Transforming the Global Financial System:
Why it is no longer possible to "square the circle"
by Nicola Bullard*
At the IMF and World Bank annual meetings in Prague three weeks ago, the deep contradictions in the project of globalisation and the total inadequacy of the answers offered by the international financial institutions and the G7 were laid out like a corpse.
On all fronts, the World Bank and the IMF could not meet the challenges of their critics whether they were on the streets, in the debating halls, in the NGO consultations, in press conferences or in official meetings.
In what the Russian intellectual Boris Kargalitsky described as "the last talks before the outbreak of armed hostilities" World Bank President James Wolfensohn and the IMF's new managing director Horst Koehler, took on their critics in a debate hosted by the famous Czech dissident (now President) Vaclav Havel. It should have been a public relations coup for the international financial institutions, yet Wolfensohn and Koehler were completely unconvincing and appeared defeated. In response to a barrage of charges and criticisms (none of them new) Wolfensohn's response was to claim that he "had a heart." Koehler not only claimed to have a heart, but also a brain!
On 26 September, the convention centre where the annual meetings were underway was under siege from 12,000 demonstrators. In his opening remarks, President Wolfensohn said, "Outside these walls, young people are demonstrating against globalisation. I believe deeply that many of them are asking legitimate questions, and I embrace the commitment of a new generation to fight poverty. I share their passion and their questioning." For his trouble, Wolfensohn was savaged in by the Financial Times editorial two days later, which slandered both Wolfensohn and the protestors in one vitriolic breath.
I am not trying to garner sympathy for Mr Wolfensohn far from it: he is paid a lot of money to do his job, and if the moral contradictions become to great, he can always go back to Wall Street.
Nonetheless, events in Prague did show that both the International Monetary Fund and the World Bank have lost direction and legitimacy: they have no credible answers to their critics, let alone policies and programmes which will effectively address the deep imbalances and injustices which make a mockery of the supposed benefits of globalisation.
Events in Prague also showed that there is a movement out there. Something is happening on the streets of Seattle, Washington, Chiang Mai, Quito, Lagos, Geneva, Okinawa, Melbourne and Prague which is terribly important and a cause for great optimism.
While reactionary forces such as the Financial Times sneer that the protestors should be "treated with contempt" and South Africa's Finance Minister Trevor Manuel condescends "I know what they're against but have no sense of what they're for" there is a growing recognition that the "mobilsation against globalisation" is not a flash in the pan. It taps into concerns both in the North and the South that globalisation has gone to far, that financial markets and corporations dictate all aspects of life, and that we must re-gain sovereignty over the market, governments and institutions. It is time to "deglobalise."
So today I want to talk about alternatives and what we might call "deglobalisation."
The lure of neo-liberalism
One of the great attractions and perhaps the compelling power of neo-liberalism is the simple message it conveys: free markets equal freedom. But that is also its weakness because as an ideology it attempts to impose universal and pro-forma solutions on a complex, diverse and unpredictable world. Again, the quotable Boris Kargalitsky has compared the doctrinaire policies of the International Monetary Fund with the worst excesses of Soviet Central planning, and he should know he has lived under both.
But we cannot replace one simplistic ideology for another, even for the sake of a sound bite. There are many alternatives and as the UNCTAD Least Developed Countries 2000 Report notes in its assessment of policy options for the world's poorest countries "A pluralistic conception of development strategies, which is not wedded to a single model, should be encouraged."
Perhaps the most we can do is to create the environment within which these alternatives can be built by undertaking urgent efforts to redistribute economic and political power between and within countries and re-establish peoples' sovereignty over economic policies and the market.
However we still need some unifying vision, some shared idea of "development" or at least some shared idea of "collective good" that unites common actions and is the base of our solidarity.
