Bretton Woods Institutions, Missions, and Policies
Near the end of World War II representatives of the victorious allies met in Bretton Woods, New Hampshire with the purpose of formulating a coordinated strategy for rebuilding the war-torn nations of Europe and stabilizing the global system of currency exchange rates. The International Monetary Fund (IMF) was established to focus on monetary policy issues, and the World Bank was established to help rebuild infrastructure devastated by years of warfare. By tacit agreement from the outset and continuing customary practice today, the European nations designate the head of the IMF while the US designates the head of the World Bank. Other spots, such as chief economist and important research and policy posts are reserved for nominees of a small bloc of developed nations.
By the 1970s the IMF was tasked with the job of dealing with the problem of rising sovereign debt among the developing nations, nearly of all of which were not far from having gained independence from former colonial rule. Many of the newly independent nations experienced difficulty in repaying debt, exacerbated by oil price shocks that compromised the ability of even the most financially healthy countries to balance debt payment obligations with current needs for expenditure. In addition, the old system of fixed currency exchange rates that had been in place since the end of the War ended when President Richard Nixon responded to the mounting US debt crisis by removing the dollar from the gold standard. Nixon thereby let global market forces set the currency exchange rate and in the process, it allowed the US to repay existing debt in devalued dollars.
The IMF undertook a different strategy for managing the debt crises faced by developing nations. The aim was to ensure orderly debt repayment in large part by a combination of two changes in the economies of the debtor nations. First, they imposed austerity measures designed to reduce domestic governmental spending, and second, they pushed for a transformation of their economies overall with the aim of stimulating rapid increases in gross domestic product (GDP). The two strategies were meant to work hand in hand. For example, one way to reduce government spending - and free up funds for debt repayment - is to sell off state industries and end state subsidies for private industries. At the same time, the newly privatized industries were expected to operate more efficiently, and as a result produce more revenue for the citizens and for the public coffers. Moreover, the elimination of state subsidies would have the further effect of encouraging the movement of capital into economically more productive areas. Economic growth and poverty reduction would then be the predictable and desirable side effects of economic policies designed initially with the focal aim of solving "balance of payment" problems among nations unable to maintain their debt payments and continue to provide support for the goods services traditionally provided to be public by state funds.
Trade liberalization - the elimination of protective tariffs and state subsidies, along with other regulatory impediments to attracting foreign investment could be expected to further add to economic growth. Economic development within countries lacking in large stocks of capital needs external investment. Foreign investment requires a favorable and stable regulatory climate. In addition, the IMF not only pressed for economic policy changes that would move domestic capital investment away from heretofore inefficient and state subsidized industries, but it actively encouraged countries to focus on export-led growth, much of which was only possible from the infusion of foreign capital.
The principal idea underlying the push for export-led growth was the economic ideal made popular by 19th century economist David Ricardo. The thought was quite simple. Nations, like individuals and firms, do best when they exploit a comparative advantage. If your country has oil, then develop the oil reserves. If your climate and soil is favorable for growing coffee, then shift land use from traditional subsistence farming to large-scale coffee production. The relevant notion of comparative advantage, however, does not mean absolute advantage, or the ability to produce some good such as coffee more efficiently than any other nation. It merely means that there are good reasons to produce some goods or services because of some advantages a nation enjoys that makes production of that one thing more likely to increase its GDP than alternative investments.
The further suggestion was that countries should focus its economic growth efforts on an increased production of a small number of export products that have such comparative advantages and which also can benefit from economies of scale (e.g., where doubling the inputs of production will more than double the outputs). Moreover, you will be better off overall economically if you can buy other goods that are needed on a global market from nations where the costs of production are lower. Think of it as the Walmart Principle. They advertise that their buying policies save US consumers an average of $2500 per year per family.
The economic policies were not mere recommendations. The IMF, in conjunction with regional development banks and the World Bank, made policy changes a condition of granting IMF loans and World Bank investment in associated infrastructure projects such as large dams and water projects. The contractual requirements that had to be agreed to by debtor nations in order to satisfy the various external parties were referred to as "cross-conditionalities" reflecting the fact that both loans and external investments were conditional upon acceptance of a full range of multi-party demands. The name given to the packages of policy changes required as conditions for IMF assistance was "structural adjustment program" (SAPs). The complex and often quite detailed requirements of the SAPs were put in place by multi-party contractual agreements involving the debtor nation, the IMF, and the World Bank.
The origin of the co-ordinated structural adjustment loan program is widely attributed to World bank President Robert McNamara, along with his deputy Ernest Stern, who in 1979, adopted the idea of conditionality of loans already in practice at the IMF. The standard IMF loan is known as a "standby agreement," while the World Bank relies upon an "adjustment loan." Taken together are commonly known as a structural adjustment program. The typical bundle of economic policies that were incorporated within SAP agreements reflected a belief in the benefits of rapid and thoroughgoing transformation to a variety of policies designed to implement a robust commitment to free trade. The policies were designed to force a rapid transition of traditional economies and has been widely referred to as "shock therapy." Collectively, the favored policies came to be known as the Washington Consensus.
The SAPs were replaced by new cross-conditional documents now known as Poverty Reduction Strategy Papers (PRSP) that are meant to bind debtor nations to the implementation of a set of macroeconomic stability and growth policies that include pro-poor growth strategies. How much has changed in the way of policy goals and commitments since the change in nomenclature remains in dispute, but the International Development Association, the World Bank's arm that provides loans and grants to undeveloped countries has a publicly stated preference for targeting such programs on health and education for the poor. For some insight into how the World Bank currently view these policies and the guidance it offers for the countries it seeks to assist, see the World Bank's PRSP Sourcebook: Chapter and Annexes.
By the 1970s the IMF was tasked with the job of dealing with the problem of rising sovereign debt among the developing nations, nearly of all of which were not far from having gained independence from former colonial rule. Many of the newly independent nations experienced difficulty in repaying debt, exacerbated by oil price shocks that compromised the ability of even the most financially healthy countries to balance debt payment obligations with current needs for expenditure. In addition, the old system of fixed currency exchange rates that had been in place since the end of the War ended when President Richard Nixon responded to the mounting US debt crisis by removing the dollar from the gold standard. Nixon thereby let global market forces set the currency exchange rate and in the process, it allowed the US to repay existing debt in devalued dollars.
The IMF undertook a different strategy for managing the debt crises faced by developing nations. The aim was to ensure orderly debt repayment in large part by a combination of two changes in the economies of the debtor nations. First, they imposed austerity measures designed to reduce domestic governmental spending, and second, they pushed for a transformation of their economies overall with the aim of stimulating rapid increases in gross domestic product (GDP). The two strategies were meant to work hand in hand. For example, one way to reduce government spending - and free up funds for debt repayment - is to sell off state industries and end state subsidies for private industries. At the same time, the newly privatized industries were expected to operate more efficiently, and as a result produce more revenue for the citizens and for the public coffers. Moreover, the elimination of state subsidies would have the further effect of encouraging the movement of capital into economically more productive areas. Economic growth and poverty reduction would then be the predictable and desirable side effects of economic policies designed initially with the focal aim of solving "balance of payment" problems among nations unable to maintain their debt payments and continue to provide support for the goods services traditionally provided to be public by state funds.
Trade liberalization - the elimination of protective tariffs and state subsidies, along with other regulatory impediments to attracting foreign investment could be expected to further add to economic growth. Economic development within countries lacking in large stocks of capital needs external investment. Foreign investment requires a favorable and stable regulatory climate. In addition, the IMF not only pressed for economic policy changes that would move domestic capital investment away from heretofore inefficient and state subsidized industries, but it actively encouraged countries to focus on export-led growth, much of which was only possible from the infusion of foreign capital.
The principal idea underlying the push for export-led growth was the economic ideal made popular by 19th century economist David Ricardo. The thought was quite simple. Nations, like individuals and firms, do best when they exploit a comparative advantage. If your country has oil, then develop the oil reserves. If your climate and soil is favorable for growing coffee, then shift land use from traditional subsistence farming to large-scale coffee production. The relevant notion of comparative advantage, however, does not mean absolute advantage, or the ability to produce some good such as coffee more efficiently than any other nation. It merely means that there are good reasons to produce some goods or services because of some advantages a nation enjoys that makes production of that one thing more likely to increase its GDP than alternative investments.
The further suggestion was that countries should focus its economic growth efforts on an increased production of a small number of export products that have such comparative advantages and which also can benefit from economies of scale (e.g., where doubling the inputs of production will more than double the outputs). Moreover, you will be better off overall economically if you can buy other goods that are needed on a global market from nations where the costs of production are lower. Think of it as the Walmart Principle. They advertise that their buying policies save US consumers an average of $2500 per year per family.
The economic policies were not mere recommendations. The IMF, in conjunction with regional development banks and the World Bank, made policy changes a condition of granting IMF loans and World Bank investment in associated infrastructure projects such as large dams and water projects. The contractual requirements that had to be agreed to by debtor nations in order to satisfy the various external parties were referred to as "cross-conditionalities" reflecting the fact that both loans and external investments were conditional upon acceptance of a full range of multi-party demands. The name given to the packages of policy changes required as conditions for IMF assistance was "structural adjustment program" (SAPs). The complex and often quite detailed requirements of the SAPs were put in place by multi-party contractual agreements involving the debtor nation, the IMF, and the World Bank.
The origin of the co-ordinated structural adjustment loan program is widely attributed to World bank President Robert McNamara, along with his deputy Ernest Stern, who in 1979, adopted the idea of conditionality of loans already in practice at the IMF. The standard IMF loan is known as a "standby agreement," while the World Bank relies upon an "adjustment loan." Taken together are commonly known as a structural adjustment program. The typical bundle of economic policies that were incorporated within SAP agreements reflected a belief in the benefits of rapid and thoroughgoing transformation to a variety of policies designed to implement a robust commitment to free trade. The policies were designed to force a rapid transition of traditional economies and has been widely referred to as "shock therapy." Collectively, the favored policies came to be known as the Washington Consensus.
The SAPs were replaced by new cross-conditional documents now known as Poverty Reduction Strategy Papers (PRSP) that are meant to bind debtor nations to the implementation of a set of macroeconomic stability and growth policies that include pro-poor growth strategies. How much has changed in the way of policy goals and commitments since the change in nomenclature remains in dispute, but the International Development Association, the World Bank's arm that provides loans and grants to undeveloped countries has a publicly stated preference for targeting such programs on health and education for the poor. For some insight into how the World Bank currently view these policies and the guidance it offers for the countries it seeks to assist, see the World Bank's PRSP Sourcebook: Chapter and Annexes.
The Washington Consensus: The History of a Phrase and its Original Context
The phrase “Washington Consensus” was coined by John Williamson as a way of summarizing a bundle of policies that enjoyed broad agreement within the official institutional circles of the US Treasury Department, the World Bank, the International Monetary Fund (IMF) and various other institutions that arose from or in the subsequent shadows of the Bretton Woods conference in which the Bank and the IMF were created initially to deal with the debt and reconstruction of Europe after the end of WWII. In many circles the phrase connotes contempt for the underlying ideology and practices of these economic institutions, and among its various critics “neoliberalism” and “globalization” has become synonymous with the idea of a Washington consensus. Williamson originally coined the phrase in 1990 “to refer to the lowest common denominator of policy advice being addressed by the Washington-based institutions to Latin American countries as of 1989.” Among the core tenets that have become most controversial are commitments to:
As Williamson later lamented, these came to be seen by critics as a "set of neoliberal policies that have been imposed on hapless countries by the Washington-based international financial institutions and have led them to crisis and misery." But his own assessment included recommendations for the redirection of public expenditure priorities toward investments offering both high economic returns and the potential to improve income distribution, such as primary health care, primary education, and infrastructure. Critics are quick to note that the leadership of the major global economic institutions favored the former but gave short shrift to the latter aims.
Source: Williamson, John. “What Should the World Bank Think About the Washington Consensus?” World Bank Research Observer. Washington, DC: The International Bank for Reconstruction and Development, Vol. 15, No. 2 (August 2000), pp. 251-264.
For a collection of important essays on the history and current assessment of the Washington Consensus, Washington Consensus Reconsidered, edited by Serra and Stiglitz, is the best available source for those who want a serious and thoughtful examination of a wide range of issues without an overly large does of ideology from any perspective.
Moses Naim, the editor of Foreign Policy Magazine, has argued that no such consensus exists. Naim focuses on the extent to which economists are often divided over such issues as the East Asian crisis, the need for an international financial architecture, and the effectiveness of “open” trade policies. A later version based on his 1999 IMF conference paper of the same name can be found in Third World Quarterly. However, critics say that even if he is correct that there is no deep consensus among members of the economics profession across the wide range of issues Naim surveys, the uniformity of a generation of policies imposed by the Bank, the IMF, and allied regional development banks is unmistakeable, and the consequences, while varied in nature, too often led to the sort of misery Williamson mentions.
For Dani Rodrik, the neo-liberal dogma was "stabilize, liberalize, and privatize" (The Paradox of Globalization, 164). For Joseph Stiglitz, the three pillars of the Washington Consensus have been "fiscal austerity, privatization, and market liberalization" (Globalization and its Discontents, 53). Moreover, there has been virtually unanimous agreement within the central leadership of the IMF throughout the 1980s and 1990s that the recommended structural reforms should be implemented comprehensively, swiftly, and imposed upon client countries through loan mechanisms that make balance of debt payment loan assistance conditional on accepting an often detailed plan for re-making the society according to the IMF's vision. The idea was that a sort of "shock therapy" is necessary in order to give lesser developed nations a "big push" into deeper global economic integration characterized by rapid elimination of all barriers to international trade.
- trade liberalization, including elimination of export tariffs and domestic subsidies
- liberalization of restrictions on foreign direct investment
- privatization of many state industries and services
- deregulation of industries and reduction of non-tariff barriers to foreign capital investment
As Williamson later lamented, these came to be seen by critics as a "set of neoliberal policies that have been imposed on hapless countries by the Washington-based international financial institutions and have led them to crisis and misery." But his own assessment included recommendations for the redirection of public expenditure priorities toward investments offering both high economic returns and the potential to improve income distribution, such as primary health care, primary education, and infrastructure. Critics are quick to note that the leadership of the major global economic institutions favored the former but gave short shrift to the latter aims.
Source: Williamson, John. “What Should the World Bank Think About the Washington Consensus?” World Bank Research Observer. Washington, DC: The International Bank for Reconstruction and Development, Vol. 15, No. 2 (August 2000), pp. 251-264.
For a collection of important essays on the history and current assessment of the Washington Consensus, Washington Consensus Reconsidered, edited by Serra and Stiglitz, is the best available source for those who want a serious and thoughtful examination of a wide range of issues without an overly large does of ideology from any perspective.
Moses Naim, the editor of Foreign Policy Magazine, has argued that no such consensus exists. Naim focuses on the extent to which economists are often divided over such issues as the East Asian crisis, the need for an international financial architecture, and the effectiveness of “open” trade policies. A later version based on his 1999 IMF conference paper of the same name can be found in Third World Quarterly. However, critics say that even if he is correct that there is no deep consensus among members of the economics profession across the wide range of issues Naim surveys, the uniformity of a generation of policies imposed by the Bank, the IMF, and allied regional development banks is unmistakeable, and the consequences, while varied in nature, too often led to the sort of misery Williamson mentions.
