The problems of globalization
Galbraith, James K.
THE DOCTRINE known as the Washington Consensus was the Apostle's Creed of globalization. It was an expression of faith that markets are efficient, that states are unnecessary, that the poor and...
...Over the past half-century, successful and prolonged periods of strong global development have always occurred in countries with strong governments, mixed economic structures and weakly developed capital markets...
...tax collection became impossible because there was nothing to tax...
...It took five years or longer in the Texas of the mid-1980s...
...We need many changes from this naive and doomed vision of an ungoverned world order...
...They saw every unwelcome case as an unfortunate exception...
...ARE THERE alternatives...
...As for Brazil, through the early fall of 1998 it was said that the International Monetary Fund (IMF) would restore confidence and keep the Brazilian real afloat...
...opposition to them should be dropped...
...Beyond this, a major reconstruction of world financial practices, aimed at restoring stability and strengthening the regulatory and planning capacities of national governments, is in order...
...Beginning in 1979, however, China embarked on reforms that changed the face of the country...
...This faith has now proved totally unfounded...
...It is this imperative that is Brazil's problem today...
...A flight to quality began, usually following moves to raise interest rates in the "quality" countries—notably the United States in 1994 and in early 1997...
...A Tobin Tax on foreign exchange should be enacted here, not only to slow speculation in the United States, but also to signal our acceptance of this principle for other countries, for whom different mechanisms of capital control may be more suitable in different cases...
...Policies that guarantee that they can do so, and with steadily improving diets and housing and health and other material conditions of life over long time spans, are good policies...
...The crisis of the Washington Consensus is visible to everybody...
...But serious dangers have also emerged in Asia and Latin America and they are not going to go away soon...
...As early promises of "transformation" proved unrealistic, the investor mood soured...
...It took them seventy years to forget the essential lesson of that experience, which is that there are no easy, sudden, miraculous transitions...
...Strong national governments have a sovereign right to regulate capital flows and banks operating on their soil—as much right as any nation has to control the flow of people across its national frontiers and to regulate their activities at home...
...After that, policies that welcomed long-term direct investment, that fostered township and village enterprises, joint ventures, and private enterprises, put into place a vast and continuing improvement in human living standards...
...It is not politically free...
...Then there is fiscal policy...
...And these empires sponsored their own banks, which were not banks at all but rather simply speculative pools, sewing none of the essential functions of commercial banks...
...indeed growth has been so rapid that many people can perceive the improvement in their standard of living from month to month...
...And it is a failure not because of unforeseeable events, but because it was and is systematically and fundamentally flawed...
...Investors with exposure in Asia, and with losses in Russia, must reduce their lending to other large borrowers, irrespective of conditions in those countries...
...The payments system ceased to function...
...We must bring the Reagan era to a final end...
...Indeed, as bad policies produced policy failures, those committed to the policies developed a defense mechanism...
...There is, in short, a crisis of the Washington Consensus...
...We need large changes, and the need is great while time, I believe, is short...
...The IMF needs new leadership, not tied to recent dogmas...
...And it is possible to distinguish policies that meet this minimum standard from policies that do not...
...He is working on a new book on global inequality...
...Recovery from the crash of such bubbles is a slow process...
...The neoliberal experiment is a failure...
...No market would have chosen this course of action...
...These began with the most massive agricultural reform in human history, reforms that effectively ended food poverty in China in five years...
...Once finished, these towers do not go away...
...Over twenty years, average living standards quadrupled...
...Privatization and deregulation in Russia did not create efficient and competitive markets, but instead large and pernicious private monopolists, the oligarchs, and the mafiosi, with control over competing industrial empires and the news media...
...There is an obvious conflict between progrowth policies and "investor confidence...
...The crash of Indonesia spread to Korea by these financial channels...
...A very small move in U.S...
...16 DISSENT / Summer 1999...
...The major players in the Korean economy—the state, the banks, the conglomerates known as chaebols—were yoked together in pursuit of their goals...
...This was the case of Europe and Japan following World War II, of Korea and Taiwan in the eighties and nineties, of China after 1979...