First, we need to agree on the goal of "development". I think it is really very simple, perhaps nothing more than creating the social, economic and political conditions for human emancipation and freedom. Freedom concerns not only the individual, but it is shared: my freedom cannot be at the expense of another's and the choices that come with freedom should not be restricted to a deterministic (usually Western) idea of "progress" and modernity. A farmer should be free to chose to stay a farmer and not be forced by economic imperatives or government policy to abandon being a farmer. The European Union pays enormous subsidies to allow such a choice. It is even enshrined in trade negotiating language as 'multi-functionality.' Yet farmers in Thailand are forced to leave their land to make way for dams generating hydro-power to light the department stores of Bangkok while coca growers in Bolivia are being pushed from their traditions for the sake of US domestic and geo-politics.
If human emancipation and freedom is the goal of development and I hope you agree that this is a powerful enough idea to carry us forward -- then what sort of broad economic and political principles would support this goal, and where should we begin?
The first principle might be subsidiarity both economic and political. That is, finance and trade should, where possible and reasonably efficient, be local. Decisions, likewise, should be made at the most practical level and by the people most effected by those decisions.
Growth should be inclusive, with the benefits widely shared, and driven by domestic demand, rather than by exports and foreign debt.
Our priorities should be creating decent work and ensuring security of land, resources, food, education, health, culture and livelihoods, and protecting and regenerating the environment.
The most urgent tasks -- freedom from fear and oppression, and freedom from hunger, poverty, ill health and illiteracy -- are fundamental and inter-linked. But while there are limits to our capacity (and legitimacy) in addressing political deficits from outside, we can and must meet the basic material needs of all people.
And here we can re-cast the famous slogan of neo-liberalism, immortalised by Margaret Thatcher: there is no alternative. That is, there is no alternative but to undertake a massive and unencumbered redistribution of wealth.
The Wealth Alleviation and Equity Strategy
The excellent Least Developed Countries 2000 Report estimates that to achieve growth rates of six per cent (the rate necessary to start reversing the trends) the external resource flows to sub-Sahara Africa need to be increased by up to 150 per cent in the short run.
The report, which I recommend you read, has many very sensible, practical and far-reaching suggestions on how "development" might be achieved in the LDCs such as increased aid flows and debt reduction, market access, reorienting national policies towards building national productive capacity, ownership and coherence of development processes.
But it does not go far enough. We need to dismantle the most pervasive aspects of corporate-globalisation, such as the uncontrolled financial markets, unequal trade agreements and this is where the UNCTAD report falls short for obvious reasons we need to challenge the institutions which lend legitimacy to corporate globalisation in the name of development.
How do we achieve this massive shift in wealth and assets? Here are just some suggestions for what I have called the Wealth Reduction and Equity Strategy, with apologies to the World Bank.
We could start the Wealth Reduction and Equity Strategy with
Nationally, the Wealth Reduction and Equity Strategy could include policies such as
Locally, this approach would guarantee secure livelihoods by
Breaking dependence on external finance
One of the main challenges is to break the myth that "development" depends on external (and usually private) financing.
Orthodox neo-liberals insist that the market under laboratory like conditions of perfection -- allocates resources efficiently and that 'comparative advantage' is the road to free-market nirvana. On this basis, countries have systematically liberalised both their trade and financial sectors and are now vulnerable to all the associated risks. And the risks are high, a point made unequivocally in this year's Trade and Development Report.
"A fundamental lesson of the [Asian] financial crisis is surely that excessive reliance on foreign resources and markets leaves growth prospects vulnerable to external shocks. Policy makers have rightly rejected a retreat into protectionism, but it would be just as wrong to allow global market forces to dictate future growth and development."
To reduce their dependence on fickle external financing governments should, as far as possible, mobilise domestic resources. In extremely poor countries this is impossible simply because savings are too low. However in many countries, policy options, such as progressive taxation and land reform, have been sidestepped because of elite interests. So long as developing countries continue to be told by the market and the international financial institutions that their only option is to tap private sector finances they will continue to re-jig their policy framework to attract foreign capital, rather than the development needs of people.
Nonetheless, countries do have unequal capacities to raise domestic resources, so there must be some mechanism for redistribution not only from North to South, but also within the South.
