Interest Rate and Value of Bonds Determination of interest rates, risk, securitization

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1 Neo-Liberalism, Debt and Global Non-Development Pete Bohmer 1/22/02 Some key economic terms, their meaning and why they matter Structural Adjustment Privatization Deregulation Balance of Payments (surplus or deficit) a. Balance of Trade b. Balance on Current Account c. Balance on Capital Account d. Official Reserve Transactions Debt, international Government deficit and debt Devaluation of Currency Overvalued currency Floating or flexible exchange rate Fixed Exchange Rates Foreign Exchange Speculation (Currency) Arbitrage Interest Rate and Value of Bonds Determination of interest rates, risk, securitization Micro-loans Inflation and the Money Supply Convertibility of currency Capital controls

2 Foreign Direct Investment, Perfect Competition Schumpeter s-- Creative destruction Other Talk-I. Global non-development A. Slow or no growth, no development for most of the South B. Economic growth does not equal development, insofar as development is positive 1. To International Monetary Fund (IMF), World Bank, Treasury and State Dept.-- development = growth in per capita production, output 2. Growth is quantitative, development is qualitative, meeting needs, self-determination II. The dominant economic philosophy and economic policy today-- NEO-LIBERALISM, Neoliberalism is worship of the market and laissez-faire or non-regulated capitalism, argues it is the path to growth and freedom A. Origins, philosophical--18th century liberalism of John Locke, Adam Smith--Wealth of Nations 19th century of Ricardo, Mill-- B. Political-Economic origins and determinants of neo-liberalism 1. Margaret Thatcher and Ronald Reagan--No alternative, turn back the clock--rejection of NIEO, demonization of state; promotion of 1st world values and culture. 2. As a response to the "failures?" of state capitalism in the South or Third World in the 1970's and early 1980's, put forward as solution to third world debt, government deficit spending and high inflation, inefficient state and private enterprises. Failure of Import Substitution Industrialization--protect industries, countryside, inefficiency, Balance of Payments problems Chile as success story, post The 1982 Mexican debt crisis--growing Mexican debt crisis--also Brazil, Argentina, Philippines--borrowed at increasingly higher interest rates--some financed industrialization--

3 fueled by petrodollars-- b of p problems,--borrow at higher and higher rates-- loans only on condition of structural adjustment, move towards neoliberalism 4. Collapse of Soviet Union and Eastern bloc--alternative model, source of funds, poverty less of an issue, less fear of revolt by U.S. C. Key Aspects of Neo-Liberalism and Structural Adjustment, their rationale (a); and critique (b). dominates Latin America, more and more of Africa, Asia, Eastern Europe--also more and more of first world, U.S., Great Britain, European Union, WTO,IMF, Clinton and Bush, the Washington Consensus. also see p 105 of Friedman, his Golden Straitjacket, golden rules: 1. Worship of market and production for profit--deregulation, market determination of prices, wages, interest rates a. taxes and government spending are a drain on savings and hence private investment, growth will be hampered--don't ration credit let it go to who pays the highest price. They are the most productive; Subsidies cause inefficiencies, corruption. b. depends on who pays taxes, what they are spent on--who benefits from deregulation, peasants cannot get credit, squeezed off land. basic goods too expensive 2. Privatization of state enterprises and lands to a privileged few, domestic and foreign. a. to reduce subsidies, government spending; so they will be run more efficiently; banks, public utilities, manufacturing b. Should goods, services be produced for profit or need, is public necessarily inefficient? 3. Reducing government spending, usually through reducing or ending subsidies on basic goods; cutting services and/or charging for them, also tight money. a. balance budget to end inflation, tight money, cut govt. deficits-will restore confidence, Zero inflation as goal.--key to bringing in investment b. should budget be balanced, is a little inflation bad? not if there is more employment and higher wages. Why not raise taxes on the wealthy, what about demand for goods; also cutting of government services, infrastruictuire; There

