We should take note of what we see as the beginning of the end of the neoliberal approach to development. The process of discrediting that development model begins in the aftermath of the east Asian financial crisis of 1997–98.
At the time there appeared to be nothing new in the nature of the east Asian crisis or in the crisis response. But, in fact, the east Asian crisis marked the gradual beginning of the end of the neoliberal consensus in the development community.
The severe constraints on policy space that followed the east Asian crisis created momentum behind a new vision – that developing countries had to put in place new strategies and institutions to prevent a repeat of the events of the late 1990s.
Policymakers in a number of Asian countries and in other successful developing countries sought to insulate themselves from the hardships and humiliations suffered by east Asian policymakers at the hands of the IMF. Indeed, as a consequence of the crisis, the IMF suffered a loss of purpose, standing and relevance.
In the early 2000s, demand for the institution’s resources was at a historic low. In 2005, just six countries had standby arrangements with the fund, the lowest number since 1975. From 2003 to 2007, the fund’s loan portfolio shrank dramatically: from $105bn (£63bn) to less than $10bn.
The fund’s loan portfolio contracted even further after the loans associated with the east Asian crisis were repaid, as those countries that could afford to do so deliberately turned away from the institution. This trend radically curtailed the geography of the IMF’s influence.
In this context, the IMF began to soften its traditional opposition to policies that regulate the international movement of capital (ie policies called “capital controls”). At the same time, the World Bank also began to show signs of grudging change in its traditional opposition to industrial policy.
In the first instance, the current crisis appears to have been good to the IMF. It has rescued the institution from the irrelevance that followed the east Asian crisis by re-establishing its central place as first responder to financial crisis.
But the restoration of the IMF was associated with important change. For the first time in IMF history, the institution issued its own bonds, and this provided the vehicle for unprecedented developing-country financial support for the institution. At the 2009 G20 meeting, several developing countries (namely, China, Brazil, Russia, South Korea and India) committed $90bn to the fund.
And as the eurozone crisis unfolded, the IMF’s managing director, Christine Lagarde, called on developing countries to step forward with a second tranche of commitments. The new developing-country funding commitments were announced in June 2012 when the leaders of the Brics countries (namely, Brazil, Russia, India, China and South Africa) met informally on the eve of the G20 leaders’ summit.
China committed $43bn; Brazil, Russia and India each committed $10bn; while South Africa pledged $2bn. These new commitments reflect the economic power and autonomy of these rapidly growing economies. Indeed, as they have begun to contribute substantial funds to the IMF, developing countries have also become more outspoken in their demands for governance reform within the institution.
So far, these demands have resulted in very modest agreements to change voting weights at the institution (and even these have not yet been ratified by the US). But we cannot help but conclude that IMF governance reform is now firmly on the agenda. Equally important, the current crisis has also marked a substantial curtailment in the geography of the institution’s influence in the global south.
Those developing countries that have been able to maintain their autonomy during the crisis have used the resulting policy space to pursue a variety of counter-cyclical macroeconomic policies. These include inter alia programmes to ensure access to affordable credit to domestic firms; the pursuit of expansionary monetary and fiscal policies and capital controls.
At the same time, developing countries have expanded existing regional, sub-regional, bilateral and national financial institutions and arrangements and created new ones. It is now clear that the east Asian crisis and the current crisis have created the conditions for new patterns of resource accumulation, a growing diversity of financial architectures across the global south, and the beginnings of important shifts in power in the governance of the global economy.
It is notable that even recent reports of institutions like the World Bank have acknowledged the trend towards “economic multipolarity”.
Just as the Asian crisis laid the groundwork for institutional developments that have deepened only in the current crisis, so do we expect the current crisis to catalyse further innovation along the lines already in place, and in directions not yet imagined, when the next period of instability emerges.
This is an excerpt from Ha-Joon Chang and Ilene Grabel’s Reclaiming Development: an Alternative Economic Policy Manual (republished by Zed Books, 2014).