Can the US Form of Capitalism be called ‘Neo-Colonialism’?

Two points trigger us to conclude this. Firstly, innovