- by Graham Holton
- The Guardian
- Issue #2008
Photo: Charcoal Soul – flickr.com (CC BY-ND 2.0)
According to the recent World Bank report, From Crisis to Green, Resilient, and Inclusive Recovery (2021), the Third World is facing great hardships with increasing poverty, unequal wealth distribution, food insecurity, and climate change. The recent massive popular protests in Argentina and Peru are indicative of failed economies. The World Bank plans to fix these problems by reducing the share of the global population living on less than US$1.90 a day by increasing the incomes of the poorest forty per cent. It will do this by applying the same neoliberal economic principles as it has over the past forty years. It is these Washington Consensus policies that have led to increased poverty and political unrest across the world.
The institutions that assist economic development in the Third World, the International Monetary Fund (IMF), World Banking Group (International Bank for Reconstruction and Development, and the International Development Association, etc.) and the United States Department of the Treasury, are based in Washington, DC, not far from the White House, and therefore are named the “Washington Consensus.” These institutions are part of the capitalist system, financed by Western banks lending at market interest rates. They have put in place conditions that increase the wealth of lender countries but place great financial, political and social burdens upon the Developing Countries.
Oxfam International’s report, Inequality Kills (2021), shows that wealth inequality has reduced the income of ninety-nine per cent of the global population and forced over 160 million more people into poverty. Since 1995, the top one per cent of the world’s richest people now have more wealth than twenty times the wealth of the bottom fifty per cent of the World’s population. The Global Gender Gap Index benchmarks the change in gender-based gaps in economic participation and opportunity, educational attainment, health and survival, and political empowerment. The World Economic Forum’s Global Gender Gap (2020) report found that the Covid-19 pandemic had increased the income gap from ninety-nine years to 135 years, meaning it will take another generation for women to reach parity. The report finds women lost $800 billion in earnings in 2020, with thirteen million fewer women in work now than in 2019. The result has been that the poor get poorer and the rich have become staggeringly rich.
International trade is dominated by the Fortune Global 500 corporations. The top fifty companies in this list have annual revenues exceeding US$121 billion each. The top ten global companies by revenue are based in: the USA with five; China with three; Japan and Germany with one each. The Global North continues to dominate international trade. Walmart, the richest company in the world, is owned by the Walton Family. It achieved this status by paying very low wages, enforcing poor working conditions, and being strictly non-union. The Forbes 400 list of the richest Americans in 2021 shows that their collective fortune increased by forty per cent, in the past twelve months, to $4.5 trillion. Jeff Bezos is the richest American, now with a personal wealth of US$201 billion, equivalent to the collective Gross Domestic Product (GDP) of many countries. US billionaires are richer than ever before, and F Scott Fitzgerald reminds us in The Great Gatsby (1925): “Let me tell you about the very rich […] They think, deep in their hearts, that they are better than we […] They are different.” To accumulate so much wealth in so few hands, and yet disregard the suffering of “the huddled masses” says a lot, not just of billionaires, but of the bankers behind the Washington Consensus. This raises two questions, how did this worsening problem come about and why did the Washington Consensus get it so wrong?
There are two main reasons why these institutions give aid to poor countries. US President John F Kennedy said in 1961 that, “foreign aid is a method by which the United States maintains a position of influence and control around the world, and sustains a good many countries which would definitely collapse, or pass into the Communist bloc.” Teresa Hayter argues in Aid as Imperialism (1971) that the political aim of foreign aid is to build up social and economic systems to ensure against any revolutionary Left-wing government coming to power, which would then lose access to international loans if it did. The system ensures that a Socialist government is starved of international funds.
Beside this political reason, aid also enriches the richest countries. In 1993 I interviewed the director of Australia’s Overseas Aid Program, who told me that for every dollar in aid Australia gives we receive three dollars back. Aid is big business for Australia. Since the 1950s, the United Nations’ foreign aid target has been 0.7 per cent of the GDP, yet Australia has never reached this figure. World Vision Australia’s chief advocate, Tim Costello, told The Sydney Morning Herald that, “Aid was at its highest under Menzies, at 0.5 per cent.” From 1963 to 1970 Australia’s highest figure reached 0.62 per cent, and since then, our share of aid to Gross National Income (GNI) declined to 0.22 per cent (2016-17), our lowest on record.
Australia’s Official Development Assistance (ODA) in 2020–21 was $4 billion, under the federal government’s current freeze on foreign aid. The majority goes to Papua New Guinea and the Pacific nations, to strategically counter China’s influence in the region. The Lowy Institute identified a “surge” in foreign aid to the Pacific since 2018, “as geopolitical competition in the region began ramping up,” between Australia and China.
