Debunking the Myth of Free-trade, Free-market Policies
The election of Donald Trump as the 45th President of United States and the result of Britain’s 2016 Brexit referendum, which came as a surprise to many, were demonstrative of the rising populism, economic nationalism, and a move towards greater protectionism in the two nations which have been major proponents of free-trade policies and international integration. These events astounded many since the success of countries in the Global North is often attributed to the laissez-faire trade policies with little or no barriers to the international flow of goods and capital. A closer look at their strategies in the early stages of their development, however, reveals that their current stance of protectionism is not really a departure from the trade policies that they have followed in the past and the “good policies” that they recommend to the developing nations, based on the Washington Consensus, dramatically differ from what they themselves have pursued.
The advocates of the free-market-free-trade policies of today’s world extensively used state intervention and relied heavily on trade protectionism when they were in the catching-up position and, now, by preaching neo-liberal policies to the countries in the Global South, they are effectively “kicking away the ladder”, in Friedrich List’s words, with which they have climbed to the top. In their developing phase, policies were adopted by these countries to promote and protect industries in their initial stages, known as infant industries, with the help of tariffs and subsidies so that they could compete in the global market. This infant-industry argument is usually traced back to Alexander Hamilton, one of the Founding Fathers of the United States and the first Treasury Secretary, who argued for the protection of US industries against imports from competitors. In recent years, India has been criticised by the United States for imposing high tariffs on American products. What US policymakers seem to be forgetting, however, is that the US was one of the most protected nations in the world until World War II, and it was only after the war, when it had gained a considerable amount of advantage vis-à-vis its competitors in the international market, that it started actively favouring free-trade policies. Similarly, it has been long recognised that the British Industrial Revolution emerged out of deliberate policies of protectionism, imperialism, and a considerable role of the state. In fact, most of today’s developed countries entered into restrictive trade deals with their colonies, which were inherently protectionist in nature.
The IMF and World Bank have been advocating fiscal “discipline” for almost two decades now. The stance of fiscal consolidation has been incorporated in the policy-making of most of the developing nations and it is now viewed as an important macroeconomic goal. Emphasis on the same is also put by the credit-rating agencies, and economies operate under the constant threat of capital flight if fiscal targets are not met. According to the developed nations, fiscal conservatism and the minimum role of the government are prerequisites for development in Third World countries. This advice, however, was ignored by the countries in the Global North themselves when they were dealing with the Great Depression in the 1930s. Between 1932 and 1939, a series of policies, programs, and reforms were announced as part of the ‘New Deal’ enacted under the then U.S. President Franklin D. Roosevelt. There was a massive increase in public spending and as a result, employment and wages revived during this period. At the same time, various laws were passed which brought important federal government oversight and regulation to the banking and finance sectors. While Trump was extremely vocal about his views on protectionism, he was not an exception when compared to his predecessors. Both Barack Obama and George Bush were “closet protectionists’’. Similarly, Hillary Clinton, Trump’s rival in the 2016 presidential election campaign succumbed to protectionist tendencies during her campaign and even spoke out in opposition to the Trans‐Pacific Partnership (TPP).
It has been almost 30 years since the Maastricht Treaty was signed, which requires that the budget deficits remain less than 3% of GDP unless justified by a recession. However, no valid justification has been given for this “3%” figure. It remains a mystery why a fiscal deficit of less than 3% of GDP is acceptable, whereas a fiscal deficit of more than 3% would have terrible effects on the health of the economy. In a situation like the one the world is currently facing, focusing on fiscal conservatism would be a grave mistake. Even if governments decide to not spend, they cannot prevent the fiscal deficit from increasing. This is because the revenue collections fall in an economic slump. Lower aggregate demand due to loss of jobs and incomes has resulted in a lower level of economic activity and production. As a result, there has been a decline in tax revenues. If the governments continue to not spend, the revenue receipts would fall further. On the other hand, government expenditure has a multiplier effect, and would cause the revenue and GDP to eventually go up, and therefore improve the fiscal deficit to GDP ratio. Therefore, there is a need to re-think the obsession with this arbitrary target advocated by the developed nations.
Since the 1980s, international organizations such as IMF, WTO, World Bank, have been pushing for neoliberal policies and a free-market structure. Under the Structural Adjustment Programs (SAPs), the countries which were facing economic crisis had to implement policies of privatization, liberalization of trade, globalization, etc. in exchange for the loans from the Bretton Woods institutions. These countries were also pressured into easing restrictions on capital that flows across their country’s borders and this premature opening up of capital accounts has made these emerging economies susceptible to crises. Foreign capital, in principle, is meant for helping developing countries to grow faster. However, the threat of capital flight has actually put limitations on them from taking up activities that would generate huge social returns. The countries which have seen sizeable capital inflows have not seen an equivalent increase in investment. In order to appease financial interests, states have to incorporate austerity measures in their policies. This imposes restrictions on governments to invest in developmental programmes, which are extremely important for a developing nation. The rationale behind financial interests’ aversion to the fiscal deficit is that the government’s intervention is considered a “market distortion” and is seen as de-legitimising the role of finance. Evidence clearly suggests that the countries which have adopted a gradual approach towards capital account liberalisation have fared better than those who have done this in one stroke.
Turning a blind eye to their own histories, rich countries preach laissez-faire trade policies to the developing nations, and as a result, expose them to the full forces of global competition and volatility, which accompanies an open capital account. The historical facts about the developmental experiences are being tweaked by the developed world in order to force the countries in the Global South to adopt policies that suit their own agenda. Therefore, there is a need to rethink the policy recommendations made to these countries and the conventional view of what the “best practices” are. One needs to acknowledge that every nation is different and cookie-cutter solutions offered by the IMF and World Bank end up doing more harm than good and, therefore, the developing countries should be allowed to pursue policies and programs best suited to the conditions that they face and befitting to the stage of development they are currently at.
(Neha Chauhan is an M.A Economics student at the Centre for Economic Studies and Planning, JNU and can be reached at nehachauhan202@gmail.com)