For Dani Rodrik, the neo-liberal dogma was "stabilize, liberalize, and privatize" (The Paradox of Globalization, 164). For Joseph Stiglitz, the three pillars of the Washington Consensus have been "fiscal austerity, privatization, and market liberalization" (Globalization and its Discontents, 53). Moreover, there has been virtually unanimous agreement within the central leadership of the IMF throughout the 1980s and 1990s that the recommended structural reforms should be implemented comprehensively, swiftly, and imposed upon client countries through loan mechanisms that make balance of debt payment loan assistance conditional on accepting an often detailed plan for re-making the society according to the IMF's vision. The idea was that a sort of "shock therapy" is necessary in order to give lesser developed nations a "big push" into deeper global economic integration characterized by rapid elimination of all barriers to international trade.
Market Fundamentalism, Market Failures, and Market Distortions
click to enlarge image from sinkers.org
Joseph Stiglitz (Globalization and Its Discontents, xii, 35-36, 259) and Dani Rodrik (The Globalization Paradox, 159) refer to the long-standing orthodox IMF economic worldview as market fundamentalism. In a nutshell, market fundamentalism is the idea that markets on their own work perfectly, or at least sufficiently close to the ideal of Neoclassical economic theory that they routinely lead to (Pareto) efficient outcomes.
In addition, a corollary of market fundamentalism is the belief that governments should be relegated to very modest roles in the economy, in part because of the belief that in the long run markets tend to be self-correcting and that government interference is more likely to result in greater inefficiencies than a policy of government forbearance. Much of the faith in markets, largely left to play out on their own, is built on the assumption that the invisible hand of the market works its magic under virtually any conditions, and that in almost all instances, governments are likely to produce more harm than good. But as Stiglitz notes, it is a mistake to invoke the name of Adam Smith as a proponent of the sort of laissez faire approach in fashion among the neoliberal freemarketers. “Adam Smith was far more aware of the limitations of the market, including threats posed by imperfections of competition, than those who claim to be his latterday followers” (p. 219).
Stiglitz and Rodrik both observe the curious turn of events that led to the IMF’s embrace of market fundamentalism. John Maynard Keynes, one of the principal architects of the Bretton Woods institutional arrangements, is famous for his reply to fellow economists who would counsel government forbearance in the face of market upheavals: “In the long run we are all dead” (A Tract on Monetary Reform). The heart of his observation is that markets are not always self-correcting, or not self- correcting in sufficiently timely or stable fashion that would avert or mitigate economic disasters. As Keynes judged it, there are some things that only governments and regulative institutions can do, and indeed, markets can only function under conditions in which rules of contract, exchange, and enforcement are established by a state or some other authoritative institution that can perform state-like functions. In fact, a large part of the original motivation for the creation of the Bretton Woods institutions was the recognition of substantial sources of market failure, or intrinsic impediments to efficient outcomes, and that given the increasing interdependence of nations in a global economy, economic crises in one nation cannot be contained or managed absent some overarching multinational framework.
Market fundamentalists frequently rely upon a supporting assumption to bolster their case. Because markets are assumed to make everyone better off (i.e., they are said to be Pareto efficient) – parties to transactions are presumed to be rational and thus each judges herself to be better off because of the transaction– market outcomes satisfy a familiar standard of fairness. Who, then, can complain? But there are serious problems with this normative standard of Pareto efficiency. Individuals may well be wrong in their subjective assessment of an improvement in well-being from a transaction, especially if one party lacks accurate information or lacks comparable bargaining power to command better terms. But even if we don’t second guess the subjective judgments of whether one really is better off as a consequence of a transaction, as William Easterly cautions, that even if we assume that any voluntary exchange makes both parties better off (as the ideal of Pareto efficiency holds), market transactions do not necessarily make all parties better off to the same degree, and hence, we can still raise questions about the fairness of outcomes (White Man’s Burden, 75). Joseph Stiglitz offers a similar observation: “Market processes may, by themselves, leave many people with too few resources to survive” and the upshot is his judgment that government has an essential role “not only in mitigating these market failures but also in ensuring social justice” (218).
We have, then, a spectrum of opinion about how markets work and the nature and scope of the conditions under which the efficiency - and perhaps the fairness of outcomes – assumed by ideal market theory will be approximated. Market fundamentalists see markets performing optimally, as hoped for, under a wide range of conditions, as long as the role of government is limited. More circumspect supporters of markets see numerous, real world sources of market failure and other market distortions that undermine mutually beneficial market outcomes, especially when there are insufficiently developed norms and institutional rules that restrain opportunistic and anti-competitive behavior (Easterly, p. 77-94; Rodrik, 3-23; Stiglitz, 53-88).
The list of commonly identified sources of potential market failure is longer than what I include here, but here are a few key types, along with some examples.
Negative Externalities: Some transactions impose economic costs on third parties, for example, a manufacturer of computer chips that sells components to electronics consumers abroad at low prices, but only because of the money saved from dumping toxic chemical waste in nearby rivers. While the transaction may be mutually beneficial to the buyer and seller, the results may include a loss of agricultural productivity or chronic health problems of others who live nearby and not parties to the transaction. The seller is thus able to externalize, or impose on others, some of the costs of doing business, and while the seller and the buyer are benefited, society as a whole may be the net losers. A quote from Dani Rodrik is illustrative: "A profitable exchange between a buyer and a seller is only desirable for society as a whole when prices reflect the full social (opportunity) costs involved in the exchange." (Rodrik, 112).
Transaction costs: Apart from the costs of inputs to manufacturing or agriculture, there are other costs of doing business that are consequences of the way the marketplace is organized or the political and legal context in which private exchanges occur. Doing business in places where the rule of law is weak and violence is endemic may necessitate the creation of private security forces. Health insurance schemes that rely upon market competition may increase the costs of documentation of medical claims and approval for reimbursement before delivery of services far beyond what a universal national health plan would cost - for example, many draw the comparison between the 25% estimate of transaction costs in the US versus the 4% for Canada. In another kind of example, in one country there may be extensive licensing and registration requirements for buying and selling goods. Mining operations may need to secure water quality permits and submit to periodic compliance inspections, post cash bonds in order to guarantee adequate reclamation. Higher transaction costs may be defensible as vital protections against negative externalities such as water pollution or area-wide erosion due to a parcel of unreclaimed land abandoned after the extraction of minerals, or indefensible, for example, when they are simply a product of a badly organized bureaucracy. Transaction costs are not then good or bad in themselves; it all depends on what they are meant to achieve.
Public Goods: Some goods are simply less likely to get produced in the competitive marketplace even though they are highly desirable and benefit everyone. Clean air is a classic example. All benefit from clean air, but it may be possible to assure its availability only if some not-for-profit entity undertakes what is necessary to ensure it. Pure public goods are said to be non-rival: my enjoyment does not diminish your opportunity to enjoy it; and they are non-exclusive: if a governmental entity regulates air pollution such that there is clean air, then there is no way that any potential class of beneficiaries can be excluded. Private firms have no market incentive to see to it that there is clean air; in fact, they often have incentive to pollute the air for the sake of private economic gain. So if a society is to have the benefit of public goods - clean air and water, national defense, open public green spaces, transportation infrastructure, and so on - then sometimes it has to be provided by non-market mechanisms. Hence, the idea that a failure of markets on their own to supply some of society's most important needs is a familiar type of market failure. Of course, very few goods meet the strict definition of public goods as non-rival and non-excludable. We could imagine a society that devoted no public resources to preservation of clean air. The air, like the water, might become so degraded that the affluent would purchase portable designer fresh air tanks, more or less like what has happened with bottled water in many places. There is in effect a market solution such that clean air is available on the basis of ability and willingness to pay, and so even the decision to secure clean air for everyone as a public good is a moral choice that could in principle be left to the private marketplace.
Asymmetric Market Power: Some participants in markets have so much market power - the ability to set prices unilaterally or prevent or limit new market entrants - that the ideal of a competitive marketplace in which voluntary exchanges are mutually beneficial is not realized, or it is not nearly as beneficial as it might be were one party to the exchange not able to exert asymmetric market power. For example, there are markets dominated by monopolies or oligopolies with the dual result that (i) consumer prices are not restrained by the usual competitive forces and new entrants and (ii) potential technological innovators are frozen out. And there are both monopsonies and oligopsonies. In these cases there are only one (mono) or a few (oligo) buyers who can set the prices to be paid, for example, for agricultural products. "Thin markets," where one or a handful of (often colluding) buyers can determine the alternatives available for selling in local, regional, or national markets not only raise consumer prices but artificially restrain the economic rewards that parties with weaker bargaining power would be able to command.
Rent-seeking: Sometimes markets fail, not because of inherent tendencies of markets in which predatory, opportunistic, anti-competitive behavior is not restrained, but because of failures attributable to the ways governments interact with markets. (Hence, some prefer the label "government failure"). Rent-seeking behavior is a matter of individuals attempting to influence government policy in order to extract "rents" or "unproductive profits" for some groups at the expense of society as a whole. Consider some examples from the activities of lobbyists who secure legislation: that subsidizes the businesses of their clients, grants tax breaks to sectors of an industry that other competitors do not enjoy; creates exclusive licensing arrangements; or imposes restrictive product standards on goods in ways that make it harder for new competitors to enter the market. These are all forms of rent-seeking.
Rent seeking behavior s manifested in other ways. It includes the solicitation or offering of bribes for the purpose of enacting legislation or securing regulatory forbearance. So too are the behaviors of participants in the perfectly legal practice of the revolving door phenomenon in which individuals alternate their stints as regulators of some industry with their management roles in the very industry they once regulated and may yet again some day regulate. These revolving door arrangements produce handsome stock rewards for the sale of their "access" or the sympathetic treatment the private entity given during the period of their regulatory stint. And so too are the private sector cronies who stand first in line for "fire-sales" of state assets under rapid privatization efforts designed to shed various state industries, as well as the multinational companies who persuade lenders and debtor nations to let them take over the operation and ownership of national resources such as water and then sell it back to the residents.
More generally, critics of market fundamentalism insist that not only are market failures far more widespread than the freemarketers assume, the conditions for exacerbated market failure are even more favorable in countries that lack strong regulatory institutions. Negative externalities, such as pollution, are much more likely. Transaction costs can be exorbitant because of corruption and other aspects of poor governance and regulation. The ability to exercise monopoly or monopsony power may be unchecked. And the opportunities for rent-seeking behavior are unparalleled in countries that have not developed a robust legal system based on the rule of law or lack secure and determinate property rules that can protect traditional users of land from usurpation by the state and industries that propose purchase or lease of land for foreign direct investment.
In addition, a corollary of market fundamentalism is the belief that governments should be relegated to very modest roles in the economy, in part because of the belief that in the long run markets tend to be self-correcting and that government interference is more likely to result in greater inefficiencies than a policy of government forbearance. Much of the faith in markets, largely left to play out on their own, is built on the assumption that the invisible hand of the market works its magic under virtually any conditions, and that in almost all instances, governments are likely to produce more harm than good. But as Stiglitz notes, it is a mistake to invoke the name of Adam Smith as a proponent of the sort of laissez faire approach in fashion among the neoliberal freemarketers. “Adam Smith was far more aware of the limitations of the market, including threats posed by imperfections of competition, than those who claim to be his latterday followers” (p. 219).
Stiglitz and Rodrik both observe the curious turn of events that led to the IMF’s embrace of market fundamentalism. John Maynard Keynes, one of the principal architects of the Bretton Woods institutional arrangements, is famous for his reply to fellow economists who would counsel government forbearance in the face of market upheavals: “In the long run we are all dead” (A Tract on Monetary Reform). The heart of his observation is that markets are not always self-correcting, or not self- correcting in sufficiently timely or stable fashion that would avert or mitigate economic disasters. As Keynes judged it, there are some things that only governments and regulative institutions can do, and indeed, markets can only function under conditions in which rules of contract, exchange, and enforcement are established by a state or some other authoritative institution that can perform state-like functions. In fact, a large part of the original motivation for the creation of the Bretton Woods institutions was the recognition of substantial sources of market failure, or intrinsic impediments to efficient outcomes, and that given the increasing interdependence of nations in a global economy, economic crises in one nation cannot be contained or managed absent some overarching multinational framework.
Market fundamentalists frequently rely upon a supporting assumption to bolster their case. Because markets are assumed to make everyone better off (i.e., they are said to be Pareto efficient) – parties to transactions are presumed to be rational and thus each judges herself to be better off because of the transaction– market outcomes satisfy a familiar standard of fairness. Who, then, can complain? But there are serious problems with this normative standard of Pareto efficiency. Individuals may well be wrong in their subjective assessment of an improvement in well-being from a transaction, especially if one party lacks accurate information or lacks comparable bargaining power to command better terms. But even if we don’t second guess the subjective judgments of whether one really is better off as a consequence of a transaction, as William Easterly cautions, that even if we assume that any voluntary exchange makes both parties better off (as the ideal of Pareto efficiency holds), market transactions do not necessarily make all parties better off to the same degree, and hence, we can still raise questions about the fairness of outcomes (White Man’s Burden, 75). Joseph Stiglitz offers a similar observation: “Market processes may, by themselves, leave many people with too few resources to survive” and the upshot is his judgment that government has an essential role “not only in mitigating these market failures but also in ensuring social justice” (218).
We have, then, a spectrum of opinion about how markets work and the nature and scope of the conditions under which the efficiency - and perhaps the fairness of outcomes – assumed by ideal market theory will be approximated. Market fundamentalists see markets performing optimally, as hoped for, under a wide range of conditions, as long as the role of government is limited. More circumspect supporters of markets see numerous, real world sources of market failure and other market distortions that undermine mutually beneficial market outcomes, especially when there are insufficiently developed norms and institutional rules that restrain opportunistic and anti-competitive behavior (Easterly, p. 77-94; Rodrik, 3-23; Stiglitz, 53-88).
The list of commonly identified sources of potential market failure is longer than what I include here, but here are a few key types, along with some examples.
Negative Externalities: Some transactions impose economic costs on third parties, for example, a manufacturer of computer chips that sells components to electronics consumers abroad at low prices, but only because of the money saved from dumping toxic chemical waste in nearby rivers. While the transaction may be mutually beneficial to the buyer and seller, the results may include a loss of agricultural productivity or chronic health problems of others who live nearby and not parties to the transaction. The seller is thus able to externalize, or impose on others, some of the costs of doing business, and while the seller and the buyer are benefited, society as a whole may be the net losers. A quote from Dani Rodrik is illustrative: "A profitable exchange between a buyer and a seller is only desirable for society as a whole when prices reflect the full social (opportunity) costs involved in the exchange." (Rodrik, 112).
Transaction costs: Apart from the costs of inputs to manufacturing or agriculture, there are other costs of doing business that are consequences of the way the marketplace is organized or the political and legal context in which private exchanges occur. Doing business in places where the rule of law is weak and violence is endemic may necessitate the creation of private security forces. Health insurance schemes that rely upon market competition may increase the costs of documentation of medical claims and approval for reimbursement before delivery of services far beyond what a universal national health plan would cost - for example, many draw the comparison between the 25% estimate of transaction costs in the US versus the 4% for Canada. In another kind of example, in one country there may be extensive licensing and registration requirements for buying and selling goods. Mining operations may need to secure water quality permits and submit to periodic compliance inspections, post cash bonds in order to guarantee adequate reclamation. Higher transaction costs may be defensible as vital protections against negative externalities such as water pollution or area-wide erosion due to a parcel of unreclaimed land abandoned after the extraction of minerals, or indefensible, for example, when they are simply a product of a badly organized bureaucracy. Transaction costs are not then good or bad in themselves; it all depends on what they are meant to achieve.
