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Against Volcker

by PATRICK BOND

One of Barack Obama’s leading advisors has done more damage to Africa, its economies and its people than anyone I can think of in world history, including even Cecil John Rhodes. That charge may surprise readers, but hear me out.

His name is Paul Volcker, and although he is relatively unknown around the world, the 82 year old banker was recommended as ‘a legend!’ to Obama by Austan Goolsbee, the president-elect’s chief economic advisor (and a professor at the University of Chicago). Volcker was recently profiled by the Wall Street Journal: “The cigar-chomping central banker from 1979 to 1987, he received blame for driving up interest rates and tipping the US into the deepest recession since the Great Depression.”

We’ll consider the impact of Volcker’s rule on Africa in a moment. But why dredge up crimes nearly thirty years old?

This kind of reckoning is important, as three current examples suggest:

* Reparations lawsuits are now being heard in New York by victims of apartheid who are collectively requesting $400 billion in damages from three dozen US corporations who profited from South African operations during the same period. Supreme Court justices had so many investments in these companies that in May they had to bounce the case back to a lower New York court to decide, effectively throwing out an earlier judgment against the plaintiffs: the Jubilee anti-debt movement, the Khulumani Support Group for apartheid victicms, and 17 000 other black South Africans.

* Last month a San Francisco court began considering a similar reparations lawsuit – under the Alien Tort Claims Act – filed by Larry Bowoto and the Ilaje people of the Niger Delta against Chevron for 1998 murders similar to those that took the life of Ken Saro-Wiwa on November 10, 1995.

* In Boston last month, Harvard University’s Pride Chigwedere released a study into preventable deaths – at least 330 000 – caused by Thabo Mbeki’s AIDS policies during the early 2000s. The ex-president has ‘blood on his hands,’ according to Zackie Achmat of the Treatment Action Campaign, requesting a judicial inquiry.

The same critical treatment is appropriate for Volcker, because of the awesome financial destruction he imposed, within most Africans’ living memory. His policies stunted the continent’s growth when it most needed internal economic coherence.

Even the International Monetary Fund’s official history cannot avoid using the famous phrase most associated with the Fed chair’s name: “The origins of the debt crisis of the 1980s may be traced back to and through the lurching efforts of the world’s governments to cope with the economic instabilities of the 1970s… [including the] monetary contraction in the United States (the ‘Volcker Shock’) that brought a sharp rise in world interest rates and a sustained appreciation of the dollar.”

Volcker’s decision to raise rates so high to rid the US economy of inflation and strengthen the fast-falling dollar had special significance in Africa, write British academics Sarah Bracking and Graham Harrison: “1979 marked a radical change in global economic policy, inaugurated with the ‘Volcker Shock’ (so called after Paul Volcker, then chairman of the Board of Governors of the Federal Reserve) when the United States suddenly and dramatically raised interest rates, [which] increased the cost of African debt precipitously, since a majority of debt stock was held in dollars. The majority of the newly independent states had been effectively delivered into at least twenty years of indentured labor. From that point on access to finance became a key policing mechanism directed at African populations.”

Adds journalist Naomi Klein in her book The Shock Doctrine, “In developing countries carrying heavy debt loads, the Volcker Shock was like a giant Taser gun fired from Washington, sending the developing world into convulsions. Soaring interest rates meant higher interest payments on foreign debts, and often the higher payments could only be met by taking on more loans… It was after the Volcker Shock that Brazil’s debt exploded, doubling from $50 billion to $100 billion in six years. Many African countries, having borrowed heavily in the seventies, found themselves in similar straits: Nigeria’s debt in the same short time period went from $9 billion to $29 billion.”

The numbers involved were daunting for low-income countries. According to University of California economic geographer Gillian Hart, “Medium and long-term public debt shot up from $75.1 billion in 1970 to $634.4 billion in 1983. It was the so-called Volcker Shock… that ushered in the debt crisis, the neoliberal counterrevolution, and vastly changed roles of the World Bank and IMF in Latin America, Africa, and parts of Asia.”

Elmar Altvater of Berlin’s Free University recalls how the world “slid into the debt crisis of the 1980s after the US Federal Reserve tripled interest rates (the so called ‘Volcker Shock’), leading to what later has been described as the ‘lost decade’ for the developing world.”

How ‘lost’? The British Medical Journal complained in 1999 of orthodox World Bank structural adjustment policies that immediately followed: “According to Unicef, a drop of 10-25% in average incomes in the 1980s-the decade noted for structural adjustment lending-in Africa and Latin America, and a 25% reduction in spending per capita on health and a 50% reduction per capita on education in the poorest countries of the world, are mostly attributable to structural adjustment policies. Unicef has estimated that such adverse effects on progress in developing countries resulted in the deaths of half a million young children-and in just a 12 month period.”

A few honest mainstream economists also explain Africa’s economic crisis in these terms. “The external shock that might have precipitated the developing country slowdown is the increase in real interest rates after the Volcker Shock in 1979”, wrote World Bank senior researcher William Easterly in 2001. “The interest on external debt as a ratio to GDP has a statistically significant and negative effect on growth.”

A few blocks away from the Federal Reserve, one of Volcker’s closest allies was World Bank president Tom Clausen, formerly Bank of America chief executive officer. As the Volcker Shock wore on, in 1983, Clausen offered his Board of Directors this frank confession: “We must ask ourselves: How much pressure can these nations be expected to bear? How far can the poorest peoples be pushed into further reducing their meagre standards of living? How resilient are the political systems and institutions in these countries in the face of steadily worsening conditions? I don’t have the answers to these important questions. But if these countries are pushed too far, and too much is demanded of them without the provision of substantial assistance in their adjustment efforts, we must face the consequences. And those will surely exact a cost in terms of human suffering and political instability.”

