COGNITIVE DISSONANCE AND THE WASHINGTON CONSENSUS
by Marshall Auerbach
January 2002
“We have to end the decades in Argentina of an alliance that has made the
country suffer, and that's the alliance between the political power and the financial
sector and not an alliance with the productive sector. The financial sector is
important, but in its proper place'”
New Argentinean President, Eduardo Dulhade
The market fundamentalists are already out in force in arguing that Argentina’s recent
declaration of default and devaluation is yet another in a series of “one-off accidents” with no
broader implications for the globalisation project. According to the “Washington consensus”,
democratic, neo-liberal capitalism is still inevitable, rendering the manifold cultures and
traditions of the world redundant. The confidence of today’s globalisers is largely predicated
on a Utopian belief that the model itself is fundamentally solid, that each emerging market
disaster can easily be explained away by particular errors which made otherwise sensible
economic policies end in failure. Argentina is but the latest example of this line of reasoning,
but it was also the argument given when Mexico collapsed in 1994 and Brazil in 1998.
Similarly, it was not the attempted importation of the Anglo-American model that was to
blame for Asia’s startling economic collapse in 1998, but rather symptomatic of the region’s
endemic and long-lasting “crony capitalism”.
By refusing to acknowledge any weaknesses associated with their championed model of
economic development, however, the advocates of neo-liberalism/market fundamentalism
unwittingly doom their cause to irrelevance. While very few of us would advocate a retreat
into the mindless protectionism and economic nationalism that characterised much of the
1970s, the inflexible, indeed theocratic, manner in which a market fundamentalist agenda has
been imposed throughout the developing world ultimately threatens to do as much to
contribute to the demise of free markets and economic liberalisation, as Soviet-style
communism did during the Cold War.
There is also another dimension to this problem: that of collective cognitive dissonance
amongst globalisation’s champions in Washington. Just last November, a day after the
ministerial declaration in Qatar announcing the start of new negotiations to initiate a new
round of talks to reduce tariffs and liberalise trade on everything from wheat to insurance
policies, the Senate Agriculture Committee recommended a five-year, $88 billion farm subsidy
bill. Perhaps better than the version the House passed a month earlier, a 10-year, $171 billion
bill, but hardly a victory for free trade by any stretch of the imagination.
Weeks later, amidst great hoopla, President Bush secured “fast-track authority” to negotiate
new free trade agreements, a vote hailed by the New York Times as a “vote for free trade”.
Minutes before the final vote, however, Republican leaders also promised to take back
liberalisation measures already in effect that covered textile imports from the Caribbean and
sub-Saharan Africa. The day after the House vote, the International Trade Commission
recommended tariffs of up to 40 per cent be imposed on imported steel products, a
recommendation ultimately accepted by the President. Perhaps Mr. Bush doesn’t recognise the
contradiction, but it does become much more difficult to lambaste newly-elected Argentinean
President Eduardo Duhalde’s nationalistic retreat to a Peronist-style protectionism in the
context of these actions.
True Argentina made mistakes on its own, as did Mexico before that. As David Hale notes in a
recent piece on the subject (“Will Argentina Destroy the Washington Consensus?” –
Dec. 27, 2001):
“The great tragedy of the past year is that Mr. Domingo Cavallo did not recognize the
basic contradictions in Argentina’s policies when he returned as finance minister during
March. He enjoyed such a high level of investor credibility that he was well suited to
pursue both a currency adjustment and debt restructuring to revitalize the economy. But
instead he attempted to defend policies from the past which were no longer working.
