The Political Economy of Global Development 2: The Age of Neoliberalism Alf Gunvald Nilsen SOS110/Autumn 2011

RECAP AND ORIENTATIONS

Chile, 11 September, 1973: The CIA-backed forces of the Chilean Army, lead by Augusto Pinochet, launch a violent coup detat and overthrows the democratically elected government of Salvador Allende 3,200 people executed or disappeared, 80,000 imprisoned the inauguration of two decades of military dictatorship US-trained Chicago Boys, with the direct support of Milton Friedman, implements the policy designs outlined in The Brick a 500page plan for economic restructuring of the Chilean economy designed in dialogue with armed forces prior to the coup Inflation, unemployment and debt spiralled when the economy stabilized in 1988 45% of the population had fallen below the poverty line, whilst the incomes of the richest 10% had increased by 83% Next to join the experiment was Argentina/1976

The shift from liberal to organized capitalism in mid-C20 represented a re-embedding of market forces through state regulation propelled by social movements from below Labour-friendly regimes (GN) Workers movements Development-friendly regimes (GS) Anti-colonial movements

With the breakdown of labour- and development-friendly rgimes and the resurgence of international finance and free trade, neoliberal capitalism can be regarded as the first phase of a new double movement
Ray Kiely Clash of Globalizations

Central to the transition to neoliberal capitalism has been the disembedding of markets from state regulation We can, therefore, interpret neoliberalization as a political project to re-establish the conditions for capital accumulation and to restore the power of economic elites
David Harvey A Brief History of Neoliberalism

One condition of the post-war settlement was that the economic power of the upper classes be restrained and that labour be accorded a much larger share of the economic pie To have a stable share of an increasing pie is one thing. But when growth collapsed in the 1970s then the upper classes everywhere felt threatened The upper classes had to move decisively if they were to protect themselves from political and economic annihilation.
David Harvey A Brief History of Neoliberalism

The decisive move came in the form of neoliberalism across the global North and South

THE RISE OF NEOLIBERALISM

Neoliberalism in the Global North In the GN, neoliberalism became hegemonic as a new economic orthodoxy that regulated public policy at state level in the 1980s Neoliberalism = A policy regime which restructured the relationship between state and market by disembedding the economy from social regulations and restrictions imposed during the age of OC

Accumulation strategies: ! The rise of flexible accumulation ! Financialization and the centrality of shareholder value ! The rise of a transnational production process

Form of state: ! Restrictive monetary and fiscal policies ! Reduced levels of state intervention ! Reduced public expenditures ! Tax cuts ! Privatization/liberalization

In the GN, the key agency promoting neoliberalism as a political project was the New Right conservative political parties that had broken with the Keynesian consensus of the post-war era and developed an ideology centred on neoclassical economic theory/liberal individualism

Neoliberalism in the Global North The policy-response to the international debt crisis was shaped by the emergent neoliberal hegemony in the development community US Congress and Administration IFIs and the Federal Reserve
John Williamson: Democracy and the Washington Consensus

John Williamson: What Washington Means by Policy Reform

The Washington Consensus Think-tanks

Consensus on what would be regarded in Washington as a desirable set of economic policy reforms based on neoliberal economics This generated a particular conception of the debt crisis: ! Countries with balance of payments problems had been pursuing flawed economic policies ! The source of the problem was internal the inefficiency and cronyism generated by state intervention Reforms centred on policy changes and internal economic restructuring

Engberg-Pedersen Limits of Adjustment in Africa

Mosley, Harrigan and Toye Aid and Power

IMF Short-term economic stabilization

S. George: A Fate Worse than Debt

World Bank Long-term economic restructuring Structural adjustment

D. Green - Silent Revolution

Devaluation of currency

Downsizing public expenditure

Deregulation of prices and trade

Remove subsidies and enhance competition

Privatization
Sale of public utilities to increase efficiency

Imports dearer, exports Reduce the need for external cheaper improved capital supplies trade balance

From 1978 to 1992, 70 states underwent 556 stabilization and structural adjustment programmes primarily in Africa and Latin America NB! Neoliberal restructuring in the global South was not simply an imposition by the IMF/WB/GN it was pursued through alliances with domestic economic/political elites in the GS The 1990s witnessed a new round of structural adjustment this time centred on Eastern Europe and Asia