...The grim history I've just outlined is not uniform...
...But this effect is temporary...
...Look closely...
...and the cut from one to one-half percent lacks the force of the reduction from six percent to four...
...International assistance should seek to strengthen these public networks where they exist and to build them where they do not...
...Interest rate cuts last fall had an important stabilizing effect on global markets...
...It is true that Korea experienced the first harsh blows of the Asian financial crisis...
...Unlike Russia, China made the mistake of the Great Leap Forward only once...
...Workers and their wage demands 14 DISSENT / Summer 1999 were repressed...
...They do not exist...
...The Korean industrialization policy was not, in any static sense, efficient...
...The truth is that people need to eat every day...
...Regional financial institutions, as suggested for Asia by Japanese Deputy Finance Minister Eisuke Sakakibara, are therefore also needed, and U.S...
...Policies that foster instability directly or indirectly, that prevent poor people from eating in the name of efficiency or liberalism or even in the name of freedom, are not good policies...
...It was an expression of faith that markets are efficient, that states are unnecessary, that the poor and the rich have no conflicting interests, that things turn out for the best when left alone...
...In 1992, the advocates of shock therapy followed the Bolshevik path, against the good sense of much of the Russian political order, by Bolshevik means...
...To begin with, we can recognize that globalized finance makes the Federal Reserve the central banker to much of the developing world...
...They help prevent criminal monopolization of critical distribution networks by setting up an accountable alternative...
...It isn't...
...And it never liberalized its capital markets or its capital account, for fear that such actions would prove a fatal lure, unleashing a cycle of boom and bust that a poor nation cannot tolerate for long...
...This was the true meaning of Boris Yeltsin's 1993 military assault on the Russian Parliament, an act of violence that we in the West tolerated, to our shame, in the name of "economic reform...
...Yet, when one adds up the balance sheet of the Korean model, can anyone seriously argue that the country would be richer today if it had done nothing in 1975...
...Such systems stabilize the market institutions, which work better for people with higher incomes...
...Then Korea, Thailand, Indonesia became exceptions: corruption, crony capitalism on an unimaginably massive scale, was discovered, but after the crisis hit...
...It was not a crisis of crony capitalism, but of crony banking—deregulated and globalized...
...That it would be more middle class or more democratic...
...What they did was to diversify—supporting vast expansion and industrial diversification schemes of the chaebol (Samsung's adventure into motor cars, for example) and lending to such places as Indonesia, where the Koreans evidently bought paper recommended to them by their American counterparts...
...It lies, rather, in the international capital markets...
...Where are the success stories of liberalization, privatization, deregulation, sound money, and balanced budgets...
...The push for competition, deregulation, privatization, and open capital markets has undermined economic prospects for many millions of the world's poorest people...
...There is a strong case for lower interest rates, but we must also remember that the long term arrives when such short-term policies run out of steam...
...But given that conflict, it is a fool's bargain to place investor confidence above the pursuit of development...
...MOST OF ALL, we must give up illusions...
...and the Fed's powers are limited...
...But then, capital inflows led to currency overvaluation, making imports cheap but exports uncompetitive...
...But one must also acknowledge that the Chinese government has delivered on the essential economic demands of the Chinese people, namely food and housing, and that an alternative regime that did not deliver on these needs would not have been able to deliver internal peace, democracy, or human rights either...
...DISSENT / Summer 1999...
...In Russia, we are told, Dostoyevskian criminality welled up from the corpse of Soviet communism to overcome the efficiencies and incentives of free markets...
...After a cut, another one is eventually required...
...After 1975, the Korean government took note of the fate of South Vietnam, drew its own conclusions about the depth of American commitment, and embarked on a program of heavy and chemical industrialization that emphasized dual-use technologies: the first major product of Hyundai Heavy Industries, for example, was a knock-off of the M-60 tank...
...Efforts to do just this in Russia today, under the present government, should be supported and not opposed...
...China is a country with a fifty-year tradition of one-party government...
...The problem here does not originate with Brazil, and cannot be resolved by any actions the Brazilians alone might take...
...For thirty of those years, it was a case study in regimentation, ideology, and economic failure...
