Towards the integration of the Dollar and the Euro?

by Michel Chossudovsky from Global Research 20 July 2009 With a view to restoring financial stability, World leaders have called upon the Group of 20 countries (G-20) to instigate a new global currency based on the IMF's Special Drawing Rights (SDRs). The media has presented the global currency initiative as a consensus building process, in which BRIC countries (Brazil, Russia, India and China) would participate in the revamping of the international monetary system.

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Finance Capitalism Hits a Wall: The Oligarchs' Escape Plan ­ at the Treasury's Expense

by Professor Michael Hudson from Global Research 18 February 2009 The financial “wealth creation” game is over. Economies emerged from World War II relatively free of debt, but the 60-year global run-up has run its course. Finance capitalism is in a state of collapse, and marginal palliatives cannot revive it. The U.S. economy cannot “inflate its way out of debt,” because this would collapse the dollar and end its dreams of global empire by forcing foreign countries to go their own way. There is too little manufacturing to make the economy more “competitive,” given its high housing costs, transportation, debt and tax overhead. A quarter to a third of U.S. real estate has fallen into Negative Equity, so no banks will lend to them. The economy has hit a debt wall and is falling into Negative Equity, where it may remain for as far as the eye can see until there is a debt write-down.

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Towards the integration of the Dollar and the Euro?

by Michel Chossudovsky from Global Research 20 July 2009 With a view to restoring financial stability, World leaders have called upon the Group of 20 countries (G-20) to instigate a new global currency based on the IMF's Special Drawing Rights (SDRs). The media has presented the global currency initiative as a consensus building process, in which BRIC countries (Brazil, Russia, India and China) would participate in the revamping of the international monetary system. Russia and China have put forth "proposals" which have been highlighted as possible alternatives to the dollar. China has proposed the formation of a new global currency based on a reform of SDR system: "It is a feasible plan to reform the present SDR and make it into a real settlement currency, a universally accepted 'currency basket' that would replace the dollar at the heart of the monetary system," (Li Ruogu, chairman of the Export-Import Bank of China, Reuters, 6 July 2009) China's proposal does not imply a major shift in global banking arrangements, nor does it open up a window of debate regarding monetary reform. On the other hand, Russian President Dmitry Medvedev has explicitly questioned the composition of the SDR basket and has called upon the IMF "to expand the currency basket of SDRs to include the Chinese yuan, commodity currencies and gold in order that it matures into a reserve currency." Geopolitics Global Geopolitics bears a relationship to the international monetary system. Control over money creation is an instrument of economic conquest. The invasion and occupation of Iraq was to exclude rival Russian and Chinese interests from the Middle-East and Central Asian oil fields. The reform of the international monetary system is a project of the dominant financial elites, which is discussed behind closed doors. It is unlikely that Russia and China, which in large part remain subordinate to Western banking interests, will perform a significant role in central banking functions at a global level. Moreover, this initiative occurs at a time of East West confrontation, amidst veiled US-NATO threats directed against Russia as well China. The establishment of a new global currency and central banking system is an instrument of global economic domination which is intimately related to the broader US-NATO military agenda. While the SDR basket composition could be modified or revised, it is unlikely that the Yuan and the Ruble would be allowed to perform a role as major reserve currencies. What is more likely to occur is the formation of a global proxy currency predicated largely on the Euro and the US dollar. In response to the Dollar-Euro hegemony, Russia, China and the member states of the Shanghai Cooperation Organization (SCO) may decide to develop bilateral trading arrangements in Rubles or Yuan (renminbi). Special Drawing Rights SDRs are a composite accounting unit used by the IMF and the World Bank in loan agreements with member countries. The SDR is a basket of essentially four major currencies: the US dollar, the Euro, the British pound and the Japanese Yen. The IMF has recently presented a plan for issuing debt denominated in SDRs rather than US dollars. The media has heralded this decision as a major innovation, when in fact the Bretton Woods institutions have, for many years, been issuing debt denominated in SDRs. "Today, the SDR has only limited use as a reserve asset, and its main function is to serve as the unit of account of the IMF and some other international organizations. The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members." (IMF Fact Sheet on SDRs) What would happen if a new global currency were to be devised using the existing SDR framework? SDRs would no longer be an accounting unit but a unit of currency in a basket. Actual central banking functions, however, would not necessarily be transferred to the IMF, they would remain in the hands of four constituent central banks: The US Federal Reserve, the European Central Bank based in Frankfurt, the Bank of England and the Bank of Japan. I The IMF is a bureaucracy which serves the interests of major private financial institutions. While the IMF would formally be responsible for overseeing a global currency, the IMF would not actually be responsible for monetary policy. Under the existing SDR composition, the central banking functions would be divided between four central banks. These central banks are in turn controlled by a handful of private banking interests. A global currency based on the existing SDR arrangement would not fundamentally change the global monetary order. The SDR would be a proxy currency. Under the present composition of the SDR, what we would be dealing with is an alliance between US, British, European and Japanese banking institutions, ultimately with the US dollar and the Euro predominating. Euro-Dollar Rivalry From the outset in 1999, there has been a clash between the Euro and the dollar. In Eastern Europe, the former Soviet Union, the Balkans extending into Central Asia, the dollar and the Euro are competing with one another. Ultimately, control over national currency systems is the basis upon which countries are colonized. While the U.S. dollar prevails throughout the Western Hemisphere, the Euro and the U.S. dollar are clashing in the former Soviet Union, Central Asia, Sub-Saharan Africa and the Middle East. Prior to the invasion of Iraq in March 2003, there was a political confrontation between the Franco-German alliance and the dominant Anglo-American military axis. With the election of pro-US governments in both France and Germany, a political consensus seems to have emerged with regard to the Middle East war. In turn, this consensus regarding the US-NATO military agenda favors greater cooperation and integration between the US and the EU in global financial and monetary affairs. Would this potential "alliance" between powerful overlapping American, British, European and Japanese banking interests lead to the integration of the Euro and the dollar into a single global currency? This integration would lead to reinforcing the hegemonic control of a small number of global banking and financial institutions over the process of money creation. This, in turn, would overshadow the functions of national central banks, encroach on the sovereignty of the Nation State and eventually lead to a new phase of the global debt crisis.

Making the World's Poor Pay: The Economic Crisis and the Global South

by Adam Hanieh from Socialist Voice 28 November 2008 The current global economic crisis has all the earmarks of an epoch-defining event. Mainstream economists-not usually known for their exaggerated language-now openly employ phrases like "systemic meltdown" and "peering into the abyss." On October 29, for example, Martin Wolf, one of the top financial commentators of the Financial Times, warned that the crisis portends "mass bankruptcy," "soaring unemployment," and a "catastrophe" that threatens "the legitimacy of the open market economy itself....The danger remains huge and time is short."