It is always difficult for highly successful finance ministers to accept fundamental policy
corrections when market conditions change. Mexico, for example, had a major currency
crisis and near debt default during late 1994 and early 1995 because her out-going
finance minister had refused to accept a policy adjustment during his final days in
office. The peso had come under selling pressure throughout 1994 because of the
Chiapas uprising, political assassinations, a large current account deficit and rising U.S.
interest rates. During the final week of November, the Mexican cabinet had a secret
meeting and voted to devalue the peso. But Mr. Pedro Aspe refused to carry out the
policy because he had spent the previous four years promoting investor demand for pesos
in New York, Boston, London and elsewhere. Instead of making an orderly currency
adjustment before the new president took office, Mr. Aspe created a situation in which
global investor confidence continued to erode, wealthy Mexicans rushed to export capital,
and foreign exchange reserves fell so sharply that the central bank was forced to float
the peso on Dec. 19th. Instead of devaluing modestly, the peso lost over half of its
value, reserves continued to decline and Mexico had to seek international help to avoid a
default.”
But what Hale fails to note is that organisations such as the IMF and the US Treasury were
equally loath to push the required policy corrections on Mexico and Argentina in a manner
that could have damaged America’s banking and commercial interests; they were more
content to retain the status quo and continue the bailouts. These IMF handouts in effect
continued to underwrite Wall Street’s investments in the country, thereby perpetuating a form
of moral hazard – ultimately at great cost to Argentina.
The effects have been disastrous for the real economy. For the last four
years the economy has been in serious recession. The public health system is in tatters and the
public education system is a shadow of its former self.
Basic public services are negligible and the average wage in real terms is now worth half of its
1974 value. So the deterioration - in both economic and social terms - has been dramatic
indeed. Meanwhile, the economic tailspin has adversely affected tax revenues and, as a
consequence, government deficits remained high despite expenditure cuts. And the external
debt has ballooned from $43 billion in 1983 to more than $155 billion this year.
Indeed, the manner in which the Treasury/IMF have dealt with Argentina over the past 5 years
is symptomatic of a mindset which insists on “keeping the show on the road” at all costs,
seeking short-term stop-gap solutions at the risk of deferring difficult long-term problems
and making them worse in the process. This has also been the story of the American economy
over the past 5-6 years. It is “Rubinism” writ large.
The Fund’s position in current circumstances is particularly ironic. It has now decided that
the fixed exchange system is untenable and should be abandoned with a (presumably) major
depreciation of the peso. After all, it was the IMF which first championed and then supported
the highly restrictive macroeconomic austerity measures Argentina undertook to support the
Currency Board, and praised the anti-inflationary bias. Abrupt changes of direction are
nothing new for the IMF of course. Months after praising the economic performance of
Thailand and Korea in its 1997 annual report, its then managing director, Michel Candessus,
blamed Asian governments for the deep failures of macroeconomic management and financial
policies that the IMF had recently discovered when the countries’ respective financial crises
erupted.
There is also an element of idealisation of the American model implicit in the Washington
consensus. Indeed, it is worthwhile pondering the extent to which the disparity between the
ideal and the sordid reality of America’s finance capitalism (see Enron) has provided the fuel
for reactions against the US that seem to most Americans to be unjustifiable and vastly
disproportionate to the “help” that they offer around the globe. By seeking to shape the world
under the rubric of globalisation completely according to the logic of US markets, irrespective
of local social norms and cultural mores, by failing to recognise the disparity between words
abroad and actions at home, the Washington consensus apologists risk spawning a “jihadic”
reaction to modernity and Western civilisation as a whole.
The collapse of Argentina’s economy appears reasonably well-contained thus far. The
explanation given is that it was widely discounted in the financial markets, (if so, it does beg
the question as to what on earth could have induced the IMF to agree to yet another bailout
package just 4 months ago when presumably these same problems would have been already
recognised by the markets – have things really changed that dramatically since then?). In
reality, the market’s alleged “discounting power” is often oversold. The policies to be
implemented in subsequent months by the new government in Buenos Aires have not yet been
fully formed; nor do the markets yet appreciate the extent to which events in Argentina could
yet produce further intellectual contagion in other parts of the developing world that have
hitherto operated their regimes under Washington’s tutelage. Complacency, as opposed to the
market’s discounting mechanism, appears to be a much more credible explanation for the
comparatively muted global reaction to Argentina’s debt default thus far.
