Klein's Shock Doctrine

[Rex Brynen]

I guess that's a rant, and maybe it makes me a "neo-liberal". I've never encountered that term outside the academic cloister, and I'm not convinced that anyone who uses it really knows what it means, except that it covers all the stuff they don't like. But what the hell, if this be neo-liberalism, let us make the most of it. It still works. It doesn't work perfectly (not much in this world does), but there's a good deal to be said for it.

I think there has been a powerful neoliberal impulse in the aid and development community—notably in the international financial institutions, stretching as far back as the Reagan Administration, and often attacked by critics such as Klein. However, I would argue that its all become a bit of a strawperson.

Developmental approaches have become much more nuanced. Almost everyone these days accepts that most employment and growth is generated by private sector activity and investment, and that you can't create large numbers of sustainable jobs with aid money. There's broad acceptance that TNCs can have positive effects (although, in some contexts, negative ones too.)

On the other hand, almost no one--not even in the World Bank or IMF—believes that unrestricted free markets are a good thing, or that you can get equitable and sustainable growth without effective state institutions to provide an enabling environment (rule of law, anti-corruption measures, security, critical infrastructure, education, health, social safety nets, environmental regulation, enforcement of labour standards, etc). It is also important that stakeholder consultation be done properly, ideally through a political system that is responsive to the needs of all affected groups, not just those with money.

The World Bank in particular has made major adjustments in the way it works, partly because of external and internal criticism, and partly out of learning from experience. The IMF remains more of a bastion of narrow classical economics, but critics miss the point that it should be—it is an institution that is all about promoting fiscal solvency. In doing so it provides a useful reminder of the dangers of unsustainable state expenditure. Think of the IMF as your parents: No, they weren't always right, and certainly not very cool, but in retrospect aren't you glad they lectured/reminded/nagged you at times?

Sadly, it was the case that some of the initial US development personnel in Iraq—political appointees or recent hires in most cases, not career USAID folks— were ideologically blinkered neoliberal/neocons, who treated it as a bit of a sandbox for ideas about radical privatization. Almost none of this worked out very well, and much of it was later abandoned or revised.

[Dayuhan]

I think there has been a powerful neoliberal impulse in the aid and development community—notably in the international financial institutions, stretching as far back as the Reagan Administration, and often attacked by critics such as Klein. However, I would argue that its all become a bit of a strawperson.

I'd honestly prefer to drop the term "neoliberal". It has no traction outside the left and academe, and its definition is so vague that it makes discussion almost impossible. At some level almost any program that includes mainstream economic analysis can be said to demonstrate a "neoliberal impulse". It has also, as you say, become a complete strawperson. We've seen a long string of studies emerging from the academic side, looking at the failures and shortcomings of projects and programs deemed "neoliberal", and concluding that "neoliberalism" is a failure. These studies generally neglect to mention that the prescriptions of what might be called the "anti-neoliberals" haven't fared much better. A more reasonable conclusion might be that external attempts to promote economic development - whether "neoliberal" or otherwise - are extremely difficult and prone to unintended consequences and manipulation by local powers with vested interests. This is particularly true when those seeking to promote development are expected to remain strictly apolitical in environments where the principal constraints on development are political.

There's a great deal that could be said about development efforts during the Reagan era. My own greatest criticism is not that there was an excess of "neoliberalism", but that these principles were applied unevenly and often disregarded, especially when dealing with governments regarded as cold war allies. To take the example I'm most familiar with: in the Philippines, the flow of public and government-guaranteed private borrowing was sustained long beyond the point where it was clear to any observer that the money was not being productively invested and the borrowing far exceeded capacity to pay. According to "neoliberal" criteria Marcos should have been abandoned, but the conviction that he was an essential bulwark against communism kept the spigot open - even though anyone paying attention could see that Marcos was the best thing that ever happened to the Philippine communist movement. This was a common theme during the Reagan period: we talked the "neoliberal" talk, but didn't walk the walk.

Another sore point often misinterpreted is the undoubted failure of what were generically called "structural adjustment" programs. Unfortunately, these failures cast doubt on many reforms that were desirable and necessary, but were implemented by force at an impossible pace. It is of course true that subsidies, price controls, state owned enterprises do more harm than good, but forcing a country that has grown accustomed to these bad policies to abandon them instantly is simply too great a shock, especially during the early stages of democratic transition. A more rational approach would have been to aim for an extended transition period. What was done was analogous to forcing a severely unfit and overweight individual into a high intensity exercise program overnight. The diagnosis and the prescription are correct, but implementing the solution too harshly can kill the patient.

Consider a hypothetical nation where an authoritarian ruler has for several decades placated the urban populace by imposing price controls on food. Of course the result is that as production costs increase and selling prices remain fixed, production becomes economically unviable and output begins to drop, creating a supply/demand imbalance that tries to force prices up beyond the government-imposed ceiling. That is an untenable situation, and in the world of economics the solution is to scrap the price controls completely, allowing prices to rise to a level that stimulates additional production.

In the world of reality, trying to achieve immediate supply/demand/price equilibrium in an environment distorted by years or decades of bad policy will produce abrupt and dramatic price increases, and you get the populace storming the palace and stringing the unfortunate President up from the nearest lamp-post. Right prescription, wrong implementation. Unfortunately, the bad result discredits the prescription.

On the other hand, almost no one--not even in the World Bank or IMF—believes that unrestricted free markets are a good thing, or that you can get equitable and sustainable growth without effective state institutions to provide an enabling environment (rule of law, anti-corruption measures, security, critical infrastructure, education, health, social safety nets, environmental regulation, enforcement of labour standards, etc). It is also important that stakeholder consultation be done properly, ideally through a political system that is responsive to the needs of all affected groups, not just those with money.

I'm not sure that anyone ever seriously contested these ideas. I've heard many left leaning academics proclaim that "the neoliberals want to eliminate government", but I've never seen anything coming from the mainstream development world that supports that rather extreme conclusion. Those accused of being "neoliberal" are generally supportive of effective state institutions. What they do not want is to see expanding state intervention in the economy, and there are good reasons for this. The "anti-neoliberals" often propose that state intervention is necessary to protect "the people" from "big business", but they fail to recognize that state intervention in much of the developing world has generally been aimed not at protecting "the people" but at protecting the interests of the governing elite.

The IMF remains more of a bastion of narrow classical economics, but critics miss the point that it should be—it is an institution that is all about promoting fiscal solvency. In doing so it provides a useful reminder of the dangers of unsustainable state expenditure. Think of the IMF as your parents: No, they weren't always right, and certainly not very cool, but in retrospect aren't you glad they lectured/reminded/nagged you at times?

A senior Philippine politician once told me something like "we say we hate the IMF, but we love them. They make us do things we would have to do anyway, and they get the blame instead of us".

Sadly, it was the case that some of the initial US development personnel in Iraq—political appointees or recent hires in most cases, not career USAID folks— were ideologically blinkered neoliberal/neocons, who treated it as a bit of a sandbox for ideas about radical privatization. Almost none of this worked out very well, and much of it was later abandoned or revised.

I can't disgree with that. I recall reading the Treasury Dept's proposals for the Iraqi economy, back when first released. It struck me as one of the saddest documents I've ever seen. In many ways it was a lovely plan, and it would have been ideal, if it was even remotely possible to implement. Of course it wasn't: it was utterly divorced from the reality on the ground and there was never the slightest chance that it could be put into effect. Economists have some very useful knowledge and some very valuable tools, but there's a lot they don't know about political and social environments that are alien to them. Economies are far too important to be left to economists.