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Clearing Up This Mess

The UN Monetary and Financial Conference at Bretton Woods, New Hampshire, U.S, 1 July 1944. The US secured its domination of the financial system through new US controlled institutions that became the IMF and World Bank.

by George Monbiot from The Guardian 18 November 2008 Poor old Lord Keynes. The world’s press has spent the past week blackening his name. Not intentionally: most of the dunderheads reporting the G20 summit which took place over the weekend really do believe that he proposed and founded the International Monetary Fund. It’s one of those stories that passes unchecked from one journalist to another.

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Finance Capitalism Hits a Wall: The Oligarchs' Escape Plan ­ at the Treasury's Expense

by Professor Michael Hudson from Global Research 18 February 2009 The financial “wealth creation” game is over. Economies emerged from World War II relatively free of debt, but the 60-year global run-up has run its course. Finance capitalism is in a state of collapse, and marginal palliatives cannot revive it. The U.S. economy cannot “inflate its way out of debt,” because this would collapse the dollar and end its dreams of global empire by forcing foreign countries to go their own way. There is too little manufacturing to make the economy more “competitive,” given its high housing costs, transportation, debt and tax overhead. A quarter to a third of U.S. real estate has fallen into Negative Equity, so no banks will lend to them. The economy has hit a debt wall and is falling into Negative Equity, where it may remain for as far as the eye can see until there is a debt write-down. Mr. Obama’s “recovery” plan based on infrastructure spending will make real estate fortunes for well-situated properties along the new public transport routes, but there is no sign of cities levying a windfall property tax to save their finances. Their mayors would rather keep the cities broke than to tax real estate and finance. The aim is to re-inflate property markets to enable owners to pay the banks, not to help the public sector break even. So state and local pension plans will remain underfunded while more corporate pension plans go broke. One would think that politicians would be willing to do the math and realize that debts that can’t be paid, won¹t be. But the debts are being kept on the books, continuing to extract interest to pay the creditors that have made the bad loans. The resulting debt deflation threatens to keep the economy in depression until a radical shift in policy occurs ­ a shift to save the “real” economy, not just the financial sector and the wealthiest 10% of American families. There is no sign that Mr. Obama’s economic advisors, Treasury officials and heads of the relevant Congressional committees recognize the need for a write-down. After all, they have been placed in their positions precisely because they do not understand that debt leveraging is a form of economic overhead, not real “wealth creation.” But their tunnel vision is what makes them “reliable” to Wall Street, which doesn’t like surprises. And the entire character of today’s financial crisis continues to be labeled “surprising” and “unexpected” by the press as each new surprisingly pessimistic statistic hits the news. It’s safe to be surprised; suspicious to have expected bad news and being a “premature doomsayer.” One must have faith in the system above all. And the system was the Greenspan Bubble. That is why “Ayn Rand Alan” was put in charge in the first place, after all. So the government tries to recover the happy Bubble Economy years by getting debt growing again, hoping to re-inflate real estate and stock market prices. That was, after all, the Golden Age of finance capital’s world of using debt leverage to bid up the book-price of fictitious capital assets. Everyone loved it as long as it lasted. Voters thought they had a chance to become millionaires, and approved happily. And at least it made Wall Street richer than ever before ­ while almost doubling the share of wealth held by the wealthiest 1% of America’s families. For Washington policy makers, they are synonymous with “the economy” ­ at least the economy for which national economic policy is being formulated these days. The Obama-Geithner plan to restart the Bubble Economy’s debt growth so as to inflate asset prices by enough to pay off the debt overhang out of new “capital gains” cannot possibly work. But that is the only trick these ponies know. We have entered an era of asset-price deflation, not inflation. Economic data charts throughout the world have hit a wall and every trend has been plunging vertically downward since last autumn. U.S. consumer prices experienced their fastest plunge since the Great Depression of the 1930s, along with consumer “confidence,” international shipping, real estate and stock market prices, oil and the exchange rate for British sterling. The global economy is falling into depression, and cannot recover until debts are written down. Instead of doing this, the government is doing just the opposite. It is proposing to take bad debts onto the public-sector balance sheet, printing new Treasury bonds give the banks ­ bonds whose interest charges will have to be paid by taxing labor and industry. The oligarchy’s plans for a bailout (at least of its own financial position) In periods of looming collapse, wealthy elites protect their funds like rats fleeing a sinking ship. In times past they bought gold when currencies started to weaken. (Patriotism never has been a characteristic of cosmopolitan finance capital.) Since the 1950s the International Monetary Fund has made loans to support Third World exchange rates long enough to subsidize capital flight. In the United States over the past half-year, bankers and Wall Street investors have tapped the Treasury and Federal Reserve to support prices of their bad loans and financial gambles, buying out or guaranteeing $12 trillion of these junk debts. Protection for the U.S. financial elite thus takes the form of domestic public debt, not foreign currency. It is all in vain as far as the real economy is concerned. When the Treasury gives banks newly printed government bonds in “cash for trash” swaps, it leaves today’s unpayably high private-sector debt in place. All that happens is that this debt is now owed to (or guaranteed by) the government, which will have to impose taxes to pay the interest charges. The new twist is a variant on the IMF “stabilization” plans that lend money to central banks to support their currencies ­ for long enough to enable local oligarchs and foreign investors to move their savings and investments offshore at a good exchange rate. The currency then is permitted to collapse, enabling currency speculators to rake in enough gains to empty out the central bank’s reserves. Speculators view these central bank holdings as a target to be raided ­ the larger the better. The IMF will lend a central bank, say, $10 billion to “support the currency.” Domestic holders will flee the currency at a high exchange rate. Then, when the loan proceeds are depleted, the currency plunges. Wages are squeezed in the usual IMF austerity program, and the economy is forced to earn enough foreign exchange to pay back the IMF. As a condition for getting this kind of IMF “support,” governments are told to run a budget surplus, cut back social spending, lower wages and raise taxes on labor so as to squeeze out enough exports to repay the IMF loans. But inasmuch as this kind “stabilization plan” cripples their domestic economy, they are obliged to sell off public infrastructure at distress prices ­ to foreign buyers who themselves borrow the money. The effect is to make such countries even more dependent on less “neoliberalized” economies. Latvia