Choike - Growing doubts about neoliberalism

July 2004

In the past two years criticism has grown regarding the effectiveness of neoliberal strategies for poor countries. Although many of the arguments coming from the left are now new, there exists a growing body of critical economic investigation, from the very academic and institutional circles that historically have contributed to the design of policies for the international financial institutions. These arguments, which coincide with poor macro economic performance and persistent levels of poverty in many poor countries in recent years, pose important questions regarding the development plans in Central America in the era of free trade.

The first major bomb on the Washington Consensus was dropped more than two years ago, coming from a source few would have expected: the World Bank’s Chief Economist, Nobel Laureate Joseph Stiglitz, who published Globalization and its Discontents, a strong criticism of the International Monetary Fund (IMF) and the impact of its pressures on poor countries.

In particular, Stiglitz criticised the IMF in relation to the premature liberalisation of financial markets, which contributed to global instability. Once a country went into crisis, the policies of the IMF worsened conditions, especially for poor populations, concluded Stiglitz.

Since then, several economists have revealed the weak flanks in the theories that justify neoliberal globalisation.

In 2003 two renowned economists published books with historical and comparative reviews that demolish many of the arguments that sustain the IMF’s strategies.

Ha-Joon Chang, of the University of Cambridge, authored Kicking Away the Ladder, a historic perspective of development strategies. His principal thesis is that the countries that today are developed had taken development paths that are radically different from the recipes that nowadays they promote for the Third World.

His conclusion in this sense is unwavering: ‘Countries that today are developed, when they were attempting to grow…used interventionist policies in industry, commerce and technology…’ These are the very policies that developed countries say are keeping developing economies from growing.

In essence, Chang argues that developed countries, after ‘having climbed the ladder to development’, are promoting policies for the Third World that have the effect of ‘kicking away the ladder’, so that those countries behind them have no chance of following them.

According to Chang, in the history of the developed countries, these policies included incentives for infant industries, high tariffs to protect national industry, agrarian reforms, and expropriation of lands, and interventionist governments in productive and financial matters.

One tendency often found is that when an economy achieves competitive dominance in the world market, its policy-makers tend to promote tariff reduction.

Chang recommends that developing countries should be allowed ‘to adopt policies and institutions that are more suitable to their stages of development and to other conditions they experience [which] will enable them to grow faster, as indeed was the case in the 1960s and 1970s’.

This conclusion resonates in the context of the Central American economies. From 1960 to 1980, when growth rates reached historically high levels, they were accompanied by high import tariffs and interventionist governments in the region.

During those two decades, under a protective tariff regime for imports from outside the region, Central American Common Market trade grew from US$36 million in 1960 to more than US$1,000 million in 1980 and Central American economies grew an average of 5% a year.

This era of high growth in Central America coincided with regional and national trade and economic policies that today are inconceivable among economists in decision-making circles in the region. During that same period of growth, tariff policies achieved a balance in the trade flows, with extraregional imports barely 15% greater than the value of exports. During the period from 2000 to 2002, imports to Central America were double the value of the region’s exports.

Chang also questions the current discourse regarding the need to strengthen property rights: ‘Land reform in Japan, Korea and Taiwan after the Second World War violated the existing property rights of the landlords but contributed to the subsequent development of these countries… If there are groups who are able to utilise certain existing properties better than their current owners, it may be better for the society not to protect existing property rights, but to create new ones that transfer the properties concerned to the former groups.’

Toward the end of the 19th century the US applied protectionist tariffs to competitive imports of 40%, although its productivity (measured in per capita income) was about 75% that of its principal competitor, Great Britain. That is, US protectionism was high, even when its economy was almost at the level of its competitor.

Today, countries such as those in Central America, with levels of productivity approximately 10% that of the US, have tariff rates averaging about 5.4%. The ratification of the Central America Free Trade Agreement with the US (CAFTA) will reduce even further these tariffs.

In 2003, Kamal Malhotra of the United Nations Development Programme directed the study Making Global Trade Work for People, which analysed the distinct strategies being applied in poor countries. His conclusions coincide with the historical work of Chang: many of the Third World countries that today are achieving the greatest growth rates are economies that reject the recipes of the IMF and the commercial strategies promoted by the US in its free trade negotiations.

Malhotra cites as examples Vietnam, China and India, cases in which their governments maintained restrictions on trade during their initial stages of growth.

‘Nearly all the cases of successful or positive development in recent decades…have involved partial, gradual opening to imports and foreign investment,’ concludes Malhotra.

The Asian ‘tigers’ also have followed development paths dramatically distinct from those strategies today being applied in Central America. South Korea, for instance, nationalised the banks to finance investments, while providing subsidies for investment, limiting access to foreign investors, creating public enterprises and protecting domestic markets.

‘Most, if not all, of these strategies are now severely restricted under WTO agreements,’ points out Malhotra.

Malhotra not only found many successful cases in which strategies differed from the neoliberal approach that is currently guiding the Central American economies (see Box), but he also found that in the cases of ‘obedient’ economies, their results are not always positive.

According to a 2002 report by the United Nations Conference on Trade and Development, ‘there is little correlation between trade liberalisation and poverty reduction…’ Poverty increased in 10 of the 22 least developed countries that had increased their exports during the period from 1987 to 1999, concludes the study.

Malhotra recommends four principles for guiding international commerce:

(1) Trade is a means to an end, not an end in itself.
(2) Trade rules have to allow for diversity in national institutions and standards.
(3) Countries should have the right to protect their own institutions and development priorities.
(4) No country has the right to impose its trade preferences on others.

He also suggests a multilateral trade regime that ‘prioritises enabling (or at least not disabling) the domestic policy space available to developing countries to make a range of diverse, including unorthodox, policy choices… It should also be evaluated not on the basis of whether it maximises the flow of goods and services but on whether trade arrangements – current and proposed – maximise possibilities for human development.’ Third World Network Features

A Quarter Century of Reform and Adjustment

Since the early 1980s the major economic decisions in Central America have been influenced above all by the recommendations of international financial institutions. A combination of carrots and sticks, including multilateral bank funds, debt alleviation programmes and bilateral cooperation, were used to push forward reform efforts in the region.

The strategy sought to reduce the size and function of the states, ‘liberate’ regulated or intervened markets, privatise public services and nationalised sectors, eliminate or reduce tariffs and other obstacles to international commerce, and create favourable conditions for private sector investment, both national and foreign.

These recommendations were accompanied by both pressures and incentives, and the economic theory that sustained them was heavily promoted to intellectuals and technocrats by means of scholarships to universities and seminars in the United States, Great Britain and business institutes in Central America; and a similar set of values and ideas were assumed by the owners and editors of the region’s mass media.

From the outset, the arguments served to dismantle the interventionist strategies that had accompanied the growth of the Central American Common Market: a strong criticism of protectionism and State support for infant industries. Following that was the criticism against state enterprises and the celebration of the entrepreneurial spirit.

Today, with state monopolies dismantled following the privatisation of telecommunications, energy and other public services, the issue of private-sector monopolies has been forgotten by the media, in spite of the fact that important economic sectors remain in the control of a reduced number of family-run businesses.


Choike is a project of the Third World Institute supported by Hivos www.choike.org \| Contact \| Phone / Fax: +598 (2) 412-4224 \| Dr. Juan Paullier 977, Montevideo URUGUAY