Response to "In Defence of Neo-Liberalism"

I've hemmed and hawed over writing this post, largely because the critique I make is of an essay whose author is a good friend and colleague of mine. Writing on the Cambridge MPhil Development Studies Blog, Mike has passionately argued the case for neo-liberalism in three parts. he does so not for ideological or intellectual support of the ideas themselves but rather for his belief in thinking freely. Perceiving a heterodox slant in the Cambridge DevStudies Committee, Mike has taken the position simply as a way of keeping himself from being indoctrinated. For that, I commend him.

That said, I'm compelled to write a response to a number of points. Though not necessarily heterodox, I do not find the neo-liberal (NL) argument convincing. The rest of this post will outline why.

Perhaps neoliberalism’s greatest failing is that it has developed an ossifying ideology that no longer heeds the advice of people outside its political and academic circle. This has stifled critical debate and broad based thinking causing neoliberals and their institutions to fall into groupthink. Unfortunately, I believe our course, with its lack [of] neoliberal counter criticisms, is falling into the same trap.

This is problematic in that Mike's critique of the department is that it has an overzealous focus on ripping apart NL. If this is the case, how can the lectures be said to mimic NL in that they "no longer [heed] the advice of people outside [their] political and academic circle"? Mike's position is revealed in his titling of the post: a "defense" of NL is only required if it is under attack. The two positions are logically incompatible.

Disregarding this incongruence, many would take issue with the claim that the "greatest failing" of NL is developing an "ossifying ideology." The problem is not that the ideology exists per se, but rather that it is used as a mechanism of power, a rhetorical and economic program to enforce policies that actually hinder development. If this is the case, the challenge can hardly be levied that development from a heterodox perspective makes the same error.

Much of neoliberalism’s rise can be attributed to a paradigm shift in economic thinking that occurred during the 1970s. This shift was not the result of some political coup; rather it was the result of an honest assessment of facts.

There's some truth to this. As Toye (1987, ch. 2) points out quite plainly, there was much substantiation of the central claims that government intervention was inefficient, costly, and often utilized for rent-seeking.

Yet that does not translate into the universal rejection of such intervention, as the NL orthodoxy requires. As such, we need to go beyond "an honest assessment of facts" to understand the rise of NL; such an assessment could easily have given rise to a counter to development economics that kept well within the Keynesian, interventionary tradition. 

However, it did not, instead drawing its roots from a mix of liberal laissez-faire economics, monetarism, and Austrian libertarianism. This particularity cannot be cut off and extracted from the political context of the Cold War. One NL founding father, Harry Johnson, argued that the success of Keynesianism was due to its answer to the problem of unemployment, proposing that the NL counter-revolution be built up from a similar social dilemma. Thus what made it shift from "unexciting truths [about the propensity for government inefficiency] to thrilling absurdities" (ibid.) is its underpinnings in the two biggest political crises of the day: inflation and the Soviet threat. By taking the monetarist obsession with interest rates and the Western fixation on democratic freedoms, the NL approach acquired popular acceptance, as well as academic and policy hegemony.

[Another reason for its rise is that a] new wave neoliberal economists began using sophisticated econometric methods to “prove” that their theories were right. While many of these econometric studies had flaws, their sophistication has impressed many observers. Moreover, the other side has not been able to amass nearly as much convincing econometric evidence as the neoliberal side has. This superiority in econometric evidence has probably been neoliberalism’s most effective tool for silencing its critics.

First, it doesn't matter if they have "impressed many observers" - if the observers are colleagues within the "ossifying ideology", then it stands to reason that they would be impressed by any vindication of their theories, particularly if those proofs are "sophisticated". Second, the record actually favors heterodox arguments: growth has stagnated since the counter-revolution, particularly in developing countries. Inequality has worsened, real wages have dropped, and in income terms, many more are poor today than in 1980.

Moving on to part two, Mike offers four defenses of conditionality. The first two are essentially that no one is forced to take the conditions and that they often go unmet anyway. Both, however, are beside the point. If getting a college degree had the condition of never marrying, would one say "well, I guess I don't have to find a spouse"? I don't believe so. More likely, they'd wonder why that condition existed, and try to reform or eliminate it. Thus the heterodox critique. Similarly, if the Bretton Woods conditions go unmet, then why have them? Why spend millions formulating, implementing, and monitoring them if, in the end, they're useless?

His third point is that conditionality that includes anything affecting economic growth is legitimate. All right, but the line being set is arbitrary. Would it be satisfactory for the IMF and Bank to ban foreign holidays for all nationals of a country under one of its programs? Korea did so up until the 1980s as a means of controlling foreign exchange, capital reserves, and thus aggregate growth. Would such a condition be economically optimal, morally acceptable, or even logistically possible? The answer is a resounding no, on all counts. So where is the line to be drawn with regard to what is germane? The heterodox critique essentially says that recent advances have simply crossed the line.

The final point is that the countries would have chosen the policies anyway. This is just factually incorrect. Certainly, many would have chosen some (though most likely not all) of the NL policies. Many would have imposed autarky, to disastrous effect. Still others would have used Keynesian fiscal policy to stimulate aggregate demand. The odds are stacked toward the last of the three: the (political and monetary) expenditures in the West on enacting the conditions imply that NL policies would not be the automatic choice. Mike's claim is a leap of faith.

On to the IMF: 

It is responsible for the stability of the global financial and currency system. Therefore, we should not judge it by the standards of, say, the World Bank, which is a development agency. 