...Korean banks had become deregulated in 1992...
...And the initial search for markets was by no means entirely successful...
...The United States should expand its own economy using all the tools available for this purpose...
...The greatest single danger right now is in Russia, a catastrophic example of the failure of free market doctrine...
...At one point, there occurred an entirely avoidable, catastrophic famine during which twenty or thirty million people perished...
...If it is a good idea for Japan to run a deficit to fight the global recession, why is it wise for the United States to be running a surplus that vastly offsets the deficit in Japan...
...And then there came the Russian exception...
...To the extent that it undermines the stable provision of daily bread, it is dangerous to the safety and stability of the world, including ourselves...
...The state financed itself through a pyramid scheme of short-term debts—the GKO market—which collapsed as pyramids must on August 17, 1998...
...But the IMF is also too small, and too thinly spread, to be useful in helping countries with the design and implementation of effective national development schemes...
...In 1917 the Bolshevik revolution promised a war-weary Russian people liberation and deliverance from oppression...
...Many more office towers went up, in Bangkok, Djakarta, Hong Kong and Kuala Lumpur, than could reasonably be put to use...
...It held that privatization and deregulation and open capital markets promote economic development, that governments should balance budgets and fight inflation and do almost nothing else...
...In Korea, for instance, the great period of economic development was, indeed, a time of repressive crony capitalism...
...But the real has since been devalued and Brazil is heading for a deep recession...
...There wasn't a big demand for those tanks, and so Hyundai decided to try building passenger cars instead...
...15 Every functional private economy has, and needs, a core of state, regional, and municipal enterprises and distribution channels to assure food and basic necessities to low-income populations...
...The private sector literally ran out of money...
...But why...
...Look hard...
...But not everybody is willing to admit it...
...Mexico was an exception—there was a revolt in Chiapas, an assassination in Tijuana...
...If it is a good idea for the government of the United States to grow in line with our economy, then it is also a good idea for the governments of other countries to grow as their economies do...
...So, what can the United States do now...
...This was the end of free-market radicalism in Russia— and still, the Washington Consensus holds that Russia must "stay the course" on "economic reform...
...By 1997, the industrial policy was a thing of the distant past...
...Investors like to be repaid in the short run...
...But when the exceptions outnumber the examples, there must be trouble with the rules...
...One can multiply cases, but let us look at just one other, that of China...
...It is therefore not merely a naive and misguided crusade...
...interest rates in March 1997 precipitated the outflows of capital from Asia that led to the Thai crisis...
...Global development policy should be geared toward strengthening that capacity, not crippling it...
...In the first years of the Great Proletarian Cultural Revolution, village rations amounted to less than a pound of rice per day...
...DISSENT / Summer 1999 13 The Russian case is especially sad and dramatic...
...In each of the supposed exceptions—Russia, Korea, Mexico, and also Brazil—state-directed development programs have been liberalized, privatized, deregulated...
...they stay empty but available, and so remain a drug on the market, inhibiting new construction...
...Meanwhile, the state followed a rigid policy of limiting expenditures, so that even wages and pension obligations duly incurred were not paid—as if the United States government were to refuse to pay Social Security checks because of a budget deficit...
...JAMES K. GALBRAITH is the author of Created Unequal: The Crisis in American Pay...
...Throughout Asia in the 1990s, stable industrial growth gave way to go-go expansions based heavily on real-estate speculation and commercial office development...
...China's case demonstrates the potential effectiveness of sustained development policies —of policies that emphasize the priority of steady improvement over long periods of time...
...China is no democracy...
...We must return to development policies for the people whose needs matter most in the large scheme of things, namely the millions of hard-working people in poor countries who need to eat every day...
...Then there is the matter of what we preach to the world and the policies we support...
...These cases, and not the free market liberal examples—such as, say, Argentina after the mid-1970s or Mexico after 1986 or the Philippines or Bolivia—are the success stories of global economic development in our time...
...Where are the emerging markets that have emerged, the developing countries that have developed, the transition economies that have truly completed a successful and happy transition...
Vol. 46 • July 1999 • No. 3
