberal policies as his government has continued to pursue export-oriented industrialization and agribusiness. Moreover, there are still many poorer nations (particularly in Africa) that remain mired in debt and dependent on international financial institutions, with seemingly little space to maneuver away from Consensus prescriptions. The World Bank, IMF, and WTO desperately search for redemption and new roles. Global corporations remain powerful actors on global stages; many look to expand sales by draping themselves in eco-friendly rhetoric.
These caveats notwithstanding, the public institutions that were the main enforcers of the Washington Consensus are in crisis, and the legitimacy of market fundamentalism is severely diminished. The renewed energy that the Consensus received from the terrorist attacks of September 11 proved to be relatively short-lived, weakened in part by the ineptness of the George W. Bush administration’s overall response to terrorism. Almost none of the participants in the development debate of today would argue that the market alone is enough. The curtain has been pulled away to expose the inflated pretensions of neoliberalism; the little man who was the Wizard of Oz is revealed for all who are willing to look.
Significantly, debate has even found its way back to academic economists. As The New York Times phrased it in a title to a 2007 article: “In Economics Departments, a Growing Will to Debate Fundamental Assumptions.” In that article Robert Reich, a former cabinet minister in the Clinton administration, explained: “Economists can’t pretend that the consensus for free markets and free trade that existed 30 years ago is still here.”
Daily, new forces rise to challenge the Consensus and create alternatives to it. No longer can Consensus backers claim that “there is no alternative.”
Alternatives in Action
Although there are many different proposals, most alternative projects have as a common starting point a redefinition of development. Most groups in the movement prioritize the fulfillment of people’s basic social, economic, cultural, and political rights. They measure progress in terms of the improved health and well-being of children, families, communities, democracy, and the natural environment. Rather than a linear “takeoff,” development in this view involves the redistribution of political power and wealth down ward. A team of researchers from richer and poorer countries (including the authors) affiliated with the International Forum on Globalization worked collectively — discussing and debating — to distill the alter-globalization movement’s principles in Alternatives to Economic Globalization: democracy, ecological sustainability, subsidiary (favoring local production), protection of common resources (such as air, water, and parks), human rights, food security, equity, and cultural and biological diversity.
These goals are important, but part of what is exciting is that alternatives in action — which build on the above principles — abound. In the introduction to this book, we outlined how in the 1960s and 1970s, alternatives took shape at local (Tanzania’s self-reliant villages), national (import-substitution industrialization by Brazil and other countries), regional (the common markets), and global (New International Economic Order) levels. The same is true today, although there is a crucial difference between that era of debate and different paths of development, and the period we are entering now: the actors involved. In the 1960s and 1970s, the key actors pressing for change were largely Third World governments, energized by key intellectuals with a clear framework for change. Today, the dynamism for change is coming much more from social movements and citizen organizations, which are both creating alternatives and pressing governments and global institutions for change. In the words of Oscar Olivera, the Bolivian activist who has led several campaigns to keep municipal water systems out of the hands of global corporations, “[T]he true transformational power of life resides in people’s capacity for organization and mobilization.”
Many citizen groups and governments are also rethinking aid and open markets, which neoliberalism so single-mindedly promoted. In the Philippines and several other countries, citizen groups have set up innovative structures to channel aid money to endow foundations, which in turn fund small-scale, grassroots projects that often help local groups control and manage forest and fishing resources in a sustainable manner. On the debt front, Ecuador appears to have launched a significant initiative in 2007 by setting up a National Debt Audit Commission tasked with “establish[ing] the illegitimacy and illegality of the debts claimed of the Ecuadorean government and to recommend measures for securing justice and reparation.”
The “fair trade movement” seeks to bypass global corporations and set up alternative trading arrangements that discourage sweatshop working conditions and environmental destruction while ensuring that benefits remain local. This includes product labeling initiatives that let consumers know that rugs have been produced without child labor (RugMark), T-shirts have been sewn by workers paid a living wage (No Sweat), and wood products have been made from timber that was harvested in a sustainable manner (Forest Stewardship Council). Numerous outlets — from Equal Exchange in Massachusetts to Dean’s Beans — now sell “fair trade” coffee from Latin America, Africa, and Asia that has been certified by a third-party monitor. There is even fair trade music.
Note: This is an excerpt from Development redefined: How the market met its match, a book by Robin Broad and John Cavanagh recently published by Paradigm Publishers.