Except for that it imposes a "stability" specifically geared toward the interests of those whom it serves. 

The IMF is the bad guy. In fact, it is supposed to be the bad buy. Getting bailed out by the IMF is not supposed to be easy. 

The IMF is not, as many NL make out, conceived of as the ultimate bail-out. It was originally conceived to maintain stability in times of boom, not just bust. The appropriate parallel would be to laud the IMF for forcing the United States to regulate derivatives and mortgages in the 1990s and early 2000s - something which would only occur in the happiest dreams of the staunchest Keynesian.

I think the loan is really intended to prevent an economic crisis from spreading through contagion and beggar thy neighbor policies. The IMF is less like a rescue worker responding to an emergency, and more like a doctor trying maintain quarantine.

Maybe so, but it's misleading to construe this "quarantine" as protecting, say, Malaysia from Thailand, Kenya from Uganda, or Brazil from Argentina. The beneficiaries of this containment are undeniably the developed economies - one need only look at the 1990s for proof. The crisis spread across Argentina, Mexico, Thailand, all of South-East Asia, toward Russia, and then back again toward Latin America. If the IMF is built to protect neighboring countries from such contagion, it does a terrible job.

The final point is that privileging payback over social protection is justifiable in making repayment feasible and stabilization likely. Yet Mike cites Easterly while eliding his other findings: countries in IMF programs stay in IMF programs. The strict policies imposed do little to stabilize or promote growth and eventual repayment. Moreover, the social destruction causes adverse reactions to the economic decline and inequitable redistribution of wealth, leading to violent upset and more instability.

Mike also covers TRIPS, arguing that we shouldn't expect big pharma to help the poor for free, that developing countries are all too happy to steal entertainment, and that they need to "give a little to get a little". I disagree with all. Big Pharma should help, not for free but rather because of the billions in subsidies they receive from developed-economy governments every year. Also, the South has pirated DVDs, to be sure - but they do contribute to economic growth in developing countries by providing jobs, stimulating technological growth and human capital (learning how to burn a DVD or edit film, for instance). Finally, they've already given massively to get the manufacturing access: in addition to TRIPS, there was TRIMS. And a destruction of capital controls. And FDI controls. And accepting rich-country agricultural subsidies. And...

Part three is upon us. I, like Mike, support the efforts to help developing countries, new to our era. However, I don't think good intentions are enough; well-wishing does not excuse poor institutions and policy imperialism. 

Another often-voiced criticism is that rich countries almost entirely control the World Bank and the IMF. This is true, but it should be remembered that is because the World Bank and the IMF are almost entirely funded by rich countries. It is rich country money, why should we be surprised if they attempt to control how it is spent. After all, most rich countries have voters to answer to. These voters have a justifiable interest that their tax dollars are being well used.

Two problems: most developed-country citizens have no idea about aid policy, or about these institutions. It's a tough sell to suggest that NL is demanded by fickle voters in the West. Such is simply not the case. Also, since the recipients of these policies are the global poor, our voters' wishes are second to their preferences, if not altogether iirrelevant.

To think that the IFIs are a major tool of rich country power is laughable. 

On the contrary, to think that they are institutions separate from narrow political-economic self interest is laughable, particularly when the NL ideology is predicated on the tendency for national government institutions to be captured by rent-seekers privately concerned with their own gain!

I do agree, however, that the people of the IFIs are genuinely interested in helping the poor. I have yet to find anyone who would disagree with this; it's inclusion in Mike's post as a defense of NL stymies me.

Another fact, not often acknowledged, is that some residents of wealthy countries have lost a lot to developing countries... This, often unrecognized, part of the East Asian miracle was done in order to strengthen these countries against communism.

This is actually mentioned frequently, and quite often acknowledged to be the West's motivation (in addition to having wealthy trading partners, an economic surplus to be had from giving aid to poor countries which Mike forgets). This self-serving political gain undermines Mike's point that IFIs are inherently altruistic in motives.

 In the past, many rich country residents have been hit hard by the West’s efforts to help poor nations.

Here again, the explanation given does not match historical experience. The American economy grew rapidly in the last few decades of the 20th century, largely due to the flow of capital and services to developing countries. As Mike notes, many laborers lost their jobs (I too grew up in a mill town), but this is essentially a question of distribution in a situation of aggregate boom. Although such equity concerns are pertinent, they yet again lead us back to Keynesianism and away from NL.

The post moves on to defend free trade by arguing that colonialism was mercantilism and that agricultural subsidies are problematic for not being neo-liberal enough. Here the point of NL's critics is simply misinterpreted. Their denouncements of colonial economic policy is that it forced de-industrialization, which NL also does under the guise of "comparative advantage". By forcing free trade, the rich world is prohibiting the industrial growth. Second, agricultural subsidies are criticized because they represent hypocrisy in the NL dogma (and in fact, our lecturer, Ha-Joon Chang, argues that their repeal will only favor rich farmers in BRIC countries while hurting smallholders in poorer regions).

Finally, on the point of democracy: it is certainly a market for ideas. Yet in creating an ideology that undermines democracy and shouts down critiques - such as those coming from our departmental lecturers - neo-liberalism shuts down this exchange.

In sum, I too remain unconvinced by either orthodoxy. I simply find neo-liberalism, as presented by my esteemed colleague, far less convincing.

Comments

[rico]

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Liberal Bias