March 7, 2005

Economic Sovereignty: A Prerequisite to Broad-Based Development

by Garry Leech

In order to address the failure of neoliberalism’s one-size-fits-all approach to improve the standard of living of most people in the Third World, there needs to be a restructuring of the global economic system. Beginning in the 1970s and escalating dramatically in the 1980s and 1990s, the United States and international financial institutions began forcing Third World nations to abandon Import Substitution Industrialization (ISI) and begin implementing neoliberal economic reforms. Two factors were instrumental in allowing this to happen: the winding down and eventual end of the Cold War, and the massive foreign debts incurred by many Third World nations. In Colombia’s case, relatively low levels of foreign debt during the ISI era meant that the implementation of neoliberalism occurred later than in most other Third World nations. When neoliberal reforms were applied, however, they wrought the same devastating economic consequences for Colombians as those experienced by other peoples in the South. The solution to the Third World’s economic plight partly lies in orchestrating the return of economic policymaking to national governments.

During the Cold War, the United States militarily and economically supported many authoritarian, anti-communist Third World regimes. Washington encouraged international financial institutions (IFIs) and private banks to provide loans to these dictatorships with little transparency and accountability. As a result, much of the money was spirited out of these countries by corrupt officials and deposited into personal overseas bank accounts. Little of the money was spent on projects that improved living conditions for the general population. The masses, however, did inherit the massive debts that many of these corrupt regimes had incurred by the 1980s.

Colombia was ruled by authoritarian regimes throughout much of the Cold War, including the National Front governments from 1958 to 1974. However, Colombia differed from many Third World countries in that it did not borrow vast sums of money from international lenders between the 1960s and the 1990s. In fact, during the 1980s, Colombia’s economy remained relatively healthy due to its low levels of foreign debt, allowing it to avoid the economic decline that marked the period as the “lost decade” for most Latin American nations. Like other Third World nations, Colombia primarily implemented ISI between the 1940s and the 1980s, which included state ownership of vital companies, the imposition of tariffs on imports, subsidizing domestic producers and placing restraints on capital flows and foreign investment to protect emerging domestic industries.

Following the decline of the Soviet Union in the late 1980s and its eventual collapse in 1991, Washington no longer felt the need to support repressive Third World dictatorships; in fact, their human rights abuses were seen as an embarrassment. The United States instead began promoting democracy, safe in the knowledge that Third World nations could no longer turn to another superpower for an alternative source of aid and economic interaction. However, the United States was promoting a restricted democracy that separated the political and economic spheres, with the latter removed from the national policymaking process and placed under the control of Washington-based international lending institutions such as the International Monetary Fund (IMF) and the World Bank.

The massive debt loads incurred by corrupt Third World regimes led to economic crises during the 1980s and 1990s that set the stage for the transfer of economic sovereignty from national governments to IFIs. With no economic alternative to global capitalism in the post-Cold War world, Third World governments were forced to turn to the IFIs for new loans and debt restructuring agreements. This provided the IFIs with the leverage they needed to impose neoliberal reforms on Third World countries.

These reforms called for the lowering of tariffs, the privatization or restructuring of state-owned entities, cutbacks in subsidies, and the removal of restraints on capital flows and foreign investment. These policies opened up Third World countries to exploitation by multinational corporations under the belief that private sector investment would lead to economic growth and that the benefits of this growth would “trickle down” to impoverished citizens.

Until its economy collapsed in 2001, Argentina had been presented as the IMF’s neoliberal poster child. Following the country’s economic collapse, however, the United States, the IMF and other advocates of neoliberalism immediately and staunchly defended the neoliberal model while blaming the crisis on a corrupt government’s mishandling of the economy. Interestingly, when corrupt governments had mishandled Third World economies during the ISI era, Washington and the IFIs turned a blind eye. In fact, with the end of the Cold War imminent in the 1980s, the IFIs claimed that the Third World economic crises were primarily caused by the ISI model, not corruption and mismanagement. Essentially, instead of focusing on the lack of transparency and accountability evident in Third World fiscal management, Washington used it as an excuse to put an end to economic policies that often served national rather than transnational interests. In effect, they threw out the baby with the bath water.

Because they sought to increase access for multinational corporations to new markets and resources, the United States and the IFIs ignored the socio-economic gains achieved by Third World countries under ISI policies, including a reduction in poverty, lower infant mortality rates, and increased life expectancy and literacy. The imposition of neoliberal policies on Third World nations aimed to open up the economies of developing countries to multinational corporations. By the end of the 1990s, it was evident that few of the benefits of the economic growth achieved under neoliberalism were “trickling down” to the general population. Nevertheless, the IFIs and Washington ardently defended neoliberalism following Argentina’s collapse, even though the implementation of neoliberal policies had failed to elevate a single Third World nation to First World status.

