Neoliberal Finance and Crisis in the Developing World

By Grabel, Ilene | Monthly Review, April 2002 | Go to article overview

Neoliberal Finance and Crisis in the Developing World


Grabel, Ilene, Monthly Review


From Mexico to Argentina

The Mexican financial implosion of 1994--1995 marked the beginning of a parade of financial crises throughout the developing world that today shows no signs of abating. From the Asian crises of 1997--1998, to Russia and Brazil shortly thereafter, to Turkey in early 2001, and Argentina today, financial instability has swept through those developing countries that have embraced neoliberal financial reform. Former International Monetary Fund (IMF) Managing Director, Michel Camdessus, had it right when he dubbed the Mexican debacle the "first financial crisis of the twenty-first century." What he didn't understand was that the neoliberal financial regime that his institution had installed throughout the developing world contributed to the very turbulence that he lamented.

In the Mexican case, neoliberal economists tried to dismiss the crisis by claiming that it was an aberration stemming from the country's "exceptional features." Neoliberals cited economic mismanagement, corruption, and political instability as underlying causes of the Mexican crisis. A few years later, when many of the world's fastest growing economies in Asia collapsed, neoliberals again took refuge in exceptionalism in explaining the collapse of the very countries that they had earlier termed "miracle economies." In the Asian crisis countries, neoliberals discovered new--yet somehow deeply rooted--patterns of cronyism, unsustainable speculation and indebtedness, and misguided government intervention. In the Russian case, neoliberals identified rampant corruption, tax evasion, and governmental mismanagement as factors behind that country's financial crisis. Neoliberals explained the Brazilian crisis as the outcome of the government's futile effort to fix the value of the currency and its uncertain commitment to neoliberal reform. Finally, neoliberals identified domestic political conflict, the failure to target corruption and pursue economic and political reform, and the mistaken effort to fix the exchange rate as key factors behind the Turkish financial crisis.

Neoliberals rely on the benefit of a conveniently short memory in accounting for the recurrent financial crises in developing countries. Economies that pre-crisis are favorites of the international financial community are uniformly recast post-crisis as tinderboxes with serious and glaring deficiencies.

Argentina is the latest site of neoliberal revisionism. For the last decade, neoliberals praised the economy's remarkable transformation. The centerpiece of the economy's reform was the creation in 1991 of a currency board, an institution charged with maintaining a fixed (one-to-one) rate of exchange between the peso and the U.S. dollar and with restricting any growth in the domestic money supply to the receipt of additional holdings of dollars. Currency board rules reinforced broader programs of neoliberal reform by stipulating that the domestic money supply could be increased only following improvements in the country's net export performance or its ability to attract private capital inflows (such as foreign loans and investments in the stock and bond market). Up until the country's recent financial implosion, neoliberals credited the strictures of the currency board with resolving the country's longstanding problems of high inflation, currency instability, and a lack of investor confidence and transparency in economic management. The IMF and its consultants frequently invoked the success of the Argentine currency board in efforts to export the arrangement to other countries (and indeed, it was exported to Estonia, Bulgaria, Bosnia and Herzegovina, among other places).

The Argentine currency board moved from savior to demon when it and the economy encountered difficulties too serious and too public for even the most ardent neoliberals to ignore. Neoliberals now claim that the currency board was unsustainable insofar as its linchpin was an exchange rate arrangement that tethered the country's economic fate to that of the U. …

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