Public Goods: Some goods are simply less likely to get produced in the competitive marketplace even though they are highly desirable and benefit everyone. Clean air is a classic example. All benefit from clean air, but it may be possible to assure its availability only if some not-for-profit entity undertakes what is necessary to ensure it. Pure public goods are said to be non-rival: my enjoyment does not diminish your opportunity to enjoy it; and they are non-exclusive: if a governmental entity regulates air pollution such that there is clean air, then there is no way that any potential class of beneficiaries can be excluded. Private firms have no market incentive to see to it that there is clean air; in fact, they often have incentive to pollute the air for the sake of private economic gain. So if a society is to have the benefit of public goods - clean air and water, national defense, open public green spaces, transportation infrastructure, and so on - then sometimes it has to be provided by non-market mechanisms. Hence, the idea that a failure of markets on their own to supply some of society's most important needs is a familiar type of market failure. Of course, very few goods meet the strict definition of public goods as non-rival and non-excludable. We could imagine a society that devoted no public resources to preservation of clean air. The air, like the water, might become so degraded that the affluent would purchase portable designer fresh air tanks, more or less like what has happened with bottled water in many places. There is in effect a market solution such that clean air is available on the basis of ability and willingness to pay, and so even the decision to secure clean air for everyone as a public good is a moral choice that could in principle be left to the private marketplace.
Asymmetric Market Power: Some participants in markets have so much market power - the ability to set prices unilaterally or prevent or limit new market entrants - that the ideal of a competitive marketplace in which voluntary exchanges are mutually beneficial is not realized, or it is not nearly as beneficial as it might be were one party to the exchange not able to exert asymmetric market power. For example, there are markets dominated by monopolies or oligopolies with the dual result that (i) consumer prices are not restrained by the usual competitive forces and new entrants and (ii) potential technological innovators are frozen out. And there are both monopsonies and oligopsonies. In these cases there are only one (mono) or a few (oligo) buyers who can set the prices to be paid, for example, for agricultural products. "Thin markets," where one or a handful of (often colluding) buyers can determine the alternatives available for selling in local, regional, or national markets not only raise consumer prices but artificially restrain the economic rewards that parties with weaker bargaining power would be able to command.
Rent-seeking: Sometimes markets fail, not because of inherent tendencies of markets in which predatory, opportunistic, anti-competitive behavior is not restrained, but because of failures attributable to the ways governments interact with markets. (Hence, some prefer the label "government failure"). Rent-seeking behavior is a matter of individuals attempting to influence government policy in order to extract "rents" or "unproductive profits" for some groups at the expense of society as a whole. Consider some examples from the activities of lobbyists who secure legislation: that subsidizes the businesses of their clients, grants tax breaks to sectors of an industry that other competitors do not enjoy; creates exclusive licensing arrangements; or imposes restrictive product standards on goods in ways that make it harder for new competitors to enter the market. These are all forms of rent-seeking.
Rent seeking behavior s manifested in other ways. It includes the solicitation or offering of bribes for the purpose of enacting legislation or securing regulatory forbearance. So too are the behaviors of participants in the perfectly legal practice of the revolving door phenomenon in which individuals alternate their stints as regulators of some industry with their management roles in the very industry they once regulated and may yet again some day regulate. These revolving door arrangements produce handsome stock rewards for the sale of their "access" or the sympathetic treatment the private entity given during the period of their regulatory stint. And so too are the private sector cronies who stand first in line for "fire-sales" of state assets under rapid privatization efforts designed to shed various state industries, as well as the multinational companies who persuade lenders and debtor nations to let them take over the operation and ownership of national resources such as water and then sell it back to the residents.
More generally, critics of market fundamentalism insist that not only are market failures far more widespread than the freemarketers assume, the conditions for exacerbated market failure are even more favorable in countries that lack strong regulatory institutions. Negative externalities, such as pollution, are much more likely. Transaction costs can be exorbitant because of corruption and other aspects of poor governance and regulation. The ability to exercise monopoly or monopsony power may be unchecked. And the opportunities for rent-seeking behavior are unparalleled in countries that have not developed a robust legal system based on the rule of law or lack secure and determinate property rules that can protect traditional users of land from usurpation by the state and industries that propose purchase or lease of land for foreign direct investment.
The Argument from Comparative Advantage
Apart from the empirical debate over the results of particular cases in which trade liberalization, coupled with policies that focus on strong export-led growth from commodities, it is worth examining the market norms that proponents of free trade think morally adequate for regulation of the global economic order and the arguments they rely upon.
Global free market libertarianism is the mainstream American view. It has been the view of the last five American administrations, and, as noted, it is often thought of as the centerpiece of the “Washington consensus.” It remains the dominant ideology shared by developmental economists and technocrats who shape and control the policies of the World Bank, International Monetary Fund, World Trade Organization, and other institutions that constitute the overarching framework for the global economic order. How plausible are the key assumptions as the basis for general predictions of how well such policies are likely to work?
The key assumption is that on balance, a global system of trade is a mutually beneficial form of social interaction. Everyone benefits; no one can complain. The idea is an old one, often traced to Adam Smith but made famous in the 19th century by John Stuart Mill and David Ricardo. The heart of the claim is that protectionist trade policies such as high tariffs on imports, state subsidies for domestic industry, and restrictions on the in-flow of foreign capital harm both protectionist nations and their trading partners.
The rationale for that conclusion is known as the argument from comparative advantage. Dani Rodrik's book offers an explicitly moral set of arguments for reconsidering the case for robust, immediate integration of developing economies into the larger global economy under terms that conform to the dictates of free trade fundamentalism. The problem with the comparative advantage argument for free trade on moral grounds is two-fold. It can be predicated upon practices and social arrangements, which were they instituted in developed nations, would be ruled out as violations of other moral norms or values arguably more weighty, and movements toward a greater degree of free trade can occasion radical redistributive effects that would be subject to grave doubt were they the result of various other social policies.
Many of the overarching themes of the book lie beyond this particular set of arguments, and they are discussed elsewhere on this website. But within his chapters 3, 4, 7, and 8 we find a rich supply of information and argument for the potential for profound systematic disadvantage that often accompanies nations that pursue - and are pushed to pursue - a niche in the comparative advantage game consisting of a focus on commodity exports.
Some nations have greater comparative advantage in producing some goods while others have greater comparative advantage in producing others. One country can make steel for comparatively less costs than others and can realize more economic gain than by producing goods which are costly to produce domestically, while another country grows an agricultural staple crop that others cannot produce as well or as cheaply. Everyone benefits by being able to buy steel or wheat from whomever can sell most cheaply due to comparatively lower production costs.
So far so good, but there are problems that arise from supposing that comparative advantage is necessarily a good thing.
First, comparative advantage can be achieved in many ways. It is all too often a consequence of morally reprehensible social arrangements. For example, comparative advantage can be obtained through an abundance of cheap labor, including slave labor or oppressively low wage regimes that violate important moral norms that arguably trump efficiency gains.
Second, comparative advantage is generally calculated by economists in terms of the market prices for goods exchanged between individual consumers and producers. It’s a matter of who can do what at relatively lower costs. But as economists constantly remind us, the true social costs are not always captured in market prices. We get everyday low prices, as the advertisers like to claim, but very often only because the environmental costs or health consequences of lax worker safety rules have not been captured in the market price.
Third, there are well-known redistributive effects of increased integration in global free trade regimes. A typical consequence is the following scenario from a recent economic analysis by Dani Rodrik who looked at a number of developing countries.
For every dollar of increase in a developing country’s Gross Domestic Product (or GDP) through greater international trade, there is a roughly $50 transfer of income from the lowest economic strata to the middle and upper income strata. And to make matters worse, the same groups of people with the lowest skills tend to get hit over and over with each successive upward tick in GDP.
Thus even if it is empirically true, as the comparative advantage argument claims, that unrestricted free trade economically benefits all participating nations in the aggregate, it ignores the moral relevance of profound redistributive effects. Rodrik notes that unless countries adopt counteracting distributive policies, the social price of trade-led growth tends to be the further exacerbation of extreme income inequality.
Fourth and perhaps most importantly, the big hole in the comparative advantage argument is that not all positions within global supply chains stand to benefit equally from international trade. In the 19th century the world experienced what is called the “great divergence.” The richest nations at the dawn of the industrial age were no more than twice as rich as the poorest. Now that gap is roughly 80:1. There are many reasons why some nations are rich while others are poor, and we need not enter too far into that contested terrain. (Click on this page for a survey).
But there is one well-known fact of economic life that periodically gets forgotten among economists, and it tends to get lost in contemporary free trade arguments. Commodity producing nations – especially nations whose largest exports are agricultural crops or mining – sell goods at the bottom of the economic value chain. “Economic value chain” is just an economist’s way of saying that selling raw materials such as grains or minerals is the least rewarding position within the global supply chain. The overwhelmingly profitable position to be in is at the top of the supply chain where finished products are sold. That’s the niche occupied by developed nations and the smarter, luckier developing nations. Selling raw materials or commodities is a near certain way for some elites of developing nations to get richer however, bringing up the national income average, even as the bulk of the population stays poor and gets poorer. Economists call this familiar and well-documented phenomenon the “natural resource curse.” (Click here for more detail).
It is true that commodity producing nations often do gain marginally in GDP as sales of commodities in global markets go up, but they tend to lose out in other respects.The gain comes at a cost in relative terms.The buyers and producers in developed nations race farther ahead by securing cheap raw materials that power their lucrative industrial economies.
Fifth, countries for which comparative advantage consists primarily in commodity sales also deindustrialize. Whatever diversified industrial base they may have had often withers in the face of cheap imports, which can no longer be matched domestically.
There are, of course, additional arguments both for and against the case Rodrik makes against the comparative advantage argument, but two points seem clear.
First, the assumption among its proponents seems to be that whatever benefits flow to countries that jump into - or are nudged into - wholesale free trade arrangements suffer losses that are not fully reckoned by the comparative advantage argument. The argument, while empirically based in significant part, is a moral argument insofar as it presents itself as the sole or decisive consideration in evaluating free trade policies. Rodrik offers a window into the kinds of morally relevant kinds of matters that are left out of account.
Second, his discussion is a further reminder of the very important role of empirical information in formulating policy arguments that often wear the mantle moral arguments. For the comparative advantage argument was itself born of moral philosophy and takes on the patina of a moral imperative among free trade proponents who assume that their policies will do most to help the global poor in the specific ways the global poor are morally most in need of assistance. Facts matter greatly when the benefits upon which the case is predicated only materialize under factual assumptions that do not match reality, as do submerged moral assumptions about what benefits matter most morally.
His book begins with the premise that two moral arguments underlie much of the case he makes for reconsidering the depth and pace of integration into the global economy on the terms of free trade fundamentalism. It is a rare book from within the economics profession, and one that is self-consciously written to explain how economists as a group - like human beings in general - can go so terribly and confidently wrong in their recommendations.
Global free market libertarianism is the mainstream American view. It has been the view of the last five American administrations, and, as noted, it is often thought of as the centerpiece of the “Washington consensus.” It remains the dominant ideology shared by developmental economists and technocrats who shape and control the policies of the World Bank, International Monetary Fund, World Trade Organization, and other institutions that constitute the overarching framework for the global economic order. How plausible are the key assumptions as the basis for general predictions of how well such policies are likely to work?
The key assumption is that on balance, a global system of trade is a mutually beneficial form of social interaction. Everyone benefits; no one can complain. The idea is an old one, often traced to Adam Smith but made famous in the 19th century by John Stuart Mill and David Ricardo. The heart of the claim is that protectionist trade policies such as high tariffs on imports, state subsidies for domestic industry, and restrictions on the in-flow of foreign capital harm both protectionist nations and their trading partners.
The rationale for that conclusion is known as the argument from comparative advantage. Dani Rodrik's book offers an explicitly moral set of arguments for reconsidering the case for robust, immediate integration of developing economies into the larger global economy under terms that conform to the dictates of free trade fundamentalism. The problem with the comparative advantage argument for free trade on moral grounds is two-fold. It can be predicated upon practices and social arrangements, which were they instituted in developed nations, would be ruled out as violations of other moral norms or values arguably more weighty, and movements toward a greater degree of free trade can occasion radical redistributive effects that would be subject to grave doubt were they the result of various other social policies.
Many of the overarching themes of the book lie beyond this particular set of arguments, and they are discussed elsewhere on this website. But within his chapters 3, 4, 7, and 8 we find a rich supply of information and argument for the potential for profound systematic disadvantage that often accompanies nations that pursue - and are pushed to pursue - a niche in the comparative advantage game consisting of a focus on commodity exports.
Some nations have greater comparative advantage in producing some goods while others have greater comparative advantage in producing others. One country can make steel for comparatively less costs than others and can realize more economic gain than by producing goods which are costly to produce domestically, while another country grows an agricultural staple crop that others cannot produce as well or as cheaply. Everyone benefits by being able to buy steel or wheat from whomever can sell most cheaply due to comparatively lower production costs.
So far so good, but there are problems that arise from supposing that comparative advantage is necessarily a good thing.
First, comparative advantage can be achieved in many ways. It is all too often a consequence of morally reprehensible social arrangements. For example, comparative advantage can be obtained through an abundance of cheap labor, including slave labor or oppressively low wage regimes that violate important moral norms that arguably trump efficiency gains.
Second, comparative advantage is generally calculated by economists in terms of the market prices for goods exchanged between individual consumers and producers. It’s a matter of who can do what at relatively lower costs. But as economists constantly remind us, the true social costs are not always captured in market prices. We get everyday low prices, as the advertisers like to claim, but very often only because the environmental costs or health consequences of lax worker safety rules have not been captured in the market price.
Third, there are well-known redistributive effects of increased integration in global free trade regimes. A typical consequence is the following scenario from a recent economic analysis by Dani Rodrik who looked at a number of developing countries.
For every dollar of increase in a developing country’s Gross Domestic Product (or GDP) through greater international trade, there is a roughly $50 transfer of income from the lowest economic strata to the middle and upper income strata. And to make matters worse, the same groups of people with the lowest skills tend to get hit over and over with each successive upward tick in GDP.
Thus even if it is empirically true, as the comparative advantage argument claims, that unrestricted free trade economically benefits all participating nations in the aggregate, it ignores the moral relevance of profound redistributive effects. Rodrik notes that unless countries adopt counteracting distributive policies, the social price of trade-led growth tends to be the further exacerbation of extreme income inequality.
Fourth and perhaps most importantly, the big hole in the comparative advantage argument is that not all positions within global supply chains stand to benefit equally from international trade. In the 19th century the world experienced what is called the “great divergence.” The richest nations at the dawn of the industrial age were no more than twice as rich as the poorest. Now that gap is roughly 80:1. There are many reasons why some nations are rich while others are poor, and we need not enter too far into that contested terrain. (Click on this page for a survey).
