The Global Political Economy

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There are three main theories and worldviews involved in analyzing the global political economy. The first of these worldviews is liberalism. Under liberalism, individual corporations are regarded as the basic units of analysis. Moreover, the market is superior to the state, and the government plays a minimal role in the economy. The theory was developed by Adam Smith and David Ricardo, economists by their own rights.

Later, it was modified by Raymond Vernon and turned into the Sovereignty-at-Bay theory. The second theory is economic nationalism. It is the worldview that takes the state as its basic unit of analysis. In this theory, the state is superior to the market. In addition, the government, through its various agencies, plays a significant role in the economy.

The government regulates prices, production and such other issues related to the economy. The theory was originally developed by Hamilton and List. It was later modified by Kindleberger. The third form of worldview is structuralism theory. In this theory, class is taken as the basic unit of analysis. Under structuralism, the dominant class in the society wields significant control over the market and the state.

For example, the dominant class controls the means of production, as well as the government. The current paper is written against this background. In the paper, the author examines how the International Monetary Fund (herein referred to as the IMF) has used liberalism to control developing nations in Latin America and Asia.

The International Monetary Fund has a long history in the global economy. The organization was created on December 27^th, 1945. The initial membership of the organization was 45 nations. The brains behind the creation of the organization were motivated by several objectives. One of the major objectives of the IMF was to stabilize exchange rates in the global market.

The organization was also aimed at regulating and stabilizing the international payment system after the Second World War. Member countries contribute money to the organization. Nations facing various financial challenges borrow from these funds and repay their loans with interest.

Another role of the IMF is to provide guidance to member states on how to grow their economies and formulate sound economic policies. As of today, the organization has 188 members drawn from all continents in the world.

Many countries, especially those with transitional and developing economies, have encountered various challenges emanating from budget deficits. An example of how the IMF relates with its member nations is illustrated by the agreement that the organization made with Brazil in late 1990s. Around this time, the country was going through a crisis related to its Balance of Payments (herein referred to as BOP).

The organization and the government agreed that after receiving financial assistance, the Central Bank will make sure that interest rates in the country remain high. The demand was just one of the conditions put in place by the IMF. According to the IMF, the conditions were put in place for two main reasons. The first justification given by the organization for the conditions was to keep investors in the country.

The organization felt that the new policies will not only lock the existing local investors in the country, but will also attract foreign investor. The second reason used to justify the conditions was to reduce the rate of economic growth in the country. However, just like many other developing nations, Brazil found faced various challenges in efforts to implement the new policies prescribed by the organization.

For example, the government found it politically difficult to adopt some of the measures. If implemented, the government felt that the policies will make the regime unpopular in the country. High interest rates may also lead to civil unrest in the country.

At the end of the day, the Brazilian government was unable to address the budget deficit. The relationship between the IMF and the Brazilian government can be analyzed from the perspective of the liberalism theory. According to this theory, the IMF, as an organization, can have primacy over the state.

The superiority of the organization to local governments is expressed through the various conditions given by IMF, conditions that member states have to stick to for them to retain their membership in the organization.

The conditions put in place by IMF and other similar organizations are normally referred to as structural adjustment programs (herein referred to as SAPs). The conditions, which are set by other bodies, such as the World Bank Group (herein referred to as WBG) and the World Trade Organization (herein referred to as WTO) are associated with radical trade liberalization.

Such liberalizations are not supported by most developing nations in the world. The main reason for this lack of support is the fact that the developing nations feel that the liberalization policies are structured to benefit the developed nations at their expense. However, given the amount of money such countries owe the IMF, they do not have any option other than to comply with the demands of these organizations.

Analysts and economic scholars refer to this situation as arm-twisting on the part of the organizations. Such arm-twisting measures, which are meant to put pressure on developing countries, were evident during the Uruguay Round negotiations. During the negotiations, most third world economies expressed their lack of support for the process.

The lack of support was evident in their passive participation in the process, as well as lack of representation. However, the developing nations were dragged into endorsing the 1994 Marrakesh Accord, which established the WTO.

The accord also sealed the negotiations made during the Uruguay Round. Only a minority of developing countries, most of them belonging to the Cairns Group, were in support of WTO. Their support was pegged on hopes of WTO widening the market for their agricultural products.

The forceful liberalization of markets, which is championed by the IMF, has not benefited the developing economies as expected. For instance, before 1997, most nations in East Asia had fairly successful economies. For a period of about thirty years, ending in 1997, the economies of these nations recorded positive growth. The countries had recorded impressive results in the health, education, and economic sectors.

