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Breaking the consensus

Even IMF researchers are calling time on free market dogma and the neoliberal orthodoxies of the past 30 years.

What has come over the International Monetary Fund? Not content with playing the good cop to Europe’s bad in the ongoing Greek crisis – in which it has been arguing for debt relief and less austerity – the fund has just published an article in its in-house magazine by three of its leading researchers entitled “Neoliberalism: Oversold?”. Their answer is “yes”.

The article takes aim at two of the most important aspects of the neoliberal economic agenda that has been so influential since the early 1980s. The first is the removal of restrictions on the movement of capital across international borders – so-called capital account liberalisation. Readers of a certain age will recall that 40 years ago there were strict limits on the amount of foreign currency one could buy before going abroad on holiday and companies had to show evidence of the need to import supplies to gain access to the foreign exchange market. Such restrictions were even harsher for international investment – making it almost impossible for institutions in one country to invest in the equity and bond markets of another.

Neoliberal theorists decried this situation as absurd. Rich countries have abundant capital, so the rate of return on it is relatively low, they argued. Poor ones are capital-scarce, so the returns on investment are high. Erecting artificial barriers preventing capital from flowing from rich countries to poor ones was therefore like stopping water from flowing downhill: an unhelpful intervention in the natural order of things, with detrimental consequences for all. During the 1980s and 1990s, international capital controls were thus dismantled worldwide – and often as a precondition for IMF assistance. The scale of private cross-border capital flows rocketed and soon eclipsed those of public-sector lenders, such as the World Bank and the IMF itself. 

But while these private capital flows were large, it quickly became obvious that they could also be extremely erratic. Throughout the 1990s, a succession of big developing countries enjoyed huge inflows of money  to be used for financing government spending and infrastructure development. But in each case, the new sources of funding turned out to be fickle, as private investors proved far less tolerant of heterodox economic policy than official funders had been. The result was a succession of crises – in Mexico in 1994, in east Asia in 1997, in Russia in 1998, in Argentina in 2001 – as the newly discovered rivers of capital suddenly began flowing the other way.

The IMF became well known at the time for insisting that these occasional stunning crashes should not derail liberalisation: they were just the price of reforms not fully complete. The new IMF article, in the June edition of Finance & Development magazine, disagrees. After nearly 30 years, it argues, the growing pains have not stopped. Open capital accounts have indeed increased developing countries’ access to capital for development but, strikingly, there is little evidence that this has raised growth rates. And there is no question that it has exaggerated the boom-bust business cycle, increased inequality and raised the odds of periodic financial crises.

Couched as it is in the equivocal language of cost-benefit analysis, this change of tune might sound inconsequential. It is not. Twenty years ago, Malaysia’s prime minister, Mahathir Mohamad, was branded an international pariah for reimposing capital controls to insulate his country from the east Asian financial crisis. The new IMF article concludes that such measures are “a viable, and sometimes the only, option”.

The second plank of the neoliberal agenda at which the IMF article takes aim will be even more familiar to UK readers: curbing the size of the state. In the 1980s and 1990s, the main emphasis on this front was on privatisation. As that agenda began to run its course, emphasis shifted to methods of constraining governments’ abilities to run excessive deficits of spending over revenues – and rules to avoid the accumulation of too much public debt. The Maastricht rules introduced by the eurozone countries in 1993, which mandated annual deficits of no more than 3 per cent of GDP and public debt of no more than 60 per cent, were perhaps the most prominent example.

For most of the 2000s, such self-denying ordinances seemed to be costless virtues.  Then, in 2007, the global economic crisis hit. After a brief flirtation with increased state spending when confronted with the steep recessions of 2008-09, the governments of the eurozone and the UK were converted again to the crucial importance of shrinking public debt and cutting spending. The notion that cutting spending can (or even is necessary to) boost growth – of “expansionary fiscal contraction” – came roaring back into fashion.