In any case, within Argentina itself the initial omens for the country once viewed as
Washington’s star pupil do not provide much long-term comfort for supporters of liberal
economic policies and supply-side deregulation. Already Duhalde has abandoned the
convertibility program that pegged the peso at one to the dollar, with a 28 per cent
devaluation of the Argentinean currency against the greenback announced yesterday.
But his inaugural speech went much further: it was essentially a condemnation of a much
broader economic philosophy: the panacea sold by the US Treasury/IMF all over Latin
America in which deregulated markets, privatised state businesses and liberalised trade rules
for once-closed economies were viewed as a quid pro quo for growth and ever increasing
prosperity. If this sort of a widespread retreat were to extend well beyond Argentina, it would
obviously bode poorly for stock markets around the globe, given that the seeming inevitability
of such policies has been a major factor underpinning the unprecedented global bull market
in equities and bonds over the past 20 years.
The type of backlash now being witnessed in Argentina is precisely what we expected to see
when criticising previous misconceived attempts to prop up Argentina’s increasingly
untenable convertibility system. By effectively leading the country into a deflationary
cul-de-sac with no way out, the US Treasury/IMF has spawned a massive backlash against the
entire neo-liberal model of economic development that has sustained the whole process of
globalisation. IMF intervention, the vast social costs inflicted on the country as a quid pro
quo for receiving continued economic assistance, and the comparatively limited “haircuts”
incurred by Wall Street’s investment and commercial banking interests, have all combined to
set up America and its economic model as the scapegoat for the pain that has been associated
with the disastrous policy aftermath.
An overt repudiation of the open market in a frantic Argentina would reverberate across the
region, challenging uncertain democracies like those in Ecuador and Peru, while fanning the
embers of anti-globalisation movement. The reaction within Argentina demonstrates the
risks of religiously adhering to a encouraging a “one-size-fits-all” set of economic rules
without making any kind of fundamental adjustments when market conditions change.
America’s global market culture appears to its apologists as both voluntary and wholesome;
but it can appear to others as both compelling (in the sense of compulsory) and corrupt--not
exactly coercive, but capable of seducing society into a willed but corrosive secular
materialism. The Argentinean President alluded to this in his inauguration speech when he
spoke of a model that “has destroyed everything”, undermined the social cohesion of the
country and exacerbated, rather than alleviated levels of inequality throughout the country.
Given that they are among the prime beneficiaries of globalisation, trans-national
organisations such as the IMF are incapable of examining or recognising the adverse social
consequences of the policies that they have repeatedly advocated for countries such as
Argentina, Indonesia, Korea, Thailand, or Mexico. This is in part why the same mistakes
keep being made over and over again. Their economic model also remains a sacred cow of
American politics and has become identified with America’s claim to be a model for universal
civilisation.
But to what extent does the model as ideal jibe with reality? We heard much about “crony
capitalism” in Asia in the aftermath of the financial crisis of 1997/98. There has been less of
this discussion in light of the recent bankruptcy of Enron, which seems to have become (in the
words of banking analyst Charles Peabody) “the poster child for what ails [the US] economy
– excessive leverage, financial engineering, aggressive accounting and conflicted interests”.
Peabody is correct: the Enron fiasco is just the latest embodiment of an unholy melding of
political, banking and business interests, more akin to a corporatist model in Mussolini’s
fascist Italy, than a transparent, liberal market economy that supposedly is the essence of the
American system. Enron, and other incidents like it, represent the crony capitalism writ
large. Is this really the model to which countries like Argentina should aspire?
The whole Enron fiasco plays out like something out of Indonesia under the Suharto regime.