But there is one well-known fact of economic life that periodically gets forgotten among economists, and it tends to get lost in contemporary free trade arguments. Commodity producing nations – especially nations whose largest exports are agricultural crops or mining – sell goods at the bottom of the economic value chain. “Economic value chain” is just an economist’s way of saying that selling raw materials such as grains or minerals is the least rewarding position within the global supply chain. The overwhelmingly profitable position to be in is at the top of the supply chain where finished products are sold. That’s the niche occupied by developed nations and the smarter, luckier developing nations. Selling raw materials or commodities is a near certain way for some elites of developing nations to get richer however, bringing up the national income average, even as the bulk of the population stays poor and gets poorer. Economists call this familiar and well-documented phenomenon the “natural resource curse.” (Click here for more detail).
It is true that commodity producing nations often do gain marginally in GDP as sales of commodities in global markets go up, but they tend to lose out in other respects.The gain comes at a cost in relative terms.The buyers and producers in developed nations race farther ahead by securing cheap raw materials that power their lucrative industrial economies.
Fifth, countries for which comparative advantage consists primarily in commodity sales also deindustrialize. Whatever diversified industrial base they may have had often withers in the face of cheap imports, which can no longer be matched domestically.
There are, of course, additional arguments both for and against the case Rodrik makes against the comparative advantage argument, but two points seem clear.
First, the assumption among its proponents seems to be that whatever benefits flow to countries that jump into - or are nudged into - wholesale free trade arrangements suffer losses that are not fully reckoned by the comparative advantage argument. The argument, while empirically based in significant part, is a moral argument insofar as it presents itself as the sole or decisive consideration in evaluating free trade policies. Rodrik offers a window into the kinds of morally relevant kinds of matters that are left out of account.
Second, his discussion is a further reminder of the very important role of empirical information in formulating policy arguments that often wear the mantle moral arguments. For the comparative advantage argument was itself born of moral philosophy and takes on the patina of a moral imperative among free trade proponents who assume that their policies will do most to help the global poor in the specific ways the global poor are morally most in need of assistance. Facts matter greatly when the benefits upon which the case is predicated only materialize under factual assumptions that do not match reality, as do submerged moral assumptions about what benefits matter most morally.
His book begins with the premise that two moral arguments underlie much of the case he makes for reconsidering the depth and pace of integration into the global economy on the terms of free trade fundamentalism. It is a rare book from within the economics profession, and one that is self-consciously written to explain how economists as a group - like human beings in general - can go so terribly and confidently wrong in their recommendations.
How Well Have the Neo-liberal trade policies worked?
The question itself is a complex one, if for no other reason than the policies came to have multiple objectives. We can ask how well they worked in terms of debt relief, poverty reduction, economic growth stimulation, and so on.
But we can ask questions also about their impact on objectives that nations might want for themselves independent of the set of official aims of the Bretton Woods institutional actors. We can ask how well the policies serve other, arguably equally reasonable important ends, such as preservation of national sovereignty and the development of democratic institutions accountable to the will of citizens rather than the external demands of global economic institutions. And of course, we can ask how such policies affect various industry sectors and in turn, the economic and environmental sustainability of developing nations.
We might want to ask how well long-term economic goals of food security and food sovereignty (control over the agricultural resources of a nation) are served by ending agricultural subsidies and shifting agricultural land use away from what would meet local needs toward export crops. And we can ask how well the overall emphasis upon seizing comparative advantage by concentrating the economic base of a country on a narrow band of crops and goods has served other economic objectives such as maintaining an economy sufficiently diversified that it can withstand global price shocks in commodity markets.
Thus the answers to questions about how well policies have worked depend upon the ends we think those polices should serve. Moreover, even on a single metric, such as economic growth (GDP) or poverty alleviation, the evidence is mixed across nations subject to SAPs, and the evidence is subject to disagreements in interpretation. The actual terms of the SAPs and their successor Poverty Reduction Papers have varied. Nations have differed in their natural resources, quality of governance, and sheer good fortune. All we really have to go on are some case studies and some cross-country comparisons that suffer from notable methodological deficiencies.
And yet, critics can point to some very significant failures, measured in narrowly economic terms such economic growth, debt relief, or poverty alleviation. Here the interpretative differences become crucial. Were the failures due, for example, to the full implementation of the policies, the lack of full implementation, other factors that could not have been predicted or controlled for?
Some defenders of the traditional policies will deny that whatever failures we might point to now could have been anticipated, or they will argue that some things would have been done differently had we known then what we know now. Some critics will point out that there were prominent critics then who predicted accurately the circumstances of the sort where failure was highly likely, and they will point out that those who imposed the policies - whether or not they believed them to be beneficial to debtor nations in the long run - favored those policies because they were clearly beneficial to the national self-interests of the countries that created the modern rules of international economic development and cooperation.
Still other critics will argue that even from within the perspective of someone committed to free trade as a matter of principle, the actual implementation of free trade policies was anything but consistent with its underlying values. Criticisms of this sort rest on the empirical claim that free trade ideology was highjacked by the functionaries who served the interests of the developed nations and multi-national corporations at all costs, often heedless of the likely adverse impact on developing nations, and always without regard to non-economic values such as democratic decision-making, national self-determination, and state sovereignty, food security and food sovereignty.
Among the most trenchant criticisms of the track record and policy prescriptions of the IMF and World Bank are the claims that most of the countries who fared best in their integration into the global economy were the ones who managed to avoid or escape from most involvement with these institutions, proceed more slowly with trade liberalization, pursue a diversified portfolio of industries, including many high-value export goods instead of commodities and staple crops, and coordinate a public-private development strategy that simultaneously develops the institutional underpinnings necessary to make markets work and to ensure broad participation of the population in the new sources of prosperity.
Three excellent sources for comparison of how the IMF's clients performed in comparison to how several highly successful Asian nations fared can be found in chapters of two books by former chief economists at the World Bank, William Easterly and Joseph Stiglitz, and in a recent book by Dani Rodrik. See Easterly, The White Man's Burden, chapters 6 and 10; Stiglitz's Globalization and its Discontents, chapters 4 and 7, and Rodrik's The Globalization Paradox, chapters 7-8. Easterly's survey of IMF client countries throughout the 1980s and 1990s reveal a decidedly mixed picture in terms of stimulating economic growth and controlling inflation (66-72), but all three concur that it was in large part the ability of some countries to escape the clutches of the IMF and ignore its advice to proceed with deep integration into the global economy without either simultaneous creation of domestic institutions or the necessary short-term protectionist policies that best explains the achievements of the more successful recent entrants into the global economy.
Finally, another impediment to assessment is the fact that many of the same debtor nations continue under a succession of IMF new IMF loans, new bailout plans, rounds of debt forgiveness, and even with a fresh slate, there are many stalled economies, low to slow growth, continued bad governance. Whether these are failures of IMF policies, hopeless cases that might have been worse off without the IMF's involvement, or cases in which failure is a consequence of not proceeding more quickly and more comprehensively toward deeper integration into the global economy along the shock therapy path to the IMF's purist vision of free trade, remains contested. Stiglitz, Easterly, and Rodrik offer many reasons to think that some of the worst cases remain in bad shape for all sorts of reasons, but that many of the success stories are ones that carved out a path to global economic integration that differed in scale, pacing and sequencing, and in their models of governance from what the IMF has promoted.
But we can ask questions also about their impact on objectives that nations might want for themselves independent of the set of official aims of the Bretton Woods institutional actors. We can ask how well the policies serve other, arguably equally reasonable important ends, such as preservation of national sovereignty and the development of democratic institutions accountable to the will of citizens rather than the external demands of global economic institutions. And of course, we can ask how such policies affect various industry sectors and in turn, the economic and environmental sustainability of developing nations.
We might want to ask how well long-term economic goals of food security and food sovereignty (control over the agricultural resources of a nation) are served by ending agricultural subsidies and shifting agricultural land use away from what would meet local needs toward export crops. And we can ask how well the overall emphasis upon seizing comparative advantage by concentrating the economic base of a country on a narrow band of crops and goods has served other economic objectives such as maintaining an economy sufficiently diversified that it can withstand global price shocks in commodity markets.
Thus the answers to questions about how well policies have worked depend upon the ends we think those polices should serve. Moreover, even on a single metric, such as economic growth (GDP) or poverty alleviation, the evidence is mixed across nations subject to SAPs, and the evidence is subject to disagreements in interpretation. The actual terms of the SAPs and their successor Poverty Reduction Papers have varied. Nations have differed in their natural resources, quality of governance, and sheer good fortune. All we really have to go on are some case studies and some cross-country comparisons that suffer from notable methodological deficiencies.
And yet, critics can point to some very significant failures, measured in narrowly economic terms such economic growth, debt relief, or poverty alleviation. Here the interpretative differences become crucial. Were the failures due, for example, to the full implementation of the policies, the lack of full implementation, other factors that could not have been predicted or controlled for?
Some defenders of the traditional policies will deny that whatever failures we might point to now could have been anticipated, or they will argue that some things would have been done differently had we known then what we know now. Some critics will point out that there were prominent critics then who predicted accurately the circumstances of the sort where failure was highly likely, and they will point out that those who imposed the policies - whether or not they believed them to be beneficial to debtor nations in the long run - favored those policies because they were clearly beneficial to the national self-interests of the countries that created the modern rules of international economic development and cooperation.
Still other critics will argue that even from within the perspective of someone committed to free trade as a matter of principle, the actual implementation of free trade policies was anything but consistent with its underlying values. Criticisms of this sort rest on the empirical claim that free trade ideology was highjacked by the functionaries who served the interests of the developed nations and multi-national corporations at all costs, often heedless of the likely adverse impact on developing nations, and always without regard to non-economic values such as democratic decision-making, national self-determination, and state sovereignty, food security and food sovereignty.
Among the most trenchant criticisms of the track record and policy prescriptions of the IMF and World Bank are the claims that most of the countries who fared best in their integration into the global economy were the ones who managed to avoid or escape from most involvement with these institutions, proceed more slowly with trade liberalization, pursue a diversified portfolio of industries, including many high-value export goods instead of commodities and staple crops, and coordinate a public-private development strategy that simultaneously develops the institutional underpinnings necessary to make markets work and to ensure broad participation of the population in the new sources of prosperity.
Three excellent sources for comparison of how the IMF's clients performed in comparison to how several highly successful Asian nations fared can be found in chapters of two books by former chief economists at the World Bank, William Easterly and Joseph Stiglitz, and in a recent book by Dani Rodrik. See Easterly, The White Man's Burden, chapters 6 and 10; Stiglitz's Globalization and its Discontents, chapters 4 and 7, and Rodrik's The Globalization Paradox, chapters 7-8. Easterly's survey of IMF client countries throughout the 1980s and 1990s reveal a decidedly mixed picture in terms of stimulating economic growth and controlling inflation (66-72), but all three concur that it was in large part the ability of some countries to escape the clutches of the IMF and ignore its advice to proceed with deep integration into the global economy without either simultaneous creation of domestic institutions or the necessary short-term protectionist policies that best explains the achievements of the more successful recent entrants into the global economy.
Finally, another impediment to assessment is the fact that many of the same debtor nations continue under a succession of IMF new IMF loans, new bailout plans, rounds of debt forgiveness, and even with a fresh slate, there are many stalled economies, low to slow growth, continued bad governance. Whether these are failures of IMF policies, hopeless cases that might have been worse off without the IMF's involvement, or cases in which failure is a consequence of not proceeding more quickly and more comprehensively toward deeper integration into the global economy along the shock therapy path to the IMF's purist vision of free trade, remains contested. Stiglitz, Easterly, and Rodrik offer many reasons to think that some of the worst cases remain in bad shape for all sorts of reasons, but that many of the success stories are ones that carved out a path to global economic integration that differed in scale, pacing and sequencing, and in their models of governance from what the IMF has promoted.
One Insider's Point of View
Few economists are as well positioned as Joseph Stiglitz to offer critiques of the policies of the major global economic institutions. He is a Nobel Prize winning economist, and served as chairman of the Council of Economic Advisers under President Bill Clinton and chief economist at the World Bank.
Stiglitz observed from the inside how the International Monetary Fund and other major institutions put the interests of Wall Street and the financial community ahead of the poorer nations - and how the various considerations of international politics from within the US and other developed nations guided policy decisions that depressed sustainable economic growth within debtor nations, entrenched political and economic elites and sold off state assets for their personal benefit, and caused substantial environmental damage.
Even in terms of free trade ideology itself, Stiglitz argues that the actual implementation was deeply flawed, both within IMF and World Bank free trade policies and in terms of the trade agreements that developed in their shadow. As Stiglitz puts it, "In part, free trade has not worked because we have not tried it: trade agreements of the past have been neither free nor fair." (p. 62)
His observations about how things went badly because of political interferences and institutional dysfunction are not the sum of his critique. In addition, he reflects on the extent that trade liberalization ideals themselves were misguided and often not even in principle well-tailored strategies for achieving the best interests of debtor nations. Especially in Mismeasuring Our Lives: Why GDP Does not Add Up, he makes the case that global economic institutions also err in defining their most fundamental objectives in terms of maximizing GDP.
The overall critique is really quite devastating on multiple counts. Here's how the IMF imagined the likely trajectory of their program of shock therapy - i.e., propelling debtor nations into a rapid and comprehensive form of social and economic transformation designed to "jump start" rapid economic growth. They assumed that industries could be privatized quickly, that markets would respond promptly to needs for essential services once the governments were removed from the picture, that matters of regulation could be deferred, and that persons dislocated by privatization would simply shift into new jobs that the market economy would generate. They accepted the Kuznets hypothesis: the possibility that inequality might increase in the short-run, but that inequality would enable faster economic growth through capital accumulation (because the rich save more than the poor and more might be available for investment), but that over time benefits would trickle down. And they opposed increased taxation of the rich as a vehicle for closing budget deficits because that would retard capital accumulation needed for growth, all the while opposing safety nets because they added to the deficit.
What might have brought economists to run headlong to adopt policies that have the potential for such cruel consequences? Stiglitz's answer, in a nutshell, is that IMF decisions were made on the basis of ideology, bad economics, and "thinly veiled special interests" (xiii). A more lengthy assessment is as follows:
"...the West has driven the globalization agenda, ensuring that it garners a disproportionate share of the benefits, at the expense of the developing world. It was not just that the more advanced industrial countries declined to open up their markets to the goods of the developing countries... it was not just that the more advanced industrial countries continued to subsidize agriculture, making it difficult for the developing countries to compete... the net effect was to lower the prices some of the poorest countries in the world received relative to what they paid for their imports. The result was that some of the poorest countries in the world were actually made worse off." (7)
And it's not only the outcome that Stiglitz criticizes. The top-down imposition of painful and economically destructive economic prescriptions has made the IMF one of the most vilified institutions in the world (just search You-tube for IMF protests). The process of conditional loans based on a demand for deep and immediate economic restructuring - in many cases, necessitating sweeping changes in domestic laws - reflected ignorance of and indifference to local views about local conditions, arrogance in the confidence they held in the superiority of their own expertise to that of others, a thoroughly anti-democratic, authoritarian attitude that undermined national sovereignty and aspirations for building institutions that would foster greater democratic participation. It was in short, nothing less than a colonial mentality (24) coupled with the fact that the leadership itself was beholden to the agenda of the US Treasury Department - especially under the two secretaries during the Clinton years - who pursued aggressively the interests not only of the wealthy industrial countries, but the commercial and financial interests within those nations. In the end, the IMF bailed out bankers and creditors, time and again, while shredding safety nets for the poor.