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The IMF broached its dissent early in the post-crisis period, with its economists expressing scepticism over the pace and timing of austerity in Europe. Christine Lagarde, the fund’s managing director, and Olivier Blanchard, its chief economist, argued for relaxing spending constraints and turning a blind eye to debt burdens until depressed economies were solidly recovering. 

Gossip-mongers at the World Economic Forum in Davos put it down to the fact that they are both French and therefore constitutional backsliders on matters of fiscal prudence; and policymakers preferred to pick up on pseudo-scientific economic sound bites such as the idea of a public debt tipping-point at 90 per cent of GDP. In reality, however, the IMF was merely stating the clear conclusions of conventional economic models – models that the vast difference since 2009 in the recovery of the US, which did not opt for austerity, and Europe, which did, appears to have proved largely correct.

The new IMF article drives home the point. The “short-run costs of lower output and welfare and higher unemployment”, it concludes, “have been underplayed, and the desirability . . . of simply living with high debt and allowing debt ratios to decline organically through growth is underappreciated”. Austerity is often self-defeating and debt limits by themselves are meaningless.

Is this two-part mea culpa on both capital flows and the size of the state a major landmark in the evolution of the IMF’s thinking – and could this be important in practice, given the intellectual heft that the Washington institutions bring to the international policy debate? It is, and it could.

Will it rehabilitate the IMF as an institution among the populations of the countries it is meant to serve? Here I am more sceptical. There is no question that there was disagreement on policy in east Asia in 1997, for example. But the real problem with the IMF’s intervention had to do not with the correctness of its prescriptions but their legitimacy. The single most enduring image of that painful period was the photo of the then managing director of the IMF, Michel Camdessus, arms folded and frowning like a schoolmaster giving detention, watching over President Suharto of Indonesia as, humiliatingly, Suharto bowed to the inevitable and signed up to the fund’s financing plan.

In many developing countries, memories of unjust colonial domination are raw and if the IMF is to help resolve the growing dissatisfaction of populations with policymaking elites, it will need to do more than just make improvements to its advice – no matter how sincere and welcome such improvements may be. The reality that, in effect, power over its assistance belongs exclusively to a handful of rich economies will have to change. Reforming its governance to give developing countries more control is the place to start.

In the UK, meanwhile, we can have no such complaints. We have no one to blame for taking neoliberalism’s crazier ideas too seriously but ourselves.

Felix Martin is the author of “Money: the Unauthorised Biography” (Vintage)

Felix Martin is a macroeconomist, bond trader and the author of Money: the Unauthorised Biography

This article first appeared in the 02 June 2016 issue of the New Statesman, How men got left behind

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When heritage becomes hate: why my home town of Charlottesville needs to address its complex past

After an invasion of white supremacists, we need to see what our history means today.

Watching a tragedy happening in slow motion, without any way to stop it - that’s how it has felt to be from Charlottesville, Virginia in the summer of 2017. A city that used to always get voted “happiest town in the USA” when I was growing up was the target this weekend of an ugly white supremacist movement whose roots spread far from the city.

It was a huge surprise when we won the lottery of Nazi flags, with our stupid old statues that have become icons of international fascism, with a park named after a distantly forgotten old man becoming a site of struggle for an attempted racist coup of the United States. Our first reaction is: they aren´t from here. Our second: make them go away. Our third: a realisation we need to examine the way that our own ways of life, which we thought so harmless, have inspired such horrible feelings in strangers.

Maybe for my African-American classmates at high school the statue of Confederate general Robert E Lee, and the park when it was still named after him rather than Emancipation Park, always meant violence. Pulling the statue down says no more about the historical Lee than tearing down Lenin in '89 says about socialism. We've been invaded by people pretending to protect us from invasion, and the symbols of our past will never matter as much as living people do.

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The invaders picked our town, probably, because Virginia was a confederate state, and was in fact where the southern gentry used to live. Lee exemplified this tradition. He was son of Lighthorse Harry Lee, a hero of the revolutionary war and governor of Virginia, and is a descendant of one of “Virginia’s first families,” the aristocratic Englishmen who emigrated to Virginia when it was a British colony. He is part of Charlottesville's heritage, and perhaps not even all that shameful a part. He opposed the secession of the confederacy, supported the reconstruction after the war, including giving rights to recently freed slaves. Not exactly woke, but for a confederate general, not as bad as some.

