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By Anwar Shaikh
Under a free trade scheme, a country that is not sufficiently competitive in the global market will end up covering its persistent trade deficit with external debt, it will end up as an international debtor. Practicing neoliberalism in the poorest places in the world is a cruel sport.
We live in a world characterized by enormous wealth and high levels of poverty. This scenario is repeated in most countries. Neoliberalism rules the world. It is a practice apparently justified by a set of assumptions that are rooted in conventional economic theory.
Markets are represented by optimal and self-regulating social structures that, if left to function without restrictions, would allow to optimally meet economic needs, use resources efficiently and automatically generate full employment for all those who wish to work. By extension, the globalization of markets would be the best mechanism for spreading the benefits to the whole world.
The theory and practice of neoliberalism rightly generated significant opposition from activists, policy makers, and academics. However, neoliberalism continues to be a major influence in social science, common sense, and political circles.
In practice, powerful nations and the institutions that uphold and spread this agenda were successful in expanding the law of the market. As a result, huge pockets of poverty and deep inequalities persist around the world and crises continue to erupt. We have just entered the first Great Depression of the 21st century.
The basis of neoliberalism lies in the orthodox theory of free trade, whose central argument is that competitive free trade will benefit all nations. Some critics point out that today the world is far from exhibiting the conditions of competitiveness assumed in the standard economic theory of free trade. They point out that while rich nations preach free trade, when they were moving up the development ladder they used protectionism and state intervention extensively. They even point out that now the rich countries do not even follow his sermons to the letter.
Proponents of neoliberalism have already responded to these accusations: In the past, the competitive market conditions that are necessary for free trade did not exist, therefore the past does not serve as a comparison. However, they argue that, with the help of international bodies, these conditions can be achieved throughout the world. When this happens, free trade will work as promised and world poverty, unemployment and economic crises will disappear.
Free trade between nations works in much the same way as competition within a country: it favors the (competitively) strong over the weak. Globalization is expected to generate collateral damage. This also tells us that developed countries were right to warn, when they were climbing the ladder, that unrestricted international trade was a threat to their own development plans. What the developed world today so strongly denies was true then: the great power of the market is best used when it is associated with a broader social agenda.
In economics textbooks, introductions to free trade theory begin with deliberate misrepresentation. These manuals ask us to analyze two countries as if they were individuals freely participating in a barter. Individuals, they tell us, will give up what they have in exchange for something else only if each considers that they will gain something in the process. And, if their expectations are correct, they will indeed win. Thus, free trade would benefit all who participate in it. The rest are details.
But like any magic trick, this reasoning includes a fundamental deception. In a capitalist world, international trade is led by companies. Local exporters sell to foreign importers who then sell those products to their residents, while local importers buy goods from exporters and then sell them to us. Profitability is what motivates business decisions at each point in the chain.
Traditional free trade theory rests on the assumption that in a financial free market the money flows arising from a trade deficit will reduce the real price of the country's currency (devalue the value of the currency). This will reduce the deficit, since exports will be cheaper for the rest of the world and imports more expensive, until at some point the trade balance and the balance of payments find equilibrium. A trade surplus would generate the opposite path towards the same result.
Both Karl Marx and Roy Harrod offer a compelling counterargument: In a free financial market, outflows lower liquidity and raise interest rates, while capital inflows lower interest rates. None of these effects alter the trade balance. Instead, they induce short-term capital flows that will bring the balance of payments to equilibrium, covering an existing trade deficit with external indebtedness and a trade surplus, boosting an external creditor position.
Under a free trade scheme, a country that is not sufficiently competitive in the global market will end up covering its persistent trade deficit with external debt, it will end up as an international debtor. Conversely, a highly competitive country will have a trade surplus and will become an international creditor.
This is the true secret of free trade: specially designed economic policies are needed to develop a country's industry to a level where it is globally competitive. This explains why Western countries and then Japan, South Korea, and Asian tigers resisted free trade theory and policies so strongly when they were climbing the ladder.
But it also allows us to make sense of the real policies they used in their development process: using access to international markets, knowledge and resources as part of a broader social agenda. The objective should not be to balance the court, but rather to raise the level of the disadvantaged players. In this sense, practicing neoliberalism in the poorest parts of the world is a cruel sport.
Anwar Shaikh, Professor of Economics, New School for Social Research.
Who is Anwar Shaikh?
By Thomas Lukin
Anwar Shaikh is considered one of the most prestigious Marxist economists in the world. He was born in 1945 in Pakistan, but he studied and lives in New York, where he is a professor at the New School for Social Research. "The dominant economic theory is bankrupt," he declared during an interview with the economic supplement Cash in 2009. Over the last forty years his publications have covered a wide spectrum of topics from a critical perspective, such as international trade, effective demand and growth, business cycles, relative price determination, capital mobility, and technological change. “The central concern of my works has been to try to understand the fundamental processes at work in advanced capitalism. How markets work, why growth in that system periodically undergoes general crises, why capitalist development is so uneven in different countries, regions and individuals - explains Shaikh -. My training in conventional economic theory convinced me that neither neoclassical nor Keynesian theory offers a sufficient basis for analyzing these questions. On the other hand, my exposure to the works of Harrod, Leontief, Kalecki, Sraffa, Joan Robinson, and Pasinetti offered me inspiration and comfort. They took me back to the great classical economists: Smith, with his deep understanding of the hidden powers of market forces; Ricardo, with his powerful analysis of the laws of economic policy, and Marx, with his scathing analysis of the inherently conflicting origins, structure and reproduction of the system. I set out to show that it was possible to build a coherent base from the synthesis of these authors. " The economist will visit the country in the middle of the month to participate, along with other heterodox economists, in a conference. Many of his recent work as well as his older productions can be accessed on his New School for Social Research website: http://homepage.newschool.edu/~AShaikh/
Page12, March 2012