I am covering a few topics today, given that I used yesterday's post space to…
I recall a professor in my student days (formal that is, given we are always students if we remain open) telling a postgraduate class that economic development could only occur if the social democratic pretensions of the left, including tolerance of trade unions, were suppressed – “in the interests of progress”. He laughed and said that it was no surprise that the most right-wing nations grew the fastest. His poster child was South Korea. I recalled that experience when I read two articles recently in the UK Guardian. They are reflections on how neo-liberalism is really the antithesis to democratic ideals. The so-called free markets have nothing to do with freedom or political inclusion.
The first Guardian article (May 9, 2013) – Is Cameron’s Britain what we fought for in the war? – written by a 90-year-old World War II veteran, argued that the neo-liberal period of .economic policy-making is the anathema to what the soldiers had sacrificed for during that war.
It was an evocative piece.
The author noted:
It just seems too flippant, too easy, too profane in this present world; for our politicians, our media pundits, and our industrial military complex to intone the beaches of D-Day, Sword, Juno, Gold and Omaha as if it were the catechism for freedom, when our individual and collective liberty is more at risk now than it has ever been since the end of Nazism.
He said that after the War the peace dividend that the soldiers demanded included:
… a truly democratic society where merit was rewarded no one would be left behind because of poverty, poor health or an inadequate education.
After the war we revolutionized the western world and introduced the notion that all human beings deserved dignity, freedom of movement, due process before the law, and social safety nets to protect those affected by economic uncertainties. We knew the cost of not creating a just society was the end for democracy, and a life sentence of misery for too many people in our country. We knew the price of failing to create and maintain universal health care was a return to a two-tier society where the few held dominion over the many.
He contrasts this social contract that governed Post-War Britain (and all the advanced nations I would add) with the situation today where:
… in a world where our reservoirs of wealth are as deep and enormous as all the mighty rivers of the world combined, our politicians, financial institutions and megalithic industries tell us we can no longer afford these human rights that men sacrificed their lives for: the freedom to live with dignity in a compassionate society. We are told by those in charge that we can no longer live with luxuries like healthcare, proper state funded pensions, decent wages, trade unions and most aspects of our social safety network.
Which references the false financial budget constraints that are invoked to justify massive redistributions of real income to the highest income earners and the most wealthy.
Tomorrow is Federal Budget day in Australia and already the Government has announced it will once again fail to advance its Overseas Development Aid commitments to the UN by diverting some of the aid into paying for the prison camps it has set up in PNG and Nauru to incarcerate innocent refugees including their children.
The Government claims we have run out of money, which in this case will mean some of the poorest people in the world will die from preventable diseases. False budget constraint – massive consequences for those most in need. I forecast that no top official in AusAID will be denied their pay or expensive travel in the coming year.
The 90-year old British veteran saw through this type of sham in his article:
The problem with society, today, is not lack of money or debt but lack of ideas, lack of commitment by our government to realise that its constituents are the people, not city bankers and hedge fund managers whose loyalty is to their ledger books rather than to the community. I don’t know if we will come out of this present darkness. Perhaps humanity will simply retreat into the caves whence our ancestors came because we were cowed by self-serving political parties and dubious leaders of business.
And what would this current crop of dubious business and political leaders done about Hitler?
We read that:
… they wouldn’t have had the bottle to fight Nazism. There would have been no Dunkirk, no Battle of Britain, no Finest Hour. Our leaders today on either side of the house would have allowed the lights across Europe to grow dim, because after all that would have been the cheapest and most prudent solution to Hitler’s tyranny.
And so it is now. In Europe and Britain, where massive damage is being done, which will span several generations, because apparently they don’t have the resources to deal with what was an elementary case of a negative aggregate demand shock.
Sure enough, the Eurozone monetary system is poorly designed because the neo-liberal idealogues wanted to reduce the capacity of member states to fulfill their democratic charters, which, in part, requires them to use fiscal and monetary policy to advance public purpose or collective good, rather than design policy for sectional gain.
But even with that design flaw, the ECB has all the financial capacity it requires to fund any size deficit in any of the Euro-using member states. The fact that it has not been prepared to use that capacity is the question not the lack of it.
