The Fallacy and Failure of Neo-Liberalism: Any Lessons from
the “Chilean Miracle”?
by Tesfaye Habisso, July 18, 2010
Historically, development economics offered several theories
to developing economies in the 1950s and 1960s the application of which was
intended to enable them to overcome the problems of low growth and high
poverty. Briefly, prominent among them were the theories of development
advanced by ‘the so-called pioneers of development economics,” such as Clark
(1957), Hirschman (1959), Lewis(1956), Nurkse (1953), Myrdal (1968), Prebisch
(1969), R. Rodan (1964), Lebenstein (1963), Rostow (1960), Singer (1966), and
Tinbergen (1958).
Though these theories differed considerably within
themselves, there were certain unmistakable commonalities: they all recommended
an inward looking development path with a leading governmental role in the
growth process. As regards the industrial sector, they recommended an import
substitution based industrialization (ISI) policy that encouraged the promotion
of production of goods that substituted for imports, control of imports from
outside and relative neglect of exports. However, the overall outcomes of these
strategies were not encouraging in the sense that these developing economies
which pursued this path did not experience a consistent high growth or drastic
reduction in their poverty levels. These theories were therefore challenged in
the 1970s and 1980s by what is now called the counter-revolution in development
economics.
The major attack of the counter-revolution was on the key
role of the government in development and on the neglect of the market which
was seen as an efficient allocator of resources at the macro level and minimize
of production costs at the micro level. The counter-revolution viewed
government as ineffective in achieving objectives, counter-productive with
undesirable side effects and excessively costly as well as a breeding place for
immense corruption. In other words, on the one hand, the government failed to
deliver the goods particularly in trade and industry, while, on the other hand,
the neglect of the market forces led to the neglect of competition with
implications for efficiency and incentives.
The supporters of the counter-revolution therefore predicted
the collapse of the earlier generation of theories and victory for the
neo-liberal paradigm. The latter paradigm views the state as “bungling, blundering and botching” and
the market as an efficient allocator of resources, provider of incentives and a
vehicle of growth [Srinivasan 1994, Auroi 1995, Singh 1994, Smith 1995, World
Bank 1991, Amdsen 1989, Hill 1996]. The role of the state under the new
paradigm therefore has to be mainly market friendly—to facilitate the
functioning of the markets. That is, the state is expected to manage a stable
macro framework, ensure competitive markets, invest in human capital and
arrange safety nets for the poor and the weak. Vigorous competition in free
markets is expected to be the key to prevent the concentration and abuse of
economic power [Srinivasan 1994]. In the field of industry policy the new
development paradigm recommends the promotion of export-led industrialization
[ELI] in the place of import substitution based industrialization [ISI]. That
is, instead of putting trade barriers to protect domestic import substituting
industries, it recommends the promotion of export-based industries that would
lead to competitive efficiency in the exporting industries, on the one hand,
and the pattern of industrialization based on comparative advantages of the
country, on the other hand. This is the paradigm which is accepted and
recommended for the world economy and for national economies as a solution to
the ills of both the developed as well as the developing economies. This paper
is aimed at unraveling the essentials of neo-liberalism as an ideology and its
dismal failure in bringing development in the developing economies. It will
also briefly deal with the so-called “Chilean Miracle”, a test-bed case for the
fallacy of neo-liberalism in its application on a developing economy. A brief
backgrounder will also be given on what went wrong with the ideology and on
what works for developing economies in the Third World, its implications
and raison d’etre for the ascendancy of
the developmental state in late industrializing countries of the Third World,
in South East Asia, Latin America and Africa. The need for the latter countries
to move towards a developmental state as well as the lessons of the “East Asian
Miracle” will be, hopefully, dealt with in subsequent weeks.
"Neo-liberalism": Clarifying the Essentials - What Is It? What
Does It Mean?
The term stems from the original "liberal" economics of Adam
Smith, who published his "Wealth of Nations" in 1776, the same year
that the American revolution began in earnest. In that seminal classic, the
first to really adequately describe the functioning of market economics, Smith
argued that markets work best when there is minimal interference from
government, and that neither government, nor market players with any
significant share of power, should be allowed to interfere with the "unseen hand" of the free market.
What "neoliberals" do not
understand, and very few are aware of, is the fact that Adam Smith mentioned
limited liability corporations only twelve times in "Wealth of Nations," and each time, he made it clear that
his views did not favor them. In fact, he viewed transnational corporations
(such as the East India Company, one of the largest trans-nationals of his day)
with considerable mistrust and even alarm. He'd seen their behavior in India
and the American colonies, and wanted no part of those abuses which had played
no small part in bringing about the American revolution itself, through the tax
concessions it had won from the British crown at the ruinous expense of
American colonial competitors. Smith felt, as did most of his contemporaries,
that markets function only when populated by large numbers of small,
preferably local players, who are kept free of the
restraining influence of powerful corporations, monopolies and excessive
governmental intrusion.
