Economic miracles turned to disaster by Neo-Liberalism

by Chakravarthi Raghavan

GENEVA: The excessive, ill-conceived deregulation of recent
years, induced in significant part by the bullying of external
Neo-Liberal forces, have turned a number of Asian countries
from economic miracles to economic disasters in a matter of
weeks, argued three US academics in a paper on 'Multinational
Corporations, Capital Mobility and Global Neo-Liberal Regime'.

The paper by James Crotty, Gerald Epstein and Patricia Kelly
- prepared in conjunction with the Economic Policy Institute's
Project on Globalization and Progressive Economic Policy - is
being published in a South Korean economic journal, and was
made available to SUNS.

In the paper, the authors argued that capital mobility
promoted by a global Neo-Liberal Regime (NLR) has been
detrimental to the workers of the North and to prospects for
sustained, egalitarian growth in the South, and nations must
have more regulatory powers over domestic and cross-border
economic activity.

Crotty and Epstein teach at the Economics Department of the
University of Massachusets, Amherst Campus, while Kelly teaches
economics at Quinnipeac College. A related paper by the three
authors is in a book to be published by Cambridge University

Capital mobility

Analysing the effects of capital mobility under a spreading
global NLR, and the lessons of the Asian crisis, the authors
stress they are not against international economic integration
per se and that trade and cross-border flows could be used to
increase the economic well-being of the majority of people in
both North and South "provided they take place within an
appropriate international and domestic institutional and policy

Such a framework, the academics conclude, should be one that
supports strong and sustainable economic growth and low
unemployment, maintains an appropriate power balance between
capital, labour and the state, limits the more destructive
dimensions of competitive processes, and empowers democratic
political processes to exercise control over the broad contours
of economic development.

"We do not pretend to know the precise mix of markets and
the state and non-state regulatory processes that would be
appropriate for each country, but two lessons might be drawn
from the experience of the past two decades.

"First, nations must be permitted to possess far more
regulatory power over domestic and cross-border economic
activity than is now possible under the Neo-Liberal Regime.
Second, it would be far easier for individual nations to
achieve sustainable and equitable growth if the main
institutions of the international economic and financial system
valued such growth over the interests of global rentiers and
MNCs, and supported rather than undermined such state economic
regulation as was necessary to get the job done."

Foreign Direct Investment (FDI) is neither inherently good
nor bad, but its effects are conditioned by the overall
national and international context within which capital
mobility occurs.

When FDI takes place in the context of high aggregate demand
and tight labour markets, effective regulatory institutions,
and non-destructive competitive processes, it may indeed have
a positive impact on nations and communities. But absent these,
FDI can have destructive economic and political consequences on
both home and host countries.

Within the structures of the current Neo-Liberal global
economic regime, increased capital mobility is contributing to
a "race-to-the-bottom" tendency. Within the NLR are secular
forces - financial liberalization, privatization, increased
labour market 'flexibility', trade and investment
liberalization, and austerity macro- policies - that destroy
the pre-conditions required for FDI to benefit workers and

While capital mobility and the Neo-Liberal model or the
"Washington Consensus" have spread themselves unevenly around
the globe, as the NLR strengthens, the negative effects will
spread to more countries and communities, as the recent Asian
crisis makes clear, the authors say.

While there are many theories, and evidence, about the
effects of FDI and TNCs, within the NLR, forces operating to
raise aggregate demand are structurally weak, while competitive
pressure on firms to lower costs through downsizing and 'labour
shedding', speed-up and wage-cutting are structurally strong.
The NLR is thus creating secularly high unemployment in the
North and elsewhere, destroying institutions that sustained the
economic and political power of Northern workers in the Golden
Age regime, and making capital flight easier and more

While all nations have had to confront the debilitating
economic pressures emanating from the emerging Neo-Liberal
global regime, there are enormous differences across countries
in the institutions, structures and social and political
priorities that intermediate between firms, workers and
governments on the one hand and TNCs, international rentiers,
international organizations and global markets on the other.

Thus it is not possible to enunciate universally applicable
principles concerning effects of globalization in general or
FDI and TNCs in particular on workers, citizens or national
economic performance.

Harmful effects of globalization

But national institutions that have protected workers from
many of the harmful effects of globalization over the past
twenty years are deteriorating under Neo-liberal pressures, and
no national economy has come through the experience of
increased global integration with its institutional structure
and economic performance unscathed.

In general, those in the South which followed the Neo-
Liberal guidelines or the "Washington Consensus" most
faithfully have fared worst under globalization while countries
that have performed best have done so using anti-Neo-Liberal

Most developing countries, particularly those in Latin
America and sub-Saharan Africa, have suffered stagnation and
rising inequality over the past 15 years. But the state-guided
economies of East Asia took advantage of increased global
openness to industrialize and grow.

But East Asia is currently moving towards greater
international openness and less effective state intervention.

Even prior to the crisis, "the pressures of Neo-liberalism,
exerted through markets as well as by TNCs, the US Government,
the IMF and World Bank, the WTO and GATT - were becoming
increasingly difficult for the developing countries to resist."

Though the East Asian model is anti-Neo-liberal, the nations
involved integrated themselves to varying degrees in
international markets - though nations like Korea and Japan
purposely minimized the role of foreign TNCs and inward FDI.

And while, contrary to popular Western belief, there is no
single East Asian model, and each of the Asian "miracle"
countries selected a different development path, none of them
left its future development hopes to the vagaries of the
unregulated market system, and all had some form of state-led
industrial policy.

But for a variety of reasons, it became necessary in the
late 1980s and the 1990s to make significant changes in both
state and private sector practices in all the Asian countries.