In the meantime, the Euro elites have been making determined steps to further erode the democratic rights of European people. The establishment of the Eurozone was one thing – bulldozed through against popular sentiment.
The Stability and Growth Pact restrictions on fiscal flexibility were another example. Who voted for them? Who benefits from them?
More recently, the interference in national affairs in several nations and the arbitrary haircut forced on private investors. All trampling the democratic rights that our 90-year old British soldier had fought for.
Which brings me to the second UK Guardian article (May 10, 2013) –
Watch out, George Osborne: Smith, Marx and even the IMF are after you – by Cambridge University economist Ha-Joon Chang.
Dr Chang notes that the IMF has recently criticised the British government for its obsessive pursuit of austerity in the fact of overwhelming evidence that it is not working and the IMF chief economist has said that Britain is “playing with fire” for holding its inflexible policy line.
The IMF chief economist told Sky News – IMF Inflicts ‘Double Blow’ on George Osborne – when the IMF unveiled its latest forecasts for Britain on April 16, 2013 that:
People say well we we’ll are never going to get out of it and so I have to be careful with my spending. The firm say well let’s wait to see whether things will improve, so I have to be very careful with their investment. The banks say well in this environment loans are risky. Then they all do this. But in the process of doing this, its self-fullfilling and basically the result is they don’t spend and output is low. And I think you’re playing with fire when you get to very low growth rates.
Dr Chang considers this “an astonishing development” because the IMF are the have been the “standard-bearer for austerity”.
He refers to its role in South Korea in 1997:
Back in 1997 it even forced South Korea – with an existing budget surplus and one of the smallest public debts in the world (as a proportion of GDP) – to cut government spending. Only when the policy turned what was already the biggest recession in the country’s history into a catastrophe, with more than 100 firms going bankrupt every day for five months, did it do an embarrassing U-turn and allow a budget deficit to develop.
I have copious notes on the 1997 debacle by the IMF in South Korea.
South Korea was caught up in the 1997 Asian financial crisis, which exposed weaknesses in its system of industrial development. The 1997-98 crisis began at a time when the world considered the Korean economy and policy settings to be approprite. It has strong real growth, a small surplus, contained low inflation and low public debt. The exchange rate was deemed appropriate.
There was some talk about the chaebols (the concentrated industrial conglomerates) which dominated the economy from the days that the government decided to develop the chemical and heavy steel-based industries. The conglomerates (which very highly interrelated through complex corporate ownership arrangements) were highly indebted to local banks who were pressured by the government to lend on favourable terms.
The government had also bailed out struggling firms and so a public-private risk sharing culture was prominent – with all the hallmarks of moral hazard. It is now known that the firms were not the exemplars of efficiency (although they worked their workers hard) and so delivered low relative rates of return on the capital invested.
The other issue was the banks had increasingly funded the massive long-term loans to the industrial sector with shorter duration funds borrowed in foreign currency from abroad.
The banks were also political institutions in the sense that they were not properly regulated and also permitted the chaebols to over-invest in lowly returning assets.
So when confidence was lost in the Korean economy as the crisis hit (from Indonesia upwards) the banks found themselves in deep trouble. Their credit lines were restricted and this, in turn, led to a collapse in investment spending.
When the Kia Group collapse in October 1997 and the hedge funds attacked the Hong Kong dollar (which led to a loss of overall confidence in the region) the crisis deepened.
The central bank pushed interest rates up to hold the currency up but that was futile and only damaged local spending. The exchange rate depreciated and the banks effectively ran out of foreign currency reserves.
At that point the IMF was called in (it is more complex that that – in the sense that there were secret meetings with the IMF and the central bank before the politicians really knew what was going on).
In a Press Conference on December 5, 1997 – Stanley Fischer, IMF First Deputy Managing Director – told the world that:
The negotiating team led by Mr. Neiss left Washington for Seoul only 10 days ago, and we have reached agreement with the Korean authorities on a strong program in record time. The agreement with the Fund management and staff was reached in the early hours of December 3, two days ago, Eastern Standard Time.
