On Sunday April 16 Jeffrey Sommers wrote:

From: jeffrey sommers jsommers@latnet.lv

First, I agree with Gundar's assessment for the need to develop a balanced economy with many mid size businesses. He states the obvious, and the obvious often needs stating. Unfortunately, the monetarist policies pushed on East Europe, and much of the 3rd World generally, have made achieving his stated goals difficult. By capping inflation at all costs they have eliminated demand in the economy which might support such mid-size businesses. I have met no shortage of talent in Latvia. In fact, there is a surplus of it. Indeed, Latvia exports its talent! Also, I do not think Latvians were any less prepared than East Asians for an economic miracle. In fact, their position in terms of education was considerably better. Yet, it is macroeconomic policy which conditions and limits the economy's growth. It determines whether an environment which encourages productive development will occur, or rather one which only leads to profit at the expense of development. I think we all know Latvia got the latter. In sum, rather than thinking there is some problem with Latvians, as some arguments so far suggest, by contrast, I only find problems with the environment in which Latvians find themselves in. Historically, development does not take generations. It usually occurs fairly fast when the conditions are right. In fact, what usually happens is that if there are no signs of development a nation risks falling into a low growth poverty equilibrium trap. In other words, they risk long-term stagnation. I think there is a danger of Latvia falling into just such a situation.

The IMF, the World Bank (less so now, but quite problematic before say 1996), the US Treasury, and the Economics community generally, all shared a common ideology (neoliberalism), and control over structural institutions which allowed them to implement it. They indeed have exercised an inordinate degree of influence in shaping the global economy. In fact, not only have they had ideological hegemony, but they have had the power to back it up by refusing loans to nations rejecting their doctrine. Moreover, the lack of global cooperation in controlling (control, not stopping) capital movements has meant that most nations deviating from their orthodoxy can expect to see capital race out of those nations, thus impoverishing them. What's more, a local oligarchy usually evolves which is served quite well by these policies, and so they cooperate with this program.

What has this meant for E. Europe, according to Stiglitz in his Nov./Dec. 1999 article "Who is to Guard the Guards Themselves" in CHALLENGE MAGAZINE? For East Europe it has meant in increase in poverty the past decade from "4 percent to 45 percent of the population, using the $4 per day standard." They have managed the miracle of creating both "lower growth and greater inequality" in the past decade. This is pretty remarkable considering the comparison is with the horribly dysfunctional Soviet system at the peak of its crisis. Where is Latvia situated in this picture? According to World Bank data it has the lowest per capita GDP of all prospective EU candidate nations, and even lower now than Russia and Belorus. We must remember that Latvia is one of the nations that most slavishly followed Western advice and policy. A decade out we have the results of that policy.

Yet, let's expand our focus to cover the globe. Jay Mazur, in a recent edition of FOREIGN AFFAIRS argues that 200 million people more are living in absolute poverty than in 1987. Deregulation and privatization have been accompanied overall by slower rates of growth in both poor and rich nations, with the exception of East Asia, which rejected the IMF/Washington Consensus rules.

All of this has been hailed a success in the name of slaying the dragon of inflation. Granted inflation above certain levels harms development. Yet, what has not been generally recognized is that inflation below certain levels also harms development. These are no mere academic parlor games. These policies have huge consequences for peoples lives, and can even determine whether people can live at all.

Gundars finishes his note mentioning something about anarchists, or some such thing. I would only counsel that we look to the seminal work of the great Hungarian economic historian, Karl Polanyi. In 1944 Polanyi warned in his THE GREAT TRANSFORMATION that if the world ever was foolish enough to implement another economic liberal order (as it did again these past 20 years) that the result would be extreme reactions, such as fascism, communism, etc. Well, we have taken the path Polanyi warned against. And it is leading in some unsettling directions. I would suggest to Gundars that it is the very policies neoliberal policy makers and economists have implemented that risk bringing us to the cusp of chaos. Anarchists and other trouble makers, real or imagined, need an environment conducive to causing trouble. Current neoliberal policy has created just such an environment.

In solidarity with Latvia,

Jeff Sommers

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