The Founding Fathers of the American revolution had seen the
abuses of the East India Company, and shared that mistrust. Laws were enacted
throughout the colonies that limited what corporations could do, what size they
could achieve, and how they could behave in the market, and most importantly,
for how long they would remain enfranchised. Yet the money made by corporations
supplying the war effort in the Civil War gave them the money and power they
needed to get those laws changed. The first to succeed in doing so was the
Union Pacific Railroad, in 1867. Chartered for the purpose of building half of
a transcontinental railroad, it was also the first to use bribery, influence
peddling, stock "watering," laying shoddy track only to qualify for
the subsidies for which it qualified, and a host of other corporate abuses,
still seen today. But its power had grown to the point where the abuses were
largely unstoppable, largely as the result of misinterpretation of the U.S.
Supreme Court decision in Santa Clara County vs. Southern Pacific, in which it
was incorrectly assumed that the Supreme Court granted corporations the rights
of "natural" persons. Other entrepreneurs, seeing the UPRR's success,
and Southern Pacific's new legal rights, emulated them both with a series of
other large limited liability corporations, and by the end of the 19th Century,
those entrepreneurs had become known as the Robber Barons. Wealth became so
concentrated in such few hands that it hobbled the economic growth of the
nation in what became known as the Robber Baron Era, or The Guilded Age.
By the Great Depression of the 1930's, it had become
apparent that unrestrained free markets had some serious flaws. First, the
unrestrained accumulation of wealth brought with it the unrestrained
accumulation of power - railroads were, for example, literally buying and
selling corrupt state legislatures and U.S. senators among themselves as if
they were commodities. The abuses of the Robber Baron Era had brought with it a
replay of the abuses of the East India Company a century earlier and created in
the popular mind an understanding of the need to rein in the power that the
unrestrained concentration of wealth could bring. Second, it had become obvious
that there were certain functions that simply worked better when government ran
them; road networks were the first, as it was obviously impractical to have to
pay tolls to every property owner along a thousand miles of road. Second was
the postal system. Chaos would rein if one had to buy a stamp for every private
mail operator a letter might have to be handled by, so a single, unified postal
system made a lot of sense. Water supplies and sewage and garbage collection
were other examples. In a later era, electric power and telephone utilities
would also arise as problematical, when streets were being rendered constantly
impassible by continuous construction being done by one utility company after
another. Some streets were left dark at noon by the forest of telephone wires
from different, competing companies on overhead cables and wires.
Additionally, it became apparent that if private banks were
allowed to freely control the money supply without any restraint, that a
continuous cycle of boom and bust, caused by monetary inflation and contraction
were inevitable. These business cycles had wreaked havoc and had caused much
misery throughout the 19th century, and into the 20th, leading to the overwhelming
misery of the Great Depression. What to do about it?
Into that gap of understanding stepped John Maynard Keynes. Keynes explained that government had a
legitimate role in economic management, and in the regulation of "natural
monopolies," whether by direct ownership or by tight regulation of private
ownership. By engaging in deficit spending during contractions, and running
budget surpluses during inflation, business cycles could be reined in and the
misery of business panics could be avoided. Further, he argued among other
things that business cycles had the effect of transferring vast sums of wealth
from the poor to the rich, as a result of the fact that the poor had few means
of defending themselves from the effects of a business panic or a monetary
inflation, and the rich not only could defend themselves, but could even
exploit the business cycle. This is why unregulated markets always created
societies with a tiny, rich elite and a vast, dispossessed lower class.
Keynes' ideas became known as "Keynesian economics." They became the cornerstone of
Franklin D. Roosevelt's policies in dealing with the effects of the Great
Depression. Roosevelt could see that the Crash of '29 had transferred truly
vast amounts of wealth from the poor to the rich, leaving a whole nation
impoverished, and so he sought to tax that wealth and allow access to it by
means of government make-work policies. The idea was to not only create a
middle class, but transfer most of the poor into it my providing them the
opportunities to uplift their circumstances. In doing so, he earned the undying
enmity of the wealthy, whose money he was taxing to pay for it. They sought
their revenge. They got it by the "invention" of "neo-liberalism."
"Neo-liberalism" is not based on Adam Smith, as is often claimed for it by
the libertarian propaganda, but is, in reality, based largely on the ideas of
an Austrian economist, Friedrick Hayek, who had written in the 1930's that the
control of an economy by a government is the "road to serfdom," as he
titled his treatise. Asserting that human rights sprang from property rights,
he claimed that a society could be no more free than its economy. The two
principal failures of his analysis, were of course, first, the premise that
human rights are a function of property rights, and that a society that planned
its economy was doomed to serfdom. What Hayek never considered is that the
obverse of such a policy is obviously that someone who has no property, has no
rights, which means that person is, quite obviously, vulnerable to the very
serfdom that Hayek claimed to fear. Witness the millions in debt-slavery in
India and much of the rest of the world - the very serfdom that Hayek claimed
to be repulsed by. The second major error was the assumption that corporations
were entitled to the same property rights as individuals, and yet somehow
deserved an exemption from liability that individuals do not enjoy - a basic
inequality of rights. But nevertheless, his ideas had a great deal of resonance
among social libertarians, who were highly enamored of an economic theory that
corresponded to their social theories. It also found additional resonance in
the writings of the Russian philosopher and popular novelist, Ayn Rand, and
became the basis of her philosophical celebration of what can only charitably
be described as selfishness.
