Neoliberalism and its Discontents

Frank Lee

Pure economics is not a theory of real-world economics, of actually-existing capitalism, but of an imaginary capitalism.”
Samir Amin, The Liberal Virus (2004)

According to orthodox economic trade theory, free movement of labour, capital and commodities, will result in flows into the most optimal investment and growth areas. In doing so this process will be seen to maximise social welfare in terms of growth of income and output. At the level of theory this may seem disarmingly plausible; in practise, however, the theory begs a number of key questions and is not necessarily always the case. Like much orthodox economic theory, the free-trade paradigm is a one-size fits all prescriptive model; always and everywhere it is thought to be the policy of choice. Free-up the markets and they will deliver the goods.

This is, to say the least, a questionable view.

The quasi-religious belief in the efficacy of free trade and factor input movement is the cornerstone of trade agreements such as free-trade areas like NAFTA and trading blocs like the EU and MERCOSUR. In the world of actually-existing capitalism, however, free-trade and free-markets have never to any great extent really existed. It should be understood that orthodox economic theory is, as Amin stated, a purely ideological construct bearing only a tenuous connection with the real world. At every stage of capitalist development, the state, government and public authority has actively intervened in shaping and promoting the economic policies of the domestic and international economy.

Contrary to hyper-globalist assertions – which we might call ‘state-denial’ – the state and its role is and unquestionably remains the most significant force in shaping both the national and world economy. This was evident as far back as Tudor England and beyond when the English monarchs banned the importation of woollen cloth in an early version of infant industry protection transforming England from an importing wool country into the most formidable wool and later manufacturing country in the world.

The Rise of Mercantilism

It was the same in both the United States and Germany who played catch-up with the UK in the late 19th century. The proto-architect of US mercantilism was Alexander Hamilton (1789-1795) who overcame the free-trade preferences of Thomas Jefferson in the early stages of US economic development; but it was the civil war – 1861-65 – essentially a conflict between the protectionist north and the free-trading south, which settled the issue. Ex-Commander of the Union Army of the Potomac, Ulysses Simpson Grant, later to become US President argued that:

For centuries England has relied on protection, has carried it to extremes and has obtained satisfactory results from it. There is no doubt that it is to this system that it owes its present strength. After two centuries, England has found it convenient to adopt free trade because it thinks that protection can no longer offer it anything. Very well then, gentlemen, my knowledge of our country leads me to believe that within 200 years, when America has gotten out of protection all that it can offer, it too will adopt free trade.”[]

In Germany, Friedrich List (1789-1846) who also had scant regard for any ‘free-market’ nonsense and the Ricardian corollary of comparative advantage was instrumental in promoting a system of political guidance from above as a policy for economic development.

…the first stage (of such a long-term policy) is one of adopting free-trade with more advanced nations as a means of raising themselves from a state of barbarism, and of making advances in agriculture; in the second stage, promoting the growth of manufactures, fisheries, navigation and foreign trade by means of commercial restrictions; and in the last stage, on after reaching the highest degree of wealth and power by gradually reverting to the principle of free-trade and of unrestricted competition in the home and in foreign markets.[2]

This was a policy which was taken up by Bismarck and enabled Germany to outperform its European rivals, principally the UK. And in many ways German nationalist mercantilism which pretty much dominates the EU, is still much in evidence today.

Generally speaking the reversion to free-trade from protectionism has been a difficult transition. If free-trade does exist it does so only between highly developed nations, or between nations of roughly equal levels of development. There is no question that free trade can ever become a source of growth and development between nations of unequal economic status; such development has never worked and in all probability never will. Hence given the policy prescriptions stipulated by the ruling institutions of global capitalism, and their applications, the increasing divergence between developed, semi-developed and under-developed states becomes apparent and understandable.

Furthermore, simply opening up a developing economy to global market forces will almost certainly lead to further disaster. There is always the danger of local businesses being wiped out by more efficient foreign competition before they can get a toehold into the wider world. This was certainly the case in Russia during the 1990s during the Yeltsin years. Hence a prerequisite for positive and beneficial engagement with the global economy is the development of robust internal structures; the development of a national economy is more about internal integration than external integration.

Mindful of this, the development strategies employed in the East Asian states and economies were in flat contradiction to the IMF/World Bank, Washington consensus orthodoxy, and met – mirabile dictu – with considerable success. One particular facet of this policy was instanced in both early Japanese and South Korean policy on inward investment; both states were to discourage these inflows since they might well have had a debilitating effect on the development of firms in the domestic economy.

The Washington Consensus: A Recipe for Failure

Yet the Ricardian ideology still holds sway in the textbooks regardless of the outcome of such policies. Hidebound and utterly incapable of reform the systems institutions (see below) and their spokespersons are aptly personified in the words of one of Samuel Becket’s characters, “I must go on, I can’t go on, I’ll go on.”