is a poster child for this kind of disaster. Its recent agreement with Europe is a case in point. To help the Swedish banks withdraw their funds from the sinking ship, EU support is conditional on Latvia¹s government agreeing to cut salaries in the private sector ­ and not to raise property taxes (currently almost zero). The problem is that Latvia, like other post-Soviet economies, has scant domestic output to export. Industry throughout the former Soviet Union was torn up and scrapped in the 1990s. (Welcome to victorious finance capitalism, Western-style.) What they had was real estate and public infrastructure free of debt ­ and hence, available to be pledged as collateral for loans to finance their imports. Ever since its independence from Russia in 1991, Latvia has paid for its imported consumer goods and other purchases by borrowing mortgage credit in foreign currency from Scandinavian and other banks. The effect has been one of the world’s biggest property bubbles ­ in an economy with no means of breaking even except by loading down its real estate with more and more debt. In practice the loans took the form of mortgage borrowing from foreign banks to finance a real estate bubble ­ and their import dependency on foreign suppliers. So instead of helping it and other post-Soviet nations develop self-reliant economies, the West has viewed them as economic oysters to be broken up to indebt them in order to extract interest charges and capital gains, leaving them empty shells. This policy crested on January 26, 2009, when Joaquin Almunia of the European Commission wrote a letter to Latvia's Prime Minister spelling out the terms on which Europe will bail out the Swedish and other foreign banks operating in Latvia ­ at Latvia’s own expense: Extended assistance is to be used to avoid a balance of payments crisis, which requires restoring confidence in the banking sector [now entirely foreign owned], and bolstering the foreign reserves of the Bank of Latvia. This implies financing outstanding government debt repayments (domestic and external). And if the banking sector were to experience adverse events, part of the assistance would be used for targeted capital infusions or appropriate short-term liquidity support. However, financial assistance is not meant to be used to originate new loans to businesses and households. It is important not to raise ungrounded expectations among the general public and the social partners, and, equally, to counter misunderstandings that may arise in this respect. Worryingly, we have witnessed some recent evidence in Latvian public debate of calls for part of the financial assistance to be used inter alia for promoting export industries or to stimulate the economy through increased spending at large. It is important actively to stem these misperceptions. Riots broke out last week, and protesters stormed the Latvian Treasury. Hardly surprising! There is no attempt to help Latvia develop the export capacity to cover its imports. After the domestic kleptocrats, foreign banks and investors have removed their funds from the economy, the Latvian lat will be permitted to depreciate. Foreign buyers then can come in and pick up local assets on the cheap once again. The practice of European banks riding the crest of the post-Soviet real estate bubble is backfiring to wreck the European economies that have engaged in this predatory lending to neighboring economies as well. As one reporter has summarized: In Poland 60 percent of mortgages are in Swiss francs. The zloty has just halved against the franc. Hungary, the Balkans, the Baltics, and Ukraine are all suffering variants of this story. As an act of collective folly ­ by lenders and borrowers ­ it matches America's sub-prime debacle. There is a crucial difference, however. European banks are on the hook for both. US banks are not. Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks.1 This was the West's alternative to Stalinism. It did not help these countries emulate how Britain and America got rich by protectionist policies and publicly nurtured industrialization and infrastructure spending. Rather, the financial rape and industrial dismantling of the former Soviet economies was the most recent exercise in Western colonialism. At least U.S. investors were smart enough to stand clear and merely ride the stock market run-up before jumping ship. But now, the government’s plan to “save” the economy is to “save the banks,” along similar lines to the West trying to save its banks from their adventure in the post-Soviet economies. This is the basic neoliberal economic plan, after all. The U.S. economy is about to be “post-Sovietized.” The U.S. giveaway to banks, masquerading as “help for troubled homeowners” The Obama bank bailout is arranged much like an IMF loan to support the exchange rate of foreign currency, but with the Treasury supporting financial asset prices for U.S. banks and other financial institutions. Instead of banks and oligarchs abandoning the dollar, the aim is to enable them to dump their bad mortgages and CDOs and get domestic Treasury bonds. Private-sector debt will be moved onto the U.S. Government balance sheet, where “taxpayers” will bear losses ­ mainly labor not Wall Street, inasmuch as the financial sector has been freed of income-tax liability by the “small print” in last autumn’s Paulson-Bush bailout package. But at least the U.S. Government is handling the situation entirely in domestic dollars. As in Third World austerity programs, the effect of keeping the debts in place at the “real” economy’s expense will be to shrink the domestic U.S. market ­ while providing opportunities for hedge funds to pick up depreciated assets cheaply as the federal government, states and cities sell them off. This is called letting the banks “earn their way out of debt.” It’s strangling the “real” economy, because not a dollar of the government’s response has been devoted to reducing the overall debt volume. Take the much-vaunted $50 billion program designed to renegotiate mortgages downward for “troubled homeowners.” Upon closer examination it turns out that the real beneficiaries are the giant leading banks such as Citibank and Bank of America that have made the bad loans. The Treasury will take on the bad debt that banks are stuck with, and will permit mortgagees to renegotiate their monthly payment down to 38% of their income. But rather than the banks taking the loss as they should do for over-lending, the Treasury itself will make up the difference ­ and pay it to the banks so that they will be able to get what they hoped to get. The hapless mortgage-burdened family stuck in their negative-equity home turns out to be merely a passive vehicle for the Treasury to pass debt relief on to the commercial banks. Few news stories have made this clear, but the Financial Times spelled the details buried in small print.2 It added that the Treasury has not yet decided whether to write down the debt principal for the estimated 15 million families with negative equity (and perhaps 30 million by this time next year as property prices continue to plunge). No doubt a similar deal will be made: For every $100,000 of write-down in debt owed by over-mortgaged homeowners, the bank will receive $100,000 from the Treasury. Government debt will rise by $100,000, and the process will continue until the Treasury has transferred $50,000,000 to the banks that made the reckless loans. There is enough for just 500 of these renegotiations of $100,000 each. Hardly enough to make much of a dent, but the principle has been put in place for many further bailouts. It will take almost an infinity of them, as long as the Treasury tries to support the fiction that “the miracle of compound interest” can be sustained for long. The danger is the economy may be dead by the time saner economic