The conservatives of the Republican Party in the U.S. in the
1960's and 1970's used that period of slow economic growth as a means of
persuading policymakers that Keynesian economics had somehow failed, and that
only a turn to the deregulation advocated by Hayek could solve the problems of
"stagflation" that had become such an intractable problem. So,
claiming that Keynes was dead, "neoliberal economics" was born,
brought to life in America by a bald, mousy-looking economist from the
University of Chicago, by the name of Milton Friedman. Friedman knew that
Hayek's ideas were functionally anti-egalitarian, regardless of the title of
his most famous book, yet Friedman privately, but freely admitted that he was
not an egalitarian and didn't care about fairness. This made him the instant
darling of the "neo-liberals."
Friedman was the undying, sworn enemy of Keynesian
economics. He widely publicized what he considered to be a need to return to
the "unseen hand" of the market to cure the "stagflation"
of the time. His ideas were exactly what the right-wing rich elites needed in
an economic theory. It was simple, easy to understand, superficially reasonable
and logical, and above all else, suited their need for an economic theory,
which, if implemented, would enable them to accumulate wealth and thereby
transfer its accompanying power to themselves without restraint. It suited
their desire for revenge and their greed and avarice beautifully. Friedman very
quickly became their darling, lavishly gifted, and being driven around the
University of Chicago campus in a chauffered limousine. Paul Samuelson,
Friedman's long-time rival and the principal advocate of careful, sensible
regulation of business and government intervention in the market in the
Keynesian mold, tirelessly warned of the anti-egalitarian dangers of Friedman's
approach, but amidst the propaganda, he was largely forgotten, even though it
was his ideas that had not only prevented a return to business cycles, but had
created a vast middle class in America in just a couple of decades following
world war II. And ultimately, it was Samuelson's ideas which in the end saved
the Chilean economy.
The "Neo-liberal" Chilean Miracle
The "neoliberals" needed a test-bed to
"prove" their ideology and refine their repressive methods. And since
Chile had just been handed to an American stooge, Augusto Pinochet, he was recruited
to try them out and see how well they worked. The idea wasn't really to
actually test them, as much as it was to create the illusion that they worked,
whether they actually did or not, so they could be sold everywhere else in the
world under a variety of labels: "neo-liberalism,"
"free-market economics," "libertarian economics" and
"the Washington Consensus."
Most objective economists knew quite well from the beginning that they wouldn't
work in the long run and many said so publicly, but were quickly shouted down
in the intellectual coup-de-etat of the Ronald Reagan years.
There were five cardinal points of "neoliberal"
agenda that were and are to be implemented wherever it was or is to be
implemented, beginning in Chile. They include:
·
The
supremacy of the free market.
The market was to rule supreme, unrestrained by the intervention of government,
labor unions, or anything else (other than corporate monopoly power) that
constrained the operation of market forces, regardless of how much social
disorder, suffering or exploitation results. Any undesirable effects are to be
ascribed simply to "unidentified interventions" which, when they were
identified, could be eliminated, and the problem solved thereby. Monopolies
were simply assumed, against all evidence, to be self-limiting (though no one
ever managed to explain how DeBeers Consolidated Mines had managed to create
and maintain a worldwide monopoly on the diamond business for more than a
century).
·
Cutting,
and eliminating when possible, expenditure for social services. Again, in the name of reducing government interference in
the market, it was not necessary for government to involve itself in social
welfare programs. To explain the obvious suffering that results, it is
therefore claimed that when the poor suffer, it is due to their own laziness
that they do not better themselves. That the accumulation of money was
equivalent to the accumulation of power, with its attendant distortion of the
functioning of the market, was not a concern. That this led inevitably to the
disempowerment of the poor was not a concern - the poor were blamed for their
condition by claiming their "inferiority" or "bad
decisions." Social justice was a non-issue.
·
Deregulation. If government is interfering in the market, it will only
lead to a loss of profits, and therefore, government regulation had to be
assumed to be bad. Therefore, it has to be reduced or eliminated, even in monopolistic situations.
One neo-liberal, Grover Norquist, an official in the George W. Bush
administration commented that he wanted to reduce the size of government to the
point where he "could drown it in the bathtub" - and then go on to do
so.
·
Privatization. Since government is assumed, as a given, to be inefficient,
lazy, bloated and uneconomical in the provisioning of goods and services, it
was only reasonable to presume that private enterprise could and would perform
the delivery of services in a more efficient manner, and hence any activity
that delivers goods or services to citizens should and must be privatized.
Never was an explanation offered for the contrary incentive of capitalism - that
the capitalist's basic profit-driven incentive is to charge as much money as
possible for providing as few goods and services as possible.
·
Elimination
of the concept of "Community" or the "Common Good." Since this is antithetical to the notion of privatization
and "rugged individualism," the concept of the commons (the air we
must all breathe, the water we must all drink, etc.) to them, reeks faintly of
Communism, it is assumed to be bad, wrong, and hence is oppositional to the
"neoliberal" agenda. Such notions as public health, public education,
etc., are to be replaced by private initiative, as anything else is simply
considered to be a manifestation of lassitude, indolence and governmental
dependence.