We were taught at Venable Elementary School that he fought only reluctantly, to defend his land, not slavery. In the version we learned, one would imagine Lee being very opposed to people from the Midwest coming to Virginia in cars with Ohio license plates to murder Virginians. Many non-racist Virginians, including quite a few friends, respect Lee deeply - the same is true in towns like New Orleans where other Lee statues are being taken down. Yet if once we could fool ourselves into thinking that the statue didn't represent hatred and racial hierarchies, we can't anymore. The discussion of local history has turned into one of national identity. The statue should be gone by Christmas. 

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The real hero of Charlottesville is the town’s founder, Thomas Jefferson, who was among the most enigmatic of the founding fathers, idealistic and hypocritical - a real American, in other words. His idea of the gentleman farmer is also part of our heritage. It was an alternative to Hamiltonian industrial capitalism, but lost out in the tustle to shape American history. Much like English contemporaries such as William Cobbett, Jefferson believed in a rural ideal, reading poetry by morning, farming by afternoon, playing the harpsichord by night. His thought is also present in our beautiful "academical village" of the University of Virginia which he also founded. It is one of UNESCO’s few world heritage sites in the United States, so I guess it is part fo the globe's heritage as well, and it is also where the white supremacists stomped around with their tiki torches.

It’s time for us to stop being romantic about Jefferson, too. The statue in our minds needs to come down. We can recognize the great parts of his work, of his thought, in Charlottesville today, but we can also recognise that he allowed himself to use violence to dominate others, that he owned slaves and raped them. And we can recognise that equivalent scenarios continue to play out today, and will continue to play out until we are willing to face the truth.

There can be no more excuses. It’s not about Jefferson, or Lee, after all. We use monuments, statues, heroes, to inspire ourselves. In the end, the “truth” about Jefferson or Lee is a matter of trivia and history. Today, for every white male in America, we need to deconstruct the parts of our identity built on the graves of others. It’s not easy.

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Jefferson's gentleman farmer was the forerunner of the people who populate the gentrified Charlottesville that exists today of expensive coffee-shops and celebrity-filled suburbs. This romantic idea, much like the lifestyles of the American and English elite today, seems to engender a lot of resentment from those who can only watch helplessly, and are often gentrified out. It’s not only immigrants or, in the United States, African-Americans, who are denied access to America's Williamsburgs and Charlottesvilles, London's Shoreditches and Oxfords. In Charlottesville, descendants of white sharecroppers and black slaves alike are unable to afford $15 glasses of local Virginia wine.

The paradox implicit in Jefferson’s beautiful idea is that in the end, it’s impossible to sustain this chilled-out and happy lifestyle without the labor being done by others, be they slaves, sharecroppers, or factory workers in China. If America is in trouble now, the conflict comes precisely from the fact that our universalist ideas of freedom, equality, and liberty correspond to an economy that is anything but universal. We actually did it, keep doing it, and unless we can use these ridiculous men dancing through our streets iin Halloween costumes as a funhouse mirror to make us see ourselves as we are, we’ll probably keep doing it.

I resent Jefferson for his hypocrisy, because in truth, I would love it if America looked more like Charlottesville than the industrialized and nasty-looking Interstate 95 highway that leads up the East Coast, the aftermath of Hamiltonian industrial-revolution factory America. The New Jersey towns, the gas stations, what we contemptuously call “McMansions,” suburban Northern Virginia... none of it is really authentic enough. Parallel to the rich and ugly suburbs, are poor and ugly towns, the sort of places with unemployment and discounts on cereal that tastes like sugary trash in the supermarket.

