|JPRI Critique Vol. IX, Number 1 (February 2002)
Cognitive Dissonance and the Washington Consensus
by Marshall Auerback
The market fundamentalists are already out in force in arguing that Argentinas recent declaration of default and devaluation is yet another in a series of one-off accidents with no broader implications for the globalization project. According to the Washington consensus, democratic, neo-liberal capitalism is still inevitable, rendering the manifold cultures and traditions of the world redundant. The confidence of todays globalizers is largely predicated on a Utopian belief that the model itself is fundamentally solid, that each emerging market disaster can easily be explained away by particular errors that made otherwise sensible economic policies end infailure. Argentina is but the latest example of this line of reasoning, but it was also the argument given when Mexico collapsed in 1994 and Brazil in 1998. Similarly, it was not the attempted importation of the Anglo-American model that was to blame for Asias startling economic collapse in 1997, but rather the regions endemic and long-lasting crony capitalism.
By refusing to acknowledge any weaknesses associated with their championed model of economic development, however, the advocates of neo-liberalism/market fundamentalism unwittingly doom their cause to irrelevance. While very few of us would advocate a retreat into the mindless protectionism and economic nationalism that characterized much of the 1970s, the inflexible, indeed theocratic, manner in which a market fundamentalist agenda has been imposed throughout the developing world ultimately threatens to do as much harm as Soviet-style communism did during the Cold War.
There is also a good deal of collective cognitive dissonance among globalizations champions in Washington. Just last November, a day after the ministerial declaration in Qatar announcing the start of a new round of talks to reduce tariffs and liberalize trade on everything from wheat to insurance policies, the U.S. Senate Agriculture Committee recommended a five-year, $88 billion farm subsidy bill. This was perhaps better than the version the House passed a month earliera 10-year, $171 billion billbut hardly a victory for free trade. Weeks later, amid great hoopla, President Bush secured fast-track authority to negotiate new free trade agreements, but minutes before the final vote, Republican leaders also promised to take back liberalization measures already in effect that covered textile imports from the Caribbean and sub-Saharan Africa. The day after the House vote, the International Trade Commission recommended tariffs of up to 40 per cent be imposed on imported steel products, a recommendation ultimately accepted by the President. Perhaps Bush does not recognize the contradiction, but it does become much more difficult to lambaste newly-elected Argentine President Eduardo Duhaldes nationalistic retreat to a Peronist-style protectionism in the context of these actions.
It is true that Argentina made mistakes on its own, as did Mexico before it. But organizations such as the IMF and the U.S. Treasury were equally loath to push the required policy corrections on Mexico and Argentina in order not to damage Americas banking and commercial interests. The IMF bailouts in effect continued to underwrite Wall Streets investments, thereby perpetuating a form of moral hazardultimately at great cost to Argentina.
The effects have been disastrous for Argentinas real economy. For the last four years the economy has been in serious recession. The public health system is in tatters and the public education system is a shadow of its former self. Basic public services are negligible and the average wage in real terms is now worth half of its 1974 value. So the deteriorationin both economic and social termshas been dramatic. Meanwhile, the economic tailspin has adversely affected tax revenues and, as a consequence, government deficits remained high despite expenditure cuts. The external debt has ballooned from $43 billion in 1983 to more than $155 billion in 2001.
The IMFs position in the current circumstances is particularly ironic. It has now decided that the fixed exchange system is untenable and should be abandoned with a major depreciation of the Argentine peso. After all, throughout the 1990s and even as late as August 2001the time of the most recent bailoutthe IMF continued to champion the highly restrictive macroeconomic austerity measures Argentina undertook to support the Currency Board, praising their anti-inflationary bias. Abrupt changes of direction are of course nothing new for the IMF. Months after praising the economic performance of Thailand and Korea in its 1997 annual report, its then managing director, Michel Candessus, blamed Asian governments for the deep failures of macroeconomic management and financial policies that the IMF claimed to have recently discovered.
There is also an element of idealization of the American model implicit in the Washington consensus. In light of the Enron scandal, it is worth pondering the extent to which the disparity between the ideal and the sordid reality of Americas finance capitalism has provided fuel for reactions against the U.S. that seem to most Americans to be unjustifiable and vastly disproportionate to the help they offer around the globe. By seeking to shape the world under the rubric of globalization completely according to the logic of U.S. markets, irrespective of local social norms and cultural mores, by failing to recognize the disparity between words abroad and actions at home, the Washington consensus risks spawning a jihad-like reaction to modernity and Western civilization as a whole.
Within Argentina the initial omens for the country once viewed as Washingtons star pupil do not provide much long-term comfort for supporters of liberal economic policies and supply-side deregulation. Duhalde has not only abandoned the convertibility program that pegged the peso at one to the dollar, but his inaugural speech was essentially a condemnation of a much broader economic philosophy: the panacea sold by the U.S. Treasury/IMF all over Latin America in which deregulated markets, privatized state businesses, and liberalized trade rules for once-closed economies were viewed as necessary for growth and ever increasing prosperity. If this sort of retreat were to extend well beyond Argentina, it would obviously bode poorly for stock markets around the globe, given that the seeming inevitability of such policies has been a major factor underpinning the unprecedented global bull market in equities and bonds over the past 20 years.