Pinochet allowed Milton Friedman and his cronies,
principally Arnold Harberger, along with a small clique of Chilean
"neoliberal" economists to implement this "neoliberal"
agenda. Here was Friedman's chance to prove himself right and Samuelson wrong.
Friedman was given a more-or-less free hand to implement whatever economic
reforms he deemed needed, and Friedman did so with a vengeance. In a quick
succession of reforms, the collective-bargaining law was abolished, essentially
eliminating the influence of labor unions. The minimum wage law was abolished. The
Social Security System was privatized, by being evenly divided among six
companies, each to compete with each other. Public assets were sold, often at
bargain basement prices, to whoever would buy them.
On the political side, Pinochet did his part by rounding up
any opponents of the "neo-liberal" agenda. Anyone who questioned the
wisdom of the reforms being implemented by the "Chicago Boys" was
swiftly rounded up and, as often as not, never heard from again. Trade union
organizers, economic justice advocates, Leftists and anyone else who objected
to the reforms began to disappear. By the end of his regime, Pinochet was
responsible for the deaths of at least 3,000 people and the disappearance of
many thousands more.
Gradually eliminating their political competition within the
military and civilian bureaucracy, the Chicago Boys had, by 1975, accumulated
enough political capital to implement their program pretty much as they
pleased. They began a series of far-reaching reforms - which they called "shock treatment" - which
included devaluing and floating the currency, steeply increasing interest rates
and slashing tariffs to counteract the inflation that the devaluation would
have caused, while greatly reducing public expenditures. They abolished all
taxes on wealth and business profits, and began slashing government workforces,
including selling off any and all state-owned enterprises.
Social reforms included school choice, labor law reform,
social welfare reform, and many other similar proposals that would be instantly
familiar to current American conservatives as part of their own agenda. The
effects, however, were exactly what American social liberals had predicted - a
generalized increase in poverty, disease, homelessness, and a general spread of
squalor, unrest and disaffection - all effects that were of no concern whatever
to the Chicago Boys.
The land reforms carried out by the two previous
administrations, including Allende's, were also reversed. But the reversals
were not to restore the land to its previous owners, but rather to consolidate
ownership of it for the use of export-oriented corporations. The slogan was
"the three 'F's,' fruit, forest products and fish." Never mind that
those whose land had been expropriated were not compensated or offered other
means of employment. They were left to fend for themselves, swelling the ranks
of the already previously dispossessed, former members of the working class who
had worked, often for years, in the newly-abandoned factories, and were left
with nothing.
The Chicago Boys began privatizing anything and everything
in sight - 212 state-owned enterprises in all, including utilities - resulting
in steep rises in utility costs, transportation costs and health care costs for
ordinary Chileans. The banks were an especially interesting case. The Chicago
Boys convinced Pinochet that freeing the banks from government regulation would
attract foreign investment, and competition would enforce fiscal discipline and
honest accounting. So in a case of deregulation gone berserk, the general sold
off all six state-owned banks to the first comers. They quickly fell into the
hands of two speculators, Javier Vial and Manuel Cruzsat. These two then
promptly used the banks as collateral on loans obtained from foreign sources to
buy up local industrial enterprises. Disposing off these enterprises to foreign
companies generated more cash, which Vial and Cruzsat then used for even more
leveraged buyouts, and as the end approached, these go-getters got themselves
gone. It was a classic Ponzi scheme. Soon, Chileans faced the problem of having
no trustworthy banks at all through which they could conduct banking
transactions.
Freed from the heavy hand of bureaucracy, business
regulation, taxes and public-owned enterprise, the economy took off - right off
a cliff and into a severe recession. The slowdown had the predictable effect on
Chile's industrial sector, resulting in massive layoffs and reduced economic
activity. Suddenly, Chile's large and prosperous middle class found itself
facing huge unemployment increases, rapidly falling salaries and rapidly
increasing living costs.
The economic performance of the Chilean economy after the
application of the "shock
treatments" was anything but impressive. While there were three short
bursts of impressive economic growth (which were impressive mostly because they
were really just periods of recovery), they were interspersed with the classic
steep, sharp, much lengthier contractions, which simply added to the growing
misery of the poor and the former middle class. The later recessions, the last
of which synchronized with world-wide recessions, were exacerbated by the
liberalization of trade policies, making it more difficult for local industries
to compete, either locally or internationally. Add to that the banking collapse
caused by the privatization of the banking system, created widespread problems
with credit, especially for the poor, and the stage was set for economic
failure. Blood and glass began to litter factory floors throughout the country.
Real economic output declined by a full 19% in 1982 and 1983 alone. The Chicago
Boys, in classic Orwellian doublespeak, declared the results a terrific
success, in spite of the remarkably poor metrics. The U.S. State Department
seemed to agree, declaring "Chile is a casebook study in sound economic
management." Ronald Reagan's propaganda machine was also highly
supportive. Almost no one questioned it when Art Laffer, a Reagan protege and
colleague of Milton Friedman, coined the phrase, "The Chilean Miracle,"
and stated that Chile is "a showcase of what supply-side economics can
do" [Palast]. It certainly was for
those who bothered to look.
