Magic markets and voodoo economics

"In this world the follies of the rich pass for wise sayings." John Kenneth Galbraith in the The Culture of Contentment

The current financial disaster caused by the banking and housing sectors of the US has led to economic and social consequences which are spreading like cancer from America and Europe to other parts of the globe. In the ensuing panic, the sense of infallibility possessed by true believers in the "quiet theology of laisser-faire", to use Galbraith's expression in the book quoted above, has faded somewhat.

Great gurus such as Greenspan himself have expressed shock and distress at the way erstwhile monetary certitudes have so rapidly unravelled (more of him later). Even academics like Francis Fukayama, self-appointed guardian of cosmic clocks which tell him when human history ends, now offer brutally honest accounts of the reasons why things have fallen apart at the centre of the paradigm, the one and only available to earthlings.

In a severe article in Newsweek (13/10/2008) entitled, "The Fall of America Inc." Fukayma fumed thus:

"Between 2002 and 2007, while the world was enjoying an unprecedented period of growth, it was easy to ignore those European socialists and Latin American populists who denounced the US economic model as "cowboy capitalism." But now the engine of that growth, the American economy, has gone off the rails and threatens to drag the rest of the world down with it. Worse, the culprit is the American model itself: under the mantra of less government, Washington failed to adequately regulate the financial sector and allowed it to do tremendous harm to the rest of the society."

So what else is new, one is tempted to ask today, having observed the same Washington-made mantras produce the same harmful consequences in African countries in the 1980s.

This sense of deja vu is more acute than ever since the G20 Summit met in Washington on November 15 and agreed in principle to act in concert on a number of items; most of these will remain abstractions till the new Obama administration takes office-and the leadership-in January next year.

However, there is one subject which has already been seized upon for immediate action and this relates to the IMF's greatly strengthened position as the main lending agency. As result of the current financial crisis,the IMF is busy bailing out the long queue of developing countries that has already formed at his door, according to the Managing Director, Dominique Strauss-Kahn.

African and Third word countries generally will remember how they were treated by the arrogant gurus of the IMF and the World Bank 25 years ago during those heady days of reaganomics.

In those days, under the pretext of structural adjustment programmes, an ideological brew of monetarism, magical market forces, conditionalities and debt service were forced upon African countries seeking to borrow money from the World Bank and IMF. These programmes resulted in massive impoverishment for mainly rural populations all over the continent.

Massive cuts in education and health budgets and the removal of food and farming subsidies (puny compared to the amounts handed out then- and - now by the US State to the American agro-business sector) imposed as conditionalities led to "tremendous harm" in Africa. They also caused food riots, general strikes, civil strife and political instability.

A new phrase came into being in the early 1980s to describe this type of reaction to World Bank/IMF advice, "IMF riots" as citizens of Sudan,Egypt, Tunisia, Morocco and Nigeria took to the streets to protest against increased food prices and local currencies devalued overnight.

Another new expression also entered the development dictionary to denote the World Bank/IMF expert: "second-rate economists from first-rate universities." This phrase was invented by Joseph Stiglitz to describe his colleagues when he was Chief Economist at the World Bank and as such knew what he was talking about.

Endless expert missions were dispatched from Washington equipped with a checklist of dogmatic demands which never varied: instant currency de-valuation,increased producer prices, import liberalisation, privatisation, market deregulation, cuts in state spending in education and health and food subsidies and so on.

And the consequences everywhere of this pressure were always the same: children out of school,fragile health systems further weakened, workers out of work and the majority of the people living in the countryside more impoverished by the day.

Meanwhile, IMF riots everywhere they happened also produced the same reaction from the authorities: armed police and troops to control those demonstrating against increases in staple food prices.

Third World leaders who dared to question and disagree with these experts were punished, like Prime Minister Michael Manley of Jamaica, "squeezed out like a wet rag" as the Guardian once put it or were treated as dimwits who "did not understand economics." President Julius Nyerere of Tanzania, who argued consistently against IMF ideology and the injustice of debt service, was included in this club.

In October 1985, a few weeks before Nyerere retired from the presidency, the Guardian wrote on the subject of Tanzania's six-year battle with the IMF (18/10/1985):

"President Nyerere has said for years that if Tanzania were to implement a classic IMF programme it would mean putting the army on to the streets to control the anger of the population.....and the government and people have been squeezed progressively every year since 1980. Two successive devaluations, cuts in the state sector (18,000 civil servants sacked), a rise in producer prices and cuts in food subsidies have already been carried out gradually since 1981. But none of this has been enough to persuade countless IMF missions to Dar es Salaam to release the $200million stand-by credit already agreed by the IMF in August 1980. Most other donors have held back waiting for the IMF stamp of approval from Washington."

It should be pointed out here that during this same period,Tanzania's neighbour, Zaire, was being treated with the utmost generosity by the World Bank because of the special relationship that existed between President Mobutu and Washington.As Michaela Wrong explains in her excellent book on the subject "In the Footsteps of Mr.Kurtz", Mobutu could " borrow" as much as he wanted, with no conditionalities asked;where the money went is another story.

And this was not all; added to IMF obduracy and collateral ganging -up by the rest of the Western donors, there was the other sacrosanct demand.... of debt service. By the mid 1990s, African countries were net exporters of US dollars to the tune of 10 billion a year. (In Washington techno-speak, this massive outflow of funds from the poor to the rich was called "negative transfer", an interesting turn of phrase like "friendly fire.)

