Book Review: Failed, what the ”experts” got wrong about the global economy

By Mark Weisbrot

The world economy is, by any measure, resting on shaky foundations. With the Eurozone and Britain facing a lost decade and the US in the middle of a recovery that only seems to affect the stock markets, you would have to look at China and other countries in the developing world to see any meaningful growth. Conventional wisdom, peddled by the likes of the International Monetary Fund (IMF), The World Bank and the World Trade organization (WTO), has it that governments need to start tightening their belts and live within their means, Budget deficits has to be brought under control, inflation kept stable and markets have to be opened up to international trade. This is to be achieved by adopting neoliberal agenda of tax cuts, deregulation and privatization of public utilities. For the countries that do all this, growth will come, eventually. At least that is what they are told. In Failed, Mark Weisbrot, Co-director for the Center of Economic and Policy research in Washington D.C, questions the core principles of this policy approach and show the countries that have enjoyed solid growth during the last decades are those that have done the exact opposite.

The preface to Failed brilliantly sets the tone for what is to follow. A prominent South Korean economist from Cambridge University explains that his country started out in the 1960s as a poor and rural backwater, yet has now managed to achieve living standards comparable to those in the West. If South Korea had followed the recipe I describe in the previous paragraph, his people would still be living in mud huts. South Korean prosperity was not created by austerity or opening the country to free trade and volatile capital flows. Instead the government invested in their own production base and infrastructure, erecting trade barriers to promote domestic industries capable of developing new technology and providing highly skilled jobs. Without this there wouldn’t have been any Samsung or Hyundai. He even goes so far as to call the IMF, the World Bank and the WTO “the unholy trinity”.

The chapters that follow takes a closer look at some of the most glaring economic policy failures of recent years and seeks to cure what the author refers to as amnesia within in the field of economic study, where the hard-earned wisdom of past scholars has been replaced by a rigid neoliberal doctrine and a Washington consensus. A great portion of the book is dedicated to South America’s economic development during the last fifty or so years. The lessons learned by that region serves as an excellent summary of the central message in Failed, and charts a blueprint for a way forward for troubled countries in Europe and beyond.

During 1960-1980, Per Capita GDP in Latino America grew by a healthy 3,3%, and poverty rates declined. During the following 20-year period, 1980-2000, Per Capita GDP grew by a paltry 0,4%, while poverty rates increased slightly. What was the cause behind the two lost decades? According to Weisbrot, America has long exerted its influence in the region to suppress or remove governments it doesn’t like, and make sure that their own interests are well cared for. The US has long viewed left wing governments in Latin America with barely disguised hostility, on occasion going so far as to overthrow them in a coup, like Richard Nixon did in 1973 when the Chilean military with the aid of the CIA overthrew Chile’s socialist president, Salvador Allende. He was succeeded by Augusto Pinochet, an authoritarian dictator amenable to Western interests. According to Weisbrot, quiescent leaders peddling neoliberal politics and paying fealty to the IMF were the main causes for the lost decades between 1980 and 2000.

When the Latin American people had finally had enough by the turn of the millennium and decided to change things, their situation improved markedly. During the last twenty or so years several left leaning governments have been elected in landslide victories across the region, with the effect of poverty rates and inequality being reduced. When Lula da Silva ran as the Workers Party candidate for president in the 2002 Brazilian election, he campaigned against neoliberalism and a US backed free trade deal, the Free Trade Area of the Americas. The American investment bank Goldman Sachs were so afraid of the former factory worker that they developed a special “Lulameter” where they calculated his chances of winning the election in real-time. Lula proceeded to win the election and form a progressive government that heralded a sharp break with the neoliberal policies of the past and provided solid economic growth for Brazil after decades of stagnation. This story was repeated in several Latin American countries during the 2000s, to the barely disguised dismay of many western countries and institutions. This I can attest to personally. The Economist magazine, which I read every week, seems to have an almost pathological aversion to any government in Latin America which is even remotely left of center, while they savor Venezuela’s current woes with barely contained glee. Its editorials lambast reckless spending and excessive government debt, in effect proposing the same failed remedies that led to the lost decades of 1980-2000.

It is startling, writes Weisbrot, when you consider that the positive economic development Latin America saw during last two decades or so have either gone completely unreported in the West or been dismissed as a “commodities boom”. What’s especially painful to adherents of the Washington consensus, according to Weisbrot, is that Latin America managed to recover by kicking the IMF to the curb, which has led to their influence being drastically reduced and the region becoming more independent. This standoff between the Latin American nations and foreign creditors was apparent when then president of Argentina, Néstor Kirchner, purposefully defaulted on the country’s sovereign debt. Argentina’s citizens enjoyed one of the highest living standards in Latin America, until the country was struck by an exceptionally nasty recension during the years 1998-2002. Those who looked to the IMF for help were soon disappointed, all the organization had to offer were stringent demands for paying down the country’s national debt. This was a blatant attempt to get a better deal for its creditors, at a time when Argentina was engulfed in crisis. Refusing the IMF’s draconian demands, Kirchner made the bold move of defaulting on the debt, something that only “failed” nations like Congo and Somalia had done before. The experts predicted a calamity, but the IMF folded and Argentina went on to make an exceptionally strong recovery that the editorial staff of The Economist refuses to acknowledge to this day.

It is with great sadness that Weisbrot notes Europe has been unable to what most of Latin America did and send the IMF packing. The recession that was sparked by the financial crisis in the US could have been much less severe if European institutions had acted decisively to stimulate the economy and create more aggregate demand. Greece might have needed a bit of structural reform, he admits, but the kind of abject misery that the country has been subjected to by the unelected troika of the IMF, the European Commission and the European Central Bank was completely unnecessary. The Eurozone crisis unmasks the IMF, according to Weisbrot, as little more than a creditors cartel attempting to strong-arm its hapless debtors into ever more concessions. Worst of all, so called Article IV consultations, internal documents by the IMF, reveal that the fund and the rest of the troika used the Eurozone crisis to force policy changes on the affected nations that their electorates would probably never have voted for had they been on the ballot. These unwelcome initiatives included reducing labor protection and lowering the pension age. What’s unique when it comes to Europe’s woes, Weisbrot writes, is that this kind of financial shock treatment used to be reserved for poor and middle income countries, and had never previously been used against wealthy nations with high standards of living. As a European I read his chapter on Europe with resignation, our continent is no doubt in great financial and political trouble, and the outlook for the EU and its member states mostly seem to get worse each day. Around the world, Europe has become a byword for stagnation and failed policies. It is staggering, Weisbrot asserts, that policymakers, economists and the general public have not thoroughly investigated the causes of the Eurozone crisis and come up with anything else than austerity, a cure that seems to have been as effective as a medieval doctor using leeches to bleed his patient. Just one more concession, one more cut to public services, and a recovery will be around the corner, we keep hearing, yet the situation keeps getting worse and worse. 

Failed offers a fresh perspective on the economic woes that plague Europe and many other parts of the developed world, and points to tried and tested policies that could offer a way out of stagnation and lackluster growth.