It should always be borne in mind that practical results have little to do with the persuasiveness of ideologies.

This, ideological paradigm both permeates and is pretty much obligatory in the ruling institutions of global capitalism: i.e., those progenies of the Bretton Woods conference, the IMF, GATT-WTO and World Bank, as well as other bodies such as the Bank for International Settlements (BIS) the OECD and G7. Any questioning of the holy script is treated as blasphemy and relegated to mocking footnotes or treated as being non-existent.

But this fixation with ideology has had extremely deleterious effects in practice, both in the developing world but more recently particularly in Europe. Suffice it to say that the EU defenders of the faith are completely sold on the putative beneficial outcomes on the first holy trinity of free-movement of labour, capital and commodities. And of course, this holy trinity is crucial to an understanding of the results of these policies.

So long as a country is a member of the EU – even if it not bound by a specific programme imposing austerity measures because of its huge debt, and so forth – it will still be bound by the catastrophic neoliberal rules imposed by the various EU treaties. That is to say the EU treaties that followed the Treaty of Maastricht, which institutionalised the opening and liberalisation of the markets for commodities, capital and labour, and which, indirectly, imply also privatisations and the phasing out of the welfare state. (my emphasis – FL) This on top of the severe restrictions imposed on fiscal policy through the stringent rules imposed upon budget deficits and debt-to-GDP ratios (through the Stability and Growth Pact) which indirectly impose austerity.”[3]

We should be by now also familiar with the imposition of the second holy trinity of privatisation-liberalisation-deregulation policies and the effects which these policies have visited upon the world courtesy of the so-called ‘Washington Consensus’.

We are now being asked to believe that these policies which have further impoverished people and are devastating the planet will in fact lead to diametrically different and highly beneficial outcomes, if only they can be accelerated and applied everywhere, freely and without restrictions; that is when they are globalized.”[4]

Euroland Stagnation

This trade between unequals also applies to nations which form the EU trade bloc. Given that the core countries – in this instance Germany/Austria, Benelux and Scandinavia – have higher productivity and lower cost levels this will, given the same currency usage which is the case in the Eurozone, result in trade surpluses for the core economies and trade deficits for the peripheral economies who have higher costs lower productivity and cannot devalue. Or, more precisely can only opt for ‘internal devaluation’ – otherwise known as austerity.

However, latest annual GDP growth figures for the big 4 has been uniformly poor. As follows: the UK 1.5%, France 1.4%, Germany 1.1% and Italy 0.7% (Source: Trading Economics). Growth of this level almost guarantees rising unemployment and weak levels of investment. Additionally, the EU’s southern periphery has been staked out on the ant-ill of internal devaluation but was pulled out of a lasting downturn due to an (admittedly weak) global recovery which started circa, 2010. At the present time GDP growth in the Euro area as a whole is 1.6%, which does not include the Eastern periphery – apart from the Baltics – since they do not use the euro currency.

It is also worth bearing in mind that these states started from a very low base. A high rate of growth in a poor(ish) country can always boast high GDP when starting from ground zero. So, Poland, very much the blue-eyed boy of the western financial institutions, clocked up 5% GDP growth in the last financial year. Impressive, until you read on and discover, firstly, that Poland has a lower per capita income than Greece, the poorest country in western Europe, and that Bangladesh had a growth rate of 7.4% and Pakistan 5.79%.[5]

IMF/WB Shock Therapy

There has been much written and said about the economic/political situation in Southern Europe but much less in Eastern Europe. The ex-Soviet satellites and Republics have received less attention in the business and financial media. What attention they have received paints a rosy picture of full-employment, runaway growth which have been a function of the rapid shock therapy which caused such mayhem in Russia in the 1990s.
But in economic terms there is no comparison between Eastern and even Central Europe to Western Europe.

The Czech Republic, reputed to be the success story Central/Eastern states just squeezes into bottom of the income hierarchy of the west as measured in GDP per capita of $39,337.00 Purchasing Power Parity (PPP). The only western states which fall below the Czech Republic are Portugal $33,409.00 and Greece $30,522.00. I have not counted in the Balkans since they do not constitute functioning states. Western Europe GDP per capita start at the lowest point – Greece – and climb to a dizzying peak of $76,321 for Norway.[6]

After the demise of the communist system in Eastern Europe the West was invited in to share the secrets of its success with the ingenues of the Slavic world. The was largely engineered with dual membership of the EU and NATO and something called “The Eastern Partnership” a propaganda offensive launched by the hawkish Swedes and Poles to entice the states of Eastern Europe into the anti-Russian alliance. Eastern and Central Europe was to become a geopolitical and economic hinterland and spread up to the western frontiers of Russia. In short order the putative cure all of Eastern European ailments was to be the third holy trinity of deindustrialisation, denationalisation, and depopulation (that is, free movement of labour). The standard shock therapy concoction brewed up by the IMF/WB mixture to guarantee economic stagnation and underdevelopment.