"Powerful domestic financial and industrial enterprises and
wealthy and politically influential families, having enriched
themselves in the process of economic development through
state-led industrial policy, now believed that substantial
deregulation, especially of domestic and international
financial markets, rather than revision or reform, was in their
individual economic interest. The changes they pushed did not
constitute a coherent or viable stable model, nor a full Neo-
Liberal package; indeed they maintained allegiance to those
dimensions of state regulation that continued to suit their

Neo-liberal forces

The issue thus was not whether change was needed. Everyone
agreed it was. But the internal pressures for deregulation was
strongly reinforced by the forces of global Neo-liberalism. The
US and other large Northern countries, important transnational
industrial firms, banks, global rentier interests and world
organizations like the IMF, World Bank and the WTO came
together to pressure Asian nations in the direction of full-
blown Neo-liberalism, and the outlawing of the East Asian

The external Neo-liberal forces profoundly influenced, and
in some cases may even have determined the outcomes of the
national debates by substantially altering the perceived costs
and benefits attached to the various possible new development
strategies and structures. Under the combined influence of the
coalition of domestic elites and global forces, from around
1980 through mid-1997, governments which previously had imposed
controls on movement of money capital across their borders
began to loosen them, and conditions were constructed that
could easily lead to speculative boom and bust cycles.

It should have been clear by the end of the 1980s to anyone
not ideologically blinded by Neo-liberal economic theory that
if taken too far, deregulation of both domestic and
international financial markets could be a potentially deadly
combination of 'reforms', particularly for countries heavily
dependent on international trade and thus subject to serious
destabilization in the event of excessive volatility in the
exchange rate.

Such credit-fed speculative booms appeared across Asia in
the second half of the 1980s and the process accelerated in the

One might have thought that the collapse of the Japanese
'bubble economy' in the early 1990s, which led to years of
stagnation in what had once been one of the world's fastest-
growing economies, would have alerted neighbouring countries to
the danger of domestic financial deregulation and dramatic
weakening of government oversight of financial markets. But on
the contrary, the Asian speculative boom picked up intensity.

The deregulation process in Asia and its effects on the
regional and global economy were certified as generally sound
and healthy by the IMF, the World Bank , global investors and
mainstream economists who all have given the whole process
their seal of approval right up to the day disaster struck the
region in mid-1997.

If global Neo-liberal forces can be said to have been
extremely influential in determining the evolution of Asian
economies in phase one of their transformation, they made a
bold bid to take direct control of Asia's economic future in
phase two - the ongoing Asian economic crisis kicked off in
July 1997.

"Even Neo-liberalism's most persistent critics were shocked
by the speed and audacity with which the US, the IMF and
international capital attempted to usurp control over key
economic decisions from legitimate domestic agents in those
countries hit hardest by the crisis."

"Though it is far too early to make predictions about how
this crisis will play itself out, at the moment it does not
seem out of the question that global forces may end up with
near-Imperial control over the ongoing transformation of
economic institutions and practices in several Asian

Analysing the case of Korea, viewed as the crucial case, the
three authors added: "As the world watched in amazement and
fear, the excessive, ill-conceived deregulation of recent
years, induced in significant part by the bullying of external
neo-liberal forces, turned a number of Asian countries from
economic miracles to economic disasters in a matter of weeks!"

Referring to the IMF-Korean negotiations, the three authors
note that according to press reports the US was in effective
control of these negotiations - with Robert Rubin and Lawrence
Summers at the US Treasury and Federal Reserve Chairman, Alan
Greenspan calling the tune.

When a tentative deal had been reached with Seoul, the US
held it up for a number of days while adding numerous
additional demands beyond those in the initial agreement.

The US-IMF programme

"Under US pressure, the IMF acted not as a partner in Korea's
attempt to survive the crisis, but in a manner more appropriate
for an occupying military power. It demanded total destruction
of all remaining elements of the East Asian model, and their
replacement with Neo-liberal institutions and practices - a
transformation the US had struggled with only partial success
to impose on Korea for several decades."

"... while the problem loans at the center of the
negotiations had been mutually agreed to by domestic borrowers
and foreign lenders, all the costs of the rescue were to be
borne by Koreans - firms, banks, government, workers and
citizens. Foreign banks were guaranteed by the IMF not to lose
a penny; IMF dollars would be immediately recycled their way.
and this was by design, not necessity. The IMF could have
chosen to offer foreign banks partial repayment over an
extended period of time, which would have been a far better
deal for them than the free-market alternative of default..."

The US-IMF program demanded for more than austerity and bank
reform. "It sought the complete destruction of the Korean
model, and the opening of all Korea's markets to unrestricted
exploitation by foreign MNCs, banks and financial investors.
The IMF demanded that the government end its control over
central bank policy, and give up its influence over allocation
of credit by the private sector; credit allocation would
henceforth by regulated solely by considerations of private

Even if one were to accept that it is in Korea's self-
interest to open its firms and banks to foreign ownership, "it
would be completely irrational to do so in the midst of the

The damage done to Asian economies has caused many
economists to reconsider their opposition to controls over
short-term capital flows, the three authors point out, citing
reports in the New York Times of views of American economists
at the January meeting of the American Economic Association

The authors note that at the AEA meeting, the IMF's Deputy
Managing Director, Stanley Fischer, having been part of the IMF
team that required Korea to eliminate all controls over cross-
border money movement, cited approvingly of Chile's tight
regulation of short-term foreign borrowing.

"Such IMF schizophrenia is not unprecedented. The IMF
briefly flirted with support for inward capital controls after
the recent Mexican peso crisis, only to revert to the Neo-
liberal orthodox view when the crisis was over." -(Third World Economics
No. 179/180, 16 Feb-15 March 1998)

Chakravarthi Raghavan is the Chief Editor of the SUNS.