What might be called a "global trust fund for the common good" could be established, drawing on taxes (such as a currency transactions tax or ecological taxes) and the long-promised .7 % of GDP for development co-operation. It could be administered by a board of trustees composed of credible, non-partisan individuals such as Nobel and alternative-Nobel prize winners, social leaders and trade unionists, jurists, intellectuals and economists on behalf of the people. It would be charged with redistribution according to an agreed formula (based, for example, on the human development index). From the start it would have sunset clause to avoid the inevitable occupation by vested interests, and on the understanding that its principle task is to facilitate unencumbered, large scale net transfers of resources from the rich to the poor. It could be devolved to the regional level ensuring closer links between national governments, peoples' organisations and those who manage the transfer of resources.
Such a fund could be used for a multiplicity of purposes beyond its immediate task of redistribution. For example, the fund could provide short-term loans to meet balance of payments shortfalls (a necessary task which has been thoroughly politicised and discredited by the IMF), to stabilise commodity prices, or to make one-off purchases of patents to ensure free technology transfer to the South.
All of this should take place within a larger framework of transforming the international institutions, re-establishing national sovereignty over economic and trade policies, and de-linking resource transfers from policy conditions designed to further the project of neo-liberal globalisation. Capital controls, debt standstill mechanisms, and a reduced dependence on volatile short-term finances would go a long way towards providing some protection from the vicissitudes of the financial markets.
The benefits of redistribution
The logic of massive redistribution of wealth is compelling, at least to those of us who live in the "real" rather than the "virtual" economy.
First, raising the incomes of poor people leads to increased savings which is the basis for mobilising domestic resources, thus reducing dependence external financing.
Redistribution would boost and expand domestic markets at a time when the balance between production and consumption is wildly out of kilter. Over-production/under-consumption is one of the factors driving the current phase of capital accumulation where finance is increasingly de-linked from production. Others include the growth of pension and mutual funds, the boom in equities, advances in technology, new financial instruments and the "poor performance" of the "real" economy compared to the finance markets. All of this is driven by increasingly unrealistic expectations of gains why earn six per cent on your money in the long-term when you can earn 20 per cent in the short term. This, I believe, reflects the precarious, almost existential, nature of modern life in the West where future security is traded against present-day consumption and is certainly related to the fact that work itself is becoming more insecure, that productivity gains are not being translated into earnings and that the social welfare system is being progressively rolled-back.
Redistribution would also be one step towards the "convergence" of the North and South, at least in terms of wealth. I have no illusions or Utopian vision of a future "global society" but clearly the gross material injustices between the North and the South cannot be tolerated -- unless of course you are an arms trader or a banker, in which case it's all good business!
But if we are to achieve this sort of half-baked Utopia, is it possible in the current configuration of forces.
Shifting the balance of power
The answer an unambiguous no: the kinds of changes necessary to take the first step on a strategy of "wealth reduction or wealth alleviation" cannot be entrusted to the IMF, the World Bank, the WTO, the Bank for International Settlements, the G20 or the G7.
Those of you who have seen the movie "The Crying Game" will recall the fable of the scorpion and the frog. The frog agrees to carry the scorpion to the other side of the river on the condition that the scorpion will not sting the frog. Of course, half way across the river, the scorpion stings the frog. As they are both drowning, the frog asks "Why?" "Because it is my nature," says the frog.
I hope the analogy is clear: it is in the nature of the international financial institutions and the global political and economic elite to support the interests of capital whether it's transnational corporations or the financial markets. To expect otherwise would be naïve. We need look no further than the tepid and highly conditional reform proposals, such as the Enhanced HIPC and the Poverty Reduction and Growth Strategy, to realise that, as the Least Developed Countries Report politely says
"The current diagnosis for change is too rooted in perspectives which locate past problems at the national level rather than in international economic relationships, and is also unbalanced in its attribution of policy mistakes and bad management between donors and recipients."
What's more, these proposals limited as they are -- are not working and the protests against neo-liberal globalisation continue and grow.
