Neoliberal solution to poverty?

October 12, 2010

Eric Toussaint is president of the Committee for the Abolition of Third World Debt. At a speech for a special event of the General Assembly session of the United Nations, he assessed the UN's Millennium Development Goals (MDG) for targeting poverty.

I. Despite the fact that the millennium goals are exceedingly modest, they will not even be achieved.

On a global level, the limited percentage decrease in population of those living on less than $1.25 a day is the result of growth in China and India, [1] countries which did not subscribe to the Washington Consensus.

Mankind has the material capacity to guarantee a respect for every human being's fundamental human rights that far exceeds the modest Millennium Goals. It is clear that the problem is not a lack of resources.


II. The explanation given in the papers produced by institutions such as the World Bank, the International Monetary Fund (IMF) and the Organization of Economic Cooperation (OECD) is not convincing and serves to further consolidate the very policies which are at the root of the crisis, since they have weakened the countries that have accepted such policies.

The recommendations or impositions made by these institutions are based on several dogmas.

The first relates to the financing of development through debt. This leads the vast majority of developing countries to behave in an absurd manner. In fact, although developing countries--mainly exporters of raw materials and China--hold the vast majority of international reserves (mainly in dollars) identified around the world, they continue to further indebt themselves. What do they do? They buy Treasury bonds from the United States, thus they effectively lend money to the American government. They deposit these Treasury bonds in their central banks' coffers and then issue public debt securities on Wall Street or on their own national domestic financial market.

An extended family living in a cramped space in the Indonesian capital of Jakarta
An extended family living in a cramped space in the Indonesian capital of Jakarta (Henri Ismail)

This situation is absurd. The treasury bonds give a very low return, while the bonds that the developing countries issue, which are in dollars, allow creditors to earn considerably more because the interest rates are much higher [2]. The leaders of these countries would do a lot better to not get into debt and use the reserves for productive investments and social spending so as to improve the living conditions of their people.

The second dogma is that of free trade and free movement of capital, goods and services. This freedom of movement is not applied by the most industrialized countries to workers and the citizens in general, which is in total contradiction of liberal theory. In fact, it was Adam Smith, a reference for neoliberals, who was in favor of the freedom of movement and the free establishment of workers.

The third dogma, in complete opposition to reality, is the idea that giving the poor better access to the markets will result in an end to poverty, whereas the eradication of poverty is the responsibility of the state, to be achieved through structural changes that will put an end to social injustice.

The harmful role of macro-economic policies, as incorporated in the Washington Consensus, has been highlighted on various occasions in the past 20 years.

An example: the 2007-2008 food crisis

In 2007-2008, the number of people suffering from hunger increased by 140 million. This increase was the result of a sharp increase in food prices [3]. In many developing countries, this increase in food prices reached 50 percent.

Why the increase?

On the one hand, the authorities in the countries of the North increased aid and subsidies for the production of agrofuels (misnamed as biofuels, as there is nothing biological or "ecological" about them). All of a sudden it became very profitable to replace crops meant for human consumption with silage and oilseed crops or to divert part of the grain crops (corn, wheat, etc.) toward agrofuel production. This led to a decrease in food supplies on the global markets and thereby caused a global rise in food prices.

On the other hand, since the bursting of the real estate bubble in 2007 in the United States and, by contagion, in the rest of the world, speculation by the major investors (pension funds, investment banks, hedge funds, etc.) has shifted toward markets where basic foodstuffs are traded, principally on three American stock exchanges specializing in grain futures: Chicago, Kansas City and Minneapolis.

Developing countries--by reason of the policies imposed by the IMF and the World Bank since the debt crisis, depriving them of all forms of basic protection--find themselves in a particularly vulnerable position. In fact, these policies have led to a reduction in land areas normally used for subsistence crops, to specialization in one or two export products, to the disappearance of price control mechanisms, to the abandonment of self-sufficient grain production and the reduction of their reserves, to the weakening of economies due to an extreme dependence on global markets, to a sharp reduction in social spending budgets, to the suppression of subsidies for basic foodstuffs, to the opening of markets which leads to unfair competition between local small producers and the multinationals...

Masters in the art of pillaging, the institutions in question acknowledge certain mistakes in order to remain key players on the international stage. Having committed the crime of imposing an economic model which deliberately deprives poor populations of the most basic protection and leaves them at the mercy of the most aggressive speculators, their timid mea culpa in a semi-confidential document is clearly insufficient.

According to the Food and Agriculture Organization (FAO), the situation improved in 2010 [4], but it is clear that Objective 1 of the MDGs will not be met by 2015.

After this quick analysis of the causes of the food crisis in 2007-2008, it is appropriate to cite Fantu Cheru, an independent expert of the UN Human Rights Commission in Geneva who, already in 1999, wrote:

Structural adjustment goes beyond the simple imposition of a set of macroeconomic policies at the domestic level. It represents a political project, a conscious strategy of social transformation at the global level, primarily to make the world safe for transnational companies. In short, structural adjustment programs (SAPs) serve as "a transmission belt" to facilitate the process of globalization, through liberalization, deregulation, and by reducing the role of the State in national development. [5]


III. We should not be led into believing that these policies have been abandoned. Even if the World Bank and the IMF state that they have replaced the Washington Consensus formulas with other policies, the facts contradict these assertions. These institutions, as well as the OECD, continue to make the same recommendations that are often impositions. Such was the case in Haiti [6] or in Pakistan [7] in 2010, countries whose citizens were seriously affected my natural disasters.