A case study by Michael Hudson[7] is illustrative of the whole process which happened, and is still happening in Eastern Europe, he writes with reference to Latvia:

Post-soviet economies were free of public debt, real estate and personal debt or other bank loans that they obtained when the obtained their political independence in 1991 … like other post-soviet economies Latvians wanted to achieve the type of prosperity they saw in Western Europe. If Latvia had actually followed the policies that had built up the western industrial nations, the state would have taxed wealth and income progressively to invest in public infrastructure. Instead Latvia’s ‘miracle’ assumed largely predatory forms of rent-seeking and insider privatisations. [My emphasis – FL]

Accepting US and Swedish advice to impose the world’s lopsided and set of neoliberal tax and financial policies, Latvia imposed the heaviest taxes on labour. Employers must pay a flat 25% tax on wages plus a 25% social service tax, whilst wage earners pay another 11% service tax … Persons who advocated taxing real estate and financial wealth, or even supported public spending, protecting consumers and other regulation were accused of threatening a return to communism. A black and white contrast is drawn: either soviet style socialism, or neoliberal ideology denying that there is any such thing as a viable mixed economy.”
Op.cit. pp.286-287

There followed a period of phony, debt-fuelled growth which inevitably popped in 2008 when in Warren Buffet’s amusing little quip ‘’You only see who’s been swimming naked when the tide’s gone out.’’ And in the fullness of time the tide went out for Latvia. By 2008 it had become common knowledge that the post-soviet economies not really grown at all but had simply been financialised and indebted.

Eastern Europe – A Demographic Disaster Zone

What was true of Latvia was also true for Lithuania and Estonia.* The policies of liberalisation and privatisation and deregulation have resulted in a massive exodus of young and talented migrants from the Baltics to the more salubrious climes of Western Europe, mainly Germany and the Scandinavian states. The depopulation phenomenon was not a policy as such, but it emerged as the unanticipated corollary to other parts of the neoliberal policy baggage.

Post-independence from the Soviet bloc in 1991, the population of Latvia has been diminishing annually with the rate of 23,000 people a year. These frightening figures were unveiled last March by a professor of the University of Latvia, demographer Peteris Zvidriņš who would note that the sad reality is that Latvia loses a small town every two weeks. In raw figures, that is 55 people a day, or 1,650 people a month. Another Latvian demographer, who heads a local office of the International Organization for Migration of the United Nations, Ilmar Mezhs, has recently told Skaties.lv that most of those who are leaving Latvia are not planning to go back.

Referring to the forecasts of Eurostat, Mezhs suggested that in sixty years in the place of 2.7 million people who had previously resided in Latvia, one would find less than a million people still dwelling in this country. According to preliminary reports, the country’s population has already been reduced to 1.946 million people. Latvia has been plagued by high mortality rates along with the massive exodus of its people since 1991. According to LTV7, a local media station, the situation in maternity wards across Latvia is critical: low salaries often go hand-in-hand with a shortage of medical personnel, especially young professionals. If the situation is not addressed urgently, as various Latvian media sources report, there will be no qualified doctors left in hospitals.

The latest Eurostat report on the situation in Lithuania shows that up to 29% of the inhabitants are living on the verge of poverty, with the situation remaining unchanged for eight consecutive years. At the same time, Lithuania is among the top five states of the EU where people are being employed for meagre salaries. The sad reality of this trend is evident in historical records showing an unprecedented drop in the population of this Baltic country, falling from 3.7 million back in 1990 to 2.8 million in 2016 – a 25% decline. Income inequality and the striking poverty of some Lithuanian residents is only getting worse over time, putting Lithuania on the list of the poorest EU states. A typical resident would pay a third of his monthly salary in a bid to get access to healthcare services.

It’s not surprising that for many years Lithuania has had the largest number of suicide cases in the EU. Therefore, it is quite understandable why Lithuania remains a country that consumes more alcohol than any other, as it’s been stated by the World Health Organization (WHO). A similar situation can be seen in other Eastern European countries, that are being described, according to Der Spiegel, as so-called “second speed EU states … Apart from migration additional factors exacerbate the problem namely: low birth, and increasing death rates.

The long list of domestic social problems in the Baltic states has been largely ignored by media engaged in a massive Russophobia campaign promoted by Washington. Rolandas Paksas, the former president of Lithuania and now the European Parliament deputy, summed up the results of the post-Soviet period in the history of the republic in March. In his opinion, nothing has been done in the past twenty-seven years of independence nor has anything been built. Therefore, as Paksas points out, every year there are fewer and fewer people in Lithuania, and the life of those who remain is only becoming more difficult.