At that point, “Africa was not even on my radar screen”, Volcker told interviewers Leo Panitch and Sam Gindin.

Meanwhile, the Bank’s sister institution, the International Monetary Fund, was described by Tanzanian president Julius Nyerere as “a neo-colonial institution which exploits the poor to make them poorer and serves the rich to become richer.” Volcker had, ironically, played a central role in the destruction of the Bretton Woods system’s dollar-gold convertibility arrangement, effectively a US$80 billion default on holders of dollars abroad, when in 1971 he served Richard Nixon as under-secretary of the Treasury.

Eight years later, he was chosen to chair the Federal Reserve, which sets US (and by extension world) interest rates. As Jimmy Carter’s domestic policy advisor Stuart Eizenstat explained, “Volcker was selected because he was the candidate of Wall Street. This was their price, in effect.”

In 1985, Ronald Reagan offered Clausen’s job to Volcker, but he decided to stay on at the Fed until 1987, when he went back to a high-paid Wall Street job.

Now he is back, and according to a recent profile by the Wall Street Journal, “Obama is increasingly relying on Mr. Volcker. His staff now routinely reviews policy proposals and speeches with Mr. Volcker.

Conference calls and face-to-face meetings of the Obama economic team are often reorganized to accommodate his schedule. When the team discusses the financial crisis, ‘The most important question to Obama: What does Paul Volcker think?’ says Jason Furman, the campaign’s economic-policy director… When Sen. Obama raised the prospect of a package of spending and tax measures to ‘stimulate’ the economy, Mr. Volcker disapproved. ‘Americans are spending beyond their means,’ he told the group. A stimulus package would delay the belt-tightening and savings needed, he added, proposing instead better regulation and assistance to banks.”

By November 8, the odds of Volcker being appointed Treasury Secretary were 10%, according to the Journal’s betting pool. The race was between New York Federal Reserve Bank president Tim Geithner and former Clinton Treasury Secretary Lawrence Summers, at 40% odds each. Geithner served under Summers and Robert Rubin in Bill Clinton’s Treasury Department during the 1990s.

Summers is best known for the sexism controversy which cost him the presidency of Harvard in 2006. But fifteen years earlier he gained infamy as an advocate of African genocide and environmental racism, thanks to a confidential World Bank memo he signed when he was the institution’s senior vice president and chief economist: “I think the economic logic behind dumping a load of toxic waste in the lowest-wage country is impeccable and we should face up to that… I’ve always thought that underpopulated countries in Africa are vastly underpolluted, their air quality is vastly inefficiently low…”

After all, Summers continued, inhabitants of low-income countries typically die before the age at which they would begin suffering prostate cancer associated with toxic dumping. And in any event, using marginal productivity of labour as a measure, low-income Africans are not worth very much anyhow. Nor are African’s aesthetic concerns with air pollution likely to be as substantive as they are for wealthy northerners.

Such arguments were said by Summers to be made in an ‘ironic’ way (and in his defense, he may have simply plagiarized the memo from a colleague, Lant Pritchett). Yet their internal logic was pursued with a vengeance by the World Bank and IMF long after Summers moved over to the Clinton Treasury Department, where in 1999 he insisted that Joseph Stiglitz be fired by Bank president James Wolfensohn, for speaking out against the impeccable economic logic of the Washington Consensus.

Volcker, Summers and a whole crew of similar capitalist economists are whispering in Obama’s ear for a resurgent US based on brutal national self-interest. They need Obama to relegitimate shock-doctrinaire neoliberalism – and in turn, they need Obama’s Africa advisors (like Witney Schneidman) to promote military imperialism in the form of the Africa Command.

Can Obama instead hear supporters like Bill Fletcher, Imani Countess and Danny Glover, who made TransAfrica (as one example) a visionary economic justice organization, by fighting the policies of Volcker and Summers? Can AfricaAction, the Institute for Policy Studies, the American Friends Service Committee, Jubilee USA, ActionAid and other genuine advocates for the continent get a word in edgewise, between fits of cackling from the corporate liberals who think they own Obama? Will the president-elect ever get advice from economists James K. Galbraith of the University of Texas or Center for Economic and Policy Research codirectors Dean Baker and Mark Weisbrot, who correctly read the various financial crises way ahead of time, and whose records promoting social justice would serve Africa far better?

Probably not. So it is vital for Africans to wake up to the danger that the likes of Volcker and Summers represent. Anyone paying attention to the continent’s economic decline since 1980 knows the damage they did, but Obama apparently needs to hear more of their sins against his father’s people before he chooses his Treasury Secretary next week. And while he’s at it, how about a revision of Obama’s utterly neoliberal ‘fundamental objective’ for the continent, which is “to accelerate Africa’s integration into the global economy”?

PATRICK BOND is the director of the UKZN Centre for Civil Society: http://www.ukzn.ac.za/ccs.  He can be reached at pbond@mail.ngo.za

 

Patrick Bond has a joint appointment in political economy at the Wits University School of Governance in Johannesburg, alongside directing the University of KwaZulu-Natal Centre for Civil Society in Durban. His latest book is BRICS: An Anti-Capitalist Critique (co-edited with Ana Garcia), published by Pluto (London), Haymarket (Chicago), Jacana (Joburg) and Aakar (Delhi).

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