Critical debate on the World Bank and IMF
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Professor Anwar Shaikh, the New School for Social Research, made the following points during his presentation on “Monetary Policy and the Global Crisis”:
- Presentation links three related topics:
- Neoliberal policy; based on underlying theory of free trade
- Economic crises
- Global monetary policy – low interest rates enabled the spread of capital and ‘hypercharge’ recovery after the 1970s
- Standard theory argues that trade means mutual gain; it is automatically balancing through exchange rates and money flows; at full employment. Patterns are determined through comparative advantage [Gary Becker famous economist even applied this to marriage]
- Free trade means that initial trade disadvantages give way through competition to final comparative advantages – jobs and firms move to areas of comparative advantage – at full employment.
- Fixed exchange rate system didn’t balance trade – neoliberal economists argued free exchange rates would balance it; in fact it became far more imbalanced.
- The quantity theory of money is wrong – Marx, Keynes and Harrod argued that when money flows into a country (because it has a trade surplus) it doesn’t raise prices increases liquidity, which lowers interest rates.This means that cost differentials are preserved; less competitive countries end up with trade deficits and foreign debt. This is the dominant empirical theory.
- Myth – that rich countries got rich through free trade (the opposite is the case – all developed countries protected their markets)
- More progressive economists such as Paul Krugman start from the theory of free trade and assume that it doesn’t work because the world is not perfect – this is a ‘religious view’ – i.e. not based on the facts.
- Trade liberalisation means those areas with high technology and low costs will dominate – this means developed countries firms moving their production to low cost areas. The rest of the world will supply low cost, low value resources.
- Crises are recurrent – 1970s was viewed as a ‘Great Depression’
- Recovery from the 1970s led to an unprecedented decline in interest rates from early 1980s which fuelled credit bubbles; huge rise in consumer spending etc. Accompanied by deregulation.
- Implications for the present period:Huge sums are propping up financial and corporate businesses – restricts the amount of money for stimulus
- Fundamental basis of IMF policies and prescriptions is based on these flawed theories.