Moreover, Stiglitz charges that even the IMF's original core mission was not well-served. Economic crises became more frequent and deeper on average (excluding the Great Depression) over a 50 year period, and this was not merely an "unfortunate streak of bad luck" (15) inasmuch as it has been due in part to the IMF's policies of premature market liberalization that made matters worse for the poor and the creation of moral hazard, the process by which incentives to make responsible expenditure decisions was eroded by the continuous bailout of debtor nations. New rounds of loan packages just kept on coming, no matter how obviously corrupt, often for narrow reasons of US foreign policy, ensuring a steady stream of bailout money that kept the banks from experiencing losses, no matter how shaky and improvident the loan in the first place. For similar critiques, see William Easterly, White Man's Burden, chapters 4 and 6.
Stiglitz observed from the inside how the International Monetary Fund and other major institutions put the interests of Wall Street and the financial community ahead of the poorer nations - and how the various considerations of international politics from within the US and other developed nations guided policy decisions that depressed sustainable economic growth within debtor nations, entrenched political and economic elites and sold off state assets for their personal benefit, and caused substantial environmental damage.
Even in terms of free trade ideology itself, Stiglitz argues that the actual implementation was deeply flawed, both within IMF and World Bank free trade policies and in terms of the trade agreements that developed in their shadow. As Stiglitz puts it, "In part, free trade has not worked because we have not tried it: trade agreements of the past have been neither free nor fair." (p. 62)
His observations about how things went badly because of political interferences and institutional dysfunction are not the sum of his critique. In addition, he reflects on the extent that trade liberalization ideals themselves were misguided and often not even in principle well-tailored strategies for achieving the best interests of debtor nations. Especially in Mismeasuring Our Lives: Why GDP Does not Add Up, he makes the case that global economic institutions also err in defining their most fundamental objectives in terms of maximizing GDP.
The overall critique is really quite devastating on multiple counts. Here's how the IMF imagined the likely trajectory of their program of shock therapy - i.e., propelling debtor nations into a rapid and comprehensive form of social and economic transformation designed to "jump start" rapid economic growth. They assumed that industries could be privatized quickly, that markets would respond promptly to needs for essential services once the governments were removed from the picture, that matters of regulation could be deferred, and that persons dislocated by privatization would simply shift into new jobs that the market economy would generate. They accepted the Kuznets hypothesis: the possibility that inequality might increase in the short-run, but that inequality would enable faster economic growth through capital accumulation (because the rich save more than the poor and more might be available for investment), but that over time benefits would trickle down. And they opposed increased taxation of the rich as a vehicle for closing budget deficits because that would retard capital accumulation needed for growth, all the while opposing safety nets because they added to the deficit.
What might have brought economists to run headlong to adopt policies that have the potential for such cruel consequences? Stiglitz's answer, in a nutshell, is that IMF decisions were made on the basis of ideology, bad economics, and "thinly veiled special interests" (xiii). A more lengthy assessment is as follows:
"...the West has driven the globalization agenda, ensuring that it garners a disproportionate share of the benefits, at the expense of the developing world. It was not just that the more advanced industrial countries declined to open up their markets to the goods of the developing countries... it was not just that the more advanced industrial countries continued to subsidize agriculture, making it difficult for the developing countries to compete... the net effect was to lower the prices some of the poorest countries in the world received relative to what they paid for their imports. The result was that some of the poorest countries in the world were actually made worse off." (7)
And it's not only the outcome that Stiglitz criticizes. The top-down imposition of painful and economically destructive economic prescriptions has made the IMF one of the most vilified institutions in the world (just search You-tube for IMF protests). The process of conditional loans based on a demand for deep and immediate economic restructuring - in many cases, necessitating sweeping changes in domestic laws - reflected ignorance of and indifference to local views about local conditions, arrogance in the confidence they held in the superiority of their own expertise to that of others, a thoroughly anti-democratic, authoritarian attitude that undermined national sovereignty and aspirations for building institutions that would foster greater democratic participation. It was in short, nothing less than a colonial mentality (24) coupled with the fact that the leadership itself was beholden to the agenda of the US Treasury Department - especially under the two secretaries during the Clinton years - who pursued aggressively the interests not only of the wealthy industrial countries, but the commercial and financial interests within those nations. In the end, the IMF bailed out bankers and creditors, time and again, while shredding safety nets for the poor.
Moreover, Stiglitz charges that even the IMF's original core mission was not well-served. Economic crises became more frequent and deeper on average (excluding the Great Depression) over a 50 year period, and this was not merely an "unfortunate streak of bad luck" (15) inasmuch as it has been due in part to the IMF's policies of premature market liberalization that made matters worse for the poor and the creation of moral hazard, the process by which incentives to make responsible expenditure decisions was eroded by the continuous bailout of debtor nations. New rounds of loan packages just kept on coming, no matter how obviously corrupt, often for narrow reasons of US foreign policy, ensuring a steady stream of bailout money that kept the banks from experiencing losses, no matter how shaky and improvident the loan in the first place. For similar critiques, see William Easterly, White Man's Burden, chapters 4 and 6.
More Criticisms of IMF Ideology and Policies
We have seen various criticisms of IMF policies by William Easterly discussed already within earlier entries on this page: arrogance reminiscent of the colonial mentality that the book's title captures so vividly; less than stellar growth and inflation control outcomes; and evidence that successful efforts in transformation were more common in precisely the places that were able to avoid IMF interference.
In addition, Easterly has argued that the expansive IMF mission of fundamental social transformation has been a misguided endeavor for several reasons. It is not only implausible to suppose that a complete transformation is possible by way of shock therapy - a view that he admits he once held while serving as economist at the World Bank - he too adds his voice to the complaint that the top-down approach is arrogant and fundamentally anti-democratic. Even the more recent attempts - under the Poverty Reduction Strategy Paper (PRSP) process - to obtain more local community input is antithetical to democratic values inasmuch as it is no substitute for actual democratic decision-making and in some instances it displaces the prospects for real democratic participation. The reason is that the process of solicitation of additional advice might well overturn settled democratic decisions about key poverty reduction strategies (144-47). In fact, the last thing many developing nations need is a such a mechanism of the sort that can strengthen the hand of authoritarian rulers (196).
The fundamental problem is the fact that the necessary mechanisms for feedback and accountability in programs designed to aid the global poor are missing. "The needs of the poor don't get met because the poor have very little money or political power with which to make their needs known and they cannot hold anyone accountable to meet their needs" (17). Worse yet, the present system of aid, whether through aid agencies of various nations or through the IMF, World Bank and associated regional lending organizations, is not set up with the poor as the client. The "people paying the bills are rich people who don't have much knowledge of poor people" (17). Moreover, from the outset, "the interests of the poor got very little weight compared to the vanity of the rich" (23). "Given the reality that the White Man's Burden weights the interests of the rich more than the poor, slight benefits for the West were enough to justify high costs to the Rest." (314).
In addition, Easterly offers a shotgun of more specific complaints. With so many aid agencies working in the same geographic areas, and each signing on to a large number of goals, such as the Millennium Development Goals, in effect no one agency can be held accountable for meeting any of the specific goals (171-75). Better to carve up the territory and make each aid agency directly accountable to the "customer" (169-71) who is in fact the poor, rather than nations who often use aid primarily as a means of achieving their own foreign policy objectives. One particularly bitter complaint is lodged against "tied aid" programs which require the purchase of goods and consultant services from the donor nation. Such practices are not optimal from the point of view of building domestic capacities or increasing sustainable economic growth potential within the recipient country. It mostly benefits industrial and financial interests from developed countries.
Among Easterly's main recommendations are the following:
Some of his recommendations are not as easy to assess as his criticisms. But the many flaws in the old system do provide powerful reasons for getting the IMF out of the business of undermining national sovereignty and using the least well-off nations as instruments for further enrichment of wealthy donor nations who assume that they have a right and a moral mandate to guide the next phase of global transformation.
In addition, Easterly has argued that the expansive IMF mission of fundamental social transformation has been a misguided endeavor for several reasons. It is not only implausible to suppose that a complete transformation is possible by way of shock therapy - a view that he admits he once held while serving as economist at the World Bank - he too adds his voice to the complaint that the top-down approach is arrogant and fundamentally anti-democratic. Even the more recent attempts - under the Poverty Reduction Strategy Paper (PRSP) process - to obtain more local community input is antithetical to democratic values inasmuch as it is no substitute for actual democratic decision-making and in some instances it displaces the prospects for real democratic participation. The reason is that the process of solicitation of additional advice might well overturn settled democratic decisions about key poverty reduction strategies (144-47). In fact, the last thing many developing nations need is a such a mechanism of the sort that can strengthen the hand of authoritarian rulers (196).
The fundamental problem is the fact that the necessary mechanisms for feedback and accountability in programs designed to aid the global poor are missing. "The needs of the poor don't get met because the poor have very little money or political power with which to make their needs known and they cannot hold anyone accountable to meet their needs" (17). Worse yet, the present system of aid, whether through aid agencies of various nations or through the IMF, World Bank and associated regional lending organizations, is not set up with the poor as the client. The "people paying the bills are rich people who don't have much knowledge of poor people" (17). Moreover, from the outset, "the interests of the poor got very little weight compared to the vanity of the rich" (23). "Given the reality that the White Man's Burden weights the interests of the rich more than the poor, slight benefits for the West were enough to justify high costs to the Rest." (314).
In addition, Easterly offers a shotgun of more specific complaints. With so many aid agencies working in the same geographic areas, and each signing on to a large number of goals, such as the Millennium Development Goals, in effect no one agency can be held accountable for meeting any of the specific goals (171-75). Better to carve up the territory and make each aid agency directly accountable to the "customer" (169-71) who is in fact the poor, rather than nations who often use aid primarily as a means of achieving their own foreign policy objectives. One particularly bitter complaint is lodged against "tied aid" programs which require the purchase of goods and consultant services from the donor nation. Such practices are not optimal from the point of view of building domestic capacities or increasing sustainable economic growth potential within the recipient country. It mostly benefits industrial and financial interests from developed countries.
Among Easterly's main recommendations are the following:
- the IMF should stop lending, especially the repeated lending and bailout of the poorest, to least creditworthy nations.
- the IMF and World Bank should cease the practice of intrusive conditionality of the loans it does offer to nations.
- The aim of aid should be incremental improvement of the lives of poor people, not wholesale social transformation according to the donor nations' own ideological vision and for its own strategic national purposes.
- experiment; see what works; don't assume that there is a single path to development suitable for all countries.
Some of his recommendations are not as easy to assess as his criticisms. But the many flaws in the old system do provide powerful reasons for getting the IMF out of the business of undermining national sovereignty and using the least well-off nations as instruments for further enrichment of wealthy donor nations who assume that they have a right and a moral mandate to guide the next phase of global transformation.
Jamaica: A Case Study in the Consequences of Structural Adjustment Policies for Agriculture
click for link to select clips
Critics of international development policies imposed on struggling debtor nations by the World Bank, International Monetary Fund, and various regional development banks argue that these institutions, by themselves, are among the most significant causes of of enduring poverty in may post-colonial countries. Critics argue that "structural adjustment" policies designed to balance domestic budgets, eliminate foreign trade barriers, deregulate private industries, and privatize various state activities and functions contribute to the long-term impoverishment of debtor nations, erode national sovereignty, and create economic and legal conditions conducive to external exploitation by more affluent nations and multi-national corporations.
The film Life and Debt is what PBS describes as a documentary "with a point of view." The following summary is from PBS, the film's co-presenter, along with Independent Television Service (ITVS). "Using conventional and unconventional documentary techniques, this searing film dissects the "mechanism of debt" that is destroying local agriculture and industry while substituting sweatshops and cheap imports.
With a voice-over narration written by Jamaica Kincaid,adapted from her book A Small Place, Life and Debt (official website) is an unapologetic look at the "new world order" from the point of view of Jamaican workers, farmers, government and policy officials who see the reality of globalization from the ground up."
The film demonstrates the familiar charge that SAPs often amounted to policies that compelled unilateral disarmament in the trade arena. While the EU and US continued to subsidize agricultural production and tailor foreign policy in order to facilitate "dumping" of cheap surplus products in the markets of less developed nations, the debtor nations were forced to eliminate its agricultural subsidies and protective tariffs, ultimately resulting in the near collapse of many segments of the agricultural economy. Food prices also spiked, food quality often deteriorated, food purchasing subsidies for consumers were eroded, and food insecurity increased as foreign export profits soared.
Click the image above for an excellent, edited collection of clips that focus on the effects of free trade policies in Jamaica. The selections are are meant to illustrate the potential for of structural adjustment policies to have devastating effects domestic agricultural industries, food security, and sustainable economic growth.
Also, see the film clip below for Bill Clinton's take on what happened and why it happened in similar fashion in Haiti.
The film Life and Debt is what PBS describes as a documentary "with a point of view." The following summary is from PBS, the film's co-presenter, along with Independent Television Service (ITVS). "Using conventional and unconventional documentary techniques, this searing film dissects the "mechanism of debt" that is destroying local agriculture and industry while substituting sweatshops and cheap imports.
With a voice-over narration written by Jamaica Kincaid,adapted from her book A Small Place, Life and Debt (official website) is an unapologetic look at the "new world order" from the point of view of Jamaican workers, farmers, government and policy officials who see the reality of globalization from the ground up."
The film demonstrates the familiar charge that SAPs often amounted to policies that compelled unilateral disarmament in the trade arena. While the EU and US continued to subsidize agricultural production and tailor foreign policy in order to facilitate "dumping" of cheap surplus products in the markets of less developed nations, the debtor nations were forced to eliminate its agricultural subsidies and protective tariffs, ultimately resulting in the near collapse of many segments of the agricultural economy. Food prices also spiked, food quality often deteriorated, food purchasing subsidies for consumers were eroded, and food insecurity increased as foreign export profits soared.
Click the image above for an excellent, edited collection of clips that focus on the effects of free trade policies in Jamaica. The selections are are meant to illustrate the potential for of structural adjustment policies to have devastating effects domestic agricultural industries, food security, and sustainable economic growth.
Also, see the film clip below for Bill Clinton's take on what happened and why it happened in similar fashion in Haiti.
World Bank Investment Policies: The Large Dam as A Case in Point
click image for a pdf
The World Bank has long been the target of criticism, not only for its complicity with IMF cross-conditionality provisions in support of SAPs and for its historically single-minded obsession with GDP as the primary metric for evaluation of the success of development strategies, but also for its focus on large-scale projects such as dams and related kinds of public works projects. The criticisms are overlapping. The choice of projects such as large dams is subject to criticism because of its environmental destructiveness. The report of the World Commission on Dams, Dams and Development: A New Framework for Decision-Making is illustrative.
Equally important is the criticism that the World Bank has, for whatever reasons, steered many of the large, lucrative development contracts to a small number of well-connected multinational corporations. While defenders will argue that technical capacity is a driving consideration for such choices and that the relevant expertise is concentrated in the hands of a very few firms, the overarching point is that the longer term consequences of concentrating economic power and decisional authority in the hands of private foreign entities for construction and management of something as vital as a nation's water supply is short-sighted. Moreover, the worry is that putting such momentum behind such large-scale investments drives out small-scale, diffusely controlled forms of local innovation for the generation of electricity and the treatment and distribution of clean water. Worse yet, some critics fear loss of effective control over the fate of small nations when outside corporations who are chosen to own, lease, or manage such resources exert outside influence on further political and economic decisions within lesser developed nations.