Neoliberalism in the 1990s: The Third Way in the Global North The 1990s witnessed a shift from the pure neoliberalism of the New Right to the softer Third Way agenda pursued by New Labour, i.e. social democratic parties that had distanced themselves from the workers movement and state-centred policy regimes 3W politics was posited as an alternative to the state-centrism of OC and the market-centrism of the New Right But: A defining feature of the 3W agenda was that globalization was taken for granted as a reality that it was impossible to escape from: Globalisation is an unstoppable force
Tony Blair

The development of markets and technologies are posited as being a realm that is beyond the reach of politics In this context, the imperative for states is to adopt policies in order to draw on the opportunities that globalization presents In particular, it is important to develop policy regimes that develop the skills of the workforce to be in sync with the demands of the New Economy and the information age A flexible, skilled labour market will ensure competitiveness in the world economy Competition will ensure growth

The discourse of the Third Way has been used to depoliticize social and political processes Social change is portrayed as a technical matter of adaptation, as opposed to conflictual political decision-making Political tasks are handed over to neutral expert institutions that develop rules and regulations that are binding on governments e.g. independent central banks or transnational institutions like the WTO This context a context that has been created by deliberate political actions is then portrayed as an objective, nonpolitical constraint that defines what it is possible and what it is impossible for governments to do in the context of globalization 3W = Acceptance of globalization in its current neoliberal form

Neoliberalism in the 1990s: The Third Way in the Global South In the 1990s, there was a turn away from the Washingtonconsensus and its understanding of development as successful participation in the world market towards a more comprehensive emphasis on institution-building and poverty reduction Good governance Market-friendly intervention Social capital

The emergence of the post-Washington consensus became manifest in the reorientation of World Bank strategy from Structural Adjustment Programmes to the Comprehensive Development Framework and Poverty Reduction Strategy Papers PRSPs = A strategy paper that describes a countrys macro-economic, structural and social policies and programmes over a 3-year period, and serve as the basis for concessional lending from IFIs Intended to promote country ownership and participation, the PRSPs is (a) to be formulated by developing countries themselves, in order to reflect the specific circumstances of the country in question, and (b) to include input from civil society organizations in order to strengthen domestic support for policy reform

P. Cammack: What the World Bank Means by Poverty Reduction

But: The content of a PRSP has to be in line with the Country Assistance Strategy of the WB and the Poverty and Growth Reduction Facility of the IMF For example there is a clear convergence in terms of what is defined as good macroeconomic policy: trade/financial liberalization, privatization, fiscal prudence, and deregulation of labour markets And while the importance of social safety nets is recognized, this is (a) conceived of in terms of targeted subsidies of the poor, not universal welfare entitlements, and (b) limited by the overall framework on public expenditure And non-economic aspects of development are still conceived of in terms of their utility to the market: Investment in education contributes to the accumulation of human capital, which is essential for higher incomes and sustained economic growth Education helps reduce poverty by increasing the productivity of the poor (WB) Washington-consensus: ! Shallow neoliberalism ! Shallow interventionism Macroeconomic focus on market reforms/minimal state Post-Washington-consensus: ! Deep neoliberalism ! Deep interventionism Wider focus on reshaping social relations/institutional frameworks
A Rckert: Producing Neoliberal Hegemony?

Craig/Porter: The Third Way and the Third World

A Global Neoliberal Regime: The WTO 1947/GATT: Intended to promote free trade and long-term reduction in tariffs on imported goods, but with exceptions (textiles/agriculture/services) Retained space for protection of infant industries 1970s to the 1990s Selective extension of free trade principles Regional free trade agreements

1995: The WTO Continuing work towards reduced tariff rates Expansion of the remit of the free trade principle

The WTO has served as a vehicle for both the extensive and the intensive expansion of neoliberal capitalism The WTO is an example of the expert institutions that are central to decision-making in the 3W project ! Undemocratic decision-making ! Double standards in free trade ! What about the need for trade protection?

NEOLIBERALISM IN PERSPECTIVE

Between 1980 and 2000, neoliberalism became hegemonic on a world scale The neoliberal counterrevolution has been a transnational process the neoliberal market logic has come to define economic policy regimes globally: Synchronizing each national economic environment with an integrated global economic environment, neoliberalism is the policy grease of global capitalism
(William Robinson: A Theory of Global Capitalism)

Neoliberal restructuring was sold as a solution to the problem of economic stagnation both in the global North and South So what has 3 decades of neoliberalism achieved?

Neoliberal restructuring has facilitated a shift in the spatial organization of capitalism

M-C-M
M-C-M

M-C-M
M-C-M
M-C-M

from national production processes linked through international trade

M C M = The production process

 to globalized circuits of production, trade, and investment in a single global market M-C-M
W. Robinson: A Theory of Global Capitalism

P. Dicken: Global Shift

M-C-M M-C-M M-C-M

Has this transition had a positive impact on the development opportunities of the global South?