My inside sources told me not long after that press conference that the levels of bullying iin the 8 days was extreme. The IMF admitted later that at the time they only had a fleeting understanding of the South Korean economy and did not have access to key economic and financial data that subsequently revealed their approach was devastatingly wrong.
The IMF intervention made matters worse.
In 2003, the IMF released an evaluation of the Korean intervention – The IMF and Recent Capital Account Crises: Indonesia, Korea, Brazil: Independent Evaluation Report. It is salutary reading.
The IMF’s projections were seriously wrong – ring a bell? In their 1997 analysis they predicted that real GDP growth would be 2.5 per cent in 1998 and Fixed investment would decline by 14.2 per cent.
What happened? Real GDP growth fell by a massive 6.7 per cent and investment was down 21.2 per cent.
The following graphs for the period 1994 to 2001 will refresh your memories of what happened in Korea. The first shows the evolution of real GDP growth and the unemployment rate. In 1998, real GDP growth fell by an astonishing 6.7 per cent and the unemployment rate shot up to 7 per cent as countless business were bankrupted by the austerity measures.
The next graph shows what happened to private consumption and investment growth.
The third graph shows the budget balance as a per cent of GDP (positive is surplus). Korea had been running a small surplus with low public debt levels. The deficits in 1997 to 1999 helped the economy growth quickly again but should have been larger. As part of the IMF funding conditions, the government was forced to run a surplus from late 1997.
The reality that with the collapse in the economy this was not possible given the scale of the automatic stabilisers. The IMF also swapped
Finally, the sectoral balances during this period were quite remarkable. The big swing in net exports was down to a massive slump in import spending. Exports grew a little in the face of a large depreciation in the won but the major reason for that spike was the change in imports.
The private domestic balance shift was due to the massive contraction in business investment and the increased caution by consumers (rising household saving ratio).
These are all standard patterns (although usually not as extreme) which accompany a major downturn in aggregate demand. If you put them in the context of the current period they provide ample reason why fiscal austerity fails. The private sector just do not act in the way the mainstream economic rhetoric (Ricardian Equivalence) claims.
When times are tough, everybody battens down, as the statement by the IMF Chief economist indicates.
In the evaluation report, the IMF concluded that (Page 2):
In Korea, IMF surveillance failed adequately to identify the risks posed by the uneven pace of capital account liberalization and the extent of banking sec- tor weaknesses, owing to the adoption of a conventional approach that focused on macroeconomic variables. There were gaps in the data needed to make a full assessment, though available data on short-term debt and financial market indicators were not fully used. While concerns over Korea’s weak banking sector had prompted international banks to review their lending to some Korean institutions even before the onset of the Asian crisis in July 1997, the IMF was optimistic until virtually the last minute.
They also concluded that (Page 2):
The Korean adjustment process involved a severe downturn, with GDP declining by 6.7 percent in 1998, compared with a forecast of positive growth. However, unlike Indonesia, this was followed by a robust recovery in 1999. The greater-than-expected downturn reflected the impact of negative balance sheet effects, which were clearly underestimated. In retrospect, the fiscal tightening in the program was unnecessary, as the IMF staff has itself concluded.
Tell that to the unemployed.
Tell that to the millions now unemployed in Europe as a result of the IMF’s faulty forecasts (again) and its completely false estimates of the expenditure multipliers.
The reason they advocated fiscal tightening in Korea was that they argued that the bank rationalisation had to be paid for by higher taxes and cuts in spending elsewhere (Page 32):
The need for a fiscal correction to cover the cost of bank restructuring cannot be disputed, because the potential quasi-fiscal costs of the banking crisis were very high. Nevertheless, with the benefit of hindsight, it can be argued that, certainly in Korea, this adjustment could have been deferred by accepting a slightly higher public debt profile in the medium term, which would not have been a problem given the relatively low initial debt position.
There is no doubt that the fiscal tightening – the standard austerity line – “damaged market confidence when output was beginning to fall”.