The residents of these towns don’t hate the residents of more gentrified towns for our organic granola, they hate the world for the structures of oppression that they can’t escape, even as an international class, an educated class, a well-meaning class, escapes without even needing to. We coexisted in the same place but not the same set of opportunities, and we glided on to new and bigger worlds of possibility, ones denied to those of different class backgrounds, regardless of their ethnicity.

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Some of my African-American classmates at Charlottesville High School were likely descendants of Jefferson’s slaves, coming from poorer neighbourhoods and housing projects and taking "standard" level classes, with honors and AP classes for students whose parents worked in the University (very liberal, of course), a genteel place where every year, some kid wears blackface or a Nazi outfit to a party - as a joke, of course. While my classmates in AP and Honors classes got help from our teachers in applying to Ivy League schools, the general level classes saw black and white students who shared poorer backgrounds acting out to get attention from harried teachers. This was public school, but Charlottesville’s many excellent private schools, of course, didn’t even have the general level students at all.

Despite some southerners such as Lee supporting the post-war “reconstruction,” white resistance to racial equality led to a Jim Crow system that wasn’t much better than slavery, and an American South which dozed in sweaty decline while the rest of the country industrialised and modernized. From 1865 to 1965, not much happened in the South. True, there were intellectual movements like the Agrarians, whose 1920s manifesto “I’ll Take My Stand” I found one high school afternoon in the local bookstore, we had our Faulkners, our occasional geniuses. But as a society, it was stagnant. 

It was only when the civil rights movement began that the south began to actually rise again. UVa went from being a minor regional school to being a world-class one. Charlottesville went from being a mediocre gentleman’s club to a place that people of all backgrounds could make lives for themselves in the public service. And we, the public, gained so much - that’s why my family chose to live there.

I remember as a child strolling the beautiful downtown mall to go to dinner al fresco with my parents, my father pointed out a man in a turban; it was Satyendra Huja, a Sikh professor at the university who had planned the downtown mall, and made a useless street into one of the nicest places to congregate in town. In 2012, Huja became the mayor. I guess the former mayor of Charlottesville who single-handedly made Charlottesville one of the most charming towns in the country often gets told to “go home,” as if that's somewhere else.

Martin Luther King Jr.’s birthday is a national holiday in the United States, but in Virginia it used to be “Lee/King/Jackson” day, with two confederate officers added in just as a reminder. That’s not really our heritage, and as students, we were grateful for the day but always laughed at how immature it was that the powers that be needed to block out Dr. King’s achievements so much.

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Charlottesville is a southern town true to and even obsessed with our heritage - a place filled with museums, historians, bookstores - which wants to dissect that heritage to remove the parts of our forefathers (and mothers) lives that we can’t accept, like a sandwich that you open up, take the pickles out of, and then keep on eating. We love our heritage in Virginia. We read about it, celebrate it, live it every day. But heritage isn’t a static thing, fixed in time, and the walls between myth and history are thin. In fact, perhaps knowing about your heritage is the ultimate form of privilege. I doubt that either the descendants of slaves I went to high school  with, or the “redneck” (so-called because they got sunburned by working in the fields - “redneck” is a class slur) descendants of the illiterate sharecroppers of rural Maryland, do. 

What happened this weekend to Charlottesville could happen to any town as long as we those who are deprived of their history and who don’t feel at home in their hometown. But the Charlottesville I remember, and the one it is now, proves that you can go from war and conflict and institutionalised racism to one where people of all races and identities can coexist, for the most part, peacefully and happily. We can, if we try, honor Jefferson for his achievements without forgetting the slaves his beautiful buildings were built by. A “Memorial to Enslaved Laborers” is being built on the campus he founded.

For the first time, every one of my old friends is thinking about racism, white privilege, the origins of violence, and what we can do about it. We can honor Jefferson and General Lee’s memory best by trying to learn from their mistakes. Maybe, if it seems like we are able to solve these problems, I’ll have a child myself. I hope she goes to Venable Elementary School, and I’ll take her to Emancipation Park afterwards.

This article first appeared in the 02 June 2016 issue of the New Statesman, How men got left behind