4 is however, danger of hyperinflation 4. Production for export, non-traditional (flowers) and traditional exports, based on comparative advantage of "cheap labor", pollution, natural resources a. to bring in foreign exchange, improve balance of payments, be globally competitive, supposed model of Japan, Taiwan, S. Korea, b. what about production for local needs, the race to the bottom, are these Asians countries models? did they even follow this model? 5. Free Trade, No restrictions on trade, foreign investment, promote foreign investment, both financial and physical, a. theory of comparative advantage--prevent inefficiencies, bring in foreign capital, technology, finances imports-- key to investment and growth b. Destruction of local production, crafts, dependency, profits flow out, cultural imperialism, negative impact on women, rural areas. 6. Convertible currency--usually push devaluation--can take money out, no restrictions on capital and currency flows, a. Brings in investment, confidence-- b. No control over huge capital outflows Mexico, ; South Korea and others, 1997, 1998, Argentina, State as protecting property rights transparency (Friedman, Chapter 8) a. Builds confidence of foreign investors, encourages innovation b. Excludes those without property 8. Democracy in the most limited sense of voting, rule of law, see 7. Getting the fundamentals right Government spending low, balanced budget or small deficit; slow monetary growth, low inflation, official reserves constant in relation to imports or some other measure of economy, growth. D. Claims of its supporters--high investment, entrepreneurial forces are let loose, technological transfers and innovation; capital stays in and flows in and trickle down growth. Growing inequality is path followed by West, based on studies by Simon Kuznets. U curve, eventually turns around

5 III. How neo-liberalism is put into place--the IMF, World Bank and Structural Adjustment--from Davison Budhoo, economist who used to work at the International Monetary Fund (IMF) "Using figures provided by the United Nation's Children's Fund (UNICEF) and the UN Economic Commission for Africa, it has been estimated that at least six million children under five years of age have died each year since 1982 in Africa, Asia and Latin America because of the anti-people, even genocidal focus of IMF-World Bank SAPs (Structural Adjustment programs. And that is just the tip of the iceberg. Even more pervasively, these programs have created economic, social and cultural devastation whenever and wherever they are introduced." (pp , 50 Years is Enough, ed., Kevin Danaher, South End Press, 1994.) A. The IMF--set up in 1944 to provide loans for countries with balance of payments deficits, loans but conditional on imposing neo-liberal policies-- controlled by G-7 countries. Without IMF conditionality can't get private bank loans--shock treatment B. The World Bank (International Bank for Reconstruction and Development) Structural adjustment of one's economy to get loans or debt reduction from them--doing II C1-5, also big projects--worl dbank is good cop-somewhat critical of financial liberalization--discussion of poverty, gender equality, environmental impact but look at main thrust which is neoliberal. C. IMF and World Bank similar--for countries to receive loan must also meet goals in terms of small government deficit, reduction in growth of the money supply, trade surplus, convertibility, etc. (also Inter-American development bank, AID, foreign aid) D. NAFTA (North American Free Trade Agreement) and the World Trade Organization, now Free Trade Agreement of the Americas (FTAA) 1. Capital mobility--financial and direct, banking, telecommunications Investor rights 2. Reduced and eventually no tariffs, quotas on goods, including agriculture, Internet and services across borders, no restrictions 3. TRIPS, Intellectual property rights must increasingly follow U.S. model E. Africa Growth and Opportunity Act--Africa devastated, not a solution

6 F. Power of Moody s Investor Service and similar organization to determine borrowing rates G. Class within countries in South that clearly benefit managers, owner of firms tied to TNC s All of this increases power of capital globally--which furthers globalization--which furthers power of capital-which must be challenged. IV. The failure of neo-liberalism, SAP's and global capitalism A. May reduce inflation, government deficit, balance of payments problems, banks get paid interest. from getting fundamentals right-- B. Financial instability George Soros, Mahathir Jagdish Bhagwati, others at WB call for control of currency, short-term capital--challenge Washington consensus-- IMF, although may be limited criticism if limited to critique of financial speculation. C. Disastrous in terms of quality of life for majority 1. Questionable on economic growth but for most part. not development; e.g., supposed success stories, Peru, Bolivia, Chile, Argentina, success for whom, which class? 2. Lower real incomes for the majority--malnourishment, poverty and unemployment grows--look at Nicaragua for a particularly vivid example or Russia 3. Worsening health--cholera, tuberculosis, AIDS; reduced spending on education, social services. Central America, Africa, Russia. Life expectancy has increased in many places but much of it, prior to 1980 s and 1990 s, similarly fall in infant mortality 4. Falling wages--race to the bottom, e.g., Mexico for the majority 5. Environmental destruction--air pollution--jakarta, fires, deforestation to export; again race to the bottom 6. Cultural imperialism--local production undermined; e.g. food, crafts 7. Women hurt particularly by cuts in social wage and often main local food producers