Consider that before leaving her office as head of the CFTC in 1992, Wendy Lee Gramm (wife
of Republican Senator Phil Gramm) kick-started a rule-making process at the behest of
various energy companies and Wall Street banks to exempt energy swaps from government
oversight. At the time of the CFTC ruling, Enron was a strong financial backer of Senator
Gramm and Mrs. Gramm herself subsequently took a seat on Enron’s board. Had these swaps
incurred a modicum of regulatory oversight, it is possible that many of Enron’s problems
might have been uncovered well before bankruptcy. The Financial Times has also reported
that her husband, Senator Phil Gramm, helped to resurrect legislation to ensure that much of
the over-the-counter derivatives market remained outside the control of the nation’s
commodities laws on December 15, 2000; the package was attached to 200 pages of legislation
of an 11,000 page general public funding bill just before Congress was about to be adjourned
for Christmas. Enron was a strong financial backer of Senator Gramm.
Then there is the unhealthy banking nexus between the energy giant and its leading creditor
bank, JP Morgan/Chase. Banking analyst Charles Peabody has documented the extent of
“circularity” in this relationship:
[I]n the early days after Enron filed Chapter 11, J.P. Morgan Chase acknowledged
having $900 million of exposure to Enron. Some $500 million was secured and some
$400 million was unsecured. In subsequent filings, the investment community is learning
that such exposures may not prove to be an accurate depiction of the Enron fallout. For
example, as trustee for the Enron bonds, Chase has played a role that may cause the
company to be dragged into the courts. Additionally, Chase has a 10 year, $750 million
contract with Enron to manage its energy needs. If Enron fails to survive as an
operating entity, this contract will need to be renegotiated with another energy manager.
Thirdly, in a recent bankruptcy filing covering some $2.1 billion in syndicated loans,
Chase (on behalf of the bank syndicate which includes Bank of America N.A., Fleet
National Bank, and BNP Paribas) acknowledged that it was seeking the collateral behind
the bank loan. After reading the filing, it is obvious that a loan that JPM thought was
secured has great uncertainty to it in that the banks don’t know where those assets are
or even the composition of the assets.”
Breaking down the supposedly excessive links between banks and their corporate customers
has been one of the principle objectives of the Treasury and IMF in Korea since the onset of
the 1997 crisis in Asia. But events like Enron/JP Morgan-Chase do much to undermine the
rationale for implementing such “reforms”. The unhealthy nexus embodied in the case of
Enron between banks, business and government also makes mockery of the implicit claims of
the Washington consensus that, contrary to appearances and underlying realities, its values
and economic system are superior and American institutions are invariably the solution for
the world’s most intractable problems.
Where the Argentineans, Asians, and much of the developing world see cognitive dissonance
and hypocrisy, the exponents of globalisation and neo-liberalism see a series of once-off
problems, each to be ring-fenced with no broader implications to be derived from the lessons
of the particulars. What's wrong with Disneyland or Nikes or the Whopper, they ask? We are
just "giving people what they want." But, as writer Benjamin Barber has recently noted
(“Beyond Jihad and McWorld – The Nation, Jan. 2002), “this merchandiser's dream
is a form of romanticism, the idealism of neo-liberal markets, the convenient idyll that
material plenty can satisfy spiritual longing so that fishing for profits can be thought of as
synonymous with trolling for liberty.”
The retreat of the new Argentinean government into a program of classic 1970s-style
Peronism may indeed reflect a desperate and ultimately destructive reaction against
aggressive markets in a free-trade world. But however misguided, this reaction is
understandable in the context of a consensus that unthinkingly seeks to use market
fundamentalism to colonise every aspect of human relations under the guise of “liberty” and
“globalisation”, and then changes the rules of the game when things begin to come unstuck.
It is not for supporters of free markets and liberal economic reforms to explain glibly why the
Argentina experiment failed, without honestly addressing some of the very real flaws
inherent in their own system with its multitude of contradictions: protectionism used as a
means of securing “fast track authority” ostensibly to negotiate free trade agreements,
market triumphalism in the context of crony capitalism. Until this gap between the ideal and
reality is addressed honestly, we will likely see more Argentinean-style backlashes across the
globe. Social injustice and an unregulated wild capitalism that leaves no space for
pre-existing cultural and social mores not only create conditions on which terrorism feeds but
invites overreaction in the name of rectification |
