29 Neo-liberal Economics
Neoliberalism is the ideology that advocates market primacy of social coordination.
The neoliberal solution to climate change is to hope that somehow it will become profitable to save the planet. This will not work. (@ExistentialComics)
Because neoliberalism has granted markets primacy, and because markets are vulnerable to large-scale runaway loops, neoliberalism is effectively a runaway feedback loop.
29.1 Washinton Consensus
John Williamson coined the term “Washington Consensus” to refer to a set of ten economic policies and reforms that received widespread support at the time. These policies included - maintaining fiscal discipline, - reordering public spending priorities (from subsidies to health and education expenditures), - reforming tax policy, - allowing the market to determine interest rates, - maintaining a competitive exchange rate, - liberalizing trade, - permitting inward foreign investment, - privatizing state enterprises, - deregulating barriers to entry and exit, and - securing property rights.
Williamson was writing in the context of Latin America as it was emerging from the debt crisis of the 1980s. His list of policies was not proscriptive but descriptive of what he thought various Washington-based institutions, such as the US Treasury, the International Monetary Fund, the World Bank, and various think tanks, agreed would stabilize and restore growth in the region.
Williamson’s original conception indicated the general direction in which policy should move, away from a heavily statist approach while retaining an important regulatory role for government.
Another version came to represent an extreme market-fundamentalist neoliberal approach that simplified economic policy to “stabilize, liberalize, and privatize” with minimal government, all of which was far from Williamson’s original intent.
Critics charged that the Washington Consensus ignored the problems associated with rising inequality and even encouraged the weakening of social safety nets.
A series of financial crises—the tequila crisis in 1994–95, the Asian crisis in 1997–98, and the Russian crisis of 1998—further damaged the reputation of Washington Consensus–type policies.
Of course, critics of the Washington Consensus usually did not argue that emerging markets should pursue policies of fiscal indiscipline, high inflation, financial repression, trade protectionism, overvalued exchange rates, more nationalization of business, and the like. Rather, they tended to argue that the original list of ten policies was incomplete and that additional policies were needed to improve economic performance. Williamson’s list was also very general, leaving ample room for debate as to how far to go in achieving those policy objectives.
But as we mark the thirtieth anniversary of John Williamson’s initial discussion of the Washington Consensus, it is important to recognize that a growing body of recent research suggests that the Consensus has produced tangible benefits while unorthodox populist policies have entailed significant economic costs. A key challenge for policymakers is to ensure that the benefits of economic reform are widely shared so that the divisions that lead to economic populism do not arise and erase those gains.
Imagine writing ‘Washington Consensus really does work’ at the end of a year when central banks bought all bonds issued by fiscal authorities in high income countries, so said fiscal authorities can put safety nets under both capital and labour.
Including Nicaragua is problematic to start with: first Ortega regime had to contend with an internal war against paramilitaries (Contras) financed by US in the famous Iran-Contras affair. You’d think the paper would mention that.
Guys, the Sandinista Revolution was distracted from growth outcomes by Ronald Reagan bombing them for refusing to say ‘yes uncle, mi patria tu patio’
Ironically, Ortega’s rein since 2007 is far more consistent with the paper’s definition of ‘populism’, but it’s a Washington Consensus, pro-market populism, so of course, we go for the civil war period.
An entire subsection on infant mortality under Ortega vs ‘synthetic Nicaragua’ that does not mention the war! Of course, synthetic Nicaragua is one that the US empire doesnt bomb.
Un thread à lire absolument pour voir le type d’analyse défendu par certains économistes américains universitaires réputés. Où inventer des pays “fictifs” entièrement à sa main est censé permettre de “prouver” le bénéfice de certaines lignes idéologiques. (@NBarreyre)
Alves
Decades of research have documented the devastating impacts of the Washington Consensus in the developing world. Yet revisionist accounts of this story have emerged in recent years. Remarkable amongst these, a recent blog post by the Peterson Institute for International Economics – “Washington Consensus stands the test of time better than populist policies” – draws on research that is jaw-droppingly ideological and flawed.
For decades, mainstream and heterodox economists broadly agreed that the Washington Consensus failed (Stewart 1995, Krueger 2004, Mkandawire 2005). Debt-crisis ridden developing countries that implemented the reforms associated with privatization, liberalisation and deregulation in the 1980s and 1990s tended to see an increase in poverty along with worsening health and educational outcomes. This led to the 1980s and 1990s being dubbed the ‘lost decades’ of development (Easterly 2001) and ultimately paved the way for the the post-Washington Consensus and pro-poor policies (Saad-Filho 2011).