In recent decades, several Third World nations such as South Korea and the other Asian Tigers have come close to achieving First World status. However, the economies of these countries were developed between the 1960s and 1980s under the strict stewardship of the state. They used ISI to industrialize and then evolved into export-oriented industrial, primarily state-controlled economies. It was only after these countries had become significant players on the global economic stage that they began opening up their economies to international competition.

Even today’s Northern industrial nations, including the United States and Britain, only achieved their current level of development through the implementation of ISI-style policies. It was only after achieving a position of competitive advantage in the international economy that these nations began advocating free trade policies. Even today, the industrial countries of the North still implement ISI-style policies as was evidenced by the Bush administration’s imposition of tariffs on steel imports to protect the domestic steel industry. All of which begs the question: If ISI-style policies are as much a failure as neoliberals would have us believe, then why are they still applied by First World nations?

The export-based economic model for Third World countries currently promoted by neoliberalism differs dramatically from the export-based model achieved by the Asian Tigers under ISI. The new neoliberal export-based model calls for Third World countries to export agriculture, natural resources and light manufacturing, most of which is owned and controlled by multinational corporations due to IMF-imposed privatization and the lifting of investment restrictions.

Following Argentina’s collapse, Washington and the IFIs defended an economic model that has provided few socio-economic benefits for impoverished Third World peoples. In sharp contrast, they worked feverishly to end ISI even though, in spite of the prevalence of corrupt regimes, it still managed to achieve dramatic socio-economic improvements in many Third World nations. The euphoric promises of early neoliberalism and the apparent victory of capitalism in the Cold War made it easy for Northern capitalists to discredit ISI. The “lost decade” of the 1980s proved devastating economically for many Latin American countries, making it even easier for neoliberal proponents to push for reforms. Interestingly, the country whose economy was least affected by the lost decade was Colombia, which had a relatively low-level of debt, maintained its protectionist ISI policies and did not turn to the IFIs for loans. It wasn’t until 1990 that Colombia began implementing neoliberal reforms in return for U.S. military aid. By the end of that decade, the country was mired in its worst recession since the Great Depression.

Even the macroeconomic indicators so revered by the IFIs as a measurement of economic health were respectable during the ISI era. During the 1970s, Colombia’s economy grew at an average annual rate of 3.2 percent. And between 1990 and 1995, as neoliberal reforms were being implemented, the economy maintained an average annual growth rate of 2.7 percent. But the neoliberal reforms of the early 1990s set the stage for an economic collapse in the latter half of the decade. Between 1995 and 1999, the country’s economy achieved a negative average annual growth rate of –1.1 percent.

The neoliberal reforms implemented during the early 1990s included reducing import tariffs in the first two years of the decade from 49.4 percent to 11.7 percent. New labor policies were designed to make the labor market more flexible, including making it possible for employers to hire workers with contracts of less than one year and decreasing the amount companies had to pay fired workers. Other reforms reduced the degree to which the government could subsidize certain sectors of the economy, while the financial system was opened to foreign investment.

While these neoliberal reforms proved to be a boon for multinational corporations interested in exploiting Colombia’s various natural resources and cheap labor, they decimated small and medium sized domestic companies that could not compete. They also resulted in massive increase in unemployment and a dramatic shift in the number of workers forced to exist in the informal economy where they earned low wages and lacked job security, benefits and pension plans. By the end of the 1990s, unemployment had reached an astounding 20 percent, while it was estimated that 50-60 percent of the workforce existed in the informal sector.

Gains in poverty alleviation during the ISI era were also reversed by the neoliberal reforms. According to the World Bank, 80 percent of Colombians lived in poverty in 1978. This number had been reduced to 60 percent by 1995. Four years later, however, it had climbed back up to 64 percent. This reflected the trend throughout Latin America where, according to the United Nations Development Programme (UNDP), a total of “244 million income-poor people in 1999 is the region’s highest ever. At the same time, income inequality worsened during the 1990s and is now the highest worldwide.”

Colombia’s success at maintaining sustainable levels of debt came to an end with neoliberalism. The economic trauma caused by the neoliberal reforms forced Colombia to increase its borrowing in the mid-1990s. Between 1995 and 2000, the country’s debt skyrocketed from 24.9 percent to 46.2 percent of the GDP. According to most in the international financial community, debt loads that amount to more than 25 percent of GDP are considered unsustainable.

In five years, Colombia had gone from maintaining a sustainable debt load to a country in financial crisis. As had happened to other Third World countries over the previous 15 years, Colombia was finally forced to turn to the IMF, receiving its first-ever loan from the international lending institution in December 1999. In return for $2.7 billion, the IMF demanded that the Colombian government implement more neoliberal reforms. Two more IMF loans over the next five years led to a further liberalization of Colombia’s economy.