understanding penetrates the public consciousness. In the mean time, bad private-sector debt will be shifted onto the government’s balance sheet. Interest and amortization currently owed to the banks will be replaced by obligations to the U.S. Treasury. Taxes will be levied to make up the bad debts with which the government is stuck. The "real" economy will pay Wall Street ­ and will be paying for decades! Calling the $12 trillion giveaway to bankers a “subprime crisis” makes it appear that bleeding-heart liberals got Fannie Mae and Freddie Mac into trouble by insisting that these public-private institutions make irresponsible loans to the poor. The party line is, “Blame the victim.” But we know this is false. The bulk of bad loans are concentrated in the largest banks. It was Countrywide and other banksters that led the irresponsible lending and brought heavy-handed pressure on Fannie Mae. Most of the nation’s smaller, local banks didn’t make such reckless loans. The big mortgage shops didn't care about loan quality, because they were run by salesmen. The Treasury is paying off the gamblers and billionaires by supporting the value of bank loans, investments and derivative gambles, leaving the Treasury in debt. U.S./post-Soviet Convergence? It may be time to look once again at what Larry Summers and his Rubinomics gang did in Russia in the mid-1990s and to Third World countries during his tenure as World Bank economist to see what kind of future is being planned for the U.S. economy over the next few years. Throughout the Soviet Union the neoliberal model established “equilibrium” in a way that involved demographic collapse: shortening life spans, lower birth rates, alcoholism and drug abuse, psychological depression, suicides, bad health, unemployment and homelessness for the elderly (the neoliberal mode of Social Security reform). Back in the 1970s, people speculated whether the US and Soviet economies were converging. Throughout the 20th century, of course, everyone expected government regulation, infrastructure investment and planning to increase. It looked like the spread of democratically elected governments would go hand in hand with people voting in their own economic interest to raise living standards, thereby closing the inequality gap. This is not the kind of convergence that has occurred since 1991. Government power is being dismantled, living standards have stagnated and wealth is concentrating at the top of the economic pyramid. Economic planning and resource allocation has passed into the hands of Wall Street, whose alternative to Hayek’s “road to serfdom” is debt peonage for the economy at large. There does need to be a strong state, to be sure, to keep the financial and real estate rentier power in place. But the West's alternative to the old Soviet bureaucracy is a financial planning. In place of a political overhead, we have a financial and real estate overhead. Stalinist Russia and Maoist China achieved high technology without land-rent, monopoly rent and interest overhead. This purging of rentier income was the historical task of classical political economy, and it became that of socialism. The aim was to create a Clean Slate financially, bringing prices in line with technologically necessary costs of production. The aim was to provide everyone with the fruits of their labor rather than letting banks and landlords siphon off the economic surplus. Ideas of economic efficiency and “wealth creation” today are an utterly different kind of liberalism and “free markets.” Commercial banks lend money not to increase production but to inflate asset prices. Some 70% of bank loans are mortgage loans for real estate, and most of the rest is for corporate takeovers and raids, to finance stock buy-backs or simply to pay dividends. Asset-price inflation obliges people to go deeper into debt than ever before to obtain access to housing, education and medical care. The economy is being “financialized,” not industrialized. This has been the plan as much for the post-Soviet states as for North America, Western Europe and the Third World. But we are far from having reached the end of the line. Celebrations that our present financialized economy represents the “end of history” are laughingly premature. Today’s policies look more like a dead end. But that does not mean that, like the Roman Empire, they won't lead us down toward a new Dark Age. That’s what tends to happen when oligarchies do the planning. Is America a Failed Economy? It may be time to ask whether neoliberal pro-rentier economics has turned America and the West into a Failed Economy. Is there really no alternative? Have the neoliberals made the shift of planning from governments to the financial oligarchy irreversible? Let’s first dispose of the “foundation myth” of the idea still guiding the United States and Europe. Free-market economists pretend that prices can be brought into line most efficiently with technologically necessary costs of production under capitalism, and indeed, under finance capitalism. The banks and stock market are supposed to allocate resources most efficiency. That at least is the dream of self-regulating markets. But today it looks like only a myth, public relations patter talk to get a generation of increasingly indebted voters not to act in their own self-interest. Industrial capitalism always has been a hybrid, a symbiosis with its feudal legacy of absentee property ownership, oligarchic finance and public debts rather than the government acting as net creditor. The essence of feudalism was extractive, not productive. That is why it created industrial capitalism as State Policy in the first place ­ if only to increase its war-making powers. But the question must now be raised as to whether only socialism can complete the historical task that classical political economy set out for itself ­ the ideal that futurists in the 19th and 20th centuries believed that an unpurified capitalism might still be able bring about without shedding its legacy of commercial banking indebting property and carving infrastructure out of the public domain. Today it is easier to see that the Western economies cannot go on the way they have been. They have reached the point where the debts exceed the ability to pay. Instead of recognizing this fact and scaling debts back into line with the ability to pay, the Obama-Geithner plan is to bail out the big banks and hedge funds, keeping the volume of debt in place and indeed, growing once again through the “magic of compound interest.” The result can only be an increasingly extractive economy, until households, real estate and industrial companies, states and cities, and the national government itself is driven into debt peonage. The alternative is a century and a half old, and emerged out of the ideals of the classical economic doctrines of Adam Smith, David Ricardo, John Stuart Mill, and the last great classical economist, Marx. Their common denominator was to view rent and interest are extractive, not productive. Classical political economy and its successor Progressive Era socialism sought to nationalize the land (or at least to fully tax its rent as the fiscal base). Governments were to create their own credit, not leave this function to wealthy elites via a bank monopoly on credit creation. So today's neoliberalism paints a false picture of what the classical economists envisioned as free markets. They were markets free of economic rent and interest (and taxes to support an aristocracy or oligarchy). Socialism was to free economies from these overhead charges. Today’s Obama-Geithner rescue plan is just the reverse. Notes 1. Ambrose Evans-Pritchard, 'If Eastern Europe falls, world is next,' The Telegraph, February 14, 2009. 2. Krishna Guha, ‘US closes in on subsidy plan to stop foreclosures,’ Financial Times, February 13, 2009.