The IMF also continues to support dictatorships: in September 2010, it decided to issue a loan of $192 million to the dictatorial regime of Honduras.


IV. Is the 2007 international economic and financial crisis behind us?

Three elements contribute to lighten the weight of the crisis in developing countries, though they are highly volatile, namely, 1. The high prices of commodities (which means a high level of international reserves); 2. Low interest rates and low country risk premiums; 3. Capital flow towards emergent stock markets.

When the central banks of the main industrialized countries (U.S. Federal Reserve, European Central Bank, Bank of England, Bank of Japan) decide to raise interest rates, this will lead to a steep increase in the cost of refinancing of developing countries' external debts and the price of commodities could plummet since it largely depends on the vast amount of money that is available on the international level and on speculation. Moreover, if the Chinese economy should go through a crisis, this could also result in commodity prices plummeting.


V. We must go back to the recommendations included in the Declaration on the Right to Development that was adopted by the General Assembly in its 41/128 resolution on December 4, 1986. [8]

We must act both on the level of the international community and within each sovereign State (each of which can take unilateral measures based on international law).

Article 1 of the UN Declaration on the Right to Development reads as follows:

1.2. The human right to development also implies the full realization of the right of peoples to self-determination, which includes, subject to the relevant provisions of both International Covenants on Human Rights, the exercise of their inalienable right to full sovereignty over all their natural wealth and resources.

Article 8 specifies: Appropriate economic and social reforms should be carried out with a view to eradicating all social injustices.

VI. Concrete alternatives or recommendations that can be implemented either by the international community or by sovereign states:

-- Global taxes such as a kind of Tobin tax (on financial transactions).

Increased development aid to reach 0.7 percent of the GDP of industrialized countries (in 2010 OECD countries devoted at most only 0.35 percent, i.e. half of their commitment); its conversion into reparation funds for damages resulting from the despoiling of peoples of the South by powers of the North over the past 500 years.

A new financial discipline that would prevent any transactions with tax havens.

A redistributive tax reform in all countries.

The restitution to peoples of the South of goods that had been unlawfully acquired by ruling elites who placed them in countries of the North or tax havens.

A drastic reduction of military expenditure with saved amounts invested in social policies.

Auditing public debts to determine their illegitimate parts and then to cancel or repudiate them. In 2006, Norway unilaterally canceled the debt of five countries of the South (Ecuador, Peru, Jamaica, Egypt and Sierra Leone). Norway considered that the loans that had been granted had not been used to develop these countries; it actually acknowledged that they had in fact been used to help Norwegian shipbuilding and exportation. In 2007 Ecuador set up a committee for an integral audit of internal and external public debt (of which I was a member) that worked from July 2007 to September 2008[9]. On the basis of the conclusions of this audit, Ecuador decided to unilaterally suspend the payment of a $ 3.2 billion debt [in the forms of bonds] and could thus save over $2 billion.

Setting up new institutions at the regional level such as the Bank of the South.

Replacing institutions such as the World Bank and the IMF with genuinely democratic institutions that adhere to the UN Charter and all international pacts and treaties related to human rights.

Regaining control of natural resources.

A land reform, distributing land to those who till it and thus ensuring food sovereignty.

The current climate crisis is affecting and will affect everybody, but people in the south will suffer more. We must be inspired by the conclusions of the summit of peoples on climate change that was held in Cochabamba in April 2010 on an initiative of the Bolivian government.

Yes, we can eradicate poverty and injustice but within a new international order and following an alternative development model that would respect nature.

Translated into English by Francesca Denley and Christine Pagnoulle in collaboration with Judith Harris.


Notes

1. China and India do not offer models to be followed. See Eric Toussaint's article China, a Capitalist Country of the Modern Style" and Damien Millet and Toussaint's La Banque mondiale découvre d'un coup 400 millions de pauvres en plus (in French).
2. For more information, see Toussaint's Bank of the South, International Context and Alternatives, in particular point 2.C.
3. See Toussaint's "Getting to the Roots of the Food Crisis."
4. See the FAO's statistics on hunger.
5. From the Report by the Independent Expert, Fantu Cheru, submitted in accordance with Commission decisions 1998/102 and 1997/103 at the 55th session of the UN Commission on Human Rights, Geneva in 1999.
6. CADTM protests against the IMF's loan and demands that creditors pay reparation money to Haïti. Read a report at the CADTM Web site (French only).
7. Damien Millet, Sophie Perchellet and Eric Toussaint, Floods and Debt: Pakistan under a Double Penalty.
8. Resolutions adopted by the General Assembly.
9. See the Internal Auditing Commission for Public Credit of Ecuador and UN report on the effects of foreign debt and other related international financial obligations.

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