The emergence of depopulation in Eastern Europe stretches well beyond the Baltics and is now posing a profound short and long-term problem for the whole area. The surge westward started when the Berlin Wall fell in 1989. The figures below just cover the years from 2006-2017. Eastern Europe population declines between 2006-2017:

  • Lithuania 12%
  • Latvia 12%
  • Ukraine 9%
  • Hungary 8.5%
  • Romania 7%
  • Bulgaria 6%
  • Estonia 1.5%
  • Poland 0.5%
  • Russia, slight increase
  • Slovakia, slight increase
  • Czech Republic, slight increase.

In a recent article in Le Monde diplomatique the depth of the demographic crisis is made clear[8].

“Eastern Europe Experiencing Deep Demographic Crisis” – Dmitry Dobrov

Depopulation of Eastern Europe is connected not only with the outflow of labour resources: after 1989, the era of wild capitalism began in the former “socialist countries”, accompanied by the collapse of social and medical systems, a sharp increase in mortality, especially among men, with a simultaneous fall in the birth rate.

The process began in late 1989 with a massive exodus of the population from East Germany, Poland, and Hungary to the countries of Western Europe in search of higher earnings, which continues to this day, covering practically all former countries of the socialist camp. Over the past 30 years, Romania lost 14% of the population, Moldova – 16.9%, Ukraine – 18%, Bosnia – 19.9%, Bulgaria and Lithuania – 20.8%, Latvia – 25.3% of the population. Depopulation also affected the eastern regions of Germany (the former GDR), which in the literal sense of the word were emptied.

Depopulation of Eastern Europe is connected not only to the outflow of labour resources: after 1989, the era of wild capitalism began in the former “socialist countries”, accompanied by the collapse of social and medical systems, a sharp increase in mortality, especially among men, with a simultaneous fall in the birth rate. However, the main blow to demography caused the outcome of the population, especially the youngest, active, qualified group. In the historical homeland remained children, pensioners and persons incapable of actively seeking work abroad.

According to the UN, all ten of the world’s most “endangered” countries are in Eastern Europe. They are Bulgaria, Romania, Poland, Hungary, the Baltic republics and the former Yugoslavia, as well as Moldova and Ukraine. By 2050 the population of these countries will decrease by another 15-23%. This means, in particular, that the population of Bulgaria will drop from 7 to 5 million people, Latvia – from 2 to 1.5 million.

In the meantime, Eastern Europe continues to lose its most talented, youngest and ambitions people. In Hungary alone, since joining the EU in 2004, 5,000 doctors have left the country, mostly under the age of 40. There is also a shortage of technicians and mechanics who also have left for Austria, Germany and other more congenial Western European climes: These have included nurses, carpenters, locksmiths and skilled workers moved from Poland, Romania, Serbia, and Slovakia to the West where there is an acute skill shortage. This skill shortage has been exacerbated by the deindustrialisation of a number of western states. This is due to the fact that the youth of the west aspire to be investment bankers, pop stars, footballers and reality show celebrities and not engineers and artisans

But the most drastic consequences of the “post-communist breakdown” have been experienced by Ukraine – once one of the most developed republics of the USSR. If in the early 1990s there were 52 million people in the republic, now the population does not exceed 42 million. So much for the revolution of dignity and promises of freedom democracy and abundance promised by the EU. The Kiev Institute of Demography estimates a population of 32 million by 2050 or perhaps sooner. According to recent polls, 35% of Ukrainians declared their readiness to emigrate usually to other Eastern European states; particularly Russia and Poland. The process accelerated after Ukraine received a visa-free regime with the EU: about 100,000 people leave the country every month. Ukraine is not so much a failing state, it is more a dying state.

All of which goes to show that Russophobia doesn’t put food on the table. The peoples of Eastern Europe have been subjected to a three-card confidence trick find the lady, a card game practised by petty thieves on dumb tourists in the streets of central London. It may work for a time, but ultimately the deteriorating conditions of life are and will be such that there will be a search for alternatives.

The global neoliberal regime is beginning to run up against increasing resistance, particularly in Europe. Given that the whole purpose of the regime is to direct money flows to the 1% at the expense of the 99% the political outcome of this was entirely predictable.

La Lotta Continua

  • [1] – Monthly Review Press – 1967
  • [2] – Friedrich List, National System of Political Economy (1841 p.141)
  • [3] – Takis Fotopolous, The New World Order in Action (pp.156-157)
  • [4] – Jerry Mander et al., The Case Against the Global Economy
  • [5] – Source: Trading Economics
  • [6] – www.countryeconomics.com
  • [7] – Michael Hudson, Killing the Host (2015)
  • [8] – “Eastern Europe Experiencing a Deep Demographic Crisis.” – Dmitry Dobrov, Le Monde diplomatique 05 July 2018