Back in the streets of Chile, things hadn't been a miracle,
they'd been a disaster. It was the results of the privatization of the banks
that proved to be the last straw for the Chilean people. By 1982 the pyramid
scheme being run by Vial and Cruzsat had collapsed, leading to the foreclosure
of the banks and the complete loss of the meager savings of millions of Chileans,
and surplus labor led to their inability to live day to day on their rapidly
falling salaries. Riots and demonstrations by people so desperate they no
longer feared bullets forced Pinochet to reconsider the Chicago Boys and their
failed economic policies which had simply been re-creating the boom-bust cycle
that had caused the hated Keynes to formulate his theories of government
intervention in the first place five decades earlier. Pinochet demanded and got
the resignation of his economics minister, Sergio de Castro. It was a sign that
the Chicago Boys had fallen from grace. The dictatorship quickly moved to
re-nationalize the banks to keep them afloat and prevent a liquidity crisis and
economic downturn from turning into a complete wholesale economic collapse. He
moved swiftly to re-impose some of those policies most hated by his supporters
- a minimum wage law, a restoration of colllective bargaining rights and a
jobs-creation program to create 500,000 new jobs. The newly privatized pension
schemes were also being run like pyramid schemes, and were on the brink of
collapse. To save them, he imposed stringent new regulations concerning their
operations. To save the economy, Pinochet embarked on a nationalization scheme
that would have left even Allende breathless - he expropriated at will,
offering little if any compensation for what he nationalized. Much of what he
appropriated would eventually be slowly re-privatized, much more carefully this
time, but the very symbol of Chile and the mainstay of its foreign exchange
earnings - the copper industry - would remain in state hands. Going even
further, Pinochet instituted a law - still in force - that gives the military
10% of the revenues from the copper production. All this caused Pinochet's
critics to quip that he'd embarked on "the Chicago Road to
Socialism." The Chicago Boys were summarily dumped on a plane to Chicago -
and told they weren't going to be welcomed back anytime soon.
But Pinochet's new economic team still included the Chilean
"neoliberals," however. They continued to push for the
"neoliberal" agenda, mostly as a result of the fact that the generals
were in power in Chile because the Reagan administration in Washington wanted
them to be, and because Reagan was a "neoliberal" himself and insisted
on these policies. So those that caused only mild discomfort, if not the ones
causing huge disruptions, remained in place. To this day, Santiagoans ride city
buses run by private companies, and put up with delays, bad service,
disruptions and dirty equipment, rather than the clean, efficient and well-run
buses they had before. But at least they can now confidently put their money in
regulated state banks.
A Second Look
By 1988, Pinochet had convinced himself that the country and
his institutionalizaton of the reforms he had instituted were ready for the
plebiscite. In an act of hubris so typical of right-wingers and the neoliberal
ideologues, he held the plebiscite, confident of victory. The only problem was
that he lost. Even with all the spoiled ballots and stuffed ballot boxes, the
refusals to vote, the vote rigging that was rampant, Pinochet still could not
claim a majority of the votes cast. He had to admit to defeat. It was a bitter
pill for the old man to have to swallow. His neo-liberalism, as well has his
right-wing authoritarianism, had made him the most hated man in all of Chile.
The people of Chile had had enough of Pinochet and his
"neo-liberalism," yet they were saddled with a constitution that
virtually institutionalized both Pinochet and what "neo-liberal"
reforms remained. So even though he was officially gone, he was still the power
behind the scenes, and everyone knew it.
Now, twenty seven-odd
years on, we can see the long term results of "neoliberal" economics:
From the beginning of the reforms of the Chicago Boys in 1973 through 1986,
there was no economic growth. Real mean salaries, adjusted for inflation, have
declined by 10% since 1986 and by 18% from what they were during the Allende
years. Median salaries have fared even worse, declining by 30% over the same
period, signaling a torrent of wealth from the poor and middle class to the
rich. When Allende was in power, less than 20% of the country lived in absolute
poverty; by 1990 40% did. That figure has remained largely constant since. A
third of the nation now survives on less than $30 per week. Some miracle,
indeed!.
Enthusiastic supporters of the Pinochet reforms like to
point out that since 1986, there has been a 7 percent annual growth rate; what
they fail to mention is that this occurred only
after 1986, after privatization of the banks was reversed, and collective
bargaining rights and minimum wage laws were restored; after jobs-creation
programs were instituted and privatization of the principal source of foreign
exchange was reversed. And they fail to point out that all of that additional
wealth has gone into the pockets of the few; the middle class and poor have
seen none of it. The much-ballyhooed privatized Social Security system, which
is being held up as a model for the United States to follow, is seriously being
considered for re-nationalization, since the public system that runs alongside
it is producing vastly better results (almost twice the benefits of the private
systems). When it was privatized, those who opted to remain in the public
system are sure glad now that they did.