In addition, they had very low levels of poverty. However, in the early 1990s, the markets were liberalized due to international pressure from IMF and the United States of America. Consequently, such countries as Thailand received short-term capital assistance, which could not be used for long term investments.

For example, the country was unable to use the capital assistance to put in place such infrastructures as factories. Instead, the money was used to pump a real estate bubble, which eventually burst.

Just like in the case of Latin America in 1997, the IMF prescribed controversial policies to address the economic challenges faced by Thailand. The organization advised the government to put in place stringent and politically unviable measures to address the economic challenges. Soon after this, all the other nations in the region were suffering from the same problems.

The most surprising thing was that the IMF ought to have known that the remedy was not working, given the effects it had on Brazil and other nations. However, the organization went ahead and prescribed the same “solution” in Thailand.

In the late 1990s, the economies of Latin America and East Asia were significantly different from one another. As a result, the attempt by the IMF to solve the challenges faced by economies in the two regions using the same strategy was a big mistake. For instance, the rate of inflation in South Korea at this time was 4%.

While the problems in Brazil and other Latin American countries had to do with their imprudent governments, the imprudence in East Asia was in the private sector, and not in the public sector. As such, austerity was not the approach to use in East Asia.

Other organizations, such as the World Bank, were becoming increasingly aware of the negative effects of market liberalization. To address the problem, the organizations were advocating for stringent conditions for financial aid in the region. However, the IMF refused to act with consideration.

The crux of the problem is that whereas the IMF is intended to serve the developing countries, it is largely controlled by industrial economies. In practice, and through the imposition of trade policies, the IMF is crippling democracies around the world. In theory, the organization is expected to support the same democratic institutions.

It is widely believed that the IMF negotiates the conditions for receiving aid with member countries. However, this is not the case given that it is not possible to have balanced negotiations when the power to decide is vested on one party.

Additionally, the organization does not give member countries enough time to build consensus or even consult with their civil societies and parliaments. At times, aid is offered on a plate that seems quite open, but the real covenants are negotiated in secret.

Before dispatching aid, the IMF sends its mission of economists to the member country. The mission lacks knowledge with regard to the culture of the developing countries. The mission is given a very short time to come up with the most suitable program for the country.

At the end, the information they collect and present to the IMF does not represent the nation’s development strategy. Furthermore, some of the models used by the economists are either out-of-date or flawed given that they are developed without taking into consideration the economic dynamics of the developing world.

The East Asia crisis spread to Indonesia, and the IMF again offered the same solution of funds with stringent conditions, especially increasing interest rates. The argument of the IMF this time round was that Indonesia would make it through like Mexico. However, a closer look reveals that Mexico had not made it through the financial crisis with the help of the IMF.

On the contrary, the country managed to get over the depression because of the increase of exports to the US. At that time, Japan was Indonesia’s main partner in trade. As a result, the situation in Indonesia was highly explosive, socially and politically, compared to that in Mexico. The IMF was just about to intensify the capital strife in the country through its restrictions that would hinder the relaxed flow of currency.

At a time when the nation needed fuel and food subsidies, the government was forced to cut its spending. As a result, subsidies were eliminated. In 1998, World Bank’s vice president in East Asia averred that the region was going through a recession.

In light of the record high rates of unemployment and the number of businesses that went bankrupt, the vice president could not have been more right in summing up the situation. To make matters worse, the region was unable to take advantage of opportunities provided by low exchange rates.

By the end of 1998, the depression reached Russia. The similarity between what happened in Russia and East Asia was represented by the participation of the United States and IMF. In the case of Russia, the IMF was largely advised by a group of macroeconomists who did not have an idea with regard to Russian economic history.

Lack of adequate consultations, which was fueled by a know-it-all attitude exhibited by the IMF and local macroeconomists, led to the economic setback that was recorded after the 1993 elections. The economic shock experienced in the country did little to move Russia towards the envisaged market economy.

The Treasury and the IMF paid very little attention, if any, to institutional infrastructure. Instead, the agencies provided the oligarchs with the opportunity to plunder the economy.

In conclusion, it is important to reiterate that the IMF was formed to assist developing nations overcome economic and capital challenges. However, the organization has ended up controlling these economies through liberalization of capital markets.

In the end, developing countries are stuck with deficits that have turned into recessions and depressions. In light of these realities, the IMF should abandon liberalism and let the developing countries grow their economies at their own pace without interference.

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The Global Political Economy

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