The Myth of Global Convergence Countries that align themselves with the forces of globalization and embrace the reforms needed to do so, liberalizing markets and pursuing disciplined macroeconomic policies, are likely to put themselves on a path of convergence with advanced economies, following the successful Asian newly industrializing economies (NIEs).
International Monetary Fund

Kiely: The argument that the globalization of the market logic leads to global convergence between the economies of the North and the South is a myth What is occurring in the global economy is a process of uneven development characterized by increasing concentration of capital which enhances accumulation in some regions and undermines it elsewhere the globalization of production, insofar as it exists, has not led to anything like convergence in the world economy (Kiely) There is a persistent core-periphery structure which is both social and spatial and this is evident in the workings of global commodity chains GCC a transnationally linked sequence of functions in which each stage adds value to the process of production of goods and services

A dynamic of polarization Those parts of the production process relocated to the South tend to be in low-cost and lower value production Core countries recovers most of the value added at the higher value end of production/distribution/marketing

Africas share of world trade: 4.1% in 1970 1.5% in 1995 LAs share of world trade: 5.5% in 1970 4.4% in 1995 Africas share of merchandise exports: 5.6% in 1960 2.1% in 2002 LAs share of merchandise exports: 7.5% in 1960 5.4% in 2002 Over 90% of manufacturing imports still come from ACCs The same pattern can be found in FDI and global financial flows developing countries face a problem not because they are insufficiently globalized or integrated into the world economy, but because the form that such integration takes serves to reinforce their (relatively) marginalized position
Ray Kiely: The New Political Economy of Development

The failure of neoliberalism to promote developmental convergence across the GN/GS divide is paralleled by its general failure to boost growth Aggregate growth of world GDP per capita: 1960s: 3.5% 1970s: 2.4% 1980s: 1.4% 1990s: 1.1% Since 2000 the aggregate growth rate has barely touched 1% This combines with unprecedented levels of inequality within and between countries and persistently high rates of unemployment But - neo-liberalism has been a huge success from the standpoint of the upper classes as it has effected a systematic transfer of wealth and income towards elites and upper classes For example - US Top 0.1% income earners/share of personal income = 1975: 2.5%/1999: 6%/2008: 10% Top 1%, 2008 = 20% of all personal income

Neoliberalism has been a political project for the restoration of the class power of capital over labour It has worked by reversing the gains made by social movements across the North-South divide in C20 Accumulation by Dispossession

Privatization Financialization Crisis management

State redistribution

Accumulation by Dispossession The key effect of accumulation by dispossession is to redistribute existing social wealth rather than generate new social wealth This is done by converting assets that were previously the common property or public goods typically through state ownership or in the form of a social wage to private property and the realm of capital accumulation The outcome = Increase in inequality and the erosion of social citizenship A by D has been instrumental in the intensive expansion of capitalism

NEOLIBERALISM IN CRISIS?

28.08.11: we could easily see the further spread of economic weakness to core countries, or even a debilitating liquidity crisis
Christine Lagarde

01.09.11: PMIs across Asia, Europe and the US produced the lowest readings of manufacturing activity and orders since mid-2009 This came at the end of a month that had witnessed the stagnation of growth in the Eurozone and its core economies UK: Manufacturing shrunk at fastest pace in 2 years US credit downgrading New austerity measures in Italy/Spain/ France The summer months witnessed the second IMF/ EU bailout of Greece and bailout of Portugal This is the latest phase in a financial crisis that stretches back to the 2008 sub-prime crisis, which became a sovereign debt crisis with the bailout of Greece and Ireland in 2010, and that now seems to be on its way to a 2x recession The crisis originates in the financialization that is a central feature of neoliberal capitalism

What is Financialization? 1980s By the end of the decade, the old structure of the economy, consisting of a production system served by a modest financial adjunct, had given way to a new structure in which a greatly expanded financial sector had achieved a high degree of independence and sat on top of the underlying production system
John Bellamy Foster

Corporations rely less on banks and are more engaged in financial markets Financial liberalization

Households have become heavily involved in financial markets: (i) assets/(ii) liabilities

Banks have changed seeking profits through fees, comissions, currency trading Financial innovation

From 1980 to 1995 international currency transactions increased six times more than world trade the ratio of currency transactions to total world exports increased from 8:1 in 1980 to 48:1 in 1995 Finance as a modest helper of production Finance as an independent sector of the economy

Why Financialization? The ACCs of the GN have experienced relatively low rates of profit from the end of the 1960s This reflects the decline of economic growth in the 3 core areas of the global economy A crisis of overaccumulation Increase the rate of surplus value Eliminate unproductive capital

The neoliberal counterrevolution proceeded via a confrontation with organized labour that established the basis for wage repression from 1979-90 As a result, productivity and profits did increase but: ! The fruits of growth increasingly accrued to capital ! Profits have remained low at 75% of the average value of 1956-65 US: Profitability peaked in 1997; declined to 1979-83 levels by 2001 How is growth sustained in this context?