Equally important is the criticism that the World Bank has, for whatever reasons, steered many of the large, lucrative development contracts to a small number of well-connected multinational corporations. While defenders will argue that technical capacity is a driving consideration for such choices and that the relevant expertise is concentrated in the hands of a very few firms, the overarching point is that the longer term consequences of concentrating economic power and decisional authority in the hands of private foreign entities for construction and management of something as vital as a nation's water supply is short-sighted. Moreover, the worry is that putting such momentum behind such large-scale investments drives out small-scale, diffusely controlled forms of local innovation for the generation of electricity and the treatment and distribution of clean water. Worse yet, some critics fear loss of effective control over the fate of small nations when outside corporations who are chosen to own, lease, or manage such resources exert outside influence on further political and economic decisions within lesser developed nations.
The World Bank's Development Focus: Looking Ahead to 2030
The Millennium Development Goals are set for attainment in 2015. The ambitious developmental goals include poverty reduction, reduction of the burden of disease, and other public health improvements such as improved access to water. Recent reports by the World Bank indicate that the United Nations’ Millennium Development Goals for extreme poverty reduction have been met 5 years in advance of targeted date of 2015. Monetary targets are not the sole focus of the Goals. In 2000, 8 goals with 2015 target dates were established. While these reports show that there has been some significant progress in some areas, a November 2012 report by Save the Children found that the gap between the richest and poorest children had grown by 35 percent since the 1990s.
Looking ahead, what should we anticipate - or hope for - in the way of priorities of major developmental organizations such as the World Bank? Draft copies of World Bank documents outlining some of the ideas under discussion internally have found their way online, available here and here) and while the suggestions contained therein are by no means finalized, they have been met with mixed reviews.
One of the poverty reduction aims is to reduce “extreme poverty” (defined as subsisting on less than 1.25 dollars per day) by about 1% per year from 2015 to 2030, resulting in a three percent rate globally in 2030. Another proposed aim is “to promote the income growth of the bottom 40 percent of the population in every country.” While all this might sound congenial to many advocates for a greater focus on poverty relief, some critics argue that there is a need to do more than lift up the bottom, and in particular, combat directly the growing rates of inequality, that many economists argue is counterproductive to economic growth, and for others, a source of injustice itself. (See more on that on page two of Institutions and Ideology).
A recent paper produced by contributors organizations including the Center for Global Development, argue instead for focus on reducing the ratio of incomes of the top 10 percent of a country’s earners to the bottom 40 percent. Again, while the document in circulation is still in draft form, the relevant issue is how the Bank intends to balance its pro-growth agenda, which they subsume under the language of aiming for "shared prosperity," in its investment decisions. Some alternatives might raise the condition of the bottom two quintiles by adoption of strategies that raise the incomes of the top tiers even more, thereby increasing inequality and presumably promoting faster aggregate economic growth, or policy makers might opt for strategies that have as a separate aim the reduction of inequality, perhaps at the short-term expense of aggregate growth.
What sort of projects then does the World Bank envision? The World Bank presented its large donors, the International Development Association, a background briefing in early March of 2013 and its priorities included what it called "regional transformational initiatives," by which they meant large projects with cross-border scope, such as proposals for large, multi-billion-dollar dams in Africa and South Asia. Critics worry that this is merely more of the same kinds of priorities that failed to benefit many of the least well-off segments of the population, and in the process, was both environmentally destructive in its heyday of the 1950s through 1970s and likely to be even more problematic going forward as climate change threats loom even larger. In particular, critics doubt whether such large-scale projects are likely to be suitable solutions to the growing energy needs of the poorest parts of the world in ways that also achieve the aims of "climate resilience."
In July of 2014 the Bank's governing board met to consider the most recent (fourth) draft policy statement: Environmental and Social Framework: Setting Standards for Sustainable Development. Nearly 100 civil-society groups had argued that it rolls back several decades of reforms designed to protect indigenous populations, the poor and sensitive ecosystems. In a letter by Bank on Human Rights, a coalition of two dozen human-rights, anti-poverty, and environmental groups, critics charge that "the draft safeguard framework represents a profound dilution of the existing safeguards and an undercutting of international human rights standards and best practice.” One example of that dilution is a provision that would permit borrowing governments to “opt out” of the Indigenous Peoples Standard that was developed by the Bank to ensure that Bank-funded projects protected essential land and natural-resource rights of affected indigenous communities. In addition, according to BHR, the draft fails to incorporate any serious protections to prevent Bank funds from supporting land grabs that have displaced indigenous communities and small farmers in some of the world’s poorest countries in order to make way for large-scale agricultural projects that produce export crops for the benefit of citizens of more developed nations.
A part of the rationale for changes in existing policy is a desire to make itself more attractive to borrowers by, for example, streamlining operations and reducing waste and duplication. Increasingly, there are alternative lenders to the roughly 50 Million dollar pool of annual loans provided to the developing world, and countries such as China typically impose fewer restrictions on their loans. World Bank restrictions meant to curb corruption as well as human rights abuse have not been among the standard conditions for loans.
Looking ahead, what should we anticipate - or hope for - in the way of priorities of major developmental organizations such as the World Bank? Draft copies of World Bank documents outlining some of the ideas under discussion internally have found their way online, available here and here) and while the suggestions contained therein are by no means finalized, they have been met with mixed reviews.
One of the poverty reduction aims is to reduce “extreme poverty” (defined as subsisting on less than 1.25 dollars per day) by about 1% per year from 2015 to 2030, resulting in a three percent rate globally in 2030. Another proposed aim is “to promote the income growth of the bottom 40 percent of the population in every country.” While all this might sound congenial to many advocates for a greater focus on poverty relief, some critics argue that there is a need to do more than lift up the bottom, and in particular, combat directly the growing rates of inequality, that many economists argue is counterproductive to economic growth, and for others, a source of injustice itself. (See more on that on page two of Institutions and Ideology).
A recent paper produced by contributors organizations including the Center for Global Development, argue instead for focus on reducing the ratio of incomes of the top 10 percent of a country’s earners to the bottom 40 percent. Again, while the document in circulation is still in draft form, the relevant issue is how the Bank intends to balance its pro-growth agenda, which they subsume under the language of aiming for "shared prosperity," in its investment decisions. Some alternatives might raise the condition of the bottom two quintiles by adoption of strategies that raise the incomes of the top tiers even more, thereby increasing inequality and presumably promoting faster aggregate economic growth, or policy makers might opt for strategies that have as a separate aim the reduction of inequality, perhaps at the short-term expense of aggregate growth.
What sort of projects then does the World Bank envision? The World Bank presented its large donors, the International Development Association, a background briefing in early March of 2013 and its priorities included what it called "regional transformational initiatives," by which they meant large projects with cross-border scope, such as proposals for large, multi-billion-dollar dams in Africa and South Asia. Critics worry that this is merely more of the same kinds of priorities that failed to benefit many of the least well-off segments of the population, and in the process, was both environmentally destructive in its heyday of the 1950s through 1970s and likely to be even more problematic going forward as climate change threats loom even larger. In particular, critics doubt whether such large-scale projects are likely to be suitable solutions to the growing energy needs of the poorest parts of the world in ways that also achieve the aims of "climate resilience."
In July of 2014 the Bank's governing board met to consider the most recent (fourth) draft policy statement: Environmental and Social Framework: Setting Standards for Sustainable Development. Nearly 100 civil-society groups had argued that it rolls back several decades of reforms designed to protect indigenous populations, the poor and sensitive ecosystems. In a letter by Bank on Human Rights, a coalition of two dozen human-rights, anti-poverty, and environmental groups, critics charge that "the draft safeguard framework represents a profound dilution of the existing safeguards and an undercutting of international human rights standards and best practice.” One example of that dilution is a provision that would permit borrowing governments to “opt out” of the Indigenous Peoples Standard that was developed by the Bank to ensure that Bank-funded projects protected essential land and natural-resource rights of affected indigenous communities. In addition, according to BHR, the draft fails to incorporate any serious protections to prevent Bank funds from supporting land grabs that have displaced indigenous communities and small farmers in some of the world’s poorest countries in order to make way for large-scale agricultural projects that produce export crops for the benefit of citizens of more developed nations.
A part of the rationale for changes in existing policy is a desire to make itself more attractive to borrowers by, for example, streamlining operations and reducing waste and duplication. Increasingly, there are alternative lenders to the roughly 50 Million dollar pool of annual loans provided to the developing world, and countries such as China typically impose fewer restrictions on their loans. World Bank restrictions meant to curb corruption as well as human rights abuse have not been among the standard conditions for loans.
BRICS Bank: should competition be welcome?
Click image for link to the story in the Hindustan Times
At the BRICS summit - Brazil, Russia, India, China, and South Africa - in the spring of 2013, the five nations agreed to create an alternative development bank. In July of 2014 they announced an agreement to establish a “New Development Bank” (NDB) that will compete with the World Bank for developmental lending and a “Contingent Reserve Arrangement” (CRA) designed as an alternative to the IMF for access to emergency loans for meeting sovereign debt crises.
The stated focus of the developmental loan program will be on infrastructure improvement, and the BRICS countries estimate that their own countries will need as much as 4.5 Trillion dollars of infrastructure development over the next 5 years. The Indian government alone estimates that 1 Trillion dollars will be needed for financing domestic infrastructure projects over the next 5 years, and that approximately half of that amount will come from the private sector. Historically, BRICS countries do not make substantial investments in other BRICS countries. Over 40% of their foreign investment goes to developed nations, the lion's share to EU countries, while only 2.5% is invested in other BRICS countries. The initial capitalization from participating countries is 50 Billion dollars with authorization for up to100 Billion Dollars, and while that might seem like quite a lot, the actual funds available for loans will be a tiny percentage of that figure.
The CRA will have 100 Billion dollars to bail out any of its members suffering an exchange crisis. China will contribute 41 percent of the total, while South Africa will contribute only 5 percent, and the other countries will contribute 18 percent each. By contrast, The IMF’s resources total 937 Billion dollars.
How much either the NDB or CRA alters the global development landscape remains to be seen.
The stated focus of the developmental loan program will be on infrastructure improvement, and the BRICS countries estimate that their own countries will need as much as 4.5 Trillion dollars of infrastructure development over the next 5 years. The Indian government alone estimates that 1 Trillion dollars will be needed for financing domestic infrastructure projects over the next 5 years, and that approximately half of that amount will come from the private sector. Historically, BRICS countries do not make substantial investments in other BRICS countries. Over 40% of their foreign investment goes to developed nations, the lion's share to EU countries, while only 2.5% is invested in other BRICS countries. The initial capitalization from participating countries is 50 Billion dollars with authorization for up to100 Billion Dollars, and while that might seem like quite a lot, the actual funds available for loans will be a tiny percentage of that figure.
The CRA will have 100 Billion dollars to bail out any of its members suffering an exchange crisis. China will contribute 41 percent of the total, while South Africa will contribute only 5 percent, and the other countries will contribute 18 percent each. By contrast, The IMF’s resources total 937 Billion dollars.
How much either the NDB or CRA alters the global development landscape remains to be seen.
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One Explanation for IMF/World Bank Policies: we meant well but we made a Devil's BargainBill Clinton in this video clip articulates the view that we meant well and expected better results when we imposed the structural adjustment policies on developing nations. Note that the commentators are not impressed by the former president's claim that they acted in good faith or that had they known then what they know now they would have acted differently.
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A Different, Less Trusting Explanation of MotivationsMany critics argue that the nations that created, funded, and managed the major global economic institutions established the rules of the modern global economic order to serve their own economic interests. Structural adjustment programs and cross-conditionality agreements in particular allow their multi-national corporations to enter local markets with competitive advantages such as subsidies for their own agricultural export products while simultaneously requiring debtor nations to remove their own subsidies and import tariffs as conditions for IMF loans. The Pinky cartoon on the right hand side of this page provides a humorous account of what many critics see as a faithful portrayal of what those in charge knew or should have known at the time they imposed structural adjustment programs on debtor nations.
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A Musical Tribute of Sorts to Bankers EverywhereOnly the Brits can put such a fine point on such delicate matters. This musical interlude goes out to Larry Summers, the former World Bank leader who once posited that the Third World is Underpolluted, and more generally, to all the folks that every administration, whatever the party, in the US and UK, keep putting in charge of regulating private banks.
Also, read Matt Taibbi's story of how captive government treats big corporate culprits, which are in his immortal words, "Too Big to Jail." Read his column and the detailed account of ignorance, sloth, and favoritism shown by the US and UK regulators in the late hours of 2012. |
WTO and GATS: Effects on Poverty, Inequality, Democracy, Trade Barriers, Development, and Water
The World Bank and IMF are not the only global economic institutions increasingly subject to moral scrutiny. Trade is now regulated through a more complex set of multi-party agreements that exert influence that goes well beyond what is possible in SAPs that are imposed on countries, one nation at a time.
The original Global Agreement on Trade and Tariff (GATT) was established in 1947 in Geneva. It remained provisional for almost 50 years, until the Uruguay Round of global trade discussions in 1994. GATT was originally conceived as an agreement creating an independent world trade oversight body. The goal was to reduce tariffs in order to encourage international trade.
As global trade became more complicated, the need for systematic reform was evident, resulting in the Uruguay Round. The round led to the eventual creation of the World Trade Organization (WTO) and the solidification of global trade policies of liberalization and privatization in 1995 through the Global Agreement on Trade in Services (GATS).
The implications of WTO and GATS are numerous and highly significant for goals of economic development, poverty reduction, and national sovereignty. The WTO's authority is extensive. It covers trade in raw materials, goods, and services, even when those goods and services are produced and consumed exclusively within a single country. The rationale for such extensive regulative authority is that the overarching aim is to open all markets to globalization and that allowing the existence of pockets of local economic activity immune from the WTO's reach would undermine its ability to enforce the goals of a genuinely open global market.
Moreover, the WTO's rulings are binding on every member country. There are now more than 150 participating countries, and realistically, it is the only game in town. No nation can afford to go its own way. No nation can be, in philosopher Allen Buchanan's words, "distributionally autonomous and economically self-sufficient." The reach of WTO regulation even extends to its authority to review the intellectual property laws of member nations inasmuch as they may constitute non-tariff barriers to trade.
The regulation of "non-tariff barriers" to trade is quite significant as well. While tariffs on imports and subsidies of export products are paradigm instances of trade barriers, the imposition of environmental or worker safety standards on products being shipped into a country are generally prohibited as well. Governments must ensure equal treatment of foreign goods and domestic goods, and concretely that means that there must be equal access for goods that qualify as "like products." So for example, "domestic content" laws are not permitted. Other non-tariff barriers swept away by the rules include distinctions based on "production processes and methods" (PPM). Policies designed to protect the environment or worker safety are readily judged as impermissible restrictions on trade unless there are no less trade-restrictive measures available to achieve a country's social and environmental goals. Distinctions cannot be made, for example, simply on the basis of differences in environmental impact in the production process, and the consequence is that goods made in environmentally unsustainable, less expensive ways are given market advantage. As long as the end product is the same, the social, environmental, and economic impact of how it s made is no grounds for countries to restrict its sale or impose further taxes upon it.