Since President Alvaro Uribe’s assumed office in 2002, Colombia has become the new neoliberal poster child. The country’s economy has achieved annual growth rates of 3 percent or higher and foreign investment has increased dramatically as multinational corporations have taken advantage of the favorable investment climate generated by IMF-imposed reforms. However, it has been a “jobless” economic growth with the percentage of workers in the informal economy remaining the same as the late 1990s. Also, there has been no reduction in poverty.

Many analysts blame Colombia’s socio-economic problems on the country's ongoing civil conflict. But even if the conflict were to be resolved, it is unlikely that the economic situation of most Colombians would improve given that most people in Latin American and Third World countries not in conflict are enduring the same hardships under neoliberalism.

Following Argentina’s economic collapse in 2001, the IMF claimed that the neoliberal economic model was fundamentally sound and that the crisis was caused by corruption and mismanagement. Given the clear evidence that the peoples of most Third World countries benefited more during the ISI era than during the past two decades of neoliberalism, one could use the same IMF logic in defense of the ISI model, claiming that it improved living conditions throughout much of the Third World and that the failures resulted from corruption and irresponsible borrowing and lending. In other words, instead of throwing the baby out with the bath water, if IFIs had truly been concerned with the welfare of Third World peoples they would have implemented reforms requiring that national governments function in a fiscally transparent manner so their citizens could hold them accountable.

The IMF’s role should have been focused on linking loans to transparency and accountability, while leaving economic policymaking to national governments. Such a practice would have forced governments to make public their borrowing and spending practices, making it much more difficult to pilfer the public coffers. National government’s would have retained sovereignty over their economic policymaking, increasing the likelihood that policies would benefit local populations rather than a global economic system structured to serve the interests of multinational corporations and the economies of the North. Of course, this would also have required the United States to promote truly democratic reform in the Third World that permitted national governments to retain sovereignty over their economic policymaking.

Instead, once national governments had been relieved of their right to formulate economic policies, it was safe for Washington to promote democracy in these nations because the risk of economic nationalism interfering with the operations of multinational corporations and the economic interests of Northern nations had been eliminated. The United States successfully undermined the nationalist economic projects that had evolved to varying degrees in Third World nations throughout the twentieth century. Consequently, the South has now returned to a position of hyper-dependence on the North that far exceeds that experienced under ISI.

It is not too late to restructure the current global economic system, returning economic policymaking to Third World governments. In spite of the rapid degree of globalization over the past two decades and the expanding role of international institutions, the nation-state still remains the dominant political entity. The objective is not to return to ISI per se, but to return economic sovereignty to the nation-state level so that citizens have more influence over economic policymaking that directly affects their lives.

A restructuring of the global economic system should also include the implementation of a debt forgiveness program that brings the debt levels of all Third World nations down to less than 25 percent of their GDP—with full debt relief for the world’s poorest nations. It should require the abolition of the IMF and the World Bank and the establishment of new international financial institutions that operate in a far more democratic and transparent manner than the existing entities.

The only restrictions these newly established IFIs should be permitted to place on recipient countries would relate to transparency and accountability—meaning accountability to their citizens, not international lenders, as is currently the case. Such a process would enhance the growth of democracy in Third World nations by providing citizens with the information they need to hold their governments accountable. It would not, however, infringe on their sovereignty, allowing citizens to elect governments that possess the power to implement the economic policies desired by their constituents. Such an occurrence would allow for the emergence of a more advanced democracy rather than the “restricted” democracy that currently exists due to a lack of economic sovereignty.

Despite the homogenizing effects of globalization, we still live in a world of diverse nation-states: unique geographies, unique peoples, unique cultures, unique religious beliefs and unique values. Neoliberalism’s one-size-fits-all approach to the world fails to account for the differences between and within nation-states. As long as we live in a heterogeneous world, there needs to be a tolerance for different political and economic approaches. Despite the prevalence of corrupt regimes and ISI’s other shortcomings, which included an exaggerated focus on urban industrialization at the expense of rural agricultural development and continued dependency on the North, the socio-economic situation for most Third World people still improved during the middle decades of the Twentieth Century.

After two decades of neoliberalism, however, both poverty and the debt load of most Third World countries have worsened. Clearly, the socio-economic situation for Third World peoples living under the global neoliberal system controlled by Washington and the IFIs has deteriorated in comparison to the ISI era when governments of the South possessed a greater degree of sovereignty over economic policymaking. Being fully cognizant of these facts, it is crucial to proponents of neoliberalism that any Third World economic policy even remotely reminiscent of ISI, or that proposes economic sovereignty, be thoroughly discredited and eliminated.

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