Karl Polanyi Revisited: The Purposes and Consequences of Neoliberal

Karl Polanyi Revisited:

The Purposes and Consequences of Neoliberal
Policies in Ghana and Bolivia

Semester Project:

Development and International Relations – 8^th Semester

2014

Project Members:

Bruna Afonso

Han van Kammen

Jeroen Haans

William Towsend

Table of content

1 Introduction            3                

2 Contextual Background                       5         
    2.1 From Keynesianism to Neoliberalism                    5
   2.2 The International Monetary Fund and the World Bank            6
    2.3 Ghana and the IFIs                                7
    2.4 Bolivia and the IFIs                                8
3 Methodology   11                              3.1 Applying theory          11                      3.2 Ghana and Bolivia, a comparative case study                12

    3.3 Content analysis                                13

    4.2 Neoliberalism, monetarism and the shift of IFIs

    4.3 From the Washington Consensus

    4.4 Karl Polanyi’s ‘Double Movement’       20                 

5.3 The case of Bolivia   38                              5.3.1 Bolivia’s Poverty Reduction Strategy                38

        5.3.3 Liberalisation of trade in Bolivia                    40

        5.3.6 Fiscal policy in Bolivia                        44

        5.3.7 Bolivia’s resistance, the government as a social movement?  46      
        5.3.8 Bolivia’s double movement                    47
6 Discussion                                        49
7 Conclusion                                    51    

Appendix    53                Bibliography                                        55

Neoliberalism is the dominant ideology shaping and constraining - for better or worse - our world today. Since about 1978, it has spread to all corners of the globe with its doctrine that market exchange is an ethic in itself (Harvey 2007: 1). It is a theory of political economic practices that propagates that the most effective way to advance human well being is through an institutional framework that is highly conducive to free markets, free trade, privatisation, strict financial policies, a small state and strong property rights (Dowding 2011: 438). Almost all states, either voluntarily or through more coercive measures, have embraced these capitalist neoliberal policies in some form (Harvey 2007: 3). Neoliberalism, then, is at the same time the ideological framework used by major International Financial Institutions (IFI) to implement development strategies. In the context of this project, IFIs refer to, arguably, the two main IFIs; the International Monetary Fund (IMF) and the World Bank (WB).  

In a world where economic crises and problems are regular, and 2.4 billion people live on under $2 a day, the IFIs are highly influential and important actors on the world stage (World Bank 2014a). For example, under their Highly Indebted Poor Countries (HIPC) Initiative, 35 countries, based on a number of conditions they must meet, are receiving funds to cancel their debt. However, there is a large and varying degree of controversy surrounding these institutions and their policies; they have even sparked violent street protests in a number of countries (BBC 2012). Protestors and critics unite in their distaste for the neoliberal policies the IFIs advocate; arguing that the type of globalisation and pure free trade they support has led to an exploitation of impoverished individuals and the environment. Hence inequality, dependency and marginalisation, it is contended, are increasing, rather than decreasing – a contradiction from the proposed purposes of the IFIs policies.

Within the development discourse, the view that economic growth, stimulated through neoliberal projects and strategies, is the means to human well-being is highly contested. Those that disagree with the neoliberal view of development believe higher income does not necessitate a better life. For some commentators, important aspects of life such as rights, opportunities, freedoms, education and sustainability are more important indicators of development rather than a higher GDP (Streeten 2008: 3-5). A growing GDP figure can, for instance, provide an illusion that a country is doing better. A handful of wealthy elites getting richer through selling valuable natural resources to a Western firm can increase GDP figures while income inequality of the respective population remains the same (Streeten 2008: 5-6).

It is with all the above in mind, then, that we come to the problem formulation of this project: What has been the purpose of the neoliberal policies of the International Financial Institutions and what consequences did these policies have for market-society relations in Ghana and Bolivia? The possible aforementioned contradictions provide the reasoning behind our problem formulation. In theory neoliberalism, neoliberal advocates and the IFIs contend that transnational capitalism is the only way for humans to prosper and develop. Yet, it can be argued that there is evidence that the consequences and outcomes of the IFIs neoliberal policies differ tremendously from their intended purposes. By focusing on two case studies – Ghana and Bolivia – we aim to describe, analyse and evaluate the social and economic impact of WB and IMF policies and whether the purposes behind them meet their expectations or not. Karl Polanyi’s ‘Double Movement’ thesis will serve as our theoretical framework since it will be able to provide us with a perspective on how neoliberal policies can induce resistance and what consequences this has for the market-society relations of a country.

