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Economic
miracles turned to disaster by Neo-Liberalism 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 Press. 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 framework." 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 communities. 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 attractive. 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 models. 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 interests." 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 model. 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 1990s. 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 countries." 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 profit...." 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 crisis." 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 (AEA). 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.
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