Destroying African Agriculture

A yound protestor in Jakarta, Indonesia, calling for the World Bank to be shutdown. All round the globe the World Bank and IMF have been responsible for destroying local food economies.

by Walden Bello

from Countercurrents

07 June, 2008

Biofuel production is certainly one of the culprits in the current global food crisis. But while the diversion of corn from food to biofuel feedstock has been a factor in food prices shooting up, the more primordial problem has been the conversion of economies that are largely food-self-sufficient into chronic food importers. Here the World Bank, International Monetary Fund (IMF), and the World Trade Organization (WTO) figure as much more important villains.

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Making the World's Poor Pay: The Economic Crisis and the Global South

by Adam Hanieh from Socialist Voice 28 November 2008 The current global economic crisis has all the earmarks of an epoch-defining event. Mainstream economists-not usually known for their exaggerated language-now openly employ phrases like "systemic meltdown" and "peering into the abyss." On October 29, for example, Martin Wolf, one of the top financial commentators of the Financial Times, warned that the crisis portends "mass bankruptcy," "soaring unemployment," and a "catastrophe" that threatens "the legitimacy of the open market economy itself....The danger remains huge and time is short." There is little doubt that this crisis is already having a devastating impact on heavily indebted households in the US. But one of the striking characteristics of analysis to date-by both the Left and the mainstream media-is the almost exclusive focus on the wealthy countries of North America, Europe, and East Asia. From foreclosures in California to the bankruptcy of Iceland, the impact of financial collapse is rarely examined beyond the advanced capitalist core. The pattern of capitalist crisis over the last fifty years should alert us to the dangers of this approach. Throughout its history, capitalism has functioned through the geographical displacement of crisis by attempting to offload the worst impacts onto those outside the core. This article presents a short survey of what this crisis might mean for the Global South. World trade drops This crisis hits a world economy that-for the first time in history-is truly global. Of course exports and the control of raw materials have always been important to capitalism. But up until the 1970s most capitalist production was organized nationally. Throughout the 1980s and 1990s both production and consumption began to be organized at the international scale. Today, markets are dominated by a handful of large companies operating internationally through interconnected chains of production, sub-contracting, and marketing. Almost every product we consume has involved the labor of thousands of people scattered across the globe-from the production of raw material inputs, research and development (R&D), assembly, transport, marketing, and financing. At one level this interconnectedness of production suggests that human beings have become one social organism. At the same time, it continually runs up against a system organized for the pursuit of individual, private profit. This interconnectedness has taken a very particular form over the last couple of decades. The world market has been structured around the consumption of the US (and, to a lesser extent, European) consumer. Goods produced in low-wage production zones such as China and India-using raw materials mostly sourced from other countries in the South-are exported to the US where they end up in the ever-expanding homes of overly indebted consumers. Control of this global chain of production and consumption rests in the hands of large US, European, and Japanese conglomerates. This structure helped to fracture and roll back national development projects across the globe. Coupled with the debt crisis of the 1980s, export-oriented models of development were imposed by the International Monetary Fund (IMF) and other financial institutions on most countries in the South. Many of the elites of these countries bought into this development model as they gained ownership stakes in newly privatized companies and access to markets in the North. The ever-expanding consumption of the US market is/has been predicated on a massive rise in indebtedness. US consumers were encouraged to take on vast levels of debt (through credit cards, mortgages, "zero-down" financing, etc.) in order to maintain the consumption levels that underpinned global demand. The dollars that enabled this growth in debt came from financial instruments that were purchased by Asian central banks and others around the world. These institutions lent dollars back to the US where they were channeled to consumers through banks and other mechanisms. The US real estate market was just one of the financial bubbles that permitted this treadmill of increasing indebtedness to continue. People could continually refinance their mortgages as real estate prices went up. But with the collapse of this bubble, global world demand is suddenly drying up. Because of the interconnectedness of world trade, this will have a very severe impact on every country across the globe, particularly in the South. One measure of this is a relatively obscure economic indicator called the Baltic Dry Index (BDI). The BDI measures the cost of long-distance shipping for commodities such as coal, iron ore, and steel. From June to November 2008, the BDI fell by 92 percent, with rental rates for large cargo ships dropping from $234,000 a day to $7,340. This massive drop reflects two factors: the reduction in world demand for raw materials and other commodities, and the inability of shippers to have their payments guaranteed by banks because of the credit crisis. Falling commodity prices also demonstrate this drop-off in world trade. Copper prices, for example, have fallen 23 percent in the past two months. Chinese consumption of the metal, critical to much industrial production, has fallen by more than half this year. ArcelorMittal, the world's largest steelmaker, stated on November 5 that its global output would decline by more than 30 percent. The World Bank (which has consistently underestimated the severity of the current downturn) is now predicting global trade volumes to shrink for the first time since 1982. Social dislocation This drop in world trade will have a particularly devastating impact on those countries that have adopted export-oriented models of development. This model was heavily promoted by the World Bank, the IMF, and most economists over the last couple of decades. As global demand shrinks, countries reliant on exports will be faced with collapse of their core industries and potential mass unemployment. This will place further pressure on wages as new labor reserves augment already large levels of unemployment. Standard Chartered estimate, for example, that Chinese exports could tumble to "zero or even negative growth" in 2009. JP Morgan Chase is predicting that Chinese exports will fall 5.7 percent for every one percent drop in global economic growth. This is not just a matter of getting by on smaller levels of still positive growth. China needs to create 17 million jobs a year in order to deal with the large numbers of farmers moving from the countryside to urban areas. Even if growth drops from 11-12 percent annually to 8 percent, the country faces potentially huge social dislocation. Already, workers in China are protesting in the millions as their factories close and owners abscond with unpaid wages. A collapse in world trade is not the only potentially devastating threat this crisis presents to the global periphery. Like the 1997 Asian Crisis, the rapid withdrawal or repatriation of foreign funds from stock markets and other investments in the South could cause the meltdown of currencies and the collapse of industries already reeling from slowdowns in trade. A quick survey of a few countries demonstrates the deadly mix of capital outflows, high inflation, and drops in export earnings: In Pakistan, foreign-currency reserves have dropped more than 74 percent in the past year to about $4.3 billion. The country is teetering on the edge of total collapse and urgently requires $6 billion in order to pay for imports and service its existing debt. The dire situation of foreign outflows led the German foreign minister to state on October 28 that the "world has just six days to save Pakistan." (At the time of writing it looks like Pakistan will get this money in the form of loans from the IMF and/or countries of the Gulf Cooperation Council.) India has seen its foreign exchange reserves drop by 17 percent since March 2008. Over $51 billion left India during the third week of October, the largest fall in eight years. The Indian textile industry, which makes up the second largest component of the country's labor force after agriculture, exports 70 percent of its product to US and European markets. It is expected that textile and garment orders will decline by at least 25 percent over the winter and mass layoffs have already begun. On October 29, the Association of Chambers of Commerce and Industries predicted that companies in seven key industries (steel, cement, finance, construction, real estate, aviation, and information technology) would need to cut 25 percent of their workforce. These patterns are repeated across the globe. Mexico, Turkey, Indonesia, Brazil, Argentina, and South Korea, as well as the poorer countries of Eastern and Southern Europe, face collapsing growth rates, capital flight, and declines in the value of their currencies. In many cases, these problems have been exacerbated due to a proliferation of low-interest loans taken by individuals and companies that were denominated in foreign currency (such as Swiss francs, Euros, and dollars). These loans initially offered a better interest rate than the domestic currency but, as local currencies have dropped in value, the amount of money required to be repaid has increased dramatically. Business Week estimates that borrowers in these so-called emerging markets owe some $4.7 trillion in foreign-denominated debt, up 38 percent over the past two years. This is the reassertion of a debt crisis from the 1980s that never really went away, but only partially subsided. IMF returns This unfolding social crisis has returned the IMF to center stage. Typically, the IMF lends to those countries facing potential collapse and, in return, demands the fulfillment of stringent economic conditions. The scale of borrowing is already immense: Iceland ($2.4 billion), Ukraine ($16.5 billion), and Hungary ($15.7 billion) have been extended loans. Pakistan, Serbia, Belarus, and Turkey are likely candidates in the near future. The conditions that come with this latest round of IMF lending have been particularly opaque. The policies that Ukraine is expected to pass, for example, are not yet known despite the fact that the country has essentially agreed to accept a $16.5 billion loan. Hungary has already agreed to cut welfare spending, freeze salaries, and cancel bonuses for public sector workers, but the final details of the deal have not been made public. Iceland was required to raise interest rates to 18 percent with the economy predicted to contract by 10 percent and inflation reaching 20 percent. We can certainly expect that the conditions attached to loans in the poorer countries in the Global South will be much more stringent than those imposed on these European countries. There is little doubt that these countries will face massive job losses, intense pressure to privatize public resources, and the slashing of state spending on welfare, education, and health in the name of "balanced budgets." Whether these attacks on the social fabric are successful, however, will ultimately depend on the level of resistance they face. Authoritarian state On October 11, a meeting of progressive economists in Caracas, Venezuela, issued a statement warning that the dynamic of this crisis "encourages new rounds of capital concentration and, if the people do not firmly oppose this, it is becoming perilously likely that restructuring will occur simply to save privileged sectors." This is an important point to understand: capitalist crisis doesn't automatically lead to the end of capitalism. Without effective resistance and struggle, the crisis will eventually be resolved at the expense of working people-particularly those in the South. This could be one of the most serious crises that capitalism has faced in living memory. But we should not be fooled into thinking that the system will somehow be reformed or its contradictions solved through peaceful and orderly means. The most likely immediate outcome is a hardened, more authoritarian state that seeks to restore profitability through ratcheting up repression and forcing people to accept the loss of jobs, housing, and any kind of social support. In the South, this will inevitably mean more war and military repression. If this is not prevented then the system will utilize this crisis to restructure and continue business as usual. This is why resistance-both at home and abroad-will be the single most important determinant of how this eventually plays out. In Latin America, for example, attempts to restrict capital flight, place key economic sectors under popular control, and establish alternative currency and trade arrangements are important initiatives that point to the necessity of solutions beyond capitalism. In the Middle East, popular resistance to the political and economic control of the region has undoubtedly checked the extension of US power. Any displacement of crisis onto the South means playing different groups of people against one another. For this reason, the ideological corollary of war and military repression abroad is likely an increasingly virulent racism in the North-directed at immigrants, people of color, and indigenous populations. This means that for activists in North America the question of global solidarity and resistance to racism must be a central priority of any effective fight-back Any attempt to turn inwards or dismiss international solidarity as less important in this phase will be disastrous for all working people across the globe.