The indigenous peoples of Ecuador are rising up against privatisation, the Nigerian trade unions brought Lagos to a standstill protesting IMF demands to lift food subsidies and the unions of South Korea continue their struggle against IMF-imposed labour restructuring. Only ten countries out of more than 40 have received partial debt relief from the enhanced HIPC, a process riddled with conditions and loopholes, while reports in from the first round of Poverty Reduction Strategy Papers is that they are Country Assistance Strategies by another name. And, as you all know, three weeks ago, 12,000 protestors lay siege to the IMF and World Bank annual meetings forcing them to close one day early.
Clearly, it is within our capacity to deal with the distribution of power.
We should start with the Bretton Woods Institutions, the IMF, the World Bank and the WTO, who, through their internal arrangements and external policies, perpetuate unequal power relations between the North and the South. All aspects of their operations reflect this bias: voting entitlements, decision-making processes, the HIPC process, structural adjustments conditions and trade rules that entrench unequal relations. It also happens through less tangible conduits such as elite and technocratic alliances between the North and South. (Again, South Africas Trevor Manuel was a caricature of this when he accused those proposing dismantling the IMF and the World Bank of "abandoning the poor.")
In short, the rules and policies of these institutions will never benefit the Third World so long as the balance of power within the institutions reflects financial power and so long as they remain wedded to the pipe dream of neo-liberalism. There are no signs that they are about to abandon either article of faith in spite of their public repentance.
We must break down the neo-liberal hegemony, and this means de-constructing the institutions of neo-liberalism.
We need to "deglobalise" the power of the markets and the power of the institutions and replace them with a more fluid, pluralist and flexible regime of governance starting from the bottom and supported nationally, regionally and internationally through appropriate, democratically controlled, transparent and open mechanisms and institutions. That is, the principle of subsidiarity should apply to both the economic and political sphere: goods and decisions that can be made locally, should be, those that cannot should be moved to the next level of production or decision-making.
Against this principle we can measure the usefulness (or otherwise of reforms) by asking the question "does it increase up political and economic options at the local and national level, or does it impose and solidify top-down and unequal power relations.
To elaborate a little on what we mean by de-globalisation, I would like to quote Walden Bello, a Filipino academic and activist (and, by the way, my boss so I will quote liberally). On deglobalising, he says:
"I am not talking about withdrawing from the international economy.
I am speaking about reorienting our economies from production for export to production for the local market;
about drawing most of our financial resources for development from within rather than becoming dependent on foreign investment and foreign financial markets;
about carrying out the long-postponed measures of income redistribution and land redistribution to create a vibrant internal market that would be the anchor of the economy;
about de-emphasizing growth and maximizing equity in order to radically reduce environmental disequilibrium;
about not leaving strategic economic decisions to the market but making them subject to democratic choice;
about subjecting the private sector and the state to constant monitoring by civil society;
about creating a new production and exchange complex that includes community cooperatives, private enterprises, and state enterprises, and excludes TNCs;
"We are talking, moreover, about a strategy that consciously subordinates the logic of the market, the pursuit of cost efficiency to the values of security, equity, and social solidarity. We are speaking, in short, about re-embedding the economy in society, rather than having society driven by the economy."
The contradictions in the system are so profound that it is no longer possible to "square the circle." It is time to step outside the circle of neo-liberalism, corporate globalisation and the dominance of finance.
Creating new paradigms for human emancipation and development requires unprecedented political education and mobilisation for justice and equality. It requires activists and academics to engage with each other, for non-government organisations, trade unions, churches and political parties to form new alliances. It requires a rigorous critique of the dominant politics, especially the so-called Third Way which is perhaps the greatest threat to real change. It requires a radicalisation of the way politics is done to break down old sectarian divisions and barriers erected to protect vested interests. And most importantly, it requires solidarity with those who are discarded by the system. This is the great challenge for, as Ulrich Beck says, "the new rich no longer 'need' the new poor."