The situation became as absurd as it was tragic and by 1996, for example, a war-torn country like Mozambique was paying out 33% of its total export earnings to the West in debt service and spending just 3% on education and health.

How African countries were supposed to develop with this level of dis-investment in human resources, our experts could not explain initially. They pondered over this and eventually came up with another mantra: Good Governance and Democracy.

Today, in the year 2008, Washington's neo-liberal mantras have come home to roost, with dire results for ordinary folks yearning to be free.... and and gainfully employed and with health care and a roof over their families' heads. The magical market forces have evaporated, except in the case of those lucky few CEOs of the very same private banks which caused the crash in the first place.

Strangely enough, the hated state is bailing out these same institutions with taxpayers' money so that the fat-cats can still take home their fabulous salaries, bonuses, stock options,etc.

Confused?

As they say, not everyone can understand economics; and Reagan-omics even less so. So one is obliged to ask what exactly was Reaganomics and who really understands economics and finance.

It should be recalled that even in the1980s, at the height of the so-called Reagan revolution which cast in stone the principles of laissez-faire, self-regulating market forces,financial deregulation and monetarism, American society experienced several serious financial crises.

The most devastating of these was undoubtedly caused by the collapse of the savings and loans associations, popularly known as the S&L scandal. It was the Reagan administration's market magicians who set the stage for the S&Ls to do what they liked in the name of deregulation, thus facilitating:

"what was by far the most feckless and felonious disposition of what, essentially, were public funds in the nation's history. This scandal, which was allowed to develop in the 1980s, had emerged by the end of that decade as the largest and costliest venture in public misfeasance, malfeasance and larceny of all time (Galbraith, op. cit)."

The packaging and marketing of Ronald Reagan (by a succession of neo- liberal gurus) as a revolutionary economic thinker of genius who saved the West and the entire free world from the axis and ravages of socialistic welfare states must rank as one of the most successful sales campaigns in history.

Most people who knew him or had just a brief moment with him could confirm that his understanding of economics (and of the world) was limited to reading the script prepared for him by his staff. It is truly remarkable that a man who could not tell the Laffer curve from a loaf of bread should have immortalised his name in economic history via the term "Reaganism."

For example, Prof. Fukuyama in the article referred to above, typically claims that Reaganism was a fundamentally American idea which has "dominated global thinking since the 1980s" and which "reversed a century-long trend towards ever-larger government..." Furthermore, he adds,this engine of capitalism "laid the groundwork for nearly three decades of growth."

The fact that Fukuyama then goes on to explain that this same engine has gone off the rails precisely because of the "mantra of less government" seems irrelevant since "Reaganism (or, in its British form,Thatcherism) was right for its time."

Right for whom exactly?

The Reagan administration's first act was to cut taxes for the very rich; in 1981, marginal rates for this group were slashed from 70% to a nominal 50% and in 1986 further cuts brought the rates to 28%. These tax cuts were supposed automatically to stimulate growth and thus lead to more revenue for the state...hanks to magic market forces.

However, as was confirmed by Robert MacNamara, the former World Bank President, in his testimony to the Budget Committee of the US House of Representatives in July 1991, there was indeed an increase but equally so in the number of Americans living below the poverty line; an increase of 28% in the years 1978-1988. He also confirmed that, during the same period, nearly one out of every five children was born into poverty in the US, more than twice as high as in Canada and Germany.

Confused?

As they say, economics is not easy to comprehend, especially the faith- based kind. It is a mistake to treat the subject as an exact science,as Galbraith warned: "In economics, nothing is certain save the certainty that there will be firm prediction by those who do not know."

And this brings us back to Alan Greenspan, appointed by President Reagan as Chairman of the Federal Reserve in 1987,and re-confirmed in the post by three succeeding Presidents, until retirement in 2006. Since the current crisis began, Greenspan has been openly criticised for his role as Chairman of the Fed in allowing the sub-prime bubble and other such anomalies to take hold because of his rigid position on deregulation.

In a touching and rare admission of ignorance (not of responsibility) before the House Committee on Oversight and Government in October, he expressed his "shock and disbelief" at discovering the extent of the sub-prime scandals and the resulting credit squeeze. Like the rest of us, he did not know or realise what the banks were up to, would you believe!

He should have talked to George Bush Sr. who , in a brilliant flash of insight (never since repeated) when he was Reagan's Vice-President, described Reaganomics in two words, "voodoo economics." This definition has rarely been used or even referred to since the 1980s but its exactitude and its brevity remain intact and perennial. And its pertinence to today's banking and financial crisis is uncanny.

In the flood of comments and analyses about the causes of the current crisis, there is one from a banker in Zurich which matches the inspired words uttered by Papa Bush in the 1980s. In an article in the Geneva daily Le Temps (31/10/2008) entitled "The Crisis: An Intellectual and Political Failure", the writer explains that the first culprits to be blamed for the current debacle are the influential economic thinkers and movers who hold sway over politicians in the US and Europe: "For the last 20 years, economic gurus, who are to science what witch-doctors are to medicine, have been banging on about so-called truths (laissez fairism and associated mantras) the empirical bases for which hardly exist."

Reagan has gone; voodoo economics is still with us.

Beware of second-rate witch-doctors chanting Washington-made mantras!

*Annar Cassam is Tanzanian, former Consultant at UNESCO/PEER Nairobi and former Director, UNESCO Office, Geneva.

*Please send comments to [email protected] or comment online at http://www.pambazuka.org/