Saturday, 4 April 2009

Reflections on the G20 deal

In my last article, I suggested that it was "apparent that the end result" of the G20 Summit in London would be "little more than the status quo." One would conclude, reading the press, that I was far too cynical in my assesment. Indeed, the media was quick to hail the "triumph" of the summit and the emergence of a "new world order" for the "fightback" against the financial crisis.

Looking beyond the headlines, however, we quickly get to the meat of the summit's "triumph." According to The Independent, "$1trn will be made available to countries that run into trouble via the International Monetary Fund (IMF), the World Bank and World Trade Organisation, which will all be beefed up" but "the real significance" of the agreement was the "enhanced role" given to the likes of the IMF, "whose budget will triple to $750bn." In much the same vein, The Guardian tells us of "the death of the "Washington Consensus" of financial market liberalisation, privatisation and unfettered capitalism promulgated by ... the IMF and the World Bank" which is of course demonstrated by granting one of those same "Bretton Woods institutions," namely the IMF, "a stronger role" in "the world financial system" than that it already enjoys of enforcer of that same "unfettered capitalism" upon the world's poorest.

There is little point going through the same story across other papers. The headlines vary widely, from "The fightback starts here" (The Telegraph) and "Triumph of Substance at Summit" (Washington Post) to "And to save the world, I demand One trillion dollars" (The Sun). The story, and the conclusion to be drawn from it, remains essentially the same. Contrary to my original assesment, this is decidedly not "little more than the status quo," but an indication that yet again the rulers of the world have learnt nothing in the face of global financial meltdown.

In the same paper, on the same day, Johann Hari makes a strong and compelling argument that any fiscal stimulus should be linked to a "Green New Deal," quite correctly surmising that the "extreme ideology" of market fundamentalism which "has dominated world affairs for decades" is responsible for both the credit crunch and the "climate crunch." Consequently, "both have the same solution." I am disinclined to contest this assesment, and would second his warning that our "climate is currently going the same way as the banks" with the end result that "once we hit an increase of 4 degrees, much of the world will become uninhabitable, and there will be vast wars for what remains."

However, even if the wealth of evidence for catastrophic and man-made climate change in the near future was utterly wrong, in the "fightback" against the financial crisis we have potentially wrought yet another economic catastrophe on the world's poor. That catastrophe takes the form of the IMF, WTO, and World Bank. As long ago as 1959, Che Guevara noted that "the interests of the IMF represent the big international interests that seem to be established and concentrated in Wall Street." One particular point of interest is a long-running standard of support for military dictatorships, such as Suharto of Indonesia, Assad of Syria, Mobutu of the Democratic Republic of Congo, of Augusto Pinochet of Chile. Although the typical claim that markets "foster democracy" is often made, the fact remains that there are many examples of democracy collapsing into dictatorship or democratic resistance weakened and the rulers strengthened by IMF involvement.

That is not all, of course. As noted earlier, the IMF and World Bank were central to the "Washington Consensus" that has now "died" with the "stronger role" of the same "Bretton Woods institutions" that propped up the Consensus in the first place. This is nothing new. As now, each past crisis has marked the "death" of one form of capitalism in favour of a "stronger" form that more efficiently perpetuated the same injustices.

It is worth quoting Noam Chomsky's authoritative analysis of the IMF's actions and consequences at some length here, as he amply covers all the salient points in criticism of the institution;
The IMF is a method for paying off investors and transferring the risk to the taxpayers in rich countries. There are two forms of robbery going on: The populations in the debtor countries are being robbed blind by austerity programs, while the taxpayers in rich countries are also being robbed. It's not as serious for the latter because they're richer, but they're still being robbed. The IMF socializes the risk.

This is quite important. People invest in Third World countries because the yields are very high. So gains are high in a market system if the risks are high. They more or less correlate: the greater the risk, the greater the gain. But here it is largely risk-free. Private investors make enormous profits from very risky investments, but then, through the international financial institutions, they essentially have free "risk insurance." The structure of the system is such that the people who borrowed don't have to pay -- they socialize it by making the population pay, even though the population didn't borrow the money. The people who invest -- they don't accept the risk, because they transfer it to their own populations. That's the way market systems work-through the socialization of risk and through the socialization of cost, with the IMF acting as "the credit community's enforcer," as Lissakers puts it.

What, then, are the consequences for democracy? Over the last 20 years, power has been transferred to the hands of financial capital, so banks, investors, speculators and financial institutions make policy. The liberalization of financial flows creates what some economists call a "virtual senate": if private investors don't like what some country is doing, they can pull their money out. They in effect come to define government policy. That's the point of liberalization.

There's nothing novel about this. When the Bretton Woods system -- the international financial system -- was established in the mid-1940s, a fundamental part of it was regulation of financial flows, to keep major currencies within a fixed band close to each other so that there would be no speculation in currencies. There were also restrictions on capital flight -- and there were good reasons for that.

It was understood that the liberalization of capital flows harms the economy. Since liberalization of capital started about 25 years ago, the whole international economy has declined seriously. But there's a more serious argument, which was clearly articulated at Bretton Woods, that if you allow the free flow of capital, you undermine democracy and the welfare state. If a government is "irrational" -- if it decides to do things for the general population instead of for foreign investors, say, as Itamar Franco was trying to do when he refused to pay his state's debt to Brazil's central government then it can immediately be punished by pulling out capital. So the point of the liberalization of capital and its effect is to diminish democratic control everywhere and to undermine social programs. It ensures that policy will be geared toward enriching investors, the holders of financial capital, which becomes more and more speculative, therefore harming the general economy.

In the European Union, the power given to central bankers is overwhelming. They set policy. That's a strong weapon against democratic control of policymaking in every area, and it's happening more and more. And it's the predictable -- and surely the intended -- effect of liberalization of capital flows.
Given the effects described above, it is more than reasonable to worry what further economic devestation the IMF's "stronger role" could wreak upon the world's poor and upon democratic society. Indeed, the central "triumph" of the G20 summit appears to be a rebranding of exactly the same disaster capitalism that has brought us to this point in the first place. Whatever the press may declare about Barack Obama and Gordon Brown's "new world order," we really are just left with "little more than the status quo."