Monetarism and underdeveloped countries

Monetarism and underdeveloped countries


In the Western countries, a Keynesian macroeconomic theory and a social democrat or a Christian democrat ideology dominated since the war. States had a strong role in the economy and major parts of markets were regulated. When the International Monetary Fund, the IMF and the World Bank were created at Bretton Woods in 1944, their mandate was to lend for reconstruction and development of states. The IMF was employed to stabilize currencies and to help countries to avoid economic crises. The World Bank was meant to facilitate long-term investments in underdeveloped countries, to expand and strengthen their economies. The main instrument has thought to be lending major project investment money at low interest to correct for the deficiencies of local financial markets. In the three decades after the war, the IMF and the World Bank were appreciated as progressive organizations and loyal allies to the poor countries. In the 80s, their policies were suddenly totally opposite to that. Instead of facilitating stable exchange rates and helping countries to protect themselves, they began to work against obstacles to the market liberalization.

The IMF and the World Bank are blamed to be far too monetaristic. According to monetarism, market exchange is an ethic in itself, capable of acting as a guide for all human action[1]. Monetarism is not a force like gravity but an artificial construct. We need workable international taxation, including a Tobin Tax on monetary market transactions[2]. Friedrich von Hayek, the philosopher-economist and his students like Milton Friedman at the University of Chicago can be classified as contemporary monetaristic. The Chicago school has succeeded to build an ideological cadre that has taken the hegemony in the IMF and the World Bank in which the U.S. is the major shareholder. The Chicago school has made monetarism seem as if it could be the normal condition of humankind. Two famous politicians have often been mentioned as forespokers of neo-liberalism. In 1979, when Margaret Thatcher came to power, she undertook the monetaristic revolution in Britain. Thatcher's doctrine is based on the notion of competition. For her the market is the standard solution to increase efficiency. Ronald Reagan was the one whose neo-liberal doctrine and policies made the Chicago school possible to takeover the IMF and the World Bank. Reagan is the president who succeeded to change the U.S. income distribution totally[3]. As the result, the U.S America is now one of the most unequal societies.

A central element of the monetarism is the downsizing of the public sector. Privatization as the trend began in Britain and spread throughout the world. In reality, most of the public services constitute natural monopolies[4]. The public service producer often has the optimal size and the lowest possible costs to the consumer. Public services require large investments and continuous maintance. Public monopolies have not been inefficient because of the public ownership as monetarism's claims. When a natural monopoly is privatized, the new capitalist owners tend to impose monopoly prices and lower quality on the public services. This kind of structural market failures has earlier been prevented in the EU by state-owned monopolies. Privatization favors capital and moves wealth from the bottom of society to the top[5]. The difference between the EU and the US is that in the US, natural monopolies are difficult to maintain because of the huge geographic sized of markets.

In the developing countries, state-owned monopolies are often the only way to build up the infrastructure for the public services. The state is the only one that can take the risk of lending from the global financial markets. There is a global trend towards greater inequality. The ideological justification for such measures is that higher disposable incomes for the already rich and higher profits will stimulate investments and provide more jobs and welfare for everyone in our globe. The only predictable result is disruptive stock market bubbles and financial crises of poor countries. The monetaristic policies of the IMF and the World Bank can even deepen crises by downsizing of the public sector and thereby, domestic market demand. Instead, the IMF should promote international cooperation to make it possible for people in local communities to control their own economic lives[6]. The WTO established in 1995 trumps on behalf of free trade. The original mission of was, however, different[7]. Most of developing countries are disappointed at the WTO’s failure to create fair rules in international trade[8]. An example is cotton farmers in Africa that have difficulties to compete against the US and EU cotton subsidies, which has threaten the livelihoods of 15 million people dependent on cotton farming in West and Central Africa[9]. Some sociologists have claimed that the WTO is the major obstacle of the global justice[10].

The developed countries have initiated a new instrument: bilateral and regional free trade agreements (FTAs) to win concessions for more favorable rules. The US calls this approach competitive liberalization. The EU has declared its intention to use bilateral deals as stepping stones to future multilateral agreements. The EU argues that bilateral and regional agreements are vital for developing countries in Africa, the Caribbean and the Pacific to maintain their access to European markets in a form that is compatible with the WTO rules. One of the problem areas is intellectual property rights, IPRs that are most critical in the areas of life-saving medicines[11] and new biotechnology innovations meant to farmers. The liberalization of science-based products and digitalized services in FTAs threaten to drive local firms out of business, reduce competition, and extend the monopoly power of multinationals[12]. The risk is how to guarantee poor people’s access to essential public services. The US policy is neo-liberal and opens up public utilities in developing countries to foreign investors if the sector is opened to domestic private firms. Te US and the EU are pursuing regional and bilateral free trade agreements through FTAs that makes poor countries more difficult to get a foothold in global markets. Although developing-country governments have proved themselves increasingly assertive at the WTO and in FTAs, the balance of power in current negotiations is in favor of rich countries and multinationals.

Local entrepreneurship is the only way to develop poor countries, to reduce the negative implications of financial volatility, to enlarge democracy, and thereby, to defend human rights and environmental sustainability.



[1]Harvey, David (2005) A Brief History of Neoliberalism, Oxford, UK: Oxford University Press.
[2]Susan George, A Short History of Neoliberalism, Conference on Economic Sovereignty in a Globalising World March 24-26, 1999.
http://www.globalpolicy.org/globaliz/econ/histneol.htm
[3]In the 1990s, the extremely lucky top 1 % of American families could thank Reagan for a 50 % increase. A decade later, the top 1 percent was 115 times as well off as the bottom decile. Phillips, Kevin (1990) The Politics of Rich and Poor, Basic Books.
[4]A natural monopoly exists when the minimum scale of operations equal the actual size of the market.
[5]In Finland, Fortum, the vertically integrated and state-owned monopoly in electricity production was privatized in the beginning of the 2000s. The result was douple higher prices for consumers and huge options for the managers.
[6] A report released by the Independent Evaluation Office (IEO) of the IMF criticises the role of the IMF in managing aid inflows to Sub-Saharan Africa
http://www.brettonwoodsproject.org/institution/ieo/index.shtml
[7] The WTO is based on John Maynard Keynes’s ideas from the wartime. Keynes uses the name the International Trade Organisation (ITO), supported by an international central bank, the International Clearing Union (ICU). http://progecon.wordpress.com/tag/wto/
[8]Ikenberry, John (2001) After Victory: Institutions, Strategic Restraint, and the Rebuilding of Order after Major Wars, Princeton, N.J.: Princeton University Press.
[9] http://www.irinnews.org/report.aspx?reportid=57400
[10] Korten, David (1995) When Corporations Rule the World, London.
[11]The proposed trade deal between the US and Colombia would increase medicine costs by $919m by the year 2020 in the country of 5.2 million people.
http://commentisfree.guardian.co.uk/tony_juniper/2007/04/unfair_trade.html
[12]In some countries like Mexico “liberalized” services are owned by over 80 per cent by multinationals, most of them are US-owned.