Clearing Up This Mess

by George Monbiot from The Guardian 18 November 2008 Poor old Lord Keynes. The world’s press has spent the past week blackening his name. Not intentionally: most of the dunderheads reporting the G20 summit which took place over the weekend really do believe that he proposed and founded the International Monetary Fund. It’s one of those stories that passes unchecked from one journalist to another. The truth is more interesting. At the Bretton Woods conference in 1944, John Maynard Keynes put forward a much better idea. After it was thrown out, Geoffrey Crowther - then the editor of the Economist magazine - warned that “Lord Keynes was right … the world will bitterly regret the fact that his arguments were rejected.”(1) But the world does not regret it, for almost everyone - the Economist included - has forgotten what he proposed. One of the reasons for financial crises is the imbalance of trade between nations. Countries accumulate debt partly as a result of sustaining a trade deficit. They can easily become trapped in a vicious spiral: the bigger their debt, the harder it is to generate a trade surplus. International debt wrecks people’s development, trashes the environment and threatens the global system with periodic crises. As Keynes recognised, there is not much that the debtor nations can do. Only the countries which maintain a trade surplus have real agency, so it is they who must be obliged to change their policies. His solution was an ingenious system for persuading the creditor nations to spend their surplus money back into the economies of the debtor nations. He proposed a global bank, which he called the International Clearing Union. The bank would issue its own currency - the bancor - which was exchangeable with national currencies at fixed rates of exchange. The bancor would become the unit of account between nations, which means it would be used to measure a country’s trade deficit or trade surplus(2,3,4). Every country would have an overdraft facility in its bancor account at the International Clearing Union, equivalent to half the average value of its trade over the past five years. To make the system work, the members of the Union would need a powerful incentive to clear their bancor accounts by the end of the year: to end up with neither a trade deficit nor a trade surplus. But what would the incentive be? Keynes proposed that any country racking up a large trade deficit (equating to more than half of its bancor overdraft allowance) would be charged interest on its account. It would also be obliged to reduce the value of its currency and to prevent the export of capital. But – and this was the key to his system – he insisted that the nations with a trade surplus would be subject to similar pressures. Any country with a bancor credit balance which was more than half the size of its overdraft facility would be charged interest, at 10%*. It would also be obliged to increase the value of its currency and to permit the export of capital. If by the end of the year its credit balance exceeded the total value of its permitted overdraft, the surplus would be confiscated. The nations with a surplus would have a powerful incentive to get rid of it. In doing so, they would automatically clear other nations’ deficits. When Keynes began to explain his idea, in papers published in 1942 and 1943, it detonated in the minds of all who read it. The British economist Lionel Robbins reported that “it would be difficult to exaggerate the electrifying effect on thought throughout the whole relevant apparatus of government … nothing so imaginative and so ambitious had ever been discussed”(5). Economists all over the world saw that Keynes had cracked it. As the Allies prepared for the Bretton Woods conference, Britain adopted Keynes’s solution as its official negotiating position. But there was one country - at the time the world’s biggest creditor - in which his proposal was less welcome. The head of the US delegation at Bretton Woods, Harry Dexter White, responded to Lord Keynes’s idea thus: “We have been perfectly adamant on that point. We have taken the position of absolutely no”(6). Instead he proposed an International Stabilisation Fund, which would place the entire burden of maintaining the balance of trade on the deficit nations. It would place no limits on the surplus that successful exporters could accumulate. He also suggested an International Bank for Reconstruction and Development, which would provide capital for economic reconstruction after the war. White, backed by the financial clout of the US Treasury, prevailed. The International Stabilisation Fund became the International Monetary Fund. The International Bank for Reconstruction and Development remains the principal lending arm of the World Bank. The consequences, especially for the poorest indebted countries, have been catastrophic. Acting on behalf of the rich world, imposing conditions which no free country would tolerate, the IMF has bled them dry. As Joseph Stiglitz has shown, the Fund compounds existing economic crises and creates crises where none existed before. It has destabilised exchange rates, exacerbated balance of payments problems, forced countries into debt and recession, wrecked public services and destroyed the jobs and incomes of tens of millions of people(7). The countries the Fund instructs must place the control of inflation ahead of other economic objectives; immediately remove their barriers to trade and the flow of capital; liberalise their banking systems; reduce government spending on everything except debt repayments; and privatise the assets which can be sold to foreign investors. These happen to be the policies which best suit predatory financial speculators(8). They have exacerbated almost every crisis the IMF has attempted to solve. You might imagine that the United States, which since 1944 has turned from the world’s biggest creditor to the world’s biggest debtor, would have cause to regret the blinkered position it took at Bretton Woods. But Harry Dexter White ensured that the US could never lose. He awarded it special veto powers over any major decision made by the IMF or the World Bank, which means that it will never be subject to the Fund’s unwelcome demands. The IMF insists that the foreign exchange reserves maintained by other nations are held in the form of dollars. This is one of the reasons why the US economy doesn’t collapse, no matter how much debt it accumulates(9,10). On Saturday the leaders of the G20 nations admitted that “the Bretton Woods Institutions must be comprehensively reformed.”(11) But the only concrete suggestions they made were that the IMF should be given more money and that poorer nations “should have greater voice and representation.” We’ve already seen what this means: a tiny increase in their voting power which does nothing to challenge the rich countries’ control of the Fund, let alone the US veto(12). Is this the best they can do? No. As the global financial crisis deepens, the rich nations will be forced to recognise that their problems cannot be solved by tinkering with a system that is constitutionally destined to fail. But to understand why the world economy keeps running into trouble, they first need to understand what was lost in 1944. http://www.monbiot.com/ *Erratum: Professor Tony Thirlwall, an expert on this subject, writes to tell me that “The proposed interest rate on credit and debit balances was 1% if the balance was more than 25% of quota and a further 1% if the balance went above 50% of quota.” References: 1. Geoffrey Crowther, quoted by Michael Rowbotham, 2000. Goodbye America! Globalisation, Debt and the Dollar Empire. Jon Carpenter, Charlbury, Oxon. 2. My sources are: Michael Rowbotham, 2000, ibid; 3. Robert Skidelsky, 2000. John Maynard Keynes: Fighting for Britain 1937-1946. Macmillan, London; 4. Armand van Dormael, 1978. Bretton Woods: Birth of a Monetary System. Macmillan, London. 5. Lord Robbins, quoted by Armand van Dormael, ibid. 6. Harry Dexter White, quoted by Armand van Dormael, ibid. 7. Joseph Stiglitz, 2002. Globalization and its Discontents. Allen Lane, London. 8. ibid. 9. eg Romilly Greenhill and Ann Pettifor, April 2002. The United States as a HIPC (Highly Indebted Prosperous Country) – how the poor are financing the rich. Jubilee Research at the New Economics Foundation, London And 10. Henry K Liu, April 11 2002. US Dollar hegemony has got to go. Asia Times. 11. The G20 Summit, 15th November 2008. Declaration of the Summit on Financial Markets and the World Economy. The White House. http://www.whitehouse.gov/news/releases/2008/11/20081115-1.html 12. See http://www.monbiot.com/archives/2006/09/05/still-the-rich-worlds-viceroy/