Following this brief introduction, the next chapter will provide a contextual background to the problem formulation; explaining the series of events that led to the dominance of neoliberalism and some background knowledge on both Ghana and Bolivia. Subsequently, a methodology is given outlining how the problem formulation is to be solved. Afterward, we draw up the theoretical framework used for our analysis. Next our two case studies are provided: looking individually at the consequences of IFI induced trade liberalisation, privatisation, water privatisation and fiscal policy. Finally, the findings and analysis are discussed; the arguments are tied together, evaluated and then concluded.

The policies that IFIs are implementing in developing countries are strongly influenced by neoliberal ideas. To understand why the IFIs are functioning in the particular way they do, an outline of the rise of the neoliberal paradigm will be given in this chapter. Subsequently, this outline is followed up by a closer inspection of the IFIs. Finally, a short review of the historical relationship between the two countries in question and the IFIs will conclude the contextual background for our analysis in chapter 5.

In 1944, when the second World War was coming to an end, the soon to be victors started planning the reconstruction of Europe. The forty-four allied countries signed an agreement that would change world affairs in a drastic way (Przeworski and Vreeland 2000: 388). The two financial institutions that were founded in the agreement were the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD) (Humphreys 2011: xv). The initial role of the IMF was twofold. Its first task was to manage the exchange rates between countries in relation to the gold standard, while its second objective was to help countries who had problems with their balance of payments by offering them a possibility to apply for emergency funding. The IBRD had as its main goal the reconstruction of a devastated Europe through providing loans (Przeworski and Vreeland 2000: 388).

John Maynard Keynes, a British economist, was one of the driving forces behind the founding of the Bretton Woods institutions. His famous book The General Theory of Employment, Interest and Money had a long lasting influence on economic policies. After WWII Keynesianism was the dominant economic paradigm until the mid 1970s (Palley 2004). Keynesianism emphasises full-employment and a ‘big state’ that has to intervene in the market where there are market failures. Therefore, in a crisis situation the state has to spend money to let their citizens be employed and to keep the economy functioning.

During the mid 1970s Keynesianism lost popularity due to the struggles of the Vietnam War and the Oil Crisis. The combination of stagnation and inflation, together called stagflation, also caused severe economic problems (LK 2011). These problems, in most western countries, led to a reconsideration of Keynesianism because within this paradigm it was problematic to fix the symptoms of stagflation. This is because rising unemployment asks for government spending while high inflation asks for tight economic policies. The rhetoric of ‘free-markets’ won terrain and with the inauguration of Ronald Reagan as US president and the election of Margaret Thatcher as Prime Minister of the UK the way was paved for a shift to neoliberalism (Palley 2004). Neoliberalism is based on the economic liberal ideas first coined by scholars like Adam Smith and David Ricardo who emphasized the importance of a division of labour, the idea of a free-market and concepts like ‘the invisible hand’ and ‘laissez-faire’.

In general, policies associated with neoliberalism are trade liberalisation, export diversification, targeting of inflation, lowering of tariffs, devaluation of countries’ currencies, free movement of capital and cutting in state expenses. Because neoliberalism became the main paradigm in macroeconomics the policies of the IFIs changed as well. After dropping the gold standard the IMF had to reinvent itself because its main task had become irrelevant (Przeworski and Vreeland 2000). Instead it started to focus on underdeveloped countries and together with the World Bank (the former IBRD) the IFIs made it their goal to create economic growth in these countries. The tools used by the IFIs are programs like the Poverty Reduction Strategy Papers (PRSP),  which aim to implement the neoliberal ideas described above.
2.2 The International Monetary Fund and the World Bank

The IMF currently has two key roles. First, it is concerned with solving balance of payments disequilibriums, creating exchange rate stability and increasing the growth of international trade – all of which come under the umbrella of immediate crisis control and smoothing global commerce. Secondly, it is heavily involved in the surveillance of the global economy through coordination with international financial regulatory agencies. All member nations of the IMF have the right to IMF financial assistance; each country, depending on the size of its economy, has a quota and members at any time can use 25% of their quota. If a country faces a crisis, however, and more is needed, up to three times the amount of the quota can be used. This, though, has large implications regarding the conditionality of the financial assistance. Furthermore, nation’s voting rights within the IMF are dependent on the size of its quota, meaning the institution is largely controlled by Western Europe and the US (Kegley and Raymond 2014: 122). Recently, a large proportion of the IMF’s work has focused on stabilizing the economies of underdeveloped nations and creating neoliberal based conditions that they believe encourage, and help to achieve, sustainable economic growth and poverty reduction (Boughton and Lombardi 2009: 1).