7 8. Repression to lock up the malcontents--market values--less concern about others. D. Overall Free Market Fundamentalism argument on failures is that it hasn t been tried enough, take-off about to happen, hard to disprove; see The Economist, bible of neoliberalism 1. Who benefits from production for export, maquiladoras?-some jobs but often few linkages particularly if foreign owned. 2. Lack of income for majority to buy goods-limited demand--not every country can run trade surplus-- prwssure to repress workers at home by stress on exports. 3. Westernized elites who manage corporations, import luxuries; they benefit but what about rural population, most women, the underemployed and unemployed. 4. Many people in the U.S. are also, increasingly, the losers--class divide --consumers and managers may gain, financial boys 5. Discard most of it transparency, anti-corruption good but not fundamental problem V. Global capitalism and neo-liberalism are not the best alternative, nor the only alternative A. Neo-liberalism is not a technological inevitability. Facilitated by technical changes in production, communication, computers, transportation but not sufficient explanation--how these changes are developed and used is central to economic impact. B. Difficulty for nations; particularly less powerful ones 1. If you are integrated into the golden straitjacket, you lose selfdetermination; acquire all of the problems mentioned above 2. If you opt outa. Left out of capital flows, some products, technology transfers. b. Probable subversion C. There must be some way out of here!!!-more next week, As Samora Machel, first president of Mozambique said, "International solidarity is not an act of charity. It is an act of unity between allies fighting on different terrain towards the same objectives. The foremost of these objectives

8 is to aid the development of humanity to the highest level possible" 1. Support struggles to end payment of third world debt with no strings attached-- Jubilee 2000, $100 billion forgiven out of debt 18 times that big- 2.International solidarity for struggles against neo- liberalism-e.g., 50 Years is Enough Campaign-- They challenge neoliberalism, and work globally to reform and/or abolish IMF, World Bank boycott world bank bonds. World Social Forum--Feb. 1st in Porto Alegre, follow on Democracy Now 3. Continued struggle against WTO, NAFTA, FTAA 4. Support for struggles of oppressed peoples and movements around world who challenge global capitalism, e.g. South Korean workers, KCTU; EZLN in Mexico, Argentina. HARMONIZATION UPWARDS! NATIONAL and GLOBAL STRATEGIES! Build movements here who can do that by linking national and global issues--see Machel above, e.g. anti-walmart campaign 5. Globalization is powerful force but don't let it be used to paralyze us, e.g., tax currency speculation--who gets money, real issue is power of capital--social not inevitable 6. Control capital--worker coops, community owned businesses with community banks, get control of pension funds, use them for real community development 7. Developing alternatives in south--production for local market, foster local demand by more equal income distribution, limit power of global capital, reparations--spring class World Social Forum resistance and alternatives. 8. BUILD MOVEMENTS, NEW PARTIES FOR A PARTICIPATORY DEMOCRATIC ECONOMY Suggested Readings: Walden Bello, The Future in the Balance, (Food First, 2001) Robert Blecker, Taming Global Finance, (Economic Policy Institute,

9 1999) Duncan Green, Silent Revolution: The Rise of Market Economies in Latin America (Cassell, 1995) Arthur MacEwan, Neo-Liberalism or Democracy? (Zed, 1999) Jackie Roddick, Dance of the Millions: Latin America and the Debt Crisis (Latin American Bureau, 1988)