Yet the remaining "neo-liberal" reforms continue
to bite. The reforms are the reason why nearly all of that much ballyhooed
annual growth has gone straight into corporate profits that benefit the rich,
and less than ever into the pockets of the poor and working classes - note the
declining median income as mentioned above. Milton Friedman and his Chicago
Boys are quite well aware of this, but simply don't care, because social
justice is not their concern. All that matters to them is the increase in Gross
Domestic Product - evidence of economic growth. The fact that it the increase
is going entirely into the pockets of a tiny handful of the rich, suits him
just fine. Remember, in his view the wealthy are wealthy because they deserve
to be - and the same for the poor. As he often said, fairness was not an issue
for him - the theory is apparently more important than the results of the
theory - in other words, it was a religion, not a science.
Consider that even in the United States, which is hardly a
paragon of equitable wealth distribution, 60% of economic output goes into
wages, and 40% into corporate profits. Yet in Chile, those numbers are exactly
reversed. Chile now rates as the seventh worst nation in the world for equality
of wealth distribution - tied with Kenya and Zimbabwe. Nearly all of the wealth
being generated by the 7% growth rate is going straight into the pockets of a
tiny number of the elite - and the only construction boom in the country in the
last fifteen years has been going on in the very richest suburbs of Santiago.
The Salvation of Chile
The salvation of Chile, then, to the extent it has had one,
clearly wasn't Pinochet, nor was it the Chicago Boys. It was a recognition by
Pinochet, however reluctantly, and in however limited a fashion, that the
"neo-liberal reforms" had led to intolerable levels of misery and
social unrest.It was, in fact, the re-introduction of many of the reforms that
had been originally introduced by Salvador Allende.
As Greg Palast, an investigative journalist for the British
Broadcasting Company noted, there was a miracle, all right, but "it was
bright red." That was the color of Allende's alleged Marxism.
In essence, the salvation of Chile was at least a limited
abandonment of free-market fundamentalism and the "Chilean Miracle." It was a recognition that the free
market simply does not solve all economic problems, but actually creates many
of them, and ignores completely the social consequences of economic decision-making.
What Went Wrong
What went wrong was simply the failure of Milton Friedman
and his Chicago Boys to come clean about their real agenda, which is not to
eliminate poverty or elevate the working class. What went wrong was that the
dogmatism of Milton Friedman in his role as an intellectual poodle of the
ultra-rich, rather than being an honest broker of economic policies intended to
"lift all the boats" - not just the yachts tied to the pier, while
threatening the skiffs sitting on the beach.
What went wrong was America's own preoccupation with
free-market fundamentalism, and our failure to look beyond the surface
propaganda, and our complicity in forcing a discredited and defective economic
model on others reluctant to accept it.
But what went wrong mostly was the complete and utter
failure of Friedman and the Chicago Boys, Pinochet and his American backers, to
consider that economic activity does not occur in a vacuum. It occurs in a
social and moral context, and economic decisions have social consequences that
simply must be considered. And failure to do so can have severe social
consequences that feed back into the economic decision-making, and thereby
undermine the theoretical framework of the economic premises on which the
decisions were based.
What Really Works
There are examples of nations that have lifted themselves
from Third-World status into First-World status--. Japan, Taiwan, Thailand,
Singapore, South Korea, the nations of Western Europe, all come to mind. Other,
more recent examples of nations that have begun to lift themselves up are also
relevant. Even the United States was once a Third-World nation, and it too had
to lift itself up.
How have these nations managed to reduce poverty and improve
the standard of living of their inhabitants? It turns out that there are
several factors that are common to all
such nations. These factors are well-known to economists, and aren't considered
controversial anymore, except to free-market fundamentalists. It is really
rather simple, and there are four key factors, and they all contradict the
conventional wisdom of free-market fundamentalism:
First,
tariff barriers that protect targeted local industries from ruinous foreign
competition and allow governments to incubate local industries through subsidy
and import substitution. This is
how the American steel industry came into being. In the 1860's, most steel in
the world, including most of what was used in the United States was produced by
Europe. By 1900, the situation was reversed. This situation was accomplished
through the use of tariffs in the United States to generate the cash used to
subsidize exports. The same thing happened with the American agricultural
sector - tariffs kept cheap foreign food out, while the U.S. government
fostered the growth of a strong and vibrant agriculture through targeted
subsidies, the university extension program, and the creation of a rural
transportation infrastructure. Once these programs were complete, tariffs were
reduced and subsidies reduced or eliminated. The result is that American agriculture
now feeds not only America, but much of the world.
Second,
government has to work carefully and judiciously with local business to
stimulate research, development and the improvement of efficiencies so that
they can compete on world markets, and enforce discipline by removing support
from players who do not improve their economic efficiency or the quality of
their output. An example is the American
agricultural industry. It went virtually nowhere in world markets until the
U.S. Congress created the university extension system, with its local offices
and agents that helped farmers come to understand what they needed to do to
produce economically and efficiently enough, with sufficient quality, to
compete in world markets. This is how first Japan, and later Korea and Taiwan
have become world leaders in the production of consumer electronic goods, and
did so in less time than it took Pinochet and the Chicago Boys to ruin Chile's
economy.