The WB, on the other hand, has the primary responsibility for financing economic growth and development. Owned by the governments of its 188 member states, the WB is an investment bank that intermediates between investors and recipients; lending to one and borrowing from the other. It has become the world’s largest source of development assistance and much like the IMF it operates according to neoliberal rules (World Bank 2011: 1). Decision making within the WB is based on votes and perhaps unsurprisingly “votes are tallied according to a weighted system that is intended to protect the interests of the great powers that make substantial contributions to the WBs resources” (Kegley and Raymond 2014: 121). Again, therefore, this IFI is largely controlled by the West. In the next two sections of this chapter we address the relationship between Ghana and Bolivia, respectively, with the IFIs.
2.3 Ghana and the IFIs

Ghana, a state in the west of Africa, gained its independence from Britain in 1957. In the first period of its independence, Ghana experienced high levels of socio-economic growth thanks to its policies of free healthcare, education and mass industrialisation (Hutchful, 1985: 122). However in 1965, due to external shocks, the economic situation deteriorated and, faced with the prospect of needing an external bailout, Ghana approached the IMF for help (Action Aid 2010: 3). However, the Nkrumah administration rejected the conditionalities of the proposed bailout and a year later, after further socio-economic problems, the government was overthrown.

The next government, the National Liberation Council, again, following a drop in living standards, approached the IMF and this time accepted the IMF’s conditionalities. Amongst these were the reduction in government expenditures, large scale retrenchments in the public and private sectors, devaluation of the national currency and a reduction in bank credits (Action Aid 2010: 5). After an election in 1969, the Progress Party became the new government and continued to pursue the IMF’s market oriented prescriptions. During the period 1966-1971 the IMF’s conditionalities produced improved economic growth and the much desired macroeconomic stability (Action Aid 2010: 6). Despite this improvement, however, exports were still largely based on the primary commodity cocoa, leaving Ghana’s economy vulnerable to the volatility of price changes.

By 1972, the Ghanaian economy was in a similar position to its predicament in 1965; reduced growth and increasing fiscal and current account deficits dominated due to falls in cocoa exports, competition, smuggling and unrealistic producer prices (International Business Publications 2012: 62). In response to this, the Ghanaian government implemented further IMF prescriptions – further austerity measures, for instance, which resulted in widespread socio-economic troubles (Action Aid 2010: 8). This resulted in Ghana’s second coup d’état and the Progress Party was overthrown in January 1972 (Shillington 2004: 578). The new governing party, the National Redemption Council, rejected IMF involvement and repudiated their $94.4 million external debts (Amoaka 1980: 40). They also adopted policies of self-reliance and the mobilisation of domestic resources to spur development. In this regard, for two years, the government was highly successful (Dickovick, 2013: 91).

However, the 1970s oil price hikes along with political corruption and fiscal indiscipline, which led to a large fall in the government's tax base, resulted in a heavy reliance on the banking sector for printing money in order to pay their debt. This, amongst other factors, created high inflation and a public insurrection against the government; in 1978 another coup ensued (Shillington 2004: 579). Between 1979 and 1983, following the overthrow of the government, varying levels of negative GDP growth and tumultuous inflationary trends had tremendous implications for the socio-economic welfare of Ghanaian citizens (Action Aid 2010: 10).

Consequently, in 1983, the Ghanaian government, facing further economic woes, sought foreign assistance. After initially approaching the Soviet-bloc, they approached the IMF and WB for help and the standard structural adjustment program (SAP) was announced by the government (Aryeetey et al 2000: 44). Some of the conditionalities included  the liberalisation of trade, fiscal austerity, privatisation and the removal of subsidies (Akonor 2006: 87-90). These reforms reflected the neoliberal thinking of both the IMF and WB with their optimistic view of the market mechanism as a driver of efficiency and development. Between 1983 and 1986, the IFIs regarded Ghana's progress as a huge success. However, acknowledging the social costs of the IFI’s neoliberal strategies in Ghana, the Ghanaian government implemented the Program of Action to Mitigate the Social Cost of Adjustment to address the situation (Action Aid 2010: 12). However this did little to improve the situation of the poor. In our analysis in chapter 5 we will elaborate on the purpose of these neoliberal policies and, subsequently, their consequences regarding market-society relations in Ghana.

It was in the early 1950s that Bolivia for the first time directly experienced the influence of the IFIs. As was highly common for Latin American countries at that time, Bolivia followed import substitution industrialisation (ISI) policies which were characterised by “high tariff walls, subsidized and managed credit, public sector expansion, currency overvaluation ... price controls and subsidies and a constant distributive battle for a piece of the state-directed pie” (Mann and Pastor 1989: 170-171). But these ISI policies proved to be ineffective for socio-economic development. Therefore, largely in line with US cold war policy and backed by US aid, a specific austerity program for Bolivia was developed by the IFIs to align it with the western side of the bipolar world order (Kofas 1995: 215).

