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1-Page Summary of Globalization And Its Discontents
The Noble Origins
Before the end of World War II in 1944, delegates from major Allied Powers and other countries met in Bretton Woods, New Hampshire. They agreed to establish certain international economic institutions such as the International Bank for Reconstruction and Development (the World Bank) and the International Monetary Fund (IMF).
In the post-WWII era, governments created institutions to deal with economic problems. The thinking was that governments should supervise the market because it is powerful and irrational. Governments established an international economic government under John Maynard Keynes’ guidance.
The IMF and the World Bank had specific roles in this economic government. The role of the IMF was to enforce rules regarding currency and capital controls, while the function of the World Bank was to provide funding for postwar reconstruction.
Since the end of WWII, these institutions have had a purpose. But their original purposes are now irrelevant because postwar reconstruction is over and the international monetary system that made them necessary has collapsed. Now they’ve found new purposes: The World Bank’s goal is to eliminate poverty through loans to poor countries; the IMF enforces economic orthodoxy, which it calls “the Washington Consensus.”
The Washington Consensus
The Washington Consensus had a large impact on the world, especially in Latin America. It turned away from Keynesian economics and embraced the market. The Washington Consensus also broke down barriers and freed up markets to compete with each other. This was part of an anti-government movement that began in the 1980s.
Privatization
Keynesian economics always accepted government involvement in the economy. In fact, it prescribed that as a solution to market failure. The U.K., for example, had numerous state-owned enterprises after World War II and so did many other European countries. This was also true of developing nations with help from the World Bank.
Privatization was a good idea in theory, but it didn’t work out well. This is because the privatization process often enriched corrupt leaders and impoverished countries. Privatization also shut down programs that were important to poor people. However, the IMF insisted on enforcing this policy as a condition for providing assistance to poor countries.
Liberalization
Liberalization means freeing. In this context, liberalization means the freeing of capital. Capital controls were a cornerstone of Keynesian economics and was used to regulate currency exchange rates, interest rates, the movement of capital in and out of countries, etc. This regulation is no longer needed as it gets in the way of progress and slows down economic growth by forcing money into unproductive areas. However, small countries are easily swamped by the waves and tides that move large amounts of money around because they have little control over their economies when compared to larger countries like China or America.
Speculative capital, or “hot money,” floods into developing countries in search of speculative profits. This influx raises the prices of goods and services beyond their actual value, wasting resources on foolish or ill-conceived investments. When market sentiment changes (for no apparent reason), hot money rushes out again, causing economic turmoil and recession. Sometimes liberalization is bad for a country’s economy because it can bring about instability without any real benefits to its people. The IMF should not blindly enforce this kind of policy as a condition for providing assistance to poor nations; it should consider that there might be better ways to help them improve their economies than forcing them to liberalize their financial markets.
