Jeffrey Sachs’ Bid for the World Bank: Lessons for the Future

Posted by Jenny O'Connor on April 9, 2012 · 2 Comments 

By Jenny O’Connor ~ Dissident Voice ~ Published: April 9th, 2012.

Jeffrey Sachs’ bid for the Presidency of the World Bank was backed by progressive publications from the Huffington Post to the Guardian and by the governments of a number of developing countries.

This support is understandable given his current positions on financial assistance and debt relief, and his occasional anti-neoliberal rhetoric. There is also a sense that he was the ‘best of a bad crowd’ and that if he had succeeded in his bid this would have broken the undemocratic top-down practice of Washington appointed leaders to date.

His supporters, however, seemed to forget his long history of promoting neoliberal ‘shock therapy’ across the developing world. Sachs’ recommendations in the past included promoting the reform agenda regularly imposed by the IMF since the 1980s, such as the freezing of wages, the removal of state subsidies and price controls on oil and food, the downsizing and privatisation of state companies, drastic cuts in government social spending and the dismantling of tariff barriers to trade. The only divergence in Sachs’ recommendations from his more neoliberal Harvard colleagues during his government advisory years was his advocacy of debt relief and increased economic aid alongside neoliberal structural reforms. But the result of the neoliberal policies Sachs recommended around the world created what Naomi Klein described as a “gaping wound” for which increased aid served as little more than a “band aid”.

Also, unlike many of his neoliberal colleagues, and apparently as a matter of principle, Sachs refused to advise unelected governments. But he had no problem advising and supporting policies implemented by governments for which they had absolutely no electoral mandate. Thus in the 1980s and 1990s he either personally recommended or praised from afar policies implemented by the so called ‘bait and switch’ leaders of a number of Latin American governments.

What became known as the ‘bait and switch’ phenomenon was the strategy whereby leaders (usually with a track record of left-wing polices) ran for government on an anti-neoliberal platform in order to ‘bait’ the electorate but once in government ‘switched’ to enact deep cutting neoliberal reforms, for example in Argentina, Bolivia, Venezuela, Peru and Brazil. The degradation of democratic legitimacy in Latin America as a result of the ‘bait and switch’ strategy has been far-reaching, resulting in some cases in the collapse of the party political system, the rise of political populism and a steep decline in electoral participation. Yet Sachs was still being praised years later by the New York Times as an “evangelist for democratic capitalism”.

Bolivia

The role Jeffrey Sachs played in curbing hyperinflation in Bolivia is regarded as one of his greatest achievements. This was during his period as an official economic advisor to the first ‘bait and switch’ leader, President Víctor Paz Estenssoro, in 1985-6. Paz had been re-elected because of the legacy of his first term as President, when he had started to redistribute land to Bolivia’s indigenous peasants and nationalised the tin mines. But once returned to power he proceeded to enact the most radical neoliberal restructuring programme ever attempted in a democracy.

Hyperinflation was successfully tackled but the social costs of the reform period were very high. Sachs’ advised removal of government subsidies sparked a crisis in Bolivia’s small business sector. Nationalised companies were downsized and thousands of public sector jobs cut. The cumulative result was a drastic increase in unemployment. Just two years after the reforms were initiated the informal sector had mushroomed to embrace 70% of the entire urban workforce . For those still in employment, wages remained at third world levels while the prices of food and basic amenities soured thanks to Sachs’ advised removal of price controls. Labour flexibilisation eroded long fought for workers rights as well as weakening Bolivia’s once strong trade unions.

Naturally, the poorest elements of society were hit hardest, and it is estimated that the unemployment crisis forced one in ten workers into some involvement in the cocaine industry. In their book, Unsettling Statecraft: Democracy and Neoliberalism in the Central Andes, Catherine Conaghan and James Malloy claim that this boost to the cocaine industry helped stabilise the Bolivian economy: “in addition to generating income, the injection of ‘coca-dollars’ into the banking system is believed to have helped stabilize the currency”. This is an issue on which proponents of Sachs’ shock therapy maintain a conspicuous silence.

A leaked US diplomatic cable revealed that even the US believed that neoliberal reforms in Bolivia had “clearly failed to meet public expectations for increased incomes and jobs”. The cable referred to the rise in inequality, particularly between those of European and indigenous decent,stating that “race-based social and economic differences have exacerbated the sense of racial separation, and amount, in the view of some critics, to a kind of de facto economic apartheid”.

