Waiting for Copernicus
WASHINGTON, 9 May
It's happening in Buenos Aires. It's happening in Paris and in Athens. It's even happening at the World Bank headquarters.
The global economy is finally shifting away from the model that prevailed for the last three decades. Europeans are rejecting austerity. Latin Americans are nationalising enterprises. The next head of the World Bank has actually done effective development work.
Maybe that long-heralded "end of the Washington consensus" is finally upon us.
After the near-collapse of the global financial system four years ago, obituary writers rushed to proclaim the death of the prevailing economic philosophy known as neo-liberalism. It was a tempting conclusion.
Except that Big Money never received the obituary notice. After some minor tweaking of Wall Street practices, some bailouts of enterprises deemed too big to fail, and the injection of some stimulus spending to arrest the free fall, Washington continued with business as usual.
The IMF and the World Bank, meanwhile, didn't fundamentally change their policies. And the European Union, led by tight-fisted Germany, continued to back austerity. All the major economic actors held to the old orthodoxy even though it flew in the face of common sense and common decency (though not in the face of the bottom line).
Wall Street's continued irrational exuberance, its lavishing of bonuses on its elite, and its pushback against even the most modest of regulations all suggest that the old Ptolemaic system – with Wall Street and the Washington Consensus still at the centre of the universe – had not yet given way to a Copernican revolution that displaces these powerful institutions from their privileged position.
Such revolutions, of course, are not made in a day. Remember: Ptolemy's system, with the earth at the centre of all things, reigned for 1,300 years even as it grew inordinately complex to explain new astronomical observations. A century after the publication of the great Pole's theory of heliocentrism, Galileo still ran afoul of church authorities for his Copernican leanings. Orthodoxy dies hard.
As a first sally against the prevailing orthodoxy of neo-liberalism, today's economic Copernicans have taken aim at austerity. It's a fat target: belt-tightening, after all, is not only unpopular but unsound.
Nowhere is that clearer than in Europe. There, the case for austerity, explains Washington Post columnist Harold Meyerson, "was that once governments began slashing their spending and deficits, markets would reward them by investing in their presumably more productive economies. But the reverse has happened. As Greece, Ireland, Portugal and Spain have cut their budgets, investors have grown less willing to buy their bonds. By plunging themselves deeper into recession, these nations have convinced investors not that they're fiscally virtuous but that they won't become economically viable for many more years."
French and Greek voters rejected austerity in the elections this weekend not because, as the U.S. media coverage implies, they are unruly children who refuse to swallow their medicine. Rather, they realise that austerity economics at this delicate moment could very well precipitate a double-dip recession (i.e.: a lot more pain).
Moreover, they want the pain – and everyone knows that there will be pain – to be fairly shouldered. Francois Hollande, the new Socialist president in France, has called for a 75-percent tax rate on all earnings over 1.3 million dollars. Now that's a Buffet tax! Hollande is also emphasising job creation and public investment.
The left has woken from its collective stupor just in time, for Europe at the moment is very much up for grabs. The far right has also rejected austerity, and it has a much simpler platform: blame the immigrants.
The National Front in France has injected its xenophobic virus into the very heart of France's center-right Union for a Popular Movement; the street thugs of Golden Dawn in Greece will enter parliament for the first time; Geert Wilders and his anti-Islamic chest-thumpers brought down the government in the Netherlands last month.
Much rests on the shoulders of Hollande and the French Socialists. To them falls the responsibility of rebuilding a European left that returns the EU to its roots – a socialist market economy that grows together and preserves unity in diversity. To pull France out of its own doldrums, Hollande can't think small. He must go big and, through persuasion and arm-twisting, rewrite the rules of European economic revival. Rejecting austerity is only a first step.
The Europeans could learn something here from Latin America, particularly Argentina. In the late 1990s, having racked up a huge debt, Argentina faced the typical recommendations from the international financial institutions: cut the budget, privatise government firms, remove barriers to outside investment. But Buenos Aires said no. It defaulted on 100 billion-plus dollars in loans.
According to the rules of the game, Argentina should have been thrown out on its ear and forever banned from playing in the global casino. But that didn't happen. Most creditors – 93 percent – eventually accepted the 35 cents on the dollar haircut that the government offered.
With a bit of luck – particularly the rise in price of soybeans, a key Argentine export -- the country clawed its way back to economic health. Unemployment dropped from 25 percent in 2001 to below eight percent in 2010. Social programmes reduced the percentage of the population living beneath the poverty line from 51 to 13 percent (though it went up again in 2010).
The recovery, like all recoveries, is tenuous, for it depends a good deal on the price of the commodities Argentina exports.
Which is why Argentina is going one step further to exert some control over the process. The government of Cristina Kirchner has nationalised Argentina Airlines as well as pension funds, and it has also instituted measures to slow capital flight from the country. Most recently, it nationalised a key oil company, YPL, taking back control of the firm from a Spanish company that had a majority stake.
Argentina is by no means the only country in the region to roll back the privatisation mania. The Brazilian government increased its control over the oil company Petrobras a couple years ago. In Bolivia, the government of Evo Morales recently renationalized the electricity grid, which had also been in Spanish hands. Venezuela and Ecuador have also adopted similar policies.
Despite this new trend in Latin America, foreign investors have been flocking to the region. In 2011, the region saw a 31-percent increase in foreign capital.
But here's the underlying reason for the nationalisations. According to a recent UN report, "FDI revenue transferred back to the countries of origin has increased from 20 billion dollars per year between 1998 and 2003 to 84 billion dollars between 2008 and 2010 per year."
Finally, there's been change at the World Bank. The new head Jim Yong Kim is a health professional, not a free-trader like Robert Zoellick or a neocon like Paul Wolfowitz. Under Jim Kim's more grassroots- oriented approach, perhaps the World Bank can help shift the locus of attention from facilitating financial speculation to empowering the poor.
A backlash against austerity in Europe, a move toward greater state control in Latin America, a change in leadership at the World Bank: this might seem slender evidence for a Copernican revolution in economics.
Moreover, a number of leaders like Barack Obama are styling themselves as Tyco Brahe, the Danish astronomer who attempted to combine both Ptolemy and Copernicus into an untenable geo-heliocentric system. These modern-day Brahes want to preserve the Washington consensus with only a few modifications.
As the world lurches from one economic crisis to another, and with the even larger crisis of global warming looming above it all, one thing is certain: there is no longer any consensus in Washington over what to do. Neo-liberalism survives, but more out of inertia than conviction.
Meanwhile, out there in the world, the economic Copernicans are busy reconstructing the order of things.
*John Feffer is co-director of Foreign Policy In Focus at the Institute for Policy Studies in Washington, DC.