Destroying African Agriculture

by Walden Bello from Countercurrents 07 June, 2008 Biofuel production is certainly one of the culprits in the current global food crisis. But while the diversion of corn from food to biofuel feedstock has been a factor in food prices shooting up, the more primordial problem has been the conversion of economies that are largely food-self-sufficient into chronic food importers. Here the World Bank, International Monetary Fund (IMF), and the World Trade Organization (WTO) figure as much more important villains. Whether in Latin America, Asia, or Africa, the story has been the same: the destabilization of peasant producers by a one-two punch of IMF-World Bank structural adjustment programs that gutted government investment in the countryside followed by the massive influx of subsidized U.S. and European Union agricultural imports after the WTO’s Agreement on Agriculture pried open markets. African agriculture is a case study of how doctrinaire economics serving corporate interests can destroy a whole continent’s productive base. From Exporter to Importer At the time of decolonization in the 1960s, Africa was not just self-sufficient in food but was actually a net food exporter, its exports averaging 1.3 million tons a year between 1966-70. Today, the continent imports 25% of its food, with almost every country being a net food importer. Hunger and famine have become recurrent phenomena, with the last three years alone seeing food emergencies break out in the Horn of Africa, the Sahel, Southern Africa, and Central Africa. Agriculture is in deep crisis, and the causes are many, including civil wars and the spread of HIV-AIDS. However, a very important part of the explanation was the phasing out of government controls and support mechanisms under the structural adjustment programs to which most African countries were subjected as the price for getting IMF and World Bank assistance to service their external debt. Instead of triggering a virtuous spiral of growth and prosperity, structural adjustment saddled Africa with low investment, increased unemployment, reduced social spending, reduced consumption, and low output, all combining to create a vicious cycle of stagnation and decline. Lifting price controls on fertilizers while simultaneously cutting back on agricultural credit systems simply led to reduced applications, lower yields, and lower investment. One would have expected the non-economist to predict this outcome, which was screened out by the Bank and Fund’s free-market paradigm. Moreover, reality refused to conform to the doctrinal expectation that the withdrawal of the state would pave the way for the market and private sector to dynamize agriculture. Instead, the private sector believed that reducing state expenditures created more risk and failed to step into the breach. In country after country, the predictions of neoliberal doctrine yielded precisely the opposite: the departure of the state “crowded out” rather than “crowded in” private investment. In those instances where private traders did come in to replace the state, an Oxfam report noted, “they have sometimes done so on highly unfavorable terms for poor farmers,” leaving “farmers more food insecure, and governments reliant on unpredictable aid flows.” The usually pro-private sector Economist agreed, admitting that “many of the private firms brought in to replace state researchers turned out to be rent-seeking monopolists.” What support the government was allowed to muster was channeled by the Bank to export agriculture – to generate the foreign exchange earnings that the state needed to service its debt to the Bank and the Fund. But, as in Ethiopia during the famine of the early 1980s, this led to the dedication of good land to export crops, with food crops forced into more and more unsuitable soil, thus exacerbating food insecurity. Moreover, the Bank’s encouraging several economies undergoing adjustment to focus on export production of the same crops simultaneously often led to overproduction that then triggered a price collapse in international markets. For instance, the very success of Ghana’s program to expand cocoa production triggered a 48% drop in the international price of cocoa between 1986 and 1989, threatening, as one account put it, “to increase the vulnerability of the entire economy to the vagaries of the cocoa market.” 1 In 2002-2003, a collapse in coffee prices contributed to another food emergency in Ethiopia. As in many other regions, structural adjustment in Africa was not simply underinvestment but state divestment. But there was one major difference. In Latin America and Asia, the Bank and Fund confined themselves for the most part to macromanagement, or supervising the dismantling of the state’s economic role from above. These institutions left the dirty details of implementation to the state bureaucracies. In Africa, where they dealt with much weaker governments, the Bank and Fund micromanaged such decisions as how fast subsidies should be phased out, how many civil servants had to be fired, or even, as in the case of Malawi, how much of the country’s grain reserve should be sold and to whom. In other words, Bank and IMF resident proconsuls reached into the very innards of the state’s involvement in the agricultural economy to rip it up. The Role of Trade Compounding the negative impact of adjustment were unfair trade practices on the part of the EU and the United States. Trade liberalization allowed low-priced subsidized EU beef to enter and drive many West African and South African cattle raisers to ruin. With their subsidies legitimized by the WTO’s Agreement on Agriculture, U.S. cotton growers offloaded their cotton on world markets at 20-55% of the cost of production, bankrupting West African and Central African cotton farmers in the process.2 These dismal outcomes were not accidental. As then-U.S. Agriculture Secretary John Block put it at the start of the Uruguay Round of trade negotiations in 1986, “the idea that developing countries should feed themselves is an anachronism from a bygone era. They could better ensure their food security by relying on U.S. agricultural products, which are available, in most cases at lower cost.”3 What Block did not say was that the lower cost of U.S. products stemmed from subsidies that were becoming more massive each year, despite the fact that the WTO was supposed to phase out all forms of subsidy. From $367 billion in 1995, the first year of the WTO, the total amount of agricultural subsidies provided by developed country governments rose to $388 billion in 2004. Subsidies now account for 40% of the value of agricultural production in the European Union (EU) and 25% in the United States. The social consequences of structural adjustment cum agricultural dumping were predictable. According to Oxfam, the number of Africans living on less than a dollar a day more than doubled to 313 million people between 1981 and 2001 – or 46% of the whole continent. The role of structural adjustment in creating poverty, as well as severely weakening the continent’s agricultural base and consolidating import dependency, was hard to deny. As the World Bank’s chief economist for Africa admitted, “We did not think that the human costs of these programs could be