The main goal of the US and the IFIs was to contain the nationalist revolution that was brewing in 1952 by creating social and political stability through a strengthening of Bolivia’s economy. But the measures that were implemented were falling short of their expectations. It was therefore decided by the Estensorro administration, that the Bolivian military had to be strengthened so it would be in the position to oppose the rise of the communist workers militias that were incited by the Cuban Revolution. But instead of creating stability, the empowerment of the army created a precedent that would herald a period of political and economic instability. The situation escalated when in 1964 the Estensorro administration was overthrown by a military coup, and after the collapse of Bolivia’s democratic system through this event, the country experienced many coups and counter-coups (Perkins, 2008: 95).

           During the turbulent period after 1964, Bolivian negotiations with IFIs came to a halt. The promotion of nationalism and sovereignty were essential for the military junta to exert their authority and this left little room for outside interference. But aside from the halted negotiations with the IFIs, the result of competing military juntas in the following two decades, appeared to be far from satisfactory concerning Bolivia’s economic performance. Eventually in the early 1980s, Bolivia endured an economic crisis that was caused by large public fiscal deficits and a foreign debt of approximately US$ 3 billion that greatly exceeded the country’s gross domestic product (see One World Nations Online 2014). Because the military junta was unable to address the economic problems, it was forced to dissolve itself and Bolivian democracy was reinstated in 1982.

           But the new democratically elected administration of Siles Zuazo faced a great challenge in improving Bolivia’s socio-economic condition. In addition to the hyperinflation that had reached over 24,000 percent in 1985, the global tin market collapsed and caused even more problems for Bolivia since it was largely dependent on this specific export sector. The staggering effect of the hyperinflation caused the Bolivian government to turn once again to the IFIs for assistance (Mann and Pastor 1989: 163-164). The Estensorro administration came back into power in 1985 and replaced the failing government of Zuazo through democratic elections. But the Estensorro administration abandoned its left ideology in favour of complying with neoliberal IFI policies. In our analysis in chapter 5 we will elaborate on the impact of these neoliberal policies on market-society relations in Bolivia.

3. Methodology

In order to provide a clear methodological approach for our project, we build on Alan Bryman’s Social Research Methods (2004). In the first section of this chapter, we elaborate on how we apply neoliberal theory and Karl Polanyi’s ‘Double Movement’ thesis in order to answer our main research question. In the second section we explain our choice to take Ghana and Bolivia as our case studies. Subsequently, in the third section we examine the method we use for our research, namely content analysis. Finally, in the fourth section we discuss our study’s limitations and what methodological problems we encountered.

Our main research question is What has been the purpose of the neoliberal policies of the International Financial Institutions and what consequences did these policies have for market-society relations in Ghana and Bolivia? The first aim of our study is to determine the purpose of the neoliberal policies developed by the IMF and the WB. In order to understand these neoliberal policies, it is necessary to inspect the theories of scholars like Milton Friedman and John Williamson who are often pointed out as the main drivers behind neoliberal thought. Especially the latter will be important for our analysis since the work of Williamson culminated into the implementation of the Washington Consensus (WC) by the IFIs in the late 1980s. The current socio-economic development of Ghana and Bolivia cannot be analysed without taking the effect of the WC into account. Therefore the implementation of the WC serves as the starting point of our analysis. Furthermore, the theories of the aforementioned neoliberal scholars provides us with the theoretical framework regarding the purpose of the neoliberal policies of the IFIs.

The past 30 years the influence of the IFIs has been substantial concerning the socio-economic development trajectory of Ghana and Bolivia. But while there is some economic success to be noted regarding the implementation of neoliberal policies, economic success does not automatically imply social development. Some studies suggest that neoliberal macroeconomic policies are not sustainable and that they have not been able to reduce poverty and income inequality (Kohl and Farthing 2009). The mixed reviews of the IFIs objectives, achievements and impacts across developing countries have been at the heart of the discussions about development, growth and poverty.

Because of the 2009 financial global crisis, the role of the IFIs and the design of their policies invoked a lot of critique from scholars as well as from the beneficiary governments of developing countries. This critique has in some cases led to strong opposition to the implementation of neoliberal policies by the IFIs. We therefore use Polanyi’s Double Movement thesis to be able to address the origin of this resistance and what consequences the neoliberal policies have for market-society relations. Polanyi argues that countermovements emerge as a form of resistance to neoliberal policies in order to protect the society from the self regulating market. Thus, Polanyi’s theory will be suitable to understand why and how these forms of resistance develop.

Through applying the aforementioned theories we are in the position to analyse in how far they reflect reality, while we use them at the same time as a guideline to ascertain the influence and impact of the IFIs on the socio-economic development trajectory of Ghana and Bolivia. Our study can thus be seen as mainly deductive (Bryman 2004: 8-9).