Defenders of the "like product" requirement will note that these rules are necessary to avoid circumvention. It is otherwise too easy for the real aim of economic protectionism to masquerade as environmental regulations. So for example, in the WTO's first case it struck down the US Clean Air Act regulations that restricted the toxic content of gasoline, and the court concluded that it was not shown that the primary aim of US regulation was conservation, or that the least trade-restrictive regulatory alternative had been selected as a way of satisfying environmental goals. The bottom line is that any restriction based on production process and production criteria are subject to WTO reversal.
One of the often noted ironies of the application of the "like product" requirements under GATS is that proponents of GMO agricultural products have to argue that for the uniqueness of the engineered food product for purposes of patent protection and turn around and argue that bans on GMO products are unacceptable under GATS because the differences in production process are not such that the equal protection requirements for market access to "like products" are not bypassed.
The GATS scheme remains a work in progress, with a series of "rounds" of negotiations, with the Uruguay Round completed in 1994. The Doha Round begun in 2001 is still active and the future of agreements on key issues such as agricultural tariffs remains unresolved. Look for current news reports for information on the status of US-EU efforts to bypass GATS entirely and create what they believe will be a mutually beneficial free trade zone that excludes nations in the rest of the world.
The original Global Agreement on Trade and Tariff (GATT) was established in 1947 in Geneva. It remained provisional for almost 50 years, until the Uruguay Round of global trade discussions in 1994. GATT was originally conceived as an agreement creating an independent world trade oversight body. The goal was to reduce tariffs in order to encourage international trade.
As global trade became more complicated, the need for systematic reform was evident, resulting in the Uruguay Round. The round led to the eventual creation of the World Trade Organization (WTO) and the solidification of global trade policies of liberalization and privatization in 1995 through the Global Agreement on Trade in Services (GATS).
The implications of WTO and GATS are numerous and highly significant for goals of economic development, poverty reduction, and national sovereignty. The WTO's authority is extensive. It covers trade in raw materials, goods, and services, even when those goods and services are produced and consumed exclusively within a single country. The rationale for such extensive regulative authority is that the overarching aim is to open all markets to globalization and that allowing the existence of pockets of local economic activity immune from the WTO's reach would undermine its ability to enforce the goals of a genuinely open global market.
Moreover, the WTO's rulings are binding on every member country. There are now more than 150 participating countries, and realistically, it is the only game in town. No nation can afford to go its own way. No nation can be, in philosopher Allen Buchanan's words, "distributionally autonomous and economically self-sufficient." The reach of WTO regulation even extends to its authority to review the intellectual property laws of member nations inasmuch as they may constitute non-tariff barriers to trade.
The regulation of "non-tariff barriers" to trade is quite significant as well. While tariffs on imports and subsidies of export products are paradigm instances of trade barriers, the imposition of environmental or worker safety standards on products being shipped into a country are generally prohibited as well. Governments must ensure equal treatment of foreign goods and domestic goods, and concretely that means that there must be equal access for goods that qualify as "like products." So for example, "domestic content" laws are not permitted. Other non-tariff barriers swept away by the rules include distinctions based on "production processes and methods" (PPM). Policies designed to protect the environment or worker safety are readily judged as impermissible restrictions on trade unless there are no less trade-restrictive measures available to achieve a country's social and environmental goals. Distinctions cannot be made, for example, simply on the basis of differences in environmental impact in the production process, and the consequence is that goods made in environmentally unsustainable, less expensive ways are given market advantage. As long as the end product is the same, the social, environmental, and economic impact of how it s made is no grounds for countries to restrict its sale or impose further taxes upon it.
Defenders of the "like product" requirement will note that these rules are necessary to avoid circumvention. It is otherwise too easy for the real aim of economic protectionism to masquerade as environmental regulations. So for example, in the WTO's first case it struck down the US Clean Air Act regulations that restricted the toxic content of gasoline, and the court concluded that it was not shown that the primary aim of US regulation was conservation, or that the least trade-restrictive regulatory alternative had been selected as a way of satisfying environmental goals. The bottom line is that any restriction based on production process and production criteria are subject to WTO reversal.
One of the often noted ironies of the application of the "like product" requirements under GATS is that proponents of GMO agricultural products have to argue that for the uniqueness of the engineered food product for purposes of patent protection and turn around and argue that bans on GMO products are unacceptable under GATS because the differences in production process are not such that the equal protection requirements for market access to "like products" are not bypassed.
The GATS scheme remains a work in progress, with a series of "rounds" of negotiations, with the Uruguay Round completed in 1994. The Doha Round begun in 2001 is still active and the future of agreements on key issues such as agricultural tariffs remains unresolved. Look for current news reports for information on the status of US-EU efforts to bypass GATS entirely and create what they believe will be a mutually beneficial free trade zone that excludes nations in the rest of the world.
Free Trade in Agriculture: The Design and Consequences of the Agreement on Agriculture
The Uruguay Round of trade agreements pursuant to the Global Agreement on Trades and Services (GATS) resulted in the 1994 Agreement on Agriculture (AoA). Sophia Murphy, a public policy analyst and a senior advisor on trade and global governance issues at the Institute for Agriculture and Trade Policy, provides a well-documented account of how agricultural trade policies have worked in practice since the push for free trade in the agricultural sector of the global economy began in the 1980s. In her 2009 article, "Free Trade in Agriculture: A Bad Idea Whose Time Is Done" she traces the gap between the benefits that the free trade proponents promised and the often harsh realities that developing nations have faced. Some of the key points about how things have gone under the AoA regime are the following:
See Sophia Murphy's 2012 update on the state of the stalled discussions on trade pertaining to the prospects for the next phase of the Doha round negotiations, "Crisis or opportunity in the multilateral trade system?." For more insight on free trade and on the impact on agriculture in particular, see the website for the Institute for Agriculture and Trade Policy. See also, the Draft Principles of Food Justice.
- It did little to impede both direct and indirect agricultural subsidies in the developed world
- It did little to change prevailing tariffs on agricultural products
- Many developing countries would have natural competitive advantages in these industries if foreign subsidies and tariffs were removed
- Existing preferential regional and bilateral trade agreements were grandfathered into AoA to the detriment of many developing countries
- The creation of new tariffs further protected key agricultural industries in the developed world from competitive developing world exports
- Developed world governments, and particularly that of the United States, still set floor prices below current market prices and the average farmer’s cost of production, making it impossible for developing world farmers to compete
- policies that might have taken some of the food price pressure off the developing nations were not implemented. For example, the Marrakesh Decision on Least Developed Countries (LDCs) and Net-Food Importing Developing Countries (NFIDCs) was supposed to provide funding for a list of developing countries if food import bills rose too high. However, the IMF claimed that the agreements were too new to have been the cause of the 40% rise in food import bills in LDCs and NFIDCs in 1995-1996 and consequentially did not implement the aforementioned Decision.
See Sophia Murphy's 2012 update on the state of the stalled discussions on trade pertaining to the prospects for the next phase of the Doha round negotiations, "Crisis or opportunity in the multilateral trade system?." For more insight on free trade and on the impact on agriculture in particular, see the website for the Institute for Agriculture and Trade Policy. See also, the Draft Principles of Food Justice.
GATS and The Example of Water Privatization and the Environmental Regulatory Huddles GATS Creates
click image for pdf version
GATS provisions also allow governments to privatize all goods and services, including access to water. The Dublin Conference in 1992 recognized that water was a decreasing resource and there was need for regulation of some sort, to ensure that everyone could retain access to water. The GATS took this one step further and allowed for privatization of water. The assumption was that it would create lower prices for consumers, if coupled with appropriate government regulations. GATS permits regulation of any kind of water and water use, from consumption to transportation to agriculture.
The flexibility of such rules, though, has led to concerns that governments will attempt to profit from privatization. The WTO has tried to allay such fears by pointing out that no country is required to privatize their water and that governments can and will maintain regulatory control over water even if private and foreign companies are in charge of distribution. There are no formal international agreements to ensure fair access to and distribution of water, though. As the disparity between developed and developing countries grows, there has been a push to restructure the WTO to more adequately address global economic needs.
For a long, detailed list of criticisms (with some useful documentation), see the World Trade Organization's webpage list of unflattering trade liberalization statistics.
Here is a representative statement of some criticisms of the WTO's impact on local water rights. And here is the WTO's response to critics who argue that the WTO works to take away water rights and access in developing nations.
The Center for International Environmental Law (CIEL) publication Environment and Trade: A WTO Guide to Jursiprudence explores in great depth many of the issues pertaining to the interaction between GATS provisions and domestic environmental regulations generally. Additionally, the following discussion paper prepared for the World Wildlife Federation and the Center for International Environmental Law (CIEL) highlights 12 areas where potential conflicts between GATS requirements and domestic policies to protect and conserve water, wetlands and ecosystems are emerging.
The flexibility of such rules, though, has led to concerns that governments will attempt to profit from privatization. The WTO has tried to allay such fears by pointing out that no country is required to privatize their water and that governments can and will maintain regulatory control over water even if private and foreign companies are in charge of distribution. There are no formal international agreements to ensure fair access to and distribution of water, though. As the disparity between developed and developing countries grows, there has been a push to restructure the WTO to more adequately address global economic needs.
For a long, detailed list of criticisms (with some useful documentation), see the World Trade Organization's webpage list of unflattering trade liberalization statistics.
Here is a representative statement of some criticisms of the WTO's impact on local water rights. And here is the WTO's response to critics who argue that the WTO works to take away water rights and access in developing nations.
The Center for International Environmental Law (CIEL) publication Environment and Trade: A WTO Guide to Jursiprudence explores in great depth many of the issues pertaining to the interaction between GATS provisions and domestic environmental regulations generally. Additionally, the following discussion paper prepared for the World Wildlife Federation and the Center for International Environmental Law (CIEL) highlights 12 areas where potential conflicts between GATS requirements and domestic policies to protect and conserve water, wetlands and ecosystems are emerging.
North American Free Trade Agreement (NAFTA)
The very mention of NAFTA evokes strong feelings among partisans on both sides. Some people imagine that anything that stands in the way of a regional free trade zone is just short-sighted nonsense, while others think that anything that fails to put America first in terms of labor policy borders on economic treason. But there are some useful observations regarding some of its key provisions and means of enforcement that merit scrutiny from the point of view of anyone interested in its potential impact on the environment and on aspirations for poverty reduction.
Chapter 11 of NAFTA allows for private parties to sue a local or national government for implementing policies that negatively impact their profits. Environmental legislation must meet what are essentially the same kinds of tests that GATS requires. But bear in mind, the parties who can bring complaints are not limited to governments, which may have various diplomatic and other interests at stake, making decisions to instigate litigation the subject of a more complex set of considerations. Environmental legislation must be necessary to protect the environment, a trade-impacting measure must be the only feasible means for doing so, and the measure chosen must be shown to be the least trade-restrictive alternative. The threat of chapter 11 actions brought under NAFTA not only undermines efforts to protect the environment, but it also interferes with the ability of nations to pursue economic development policies that might be in the long run more beneficial for purposes of poverty alleviation insofar as they favor environmentally sustainable investment decisions over alternatives that extract quick profits and leave environmental degradation behind for others to pay for later. For a discussion and update on chapter 11 cases, see Public Citizen's website.
Chapter 11 of NAFTA allows for private parties to sue a local or national government for implementing policies that negatively impact their profits. Environmental legislation must meet what are essentially the same kinds of tests that GATS requires. But bear in mind, the parties who can bring complaints are not limited to governments, which may have various diplomatic and other interests at stake, making decisions to instigate litigation the subject of a more complex set of considerations. Environmental legislation must be necessary to protect the environment, a trade-impacting measure must be the only feasible means for doing so, and the measure chosen must be shown to be the least trade-restrictive alternative. The threat of chapter 11 actions brought under NAFTA not only undermines efforts to protect the environment, but it also interferes with the ability of nations to pursue economic development policies that might be in the long run more beneficial for purposes of poverty alleviation insofar as they favor environmentally sustainable investment decisions over alternatives that extract quick profits and leave environmental degradation behind for others to pay for later. For a discussion and update on chapter 11 cases, see Public Citizen's website.
Out of Sight and Out of Mind: Export Credit Agencies
The big three - the WTO, World Bank, and the IMF - are not the only targets of criticism (and occasional ridicule) on the grounds that they play a significant role in promoting environmentally unsustainable and insufficiently poverty reducing policies in the developing world. Lesser known entities called Export Agencies (ECAs) also play a substantial, but much less publicly visible role in promoting morally dubious investment policies. See the 2003 backgrounder report "Worse than the World Bank?" at the Foodfirst website for details. But here are a few highlights.
ECAs are entities set up by the governments of most developed countries for the purpose of expanding the foreign investments of its native corporations in lesser developed countries in order to take advantage of perceived opportunities for rapid and substantial profit. The United States has three such entities and some estimates of the scale of their investment portfolios to be roughly 8 times the annual investment of the World Bank. Not that this is a bad thing necessarily. But the process is taxpayer supported through export investment credits, with virtually no oversight, no mission either for economic development benefitting the host country or poverty alleviation, and to top it off, as much as 40% of the indebtedness of some lesser developed nations is attributable to ECA activity. Critics claim that one of its intended functions is to fund what is too controversial for World Bank or other publicly scrutinized aid programs to fund.
ECAs are entities set up by the governments of most developed countries for the purpose of expanding the foreign investments of its native corporations in lesser developed countries in order to take advantage of perceived opportunities for rapid and substantial profit. The United States has three such entities and some estimates of the scale of their investment portfolios to be roughly 8 times the annual investment of the World Bank. Not that this is a bad thing necessarily. But the process is taxpayer supported through export investment credits, with virtually no oversight, no mission either for economic development benefitting the host country or poverty alleviation, and to top it off, as much as 40% of the indebtedness of some lesser developed nations is attributable to ECA activity. Critics claim that one of its intended functions is to fund what is too controversial for World Bank or other publicly scrutinized aid programs to fund.
Fair Trade Products and Consumer-Driven Activism
click logo for link to website
With GATS and NAFTA as potential impediments to domestic regulation of products based on environmental, health, safety and labor standards looming so large, turning to direct consumer advocacy seems a natural alternative. Fair Trade goods are ubiquitous in certain grocery stores and other small commercial venues. They are certified by organizations such as the Fairtrade Labelling Organizations as meeting certain labor and environmental standards. It does not and cannot change the WTO or GATS rules, but instead it aims to harness consumer sentiment and individual moral consciousness to make some marketplace difference.
Fair trade coffee is one of the most conspicuous examples. It is one of the most heavily traded commodities and it is highly subject to global price variations, putting at risk the small-scale growers whose livelihood is secured often on the thinnest of margins and whose avenues for sale of their product are controlled by large export intermediaries. While Fairtrade International certifies over 27,000 products, sympathetic critics of such consumer-driven strategies for global poverty alleviation and fairness in global trade worry that such movements can never have significant impact in comparison to the WTO regime, risks sustaining the public illusion of efficacy and the ability to change global economic behavior without structural economic change, and at best makes the lives of a relatively small segment of the poor peasants of the world better off.
