The Icelandic Canary
by SAMEER DOSSANI, source
Though Margaret Thatcher is no longer among the living, her ideology lives on. That ideology – known today as neoliberalism, “free market fundamentalism” in a phrase coined by George Soros – is strikingly unique. Apart from religious beliefs, is there any example of an ideology that has been so thoroughly disproven yet maintains an aura of respectability?
The basic premise of neoliberalism – that “free markets” lead to better growth, higher prosperity and even more equality – was always fiction. As Cambridge economist Ha-Joon Chang has repeatedly pointed out, there is no such thing as a free market. Nor is there any example of a country that has developed by following the neoliberal tenets of privatization, liberalization and budget cuts. Instead countries have traditionally used some mix of subsidies, tariffs, and debt-financed investment to prop up industries and shift comparative advantage to higher-end goods.
Despite the history, neoliberals argue that markets alone should determine things like wages, and that corporations and their owners should be able to operate however they like. Developed countries that adopted neoliberal tenets post-1980 saw wages stagnate almost as quickly as corporate profits skyrocketed.
In the developing world it was much worse. Africa suffered two decades of economic stagnation as a direct result of being forced to follow these policies, with Latin Americans and Asians doing not much better. The past decade has seen some improvement, but the global community is still well behind where it should be in terms of eradicating things like hunger and preventable disease.
But the neoliberal era may finally be nearing its long-awaited end. Here’s why.
1) The IMF has admitted that budget cuts are not always the answer.
The IMF has for over three decades forced countries to restructure their economies to be in line with neoliberal tenets. In particular, they have forced indebted countries to cut budgets before they can borrow from capital markets to pay off creditors. The phrases bureaucrats and politicians invented to sell this ideology are by now clichés. “Governments can’t spend more than they earn,” “We all need to tighten our belts,” etc. etc. By cutting government spending, the story goes, countries make room for increased private sector spending, and the economy grows.
Though earlier IMF studies had come to similar conclusions, it wasn’t until January 2013 that the IMF’s chief economist published what amounts to a “mea culpa”. Turns out that decreasing public investment is actually a pretty good way to hurt prospects for economic growth rather than increase them. Oops.
And there’s another twist in the story. For the last few years, decision makers have been citing a paper by Harvard economists that ostensibly highlights the dangers of countries borrowing too much in order to finance public expenditures. The paper specifically suggested a cutoff – when the debt hits 90% of GDP – beyond which economies would suffer for their overspending ways. The paper has been cited by public officials around the globe to justify budget cuts. But it turns out that the paper’s conclusions were a result of a series of errors, one of which was forgetting to update a calculation on an Excel spreadsheet. When the correct data is put in place, the conclusions more or less disappear.
2) The Doha development round is dead
In November, 2001 the World Trade Organization launched its “Doha development round”. Despite its name, the Doha round was about anything but development. High on the agenda were things like removing social and environmental protections, eliminating subsidies for poor farmers, and ensuring that big pharmaceutical companies could maintain patents on (and greatly increase the cost of) life-saving medicines.
With the help of progressive activists from Seattle to Hong Kong, and due to the huge uprising of developing countries in the WTO’s Cancun ministerial, Doha is more-or-less dead and the WTO is at a standstill. That’s great news for those who want to see fair trade as opposed to “free trade” and trade deals that put development and human rights first. The challenge now is to come up with a framework (and maybe even a mechanism) for multilateral regulation of global trade that prioritizes human rights over corporate profits.
3) Countries are increasingly trading in local currencies
Apart from the IMF, one way for the U.S. to maintain its control over the global economic system is the supremacy of the U.S. dollar. Certain transactions must be done in U.S. dollars – buying petroleum for example – and the U.S. dollar is still seen as the safest global currency. The result is that the dollar’s value remains artificially high, increasing the purchasing power of U.S. consumers and the desire of everyone else to sell to the U.S.
This deal benefits almost no one (not even U.S. consumers) and some governments have begun to look for alternatives. Agreements to begin to trade in local currencies have been negotiated between Brazil and China, Turkey and Iran, China and Japan, and the BRICS countries. Though some of these agreements are just taking off, if implemented they represent a significant challenge to the status quo.
4) 2007-08 proved beyond a doubt that markets don’t regulate themselves. And Iceland proved that there is another way.
The financial crisis of 2007-08 is far from the first financial crisis of the neoliberal era; in fact it would also be accurate to call the neoliberal era the “era of financial crisis”. From Mexico in 1982, to other countries in Latin America soon after that, to the U.S. stock market collapse in 1987, to Japan in 1990, to the Asian financial crisis of 1997, to Russia and Brazil in 1998-99, to Turkey and Argentina in 2000-2002, to the collapse of the dot com bubble, there has hardly been a moment since 1980 when there is not a financial crisis happening somewhere. What usually happens in such times is that governments take measures to protect the elites (usually the bankers who actually caused the crisis) and shift the burden of paying for the costs to the general public. The current crisis is a good case in point.
But unlike previous crises there are indications that this time we might be looking at a system change. The first of these is just the scale of the crisis. The collapsed U.S. housing bubble represented about $8 trillion USD in artificial wealth. That’s more than 11% of global GDP, and that’s not counting the housing bubbles that collapsed in Europe and elsewhere. This is market failure on a massive scale.
This time there’s also an example of a country that protected its citizens, jailed its bankers and is doing much better as a result. The country, Iceland, joins Argentina as one of the only countries to default on debts as a result of financial crisis. The disasters that “everyone” was expecting (no access to currency markets, investors blacklisting Iceland, etc) never materialized, showing that even small countries can stand up to the international creditor cartel and live to tell the tale.
Iceland demonstrates that there’s nothing natural about neoliberalism. The decision to protect elites from the effects of markets while using those same markets to punish everyone else is a political injustice, not a natural law.
And it is this injustice which ensures that neoliberalism will go the way of the dodo. Ultimately markets are just a social contract, like marriage. And just as the move towards marriage equality now seems inevitable, drastic reform of the way we relate to markets is on the way.