Put aside ‘economic rationalism’ to save lives, not just banks

Let’s hope it’s for good. The current financial crisis has exposed as a lie the rhetoric that untamed pursuit of economic growth and the accumulation of material wealth leads to a stable and fair world.

The effects of the current financial crisis will be felt most severely by people and countries of the Global South. While rich countries can at least offer social services to support people in financial difficulty, very few poor countries have sufficient money to offer help to those who will lose their jobs. As many as one billion people are at risk of going hungry every day.

We need bold actions. We need a fresh approach. And we need some long overdue global justice.

Facing the worst economic crisis since the Great Depression, developed capitalist countries have taken unprecedented steps in putting aside free market fundamentalism in order to save their financial markets from meltdown and economies from collapse. But in a show of spectacular double standards, the multilateral institutions of the IMF and World Bank have ensured that it’s business as usual for developing countries who must continue pursuing policies of free trade and economic liberalisation in the name of “the fight against poverty”.

Ignoring lessons from the past is both politically untenable and unwise. Even before the recent financial crisis, the debt crisis of the 1980s and the structural poverty it created should have been enough to warn of the folly of putting economic rationalism at the centre of human development.

Introduction of the floating exchange rates in the early 1970s was the first step towards the deregulation of the financial markets. With petrodollars flooding Western Banks, a glut of lending to developing countries took place. Without regard for what the loans were being spent on, or the country’s ability to repay, private banks lent billions to governments in Latin America, Africa and Asia. This irresponsible lending was only possible because the IMF and World Bank led the way.

The lending was based on three assumptions: that commodity prices would continue to rise; that interest rates would stay low; and that the development model proposed by the World Bank and others was sound. None of these assumptions proved to be correct.

When the resulting debt crisis saw countries default on their loans from the early 1980s, the IMF and World Bank took the opportunity to further entrench their development model on developing countries. The institutions were empowered by wealthy countries to lend to the indebted countries that desperately needed capital to remain financially solvent; but in the name of the “fight against poverty”, the loans were pre-conditioned. To access the funds countries were required to implement the so-called “Washington Consensus” policy prescriptions: removal of trade barriers, privatisation of public services, deregulation of financial markets, reduction of spending in social, educational and health-care sectors. At the same time, poor countries were required to spend almost half of their annual budgets servicing the debts.

Not only were the institutions authorised to become managers of a crisis they had helped to create; even more perversely the new loans, with austere economic policy conditions, worsened the level of poverty and inequality and precipitated today’s food and climate crises.

Three decades on, the 1980’s debt crisis continues to engulf countries of the South. Today debt stocks of developing countries stand at US$2.9 trillion. For every $1 received in aid, Southern countries pay wealthy countries and institutions $5 in debt repayments. This includes more than US$450 billion each year in interest payments on foreign debts to banks and other institutions in the North.

If the IMF and World Bank (and the wealthy countries that dominate them) were to cancel these failed development loans, people and countries of Latin America, Africa and Asia would recover their sovereignty and regain control over their own resources.

But the problem is not a lack of resources. World leaders have demonstrated that over recent months. It is a lack of political will. In a matter of weeks leaders of Northern governments have wiped out the debts of large banks and financial institutions to an amount that far surpasses the US$2.9 trillion owed by developing countries. Going against their own predominant free-market non-interventionist ideology, they have ordered an unprecedented program of state intervention: nationalising banks, injecting massive subsidies into institutions and industries, and re-regulating their financial sectors. There seems to be almost no limit to the amount of funds governments will provide to save their financial systems.