The Guardian June 28, 2000


The case for national economic sovereignty

by Mark Weisbrot

The best prospects for economic reform reside at the national level, not 
within unaccountable, colonial, supra-national institutions like the 
International Monetary Fund and the World Bank.

The International Monetary Fund and the World Bank had their annual spring 
meetings in Washington recently, and one thing was perfectly clear: there 
is not going to be any "new global financial architecture" in the 
foreseeable future. It took a Great Depression and a World War to bring us 
the Bretton Woods agreement, the system of fixed exchange rates that lasted 
until 1973.

In the absence of similarly cataclysmic events, the overseers of  the 
global economy have no need to look at the blueprints churned out by policy 
wonks and think-tanks who have been jockeying for "a seat near the table".

In just the past two years, the inherent instability of global  financial 
markets, coupled with the IMF's disastrous interventions on three 
continents, have pushed tens of millions of people into poverty. But for 
the "Wall Street-Treasury complex", the crisis is over. 

Investors are moving back into emerging markets, the US stock market is 
booming again, and fears of international financial "contagion effects" -- 
from Russia's default on international debt, for example -- have subsided. 
Does this mean that reform is impossible? 

Many observers could not help noticing that the Chinese economy grew by 7.8 
percent last year, while the rest of the region fell deep into recession or 
depression. Ironically, China is now helping to save the globalisers from 
themselves.

It has so far kept its fixed exchange rate, rather than devaluing in order 
to get a larger share of shrinking regional export markets. Instead of 
pursuing a "beggar-thy-neighbour" strategy, which most analysts believe 
could set off another round of currency depreciations and crises, China has 
shifted resources to domestic production. 

The government is spending a massive $200 billion on public works this year 
-- relative to their economy, an amount that is more than the entire US 
federal budget.

China example

China has more autonomy to pursue rational macroeconomic policies than most 
poor countries: its currency is not freely convertible, its financial 
system is domestically owned and controlled by the state, and there is 
relatively little foreign ownership of equities. And it does not have to 
take orders from the IMF.

But the list of countries that have taken measures to protect  themselves 
from global financial markets is growing. Malaysia's use of currency and 
other capital controls allowed it to lower interest rates significantly 
over the past year and stabilise its economy. 

Last year, Hong Kong placed restrictions on speculative trading and 
intervened heavily in its currency and stock markets in a successful effort 
to beat back an assault by hedge funds. 

Chile and Colombia have used capital controls to shift the composition of 
foreign investment away from volatile short-term flows to longer-term 
investment and loans -- measures that helped protect them from the shocks 
of the Mexican peso crisis in 1995.

These are modest reforms, but they show that even small countries  do not 
have to simply submit to the whims and caprices of international financial 
markets. Perhaps more importantly, they are signs that one of the most 
important prerequisites to social and economic progress --- national 
economic sovereignty -- is finally making a comeback.

Economists knew

More than 40 years ago, most economists knew that the state had a vital 
role to play in the process of economic development, and that unregulated 
markets by themselves would polarise the distribution of income and wealth 
and could lead to panics, crises, recessions and depressions. 

They also knew that industrialisation and economic development required 
some protection from international market forces as well as planning, and 
that the later any country arrived on the scene, the more state 
intervention it would need.

But all of this knowledge has been lost in the swamp of neoliberalism, like 
the knowledge of the physical sciences that was buried during the middle 
ages. And the neo-liberal experiment has failed much more miserably than 
most people know, even on its own terms -- that is, ignoring the 
distribution of income and wealth.

For the last 20 years, Latin America has chalked up about zero growth per 
capita, as compared to a more-than-70 percent increase in the previous two 
decades. For Africa, the decline has been even worse, with per capita 
income actually shrinking over the past 20 years.

There are many paths to economic development, but almost all of those taken 
successfully in the past are currently prohibited by Washington and its 
primary enforcer, the IMF, which literally makes the major economic 
decisions for 75 countries. (Despite rhetorical and some programmatic 
differences, the World Bank plays the same role by denying credit to 
countries who resist the IMF's deadly macroeconomic prescriptions.) 

Break stranglehold

The first precondition for the advancement of the world's poor is therefore 
to break this foreign stranglehold on their governments.

This is where we, who live in the United States, can make a real 
difference. A mass movement for debt relief, led by the Jubilee 2000 
coalition in Europe, Africa, and Latin America, promises to take on the 
dimensions and power of the anti-apartheid movement in the 1980s.

And last year a handful of progressive organisations and members of 
Congress delivered the swing votes to block a $90 billion expansion of the 
IMF ($18 billion from the US) in the House. The IMF eventually got the 
money, but the year-long fight significantly undermined the Fund's 
credibility and bargaining power throughout the world.

As the cracks in the Washington consensus widen, there will be further 
opportunities to help the rest of the world in its struggle against 
economic colonialism. 

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