But this is about to change. New methods that ‘produce credible counterfactuals in case studies’, turn the conventional wisdom of the Washington Consensus failure on its head (Marrazzo and Terzi 2017, Absher et al. 2020, Grier and Grier 2021). Essentially, the counterfactual approach involves first creating fictitious or synthetic countries, whose policy makers chose the opposite policy trajectory, and then testing whether the Washington Consensus package works better than the alternative. The results, the PIIE blog informs us, stack up for the Washington Consensus: countries adopting WC policies are shown to (eventually) be better off in GDP per capita terms. In contrast, left-wing populists – of the Latin American pedigree – hurt their economies by throwing the Washington Consensus policies out with the neoliberal bathwater.
If one unpacks its mechanics carefully, the counterfactual approach turns out to be a thinly-veiled ideological attempt to whitewash the Washington Consensus, to resurrect its key tenets: that minimising the footprint of the state is the right policy choice in health or education, that macroeconomic policy should mean inflation targeting by central banks not active fiscal policy by elected politicians, that state-owned companies are all white elephants in urgent need of privatization, that trade unions harm labour markets.
How does one empirically create a fictitious country? The synthetic control method predicts a ‘no Ortega’ growth/infant mortality path by creating a pool of ‘donor’ countries and calibrating their relative contribution to a synthetic Nicaragua such that the pre-Ortega growth or infant mortality path is close to actual Nicaragua. The Washington Counterfactual thus creates a synthetic Nicaragua composed of 23% Chile, 54% Honduras, 9% Mexico, 8% Norway, and 7% the US.
Or, to bring a historical touch to the method, synthetic Nicaragua, like a neoliberal Frankenstein, consist of 7% country bombing Nicaragua (US), 54% country used by the CIA/US to bomb Nicaragua (Honduras), 23% country where Washington Consensus was being implemented by Chicago Boys and a military dictatorship (Chile), 8% country never analytically paired with the Washington Consensus (Norway), and Mexico. It is this synthetic Nicaragua where per capita GDP would have been 5.000 USD dollars higher, a Nicaragua that the US empire does not bomb.
Revisionist accounts of the Washington Consensus matter because the pandemic has revived the debate around the role that the state should play in the economy.
If anything, this is a powerful reminder that all economics is political, however much some hide it behind new or ‘sophisticated’ econometric techniques.
29.2 Neoliberalism vs Capitalism
Hickel
Neoliberalism is not the disease. It is just a symptom of the disease. The disease is capitalism.
First, we need to understand what capitalism actually is. Under capitalism, the purpose of production is not primarily to meet human needs. This is no generic economy. Rather, the purpose is to maximize and accumulate profit. That is the core objective. Toward this end, capital seeks to cheapen inputs—labour and nature—as much as possible. For most of its history, capital brutally exploited workers in the core economies, and relied on imperialism to guarantee a study supply of cheap labour and resources in the global South. But this arrangement came under threat after WWII. Labour movements in the core succeeded in winning better wages, better working conditions, and a wide-range of public services: healthcare, housing, education, transit… Meanwhile, in the South, anti-colonial movements overthrew imperialism and began introducing socialist reforms: nationalizing resources, improving wages, building public services, and using tariffs, capital controls and industrial policy to achieve economic sovereignty. This radical turn dramatically improved the lives of working people, North and South.
But the new regime of fair wages and resource prices made capital accumulation in the core increasingly untenable, triggering a crisis for elites in the 1970s. As it turns out, capitalism cannot function for very long under conditions of worker justice and decolonization.
For capitalists in the core, it was clear that something had to change. The core states faced a choice: either they could accept the fair wages and decolonization, abandon capital accumulation and shift to a post-capitalist economy… or they could attack wages and somehow re-impose the imperial arrangement.
They opted hardcore for the latter. At home, they dismantled the unions and shredded public services. They slashed all manner of regulations and protections, in a desperate bid to restore the conditions for capital accumulation. Today we know this as neoliberalism. Neoliberalism was imposed even more brutally across the South, through structural adjustment programs. They reversed the socialist reforms of the anti-colonial era, cut wages and resource prices, and destroyed economic sovereignty… subordinating Southern economies once again. This was not some kind of “mistake”. Not just bad theory. Neoliberalism was imposed in order to restore the conditions for capital accumulation. It was an orchestrated backlash against the successes of the labour movement and the anti-colonial movement. This is why, despite 40 years of data on how destructive neoliberal policies are, we are still stuck in this nightmare.
We are stuck because the obvious solution—worker justice, regulation, and economic sovereignty in the South—is inimical to capital accumulation in the core. There is a way out of this nightmare, and that is to abandon capital accumulation as an objective and transition to a post-capitalist economy.
Neoliberalism is just a symptom. If we want to advance we need to deal with the underlying structural problem. *steady, that is. We can have a democratic economy organized around meeting human needs at a high standard, where production is socially just and ecologically regenerative. Such a system is possible, but it requires transitioning out of capitalism.