Third, economic planners
have to come to realize that you can't sell something to somebody who has no
money - so social justice issues do matter in a purely economic context,
even if, like Milton Friedman, you are unconcerned about the moral issues of
social injustices. If all economic productivity is absorbed by a tiny elite
through power accumulation created by capital accumulation that is not shared
through living wages, there is no purchasing power left in an economy to create
markets for the goods produced. Government simply must not allow wealth to
become excessively concentrated, however that is accomplished. It can avoid
this by using taxation of business profits, inheritance taxes and other such
means to prevent the excessive
concentration of wealth, and use the monies derived for programs to
alleviate poverty and social deprivation, and create educational and economic
opportunities for the poor. If that sounds like socialism, that is not an
accident - socialism is one means (though not necessarily the best) of attempting
to do just that.
Fourth,
some exports have to be stimulated by subsidy and some imports restricted by
tariffs. Relying on "comparative advantage" simply doesn't work in
the real world. Is the automobile industry located
in Detroit because Detroit has a comparative advantage? No. It is there because
that's where Henry Ford happened to be living when he decided to get into the
automobile business. Is Boeing located in Seattle because Seattle has a
comparative advantage in aircraft production? No. It's there because that's
where the Boeing family happened to be living at the time Boeing's founder
decided to start the company. The notion
that a nation should stick to doing only that in which it has a
"comparative advantage" is also ludicrous when you stop and think
about it. Bolivia has a comparative advantage in only one thing - beef
production. Does that mean that all Bolivians should want to be gauchos? Hardly! Bolivians want
to do the whole range of things that other people in other nations do, and the
tax, tariff and subsidy structure of the Bolivian government should reflect
that. Additionally, nations, like families, have to earn their keep. For a
nation, it is foreign exchange - you cannot buy with other countries' currency
when you don't have that currency to spend. So to control purchases and to
stimulate sales to keep current accounts in balance, nations, like families,
simply must control imports and encourage exports, whether through tax policy
or by adjusting the value of the national currency. There is no other way in
the long run. At some point, imports and
exports have to come to a monetary balance.
Since this is already well understood in the academic world,
why is it so controversial? Why are these points so vigorously disputed?
Why do the IMF, WTO and World Bank Aggressively Promote Such Defective
Dogma?
There is a widespread assumption that the people who run the
International Monetary Fund, World Trade Organization and the World Bank are
well-meaning, sincere people who really want to make a difference in the world,
helping end poverty and deprivation. And for most of the bureaucrats who work
in those institutions, that's true.
This belief is understandable; it is, after all, these
institutions that were created specifically for the noble purpose of empowering
the poor and disadvantaged. If these people weren't sincere, and weren't there
to make a difference, they would be quickly replaced, wouldn't they?
It is certainly a comforting assumption to think that they
would be. After all, the stated purpose of these organizations is to solve the
problems of world poverty, end hunger, disease and want and the wars these
problems create. Why should anyone think that these organizations aren't really
sincerely making an effort to solve these problems?
Well, for a start, there's Chile. If these organizations had
made any effort at all to study what these doctrines have had in Chile, they'd
quickly realize that these doctrines simply don't work as advertised. And it's
not just Chile, either. These doctrines have had a dramatic effect in Mexico,
where the institution of these policies have caused real wages to decline from
$1.32 per hour on average in the in 1970's to only 45 cents per hour today,
after the imposition of NAFTA. And they're still declining. The real output of
Mexican industry has declined several percent since the North American Free
Trade Agreement was signed. And it is still going down.
Beyond Mexico, the destruction of other economies,
particularly Argentina, also stand out as dramatic examples of the failures of
"neo-liberal" policies. Argentina once had an economic output that
was equivalent to most nations in Europe. But no more. More than half of its
population now lives in abject poverty, the unemployment rate exceeds 30%, real
wages are dropping dramatically and economic activity is shriveling at the rate
of 25% per year. Why? Because the very same prescriptions imposed on Chile have
been imposed by the IMF and World Bank on Argentina, which followed them
willingly and to the letter.
Who killed the Argentine economy? The IMF did. And what is
truly shocking is that it knew
exactly what it was doing. It was part of a deliberate, calculated
plan. That's a shocking allegation that I wouldn't believe myself if there
weren't proof of it.
Greg Palast, an investigative reporter for the BBC and the
Guardian, a British daily of considerable reputation, has obtained documents
that are truly a smoking gun. One is a "technical memorandum of understanding" dated September 5,
2000, signed by Pedro Pou, the president of the Central Bank of Argentina. In
it, he agreed to largely the same conditions that killed the Chilean economy:
·
A twenty percent reduction in the
budget deficit, at a time when the economy was poised on the brink of a
recession - not a very bright thing to do, when all economists agree that under
recessionary pressure, budget deficits should actually be increased, not
reduced, even if that means temporary spending deficits.
·
Under a boldface heading, titled
"improving the conditions of the poor," Argentina agreed to drop
salaries in the emergency employment program by 20%. How reducing salaries
benefits the recipients remains unexplained.
·
A 12-15% reduction in the salaries
of civil servants. With less money to spend, of course they spent less. Not a
happy thing to have happen during a period of economic contraction and tight
money supplies.