The neoliberal reform period in Latin America was characterised by a great increase in inequality and poverty, a sharp decline in real wages, labour rights and job security and a rise in living costs, the degradation of democratic legitimacy and the exclusion of large groups of society from basic health care and education services. Even in countries that achieved economic growth and decreased inflation over this period, such as Chile and Argentina, the social costs were immense due to the negative effects of economic reform falling disproportionately on the poor. Yet Sachs went on in the 1990s to advise precisely the same policy prescriptions (accompanied by the ‘band aid’ of Western aid packages) to transitioning post-Soviet states, prioritising monetary stability over basic standards of living.

Russia

The most spectacular failure of Sachs’ advisory missions in the former Soviet republics was the case of Russia itself, where his neoliberal ideology led him simply to dismiss the advice of numerous international economists who advocated supporting a gradual transition to capitalism with an emphasis on democratic consensus building. The impatient approach supported by Sachs’ ultimately led to the collapse of the Russian economy, the transfer of Russia’s vast state owned recourses into the hands of a corrupt oligarchy, and the plummeting of real wages, life expectancy, GDP and industrial output. Even the US Government Accountability Office found itself forced to investigate if the Harvard Institute for International Development (HIID) had acted in breach of US law by channeling hundreds of millions of USAID money to corrupt privatizers, and to what extent Harvard advisors had personally profited from the process. The conclusions of the report led to the firing of Jonathan Hay (HIID’s General Director in Moscow) and Andrei Schleifer (Director of HIID’s Russia Project). This followed the withdrawal of millions in USAID funding amid allegations that the HIID had “abused the trust of the United States Government by using personal relationships…for private gain”.

Jeffrey Sachs, reformed man?

Sachs has since moved on from neoliberal reform to become an advocate of aid and debt relief. He even appeared to a cheering crowd (and a small number of outraged Latin American activists) at the Occupy Wall Street protest, decrying the greed of bankers and handing out free copies of his book. Much to the dismay of the Occupy Nigeria Movement, however, Sachs has openly praised the Nigerian neoliberal economic reform agenda which is being led by the IMF and Finance Minister Ngozi Okonjo-Iweala, himself fresh from a top post at the World Bank. “If the president and his team carry through on their plans for bold, honest, equitable and transparent reforms, they are well placed to usher in a new day for Nigeria”, he wrote. His praise extended to President Goodluck Jonathon’s unexpected removal of oil subsidies in January, a decision that sparked mass strikes and demonstrations as the immediate doubling of fuel costs inevitably hit the poorest hardest.

Most worrying, however, is his total failure to acknowledge any of his past interventions as mistaken. In fact, he continues to boast about the purely monetary successes of these interventions, rarely referring to their social consequences which he is now so quick to identify in the actions of others. Sachs’ simplistic ideological conviction was that the same policy formula would work in virtually any situation, regardless of acute political, historical and socially diverse environments.

This is the same simplistic and destructive approach to development economics that has led to a global counter-movement demanding reform of world financial institutions. To assume, therefore, that Sachs would have represented some radically different future for the World Bank is misguided. At best, his history and current views on development economics demonstrate that he remains firmly within the post-Washington consensus, advocating what has been coined ‘neo-liberalism with a human face’; the same old unequal system with a bit more financial assistance and a bit less debt to lessen the effects of the wrecking ball.

Lessons for the Future

As Broad and Cavanagh of the Institute for Policy Studies argue, the progressives of the world should have backed the best progressive candidate for the job of heading the World Bank rather than promoting Jeffrey Sachs’ bid, on the simplistic basis that he represents the lesser of two evils. They highlight not only the consequences of Sachs’ history of neoliberal shock therapy but also his present day “top-down and formulaic” approach to development.

A more suitable candidate would have garnered a far greater support base in the global South and the result would have been a more global push to reform the current system of Washington appointed World Bank leaders. Suggested candidates have included former President of Brazil Luiz Inácio Lula de Silva for his efforts to unite the global South to push for World Bank, IMF and WTO policies that reflect the needs of both developed and developing countries, former head of the United Nations Development Programme, Gus Speth, and  Nobel Prize winning economist Amartya Sen. Instead, the progressive Western press and a handful of countries backed the bid of a man who the majority of the developing world still see as a leading architect of the doctrines of economic reform that caused such serious hardship among many of the poorest societies on earth. A great opportunity to open a real global debate on democratic reform of the financial institutions has been lost but perhaps lessons have been learned for the future.

Filed under International Financial Institutions, World Bank · Tagged with Bolivia, Jeffrey Sachs, Neoliberalism, Russia, World Bank