There are many criticisms of the Washington Consensus policies, which are market-oriented and focus on reducing government intervention. Free trade is not in the best interest of developing economies as it makes them vulnerable to market price fluctuations and market crashes. The Washington Consensus enforces the privatisation of state owned enterprises (SOEs) which leads to companies ignoring the social needs of the economy. It also enforces the increased deregulation of market controls which leads to financial and market volatility. Public sector initiatives, such as primary education, primary health care and infrastructure investment are ignored. The consequences of foreign banks giving massive loans to countries that can ill afford them, was the Latin American Debt Crisis of the 1980s and the South East Asian Crisis in 1990s. The credit crisis of 2008, the Global Financial Crisis (GFC), illustrates that free markets are unstable and stock market crashes lead to bankruptcies and high unemployment.
The Washington Consensus had its beginning in 1944, when the United States, the United Kingdom, Canada, Australia and forty-one other countries signed the Bretton Woods Agreement. This regulated the international monetary system through the IMF. The English economist, John Maynard Keynes advocated deficit spending on labour-intensive infrastructure projects to stimulate employment and stabilise wages during economic downturns, now referred to as Keynesian economics.
Today the World Bank operates in 142 countries worldwide. These institutions were set up to rebuild Europe after the war, to control international currency speculation and to reduce the inflation springing from the Marshall Plan pouring millions into Europe. They were not designed for use in Third World economies, which did not have highly trained and educated populations, nor did they have the infrastructures to develop modern economies. It resulted in: Third World countries forcing the driving down of wages; increased unemployment; reduced government spending; and the privatisation of SOEs. This was in order to pay off foreign bank loans, which directly led to civil unrest and political instability.
To ensure international trade stability after World War II, the US agreed to converting paper dollars for gold at $35 per ounce (31 grams). This financial agreement made the dollar the lynchpin of the international monetary system. The Bretton Woods system ended in 1971, when US President Richard Nixon stopped the conversion of dollars for gold. Two years later the current system of floating exchange rates on the international market was put in place. In 1983 the Australian Labor government of Bob Hawke moved the Australian dollar onto a floating exchange rate, making the dollar vulnerable to currency speculation.
More than half of the world’s foreign exchange reserves are in US dollars. The dollar is still the most frequencies used currency used for international trade and every international transaction involving US dollars incurs a fee paid to the US treasury. Countries usually need to hold US dollar reserves to assure creditors that debt payments denominated in foreign currencies can be met. Central banks hold US Treasuries bonds. Commodities such as oil are bought and sold using US dollars. Numerous countries peg their own currencies to the dollar, such as Saudi Arabia, while others use the dollar as local currency, such as Belize and Panama. This centrality of the US dollar ensures that it will not be replaced as the leading reserve currency any time soon.
The World Bank says it assists the poor by “tackling multifaceted challenges, safeguarding human capital, and providing social safety nets to target their most vulnerable people.” Its “Green” projects are based on a framework “which supports green, resilient, and inclusive development” to help address the longer-term challenge of climate change. These “Green Washed” projects are aligned with the goals of the Paris Agreement, starting in 2023. Since 2016 climate projects totalled over US$26 billion, thirty-five per cent coming from the World Bank Group. To reduce debt distress in more than forty countries, the World Bank, the IMF and the G20 (Group of the world’s twenty top economies), through the Debt Service Suspension Initiative, suspended debt service payments in excess of $5 billion. This does not nearly go far enough to alleviate the problem.
When a country is unable to make payments on its bank loans, the IMF is called in for the country to restructure its debts. This requires Structural Adjustment Programs (SAPs) to establish fiscal discipline by privatising SOEs, reduce public spending, reform tax policy, allow the market to determine interest rates and to maintain a competitive exchange rate, liberalise trade, cut wages, reduce welfare spending, increase foreign direct investments, deregulate corporate barriers to entry and exit, and the guaranteed right to own private property. These Washington Consensus policies diminish or eliminate a country’s social and welfare responsibilities, the consequences of which have led to civil unrest, poverty and malnutrition in the Third World.
Australia’s bilateral aid has had little attention in the upcoming election. In the recent budget the ODA will increase to $4.089 billion, marginally up from last year. No increase if taking inflation into account. The then Minister for International Development and the Pacific, Senator Zed Seselja, said that of this, $1.85 billion will go to the Pacific to provide “vital humanitarian assistance.” The present government has given too little aid to countries that desperately need assistance, following the natural disasters brought on by climate change, the COVID-19 pandemic and social unrest in the region. If Australia does not increase its lending, these countries’ only alternative, apart from China, is to seek loans through the World Bank, and bear the consequences.