The financial crisis, followed by the Euro imbroglio, has produced probably the largest number of books in recent times. Some tomes tell us how the crises came about and were addressed, while others have been critical of the capitalist system that engenders greed. The Federal Reserve, European Central Bank (ECB) and their chiefs have been the protagonists in all these expositions. Mark Weisbrot, the author of Failed, starts off from these crises to build his theory of how the so-called new-liberal policies, built around the Washington Consensus, have failed, and why we should think differently. In fact, he details how these policies have ossified economic growth paths of nations, while those that did break with their commandments have done better.
Look at the US and Euro regions. Both faced a crisis of immense magnitude. Yet, the US officially came out of the recession after 18 months in 2009, while Euro zone countries continue to struggle to get out of it. Here, the author points out the differences in approach from the policy perspective. In the US, the government was responsible towards the people and the politicians could not get away with so-called conservative, or rather ‘oppressive’, policies. Quantitative easing was a result of this thinking. As various measures of easing started almost immediately, the country was able to come out of the rut.
In case of the Euro region, this was not possible, as governments there had no control over the currency, as well as the interest rates. The concept of one central bank—the ECB, combined with the European Commission and the International Monetary Fund (IMF), formed the deadly trio—forced several structural reforms on countries facing a crisis like Greece, Italy, Spain, Portugal, Ireland, etc. This, as per Weisbrot, was inappropriate and pushed these countries further into recession, as their governments could not spend and had to cut down on social spending, including pensions.
This mistake was realised quite late in the day when Mario Draghi reassured people that the ECB would do everything to support the system—that is, provide money. Hence, the change in stance from ‘no printing’ to ‘printing of unlimited currency’ brought about a transformation. Interestingly, the absence of a political will, or rather political ability, to follow independent policies was responsible for the downfall of 20 governments during this period, which tells the entire story.
The author is very critical of the IMF and the role assigned to it as the gatekeeper or head of the creditors’ cartel all through its history and more so after the breakdown of the Bretton Woods agreements. Here, even India can vouch for the stiff conditions, which have been imposed in the past when drawing assistance from the IMF—the last dose of such bondage being, ironically, the introduction of economic reforms in 1991. This package includes opening up the economy, privatisation, letting in foreign investment, a strict monetary policy, constriction of the fiscal policy, etc. These had to be implemented by the countries sourcing finance, as not doing so kept them away from the entire cartel of lenders, including the US. However, by pursuing these policies, the countries fell into the trap of low growth.
The author points out that this new-liberal doctrine pushed low- and mid-income countries further down and the levels of poverty increased. Governments were not allowed to spend on social causes like education, health and sanitation, etc, as fiscal prudence had to be adhered to. Consequently, the implementation of these policy prescriptions led to increased suffering in these countries.
The Asian crisis was a clear case of how the situation became worse because of the IMF, a view echoed by economist Joseph Stiglitz in the past too. The author is all praise for Latin American countries, which broke away from these neo-liberal policies and pursued independent approaches to bolster their economies.
Failed is a strongly- and passionately-worded book on how blindly following the western doctrine could be harmful. Weisbrot admits that there have been exceptions—like China—which have gained from this, but a ‘one-size-fits-all’ approach is doomed to fail. The way he goes about demolishing the IMF and the Eurozone myth is very logical and particularly interesting. The rebellion started by Latin American countries like Argentina, Brazil, Bolivia and Ecuador has vindicated his theory that working independently to fight problems works best.
Failed should be read by all our policymakers, as we often fall into the trap of following a western doctrine especially when it comes to the Budget, where we are conscious of the western reaction to our fiscal deficit. The so-called structural changes and austerity measures have hurt the European economies and delayed their recovery. Following the Washington Consensus blindly and ignoring the issues of poverty, unemployment and absence of social services is not the right approach for a country like India.
There are lessons to be drawn from this book and it will go down well with both politicians and economists who frame policies—the former because they can be voted out of power (notice how the present government is taking pains to tell us that its priority is inclusive growth) and the latter because it moves them away from the textbook to reality.
Madan Sabnavis is chief economist, CARE Ratings