so great, and the economic gains would be so slow in coming.”4 That was, however, a rare moment of candor. What was especially disturbing was that, as Oxford University political economist Ngaire Woods pointed out, the “seeming blindness of the Fund and Bank to the failure of their approach to sub-Saharan Africa persisted even as the studies of the IMF and the World Bank themselves failed to elicit positive investment effects.”5 The Case of Malawi This stubbornness led to tragedy in Malawi. It was a tragedy preceded by success. In 1998 and 1999, the government initiated a program to give each smallholder family a “starter pack” of free fertilizers and seeds. This followed several years of successful experimentation in which the packs were provided only to the poorest families. The result was a national surplus of corn. What came after, however, is a story that will be enshrined as a classic case study in a future book on the 10 greatest blunders of neoliberal economics. The World Bank and other aid donors forced the drastic scaling down and eventual scrapping of the program, arguing that the subsidy distorted trade. Without the free packs, food output plummeted. In the meantime, the IMF insisted that the government sell off a large portion of its strategic grain reserves to enable the food reserve agency to settle its commercial debts. The government complied. When the crisis in food production turned into a famine in 2001-2002, there were hardly any reserves left to rush to the countryside. About 1,500 people perished. The IMF, however, was unrepentant; in fact, it suspended its disbursements on an adjustment program with the government on the grounds that “the parastatal sector will continue to pose risks to the successful implementation of the 2002/03 budget. Government interventions in the food and other agricultural markets…crowd out more productive spending.” When an even worse food crisis developed in 2005, the government finally had enough of the Bank and IMF’s institutionalized stupidity. A new president reintroduced the fertilizer subsidy program, enabling two million households to buy fertilizer at a third of the retail price and seeds at a discount. The results: bumper harvests for two years in a row, a surplus of one million tons of maize, and the country transformed into a supplier of corn to other countries in Southern Africa. But the World Bank, like its sister agency, still stubbornly clung to the discredited doctrine. As the Bank’s country director told the Toronto Globe and Mail, “All those farmers who begged, borrowed, and stole to buy extra fertilizer last year are now looking at that decision and rethinking it. The lower the maize price, the better for food security but worse for market development.” Fleeing Failure Malawi’s defiance of the World Bank would probably have been an act of heroic but futile resistance a decade ago. The environment is different today. Owing to the absence of any clear case of success, structural adjustment has been widely discredited throughout Africa. Even some donor governments that once subscribed to it have distanced themselves from the Bank, the most prominent case being the official British aid agency that co-funded the latest subsidized fertilizer program in Malawi. Perhaps the motivation of these institutions is to prevent the further erosion of their diminishing influence in the continent through association with a failed approach and unpopular institutions. At the same time, they are certainly aware that Chinese aid is emerging as an alternative to the conditionalities of the World Bank, IMF, and Western government aid programs. Beyond Africa, even former supporters of adjustment, like the International Food Policy Research Institute (IFPRI) in Washington and the rabidly neoliberal Economist acknowledged that the state’s abdication from agriculture was a mistake. In a recent commentary on the rise of food prices, for instance, IFPRI asserted that “rural investments have been sorely neglected in recent decades,” and says that it is time for “developing country governments [to] increase their medium- and long-term investments in agricultural research and extension, rural infrastructure, and market access for small farmers.” At the same time, the Bank and IMF’s espousal of free trade came under attack from the heart of the economics establishment itself, with a panel of luminaries headed by Princeton’s Angus Deaton accusing the Bank’s research department of being biased and “selective” in its research and presentation of data. As the old saying goes, success has a thousand parents and failure is an orphan. Unable to deny the obvious, the Bank has finally acknowledged that the whole structural adjustment enterprise was a mistake, though it smuggled this concession into the middle of the 2008 World Development Report, perhaps in the hope that it would not attract too much attention. Nevertheless, it was a damning admission: Structural adjustment in the 1980’s dismantled the elaborate system of public agencies that provided farmers with access to land, credit, insurance inputs, and cooperative organization. The expectation was that removing the state would free the market for private actors to take over these functions—reducing their costs, improving their quality, and eliminating their regressive bias. Too often, that didn’t happen. In some places, the state’s withdrawal was tentative at best, limiting private entry. Elsewhere, the private sector emerged only slowly and partially—mainly serving commercial farmers but leaving smallholders exposed to extensive market failures, high transaction costs and risks, and service gaps. Incomplete markets and institutional gaps impose huge costs in forgone growth and welfare losses for smallholders, threatening their competitiveness and, in many cases, their survival. In sum, biofuel production did not create but only exacerbated the global food crisis. The crisis had been building up for years, as policies promoted by the World Bank, IMF, and WTO systematically discouraged food self-sufficiency and encouraged food importation by destroying the local productive base of smallholder agriculture. Throughout Africa and the global South, these institutions and the policies they promoted are today thoroughly discredited. But whether the damage they have caused can be undone in time to avert more catastrophic consequences than we are now experiencing remains to be seen. Walden Bello is a senior analyst at Focus on the Global South, a program of Chulalongkorn University's Social Research Institute, and a columnist for Foreign Policy In Focus (www.fpif.org). Sources 1. Charles Abugre, “Behind Crowded Shelves: as Assessment of Ghana’s Structural Adjustment Experiences, 1983-1991,” (San Francisco: food First, 1993), p. 87. 2. “Trade Talks Round Going Nowhere sans Progress in Farm Reform,” Business World (Phil), Sept. 8, 2003, p. 15 3. Quoted in “Cakes and Caviar: the Dunkel Draft and Third World Agriculture,” Ecologist, Vol. 23, No. 6 (Nov-Dec 1993), p. 220 4. Morris Miller, Debt and the Environment: Converging Crisis (New York: UN, 1991), p. 70. 5. Ngaire Woods, The Globalizers: the IMF, the World Bank, and their Borrowers (Thaca: Cornell University Press, 2006), p. 158. Copyright © 2008, Institute for Policy Studies.