Growth in the US economy has become increasingly based on financial bubbles Asset price bubbles: From 1992-2000 the US experienced an economic boom centred on venture capital investments in the IT/high tech sector VCI increased from $14.3 bill/1998 to $54.5 bill/2000 1st ! 2000: Corporate asset values = $15.7 trill The bubble went bust: 33% fall in value of corporate assets The IT industry collapsed with $230 bill in bankruptcies/$2 trill market value wiped out/$110 bill defaults Household credit expansion : The 1990s boom was consumption-led Consumption/GDP = 67% The period witnessed a substantial increase in debt 65% of income in the 1960s/95% of income in the late 1990s/139% of income in 2007 2007/US household debt = 99.9% of GDP/total US debt = 352% of GDP Debt-financed consumption, based on a rise in asset values, fuelled the boom/offset impact of declining real wages/budget deficit cuts

2000s: Economic downturn and impact of 9/11 countered by reduced interest rates House prices rose 56% in 5 years US households extraced $750 bill against value of homes Sub-prime mortgages = $1.3 trill by 2007

P. Gowan: Crisis in the Heartland

Foster/Magdoff: The Great Financial Crisis

SPMs came to occupy a central place in the shadow banking system New form of banks that engage in speculative arbitrage without regulatory control Banks found lucrative business in converting consumer debt into securities and selling to pension/mutual funds New forms of financial products and practices especially the credit derivatives market: collateralized debt obligations (CDOs) CDOs ! Bundles of securitized consumer debt, combining high/ medium/low risk mortgages, along with other types of debt, with high credit ratings

In order to finance this the banks took on more debt against the wager that returns on securities would remain above the cost of borrowing Between 2004-06 interest rates were hiked a number of times House prices declined and mortgage defaults increased The SPM crisis undermined the market in MBS and drove down the prices of CDOs NB! As CDOs had been taken up throughout the worlds financial system, the crisis was global in scale
A. Callinicos: Bonfire of Illusions D. McNally: Global Slump

The response to the global banking crisis came in the form of massive bailouts: ! 12.7% of US GDP ! 9.1% of UK GDP In the recession that followed world real trade growth declined from an annual average of 7% 1996-2005 to 2.5% in 2008 and !13.2% in 2009 A global jobs crisis: Between 2007-2010 unemployment increased by 30 million Recession prompted extensive public stimulus of the economy, amounting to 2.5% of national income in OECD Driven by deleveraging by firms, banks and households, the recession in turn undermined public revenue at a time when governments were facing increased expenses 2010: The EU/IMF bailouts of Greece and Ireland signals the onset of sovereign debt crises and a new age of austerity in the EU Austerity has resulted in a growth crisis

The austerity drive is manifest in cuts in public deficits across the EU the 27 EU member states aim to cut deficits to a maximum of 3% of GDP by the financial year 2014-15 Across the EU, these cuts have been concentrated on: -! Social benefits/welfare -! Public sector jobs and wages/pensions -! Public infrastructure investments/privatization Spain: Constitutional reform to introduce a cap on future public deficits Limit to public deficit will be set at 0.4% of GDP from 2020 Similar measures have been taken in Germany and France i.e. neoliberal market discipline is embedded in the constitution Recall Harvey on the modalities of accumulation by dispossession

Financialization

Crisis management

Cp. the international debt crisis and the policing of development through structural adjustment in the global South

We are ordinary people. We are like you: people, who get up every morning to study, work or find a job, people who have family and friends. People, who work hard every day to provide a better future for those around us. Some of us consider ourselves progressive, others conservative. Some of us are believers, some not. Some of us have clearly defined ideologies, others are apolitical, but we are all concerned and angry about the political, economic, and social outlook which we see around us: corruption among politicians, businessmen, bankers, leaving us helpless, without a voice. This situation has become normal, a daily suffering, without hope. But if we join forces, we can change it. Its time to change things, time to build a better society together.