Fair trade coffee is one of the most conspicuous examples. It is one of the most heavily traded commodities and it is highly subject to global price variations, putting at risk the small-scale growers whose livelihood is secured often on the thinnest of margins and whose avenues for sale of their product are controlled by large export intermediaries. While Fairtrade International certifies over 27,000 products, sympathetic critics of such consumer-driven strategies for global poverty alleviation and fairness in global trade worry that such movements can never have significant impact in comparison to the WTO regime, risks sustaining the public illusion of efficacy and the ability to change global economic behavior without structural economic change, and at best makes the lives of a relatively small segment of the poor peasants of the world better off.
Economic Nationalism, A Bipartisan Consensus
A Relevant Musical Interlude from the Avett Brothers.... |
.... And An Explanation of Why it Matters to this ThreadWhile the central message of the Avett Brothers song is a bit overstated - your life isn't changed by the man who's elected - it remains true that in some aspects of policy, there is far too little change. In terms of the outward-facing US policy pertaining to global development and economic nationalism, the last 35 years reflect a tremendous degree of uniformity. Though Democratic and Republican administrations alike, we find the same old ideas and many of the same old faces. What differs most is the degree to which the rigid economic ideology that the US exports to the rest of the world is sought to be imposed domestically. In "The Return of the Wall Street Democrats" a column I wrote for CQ Politics in December 2008, I track aspects of that continuity by examining appointments made to Obama's economic team. There are lots of good links contained within. Check them out, and also enjoy the Avett Brothers's reflective lyrics.
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Trends in Developmental Economics: Evaluating "What Works" - The Ascendance of the Randomistas
click image for link to Reddy's review article
Critics of the World Bank and IMF policies often argue that among the primary causes of much of the developing world remaining in poverty are social structural impediments to to greater economic success. These critics note a variety of impediments, beginning with the very large head start enjoyed by the developed nations, the low end of the value chain that developing nations occupy in the sale of natural resources to developed nations that in turn reap the higher financial returns from finished or fabricated products. And of course, a major complaint is the role of international trade and lending policies and rules that are said to lock in the initial great advantages enjoyed by the developed countries and corresponding disadvantages on the developing nations.
The critics rely upon are structural explanations of the causes of poverty or perhaps more often these days, the causes of its stubborn persistence. While proponents of structural explanations differ among themselves on how much weight to assign structural factors in relation to factors such as geography, governance, luck, and so on, a shared belief is that a simple picture of the causes of poverty as residing largely in circumstances that lead individuals to make economically bad choices leads to very bad economic prescriptions. The idea that all we need to do is empower individuals in developing nations to make and pursue better choices - of crops to plant, farming techniques, educational options for their children, health precautions, and so on - will provide individuals with the tools they need to lift themselves out of poverty. Such a worldview is no doubt a comforting one for those who might have reason to resist the suggestion that their own affluence is in any way causally linked to the poverty of others thousands of miles away.
And the focus on individual solutions appeals also to a certain technocratic habit of mind that seeks "engineering solutions" to complex social problems. If all we have to do to eliminate poverty is rearrange the choice architecture, incentivize the correct choices, and supply the rudiments of the necessary causal levers that will individuals to succeed economically, then we will have performed a kind of economic alchemy by making large differences for large numbers of people by doing very small things within the local environment of a few people, one at at time. Then we simply "scale it up" - to continue the engineering metaphor.
Add in the fact that the appeal is potentially quite significant for foundations as well, both among those committed to the belief that the causes of persistent poverty lie with poor people and not poor public policy, and among those always in search of measurable outcomes by which success of funding decisions might be measured. A couple of articles have addressed critically this trend within developmental economics and have focused on the methodological assumptions that may make.
In a recent article, "Randomize This," a review of the influential new book, Poor Economics, Sanjay Reddy argues that many of the causal links observed in a series of small randomized trials to determine what works - microcredit mechanisms, school choice, farming techniques, and so on - are not designed well enough to rule out all sorts of confounding explanations and not able to support the sorts of generalizations often made for how "successes" in one circumstance might be scaled up and replicated throughout the developing world. Martin Ravallion, an economist at the World Bank, has produced a similar critique, in part in response to a new wave of criticisms that worry that the Bank has been too slow in signing on to the latest trend.
The critique of the use of randomized trials in developmental studies is part of a broader assessment of the limitations of standard scientific methodologies. Most studies in clinical medicine, for example, are correlational studies. Familiar examples are the widely reported studies of antioxidants and the extent to which their daily intake correlates with conditions such as heart disesae or some types of cancer. Even studies that involve a very large population of research subjects a correlation between taking an antioxidant and a lower incidence of some cancer cannot demonstrate a causal connection. With such studies it cannot be shown that taking the vitamin supplement is the only relevant difference between those who experienced fewer cancers and those whose had more cancers.
Given the limitations of correlational studies, there is strong support for reliance upon randomized controlled trials (RCT) in which the aim is to isolate a single variable such as the antioxidant so that we have greater confidence that it is the only relevant factor distinguishes the two groups. A moment's thought reveals that it's much easier said than done. There are simply so many imaginable variables that we might want to control for, and moreover, the costs of RCTs is often very high. John Ioannidis in a widely cited paper, “Why Most Published Research Findings Are False,” examined published medical research and found that 80 percent of non-randomized studies, 25 percent of randomized studies, and 15 percent of large randomized studies turn out to be false in significant respects. For a philosophical assessment of the inherent methodological limitations of RCTs, see Nancy Cartwright's classic article, "A philosopher's view of the long road from RCTs to effectiveness." She argues that even the best RCTs show what works only in a highly specific context, not what works in a generalizable way. Reddy and Ravillion extend this critique to social research settings where the complexity of variables is as great or greater than in clinical medicine trials.
The critics rely upon are structural explanations of the causes of poverty or perhaps more often these days, the causes of its stubborn persistence. While proponents of structural explanations differ among themselves on how much weight to assign structural factors in relation to factors such as geography, governance, luck, and so on, a shared belief is that a simple picture of the causes of poverty as residing largely in circumstances that lead individuals to make economically bad choices leads to very bad economic prescriptions. The idea that all we need to do is empower individuals in developing nations to make and pursue better choices - of crops to plant, farming techniques, educational options for their children, health precautions, and so on - will provide individuals with the tools they need to lift themselves out of poverty. Such a worldview is no doubt a comforting one for those who might have reason to resist the suggestion that their own affluence is in any way causally linked to the poverty of others thousands of miles away.
And the focus on individual solutions appeals also to a certain technocratic habit of mind that seeks "engineering solutions" to complex social problems. If all we have to do to eliminate poverty is rearrange the choice architecture, incentivize the correct choices, and supply the rudiments of the necessary causal levers that will individuals to succeed economically, then we will have performed a kind of economic alchemy by making large differences for large numbers of people by doing very small things within the local environment of a few people, one at at time. Then we simply "scale it up" - to continue the engineering metaphor.
Add in the fact that the appeal is potentially quite significant for foundations as well, both among those committed to the belief that the causes of persistent poverty lie with poor people and not poor public policy, and among those always in search of measurable outcomes by which success of funding decisions might be measured. A couple of articles have addressed critically this trend within developmental economics and have focused on the methodological assumptions that may make.
In a recent article, "Randomize This," a review of the influential new book, Poor Economics, Sanjay Reddy argues that many of the causal links observed in a series of small randomized trials to determine what works - microcredit mechanisms, school choice, farming techniques, and so on - are not designed well enough to rule out all sorts of confounding explanations and not able to support the sorts of generalizations often made for how "successes" in one circumstance might be scaled up and replicated throughout the developing world. Martin Ravallion, an economist at the World Bank, has produced a similar critique, in part in response to a new wave of criticisms that worry that the Bank has been too slow in signing on to the latest trend.
The critique of the use of randomized trials in developmental studies is part of a broader assessment of the limitations of standard scientific methodologies. Most studies in clinical medicine, for example, are correlational studies. Familiar examples are the widely reported studies of antioxidants and the extent to which their daily intake correlates with conditions such as heart disesae or some types of cancer. Even studies that involve a very large population of research subjects a correlation between taking an antioxidant and a lower incidence of some cancer cannot demonstrate a causal connection. With such studies it cannot be shown that taking the vitamin supplement is the only relevant difference between those who experienced fewer cancers and those whose had more cancers.
Given the limitations of correlational studies, there is strong support for reliance upon randomized controlled trials (RCT) in which the aim is to isolate a single variable such as the antioxidant so that we have greater confidence that it is the only relevant factor distinguishes the two groups. A moment's thought reveals that it's much easier said than done. There are simply so many imaginable variables that we might want to control for, and moreover, the costs of RCTs is often very high. John Ioannidis in a widely cited paper, “Why Most Published Research Findings Are False,” examined published medical research and found that 80 percent of non-randomized studies, 25 percent of randomized studies, and 15 percent of large randomized studies turn out to be false in significant respects. For a philosophical assessment of the inherent methodological limitations of RCTs, see Nancy Cartwright's classic article, "A philosopher's view of the long road from RCTs to effectiveness." She argues that even the best RCTs show what works only in a highly specific context, not what works in a generalizable way. Reddy and Ravillion extend this critique to social research settings where the complexity of variables is as great or greater than in clinical medicine trials.
The Problem of Economic Exploitation in Relation to the Rules of the Global Economic Order
click image for link
One of the most familiar points of discussion regarding the global economic order is the problem of exploitation exemplified in sweatshops that manufacture consumer goods and modern plantation-style agricultural enterprises located in the developing world. The problem of exploitation seems to be this. What could possibly be unjust about a bilateral economic transaction in which both parties are made better off and the agreement is voluntary? The question is posed this way on the assumption that factory workers and farm workers are made better off than they might have been but for the foreign investment by some multinational corporation, and that the agreements are in some sense largely voluntary. To be sure, there are those who would characterize choices made under conditions of such limited options as less than fully voluntary, and there are empirical debates about whether and in what ways the workers might be judged better off, all-things-considered. But for the sake of argument, political and moral philosophers reflecting on such problems simply make assumptions that make it more difficult to identify an injustice in order to see if some moral objection can be lodged against economic practices often defended on grounds that they actually make people better off and that the agreements are genuinely voluntary.
Richard Miller, in chapter 3 of his Globalizing Justice, argues that such agreements are unjustly exploitative - i.e., they take advantage of people in weak bargaining positions in some immoral way - when the terms offered leave no feasible options but ones that are inconsistent with human dignity. All the moral work here is being done by some notion of human dignity, and in some easy cases, we more or less know it when we see it. For example, an employer who demands sex for wages may in some sense leave the employee better off and in some sense the employee may voluntarily consent to terms of employment that would not be accepted under less inhospitable conditions. Or we can see the point of the example Miller offers where a man dying of thirst in the desert is offered life-saving water in return for a life-long agreement to be someone's personal servant. Slavery and extorted sex are paradigm cases of options incompatible with human dignity. But the hard cases appear when we start to think about low-waged labor under harsh conditions in societies where economic options are few and often repugnant (think of the problem of human trafficking). Child labor seems like a clear case to some, as does grossly unhealthy work conditions. But others find creative ways to disagree.
Among Miller's main arguments is that the solution to such problems lies not with consumer activism (though he is not opposed obviously) or the good will or moral shaming of multi-national corporations in the face of quite obvious competitive pressures that lead to a global "race to the bottom" in search of desperate people who will accept even worse terms than others similarly situated. The solution lies in the revision of the rules of global trade that make such practices not only economically attractive but competitively almost unavoidable. Equally objectionable, and in some ways morally more fundamental, are rules of the global order that are rigged for the economic advantage of the developed nations for the convenience and benefit of its native corporations when so doing fails to even accord a minimal level of concern for the interests of citizens of nations lacking any comparable degree of bargaining power.
The problem of unjust exploitative transactions is thus, so to speak, pushed one step above the level of bilateral transactions between consenting adults to an appraisal of the source of injustice in the background conditions in which these transactions occur.
Richard Miller, in chapter 3 of his Globalizing Justice, argues that such agreements are unjustly exploitative - i.e., they take advantage of people in weak bargaining positions in some immoral way - when the terms offered leave no feasible options but ones that are inconsistent with human dignity. All the moral work here is being done by some notion of human dignity, and in some easy cases, we more or less know it when we see it. For example, an employer who demands sex for wages may in some sense leave the employee better off and in some sense the employee may voluntarily consent to terms of employment that would not be accepted under less inhospitable conditions. Or we can see the point of the example Miller offers where a man dying of thirst in the desert is offered life-saving water in return for a life-long agreement to be someone's personal servant. Slavery and extorted sex are paradigm cases of options incompatible with human dignity. But the hard cases appear when we start to think about low-waged labor under harsh conditions in societies where economic options are few and often repugnant (think of the problem of human trafficking). Child labor seems like a clear case to some, as does grossly unhealthy work conditions. But others find creative ways to disagree.
Among Miller's main arguments is that the solution to such problems lies not with consumer activism (though he is not opposed obviously) or the good will or moral shaming of multi-national corporations in the face of quite obvious competitive pressures that lead to a global "race to the bottom" in search of desperate people who will accept even worse terms than others similarly situated. The solution lies in the revision of the rules of global trade that make such practices not only economically attractive but competitively almost unavoidable. Equally objectionable, and in some ways morally more fundamental, are rules of the global order that are rigged for the economic advantage of the developed nations for the convenience and benefit of its native corporations when so doing fails to even accord a minimal level of concern for the interests of citizens of nations lacking any comparable degree of bargaining power.
The problem of unjust exploitative transactions is thus, so to speak, pushed one step above the level of bilateral transactions between consenting adults to an appraisal of the source of injustice in the background conditions in which these transactions occur.
World Watch institute State of the World Report 2012: A Year in Review
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How well are the current global development policies faring? While it is not accurate to attribute to the major global economic institutions the full force of any successes or failures in global development to the policies of the major economic institutions it is useful to take a snapshot of how things are going, if for no other reason than to reflect on what these institutions might be well advised to take into consideration going forward.
The World Watch annual report covers the period from October 2010 through November 2011. It presents what its describes as "a mix of progress, setbacks, and missed steps around the world that are affecting environmental quality and social welfare."
Among the highlights reported are the following:
The heart of the report consists of 17 chapters on how to achieve sustainable prosperity. Chapter topics include opportunities in the transportation sector, local governance, policies to promote more sustainable consumption and more sustainable public buildings, how to alleviate the prospect of a global population of 9 billion, and ideas for better measurement of urban sustainability.
The World Watch annual report covers the period from October 2010 through November 2011. It presents what its describes as "a mix of progress, setbacks, and missed steps around the world that are affecting environmental quality and social welfare."
Among the highlights reported are the following:
- that humans currently use 1.5 Earths, suggesting the world would need 50 percent more ecological capacity for current consumption patterns to be sustainable
- UN Environment Programme that only 2 percent of world GDP is needed to transition the global economy toward sustainability
- NASA mapping data shows over 1.3 million acres of the Amazon browned by record-breaking drought.
- Ozone loss over the Arctic reaches record levels, due to an especially cold winter in the stratosphere and the ozone-depleting substances still in the atmosphere.
- the German government announces that it will replace all 17 nuclear power plants by 2022 with renewable energy sources
- Economists with the Economics for Equity and the Environment Network find that each ton of CO2 emitted causes up to $900 of environmental harm
The heart of the report consists of 17 chapters on how to achieve sustainable prosperity. Chapter topics include opportunities in the transportation sector, local governance, policies to promote more sustainable consumption and more sustainable public buildings, how to alleviate the prospect of a global population of 9 billion, and ideas for better measurement of urban sustainability.