An overt repudiation of the open market in a frantic Argentina would reverberate across the region, challenging uncertain democracies like those in Ecuador and Peru, while fanning the embers of the anti-globalization movement. The reaction within Argentina demonstrates the risks of religiously adhering to a one-size-fits-all set of economic rules without making any kind of fundamental adjustments when market conditions change. Americas global market culture appears to its apologists as both voluntary and wholesome; but it can appear to others as both compelling (in the sense of compulsory) and corruptnot exactly coercive, but capable of seducing society into a willed but corrosive secular materialism. The Argentine President alluded to this in his inauguration speech when he spoke of a model that has destroyed everything, undermined the social cohesion of the country and exacerbated, rather than alleviated levels of inequality throughout the country.
Given that they are among the prime beneficiaries of globalization, trans-national organizations such as the IMF seem incapable of examining or recognizing the adverse social consequences of the policies that they have repeatedly advocated for countries such as Argentina, Indonesia, Korea, Thailand, and Mexico. This is in part why the same mistakes keep being made over and over again. Their economic model also remains a sacred cow of American politics and has become identified with Americas claim to be a model for universal civilization.
Crony Capitalism and Enron
But to what extent does the model jibe with reality? We heard much about crony capitalism in Asia in the aftermath of the financial crisis of 1997/98, but what about the recent bankruptcy of Enron, which seems to have become, in the words of banking analyst Charles Peabody, the poster child for what ails [the U.S.] economyexcessive leverage, financial engineering, aggressive accounting and conflicted interests. Peabody is correct: the Enron fiasco is just the latest embodiment of an unholy melding of political, banking and business interests, more akin to the corporatist model of Mussolinis fascist Italy, than a transparent, liberal market economy. Enron, and other corporations like it, represent crony capitalism writ large. Is this really the model to which countries like Argentina should aspire?
The whole Enron mess seems like something out of Indonesia under the Suharto regime. Consider that before leaving her office as head of the Commodities Futures Trading Commission (CFTC) in 1992, Wendy Lee Gramm (wife of Republican Senator Phil Gramm) kick-started a rule-making process at the behest of various energy companies and Wall Street banks to exempt energy swaps from government oversight. At the time of the CFTC ruling, Enron was a strong financial backer of Senator Gramm and Mrs. Gramm herself subsequently took a seat on Enrons board. Had these swaps incurred a modicum of regulatory oversight, it is possible that many of Enrons problems might have been uncovered well before bankruptcy. The Financial Times has also reported that on December 15, 2000, Senator Phil Gramm helped to resurrect legislation to ensure that much of the over-the-counter derivatives market remained outside the control of the nations commodities laws; the package was attached to 200 pages of legislation of an 11,000-page general public funding bill just before Congress adjourned for Christmas. Enron was a strong financial backer of Senator Gramm.
Then there is the unhealthy banking nexus between the energy giant and its leading creditor bank, J.P. Morgan-Chase. Banking analyst Charles Peabody has documented the extent of circularity in this relationship: [I]n the early days after Enron filed Chapter 11, J.P. Morgan-Chase acknowledged having $900 million of exposure to Enron. Some $500 million was secured and some $400 million was unsecured. In subsequent filings, the investment community is learning that such exposures may not prove to be an accurate depiction of the Enron fallout. For example, as trustee for the Enron bonds, Chase has played a role that may cause the company to be dragged into the courts. Additionally, Chase has a 10 year, $750 million contract with Enron to manage its energy needs. If Enron fails to survive as an operating entity, this contract will need to be renegotiated with another energy manager. Thirdly, in a recent bankruptcy filing covering some $2.1 billion in syndicated loans, Chase (on behalf of the bank syndicate which includes Bank of America N.A., Fleet National Bank, and BNP Paribas) acknowledged that it was seeking the collateral behind the bank loan. After reading the filing, it is obvious that a loan that JPM thought was secured has great uncertainty to it in that the banks dont know where those assets are or even the composition of the assets [J.P. Morgan-Chase, A Example of Financial Manipulation, Dec. 17, 2001, Ventana Capital LLC].
Breaking down the supposedly excessive links between banks and their corporate customers has been one of the principle objectives of the U.S. Treasury and IMF in Korea since the onset of the 1997 crisis in Asia. But events like Enron/J.P. Morgan-Chase must make the Koreans wonder what exactly is so virtuous about the reforms they are being asked to embrace. The unhealthy nexus embodied in the case of Enron and banks, business, and government also makes a mockery of the implicit claims of the Washington consensus that, contrary to appearances and underlying realities, its values and economic system are superior and American institutions are invariably the solution for the worlds most intractable problems.
The retreat of the new Argentine government into a program of classic 1970s-style Peronism may indeed reflect a desperate and ultimately destructive reaction against aggressive markets in a free-trade world. But however misguided, this reaction is understandable in the context of a consensus that unthinkingly seeks to use market fundamentalism to colonize every aspect of human relations under the guise of liberty and globalization, and then changes the rules of the game when things come unstuck. Supporters of free markets and liberal economic reforms must address some of the contradictions in their own system, such as protectionism used as a means of securing fast track authority ostensibly to negotiate free trade agreements, and market triumphalism in the context of crony capitalism. Until this gap between the ideal and reality is addressed honestly, the world will likely see more Argentine-style backlashes.
MARSHALL AUERBACK is a British-based international portfolio strategist for David W. Tice & Associates, a global fund management firm.