Why did they force that option as part of the conditions for the loan? (Page 31):
… this was the direct consequence of the overoptimistic projection of output … Thus, the key questions in this respect are: (1) were the initial macroeconomic projections a good guide for judgments on the fiscal policy stance? (the answer is no in the case of Indonesia and Korea) … Growth projections that are overoptimistic not only call into question the credibility of the IMF, but they can also lead to macroeconomic policies that are either too tight or too loose. It is inherently difficult to forecast macroeconomic outcomes reliably, most of all in crisis situations. However, these problems could be reduced if there was a more explicit focus on the key factors that will have significant impact on aggregate demand, particularly private investment.
And so the mea culpa went … and then was filed away as the IMF storm troopers packed their bags for the next “8-day” visit to some hapless nation that is subsequently predicted to grow massively if they only do what they are told – which means cut welfare and drive up unemployment – and then the next Independent Evaluation Report finds …
This is such a repetitive pattern over the last forty or so years.
This is what the people thought of the IMF intervention.
The substantive intent of Dr Chang’s article is to argue that fiscal austerity (and the IMF and the rest of the conspiring agencies) is really about reinforcing class structure.
He poses the obvious question:
If even the IMF doesn’t approve, why is the UK government persisting with a policy that is clearly not working? Or, for that matter, why is the same policy pushed through across Europe? A certain dead economist would have said it is because the government is “in reality instituted for the defence of the rich against the poor”. Dead right.
It is an obvious conclusion but one that gets lost in the blabber about deficits that the media perpetuates on behalf of the owners of capital.
It is about “making poor people pay for the mistakes of the rich”. There are “millions of poor people” unemployed now and with diminishing or no welfare support but “but how many of those top bankers who caused the crisis have suffered”.
He notes that the famous classical economists – Adam Smith (the doyen of the free marketeers) and Karl Marx (the enemy of the rich) both agreed:
To Smith and Marx, the class bias of the state was plain to see. They lived at a time when only the rich had votes (if there were elections at all) and so there were few checks on the extent to which they could dictate government policy.
Civilisation forced the state to dilute its class bias. The development of concessions to the workers (welfare state, monopoly regulations, consumer protections, labour protections etc) to limit the unfettered corruption of capitalism all bolstered the democratic process.
Dr Chang considers that:
Democracy, despite its limitations, is in the end the only way to ensure that policies do not simply benefit the privileged few.
And that is why the neo-liberal period has been characterised by massive retrenchments in these protections and why they had to attack democracy itself. With all of us having the right to vote, it is too difficult to attack that idea directly.
So, as Dr Chang notes, the assault on our rights and freedoms became more insidious:
Politicians, it was argued, would adopt policies that maximised their chances of re-election but damaged the economy – printing money, handing out favours to powerful monopolies, and increasing social welfare spending for the poor. Politicians needed to be prevented from making important policy decisions, the argument went.
And so we saw several developments that have “ring-fenced the most important policy areas to keep politicians out”.
He lists the most obvious – so-called independent agencies (central banks, regulatory agencies etc) and fiscal rules and fiscal commissions of one sort or another.
These rules are all about stopping the accountability process. In a democracy it goes like this: the government we elect makes decisions. At some point we either like them or we don’t and we vote accordingly. Some new party attracts our vote by promising to do it better. If they stuff up we get rid of them.
But that gives too much power to the hoi polloi – the most of us that is. That siphons off the real income that the elites can steal off us. So all sorts of sophistry has to be developed to convince us that this is not in our best interests.
In some cases the convincing stage is bypassed and the elites just install into office who they want. The recent installation by the Troika of Euro-compliant central bankers and economists to rule Greece and Italy was an example.
Dr Chang says:
What free-market economists are not telling us is that the politics they want to get rid of are none other than those of democracy itself. When they say we need to insulate economic policies from politics, they are in effect advocating the castration of democracy.
The conflict surrounding austerity policies in Europe is, then, not just about figures on budget, unemployment and growth rate. It is also about the meaning of democracy.
Which brings me back to the professor during my postgraduate days (early 1980s) at the start of this neo-liberal infestation.
That was always their plan. To corrupt the political process to overcome the inconveniences that universal suffrage had incurred on the elites.
That is enough for today!
(c) Copyright 2013 Bill Mitchell. All Rights Reserved.