·
A currency peg of $1 to each
Argentine Peso, in spite of the fact that there was downward pressure on the
Peso. Pegging a currency when there's downward pressure on it is a guaranteed
formula for a reduction in economic activity - imported goods become cheaper,
so locally produced goods competing with them become less competitive - and the
people who were producing them get laid off during a time of lowering economic
activity. Not a wise plan.
To finance this scheme, Argentina agreed to borrow the $128
billion in foreign exchange to support the peg scheme at an interest rate of
16%. The interest, at 16%, therefore comes to $27 billion per year, a billion
more than the $26 billion in the loans for which these concessions were
extracted!
How do the Argentine people benefit by taking out this loan?
They don't! As you can see, they actually lose money! Why, then, did the IMF
even propose such an absurd scheme? And why on earth would Argentina agree to
it? It all makes sense when you start to look at the principals involved, who
they are, and how they benefit.
Who benefits by all this and how did they get Argentina to
sign such a ridiculous loan document? One must understand who the IMF is and
what its agenda is. The International Monetary Fund was one of the three
institutions set up in the Bretton Woods Conference at the end of World War II.
It was created at the insistence of the great economist, John Maynard Keynes,
who insisted that it was necessary to help smaller nations overcome the
limitations imposed by their economic size, and help them avoid the misery of
economic declines, such as the Great Depression, which was fresh in the
memories of conference participants. Large nations like the United States could
avoid such declines by careful monetary and fiscal policy, but this option
simply was not open to smaller nations. So the U.S., in concert with other
nations, created this fund to help smaller, poorer nations work around the
limitations imposed by their size.
Until Milton Friedman's "neoliberal" crowd arrived
on the scene, it largely behaved that way. But the advent of "neo-liberalism"
created an opportunity for the kingpins of international finance to use the IMF
as basically an extortion and bill-collecting mechanism. The imposition of
Friedman's long-discredited policies, in spite of their horrible social costs,
made it possible for the international megabanks to use the IMF to collect
outstanding loans. Seizing that opportunity, they used their influence to make
sure that their people were installed in positions of influence in the IMF. The
result has been that the IMF has been hijacked, and has become essentially a
means by which international finance force borrowing at extortionary interest
rates, and then collect their loans, no matter how much misery this causes.
It doesn't end there. Others, seeing an opportunity to use
the IMF to create and exploit bankruptcy on a vast scale, have also moved in
like greedy vultures, using the bankruptcies created by IMF policies as an
opportunity to purchase national assets at bargain-basement prices. A classic
case is the privatization of water utilities. Using the rubric of
"privatization," this means that the poor often find themselves
paying vastly more for water, prices they often cannot afford. So the
newly-privatized water utility, no longer willing to subsidize water supply to
the poor, cuts off the water, and the poor end up carrying water long
distances, often from contaminated sources. The result is lowered economic
performance (spending time carrying water and recovering from water-borne
illness), more disease and the higher social costs to society that result from
that disease and child mortality. Even if one does not consider the inhumanity
of depriving people of clean, subsidized water, the raw economic costs end up
higher, by far, than the presumed "efficiency" gained by private
operation of the water utility. When these utilities are privatized, they are
usually sold to large foreign multinationals who expatriate the profits - and
those expatriated profits become a foreign exchange liability against the
country (raising the cost of imports and discouraging other foreign
investment), instead of being reinvested or offsetting taxes at home. The hard,
basic fact is that economic decisions don't occur in a social vacuum. But
"neo-liberalism" fails utterly to consider that to be a problem.
This subversion of the goals of the IMF and its hijacking by
the "neoliberals" has meant that this only source of credit to many
nations has made those nations vulnerable to blackmail. All nations require
credit, not just to finance infrastructure projects, but to finance imports as
well. This was one of the goals of the IMF - to facilitate that credit. But
when a nation finds itself spending more abroad in finance costs than it takes
in export sales, as many third world nations do, it must seek help in financing
the debt that creates. That vulnerability means that nations often have to do
what the IMF wants - even if it is extortionary. So the people of the Third World
lose, and the international bankers and multinational capitalists win. Once again.
Neo-liberalism is another term for neo-colonialsim, let us not entertain any
illusions about that bitter reality.
Further proof, if any were needed, that those who have the gold, make the rules. And they make the rules to
suit themselves - and the rest of us be damned.
Sources
Birns, Laurence, editor, "The End of Chilean
Democracy"
Blum, William, "Killing Hope: U.S. Military and C.I.A.
Interventions Since World War II"
Cooper, Marc, "Twenty five Years After Allende"
The Nation, March 23, 1998
Foran, John, University of California, Santa Barbara,
http://www.hartford-hwp.com/archives/42a/130.html
Palast, Greg, "Miracle Cure, But The Medicine Was
Bright Red," http://www.gregpalast.com/detail.cfm?artid=54&row=1
Parenti, Michael. "Serving The Few," http://sonic.net/~doretk/Issues/96-08%20AUG/servingthefew.html
Ruess, Alejandro, "Invisible Hand and Iron Fist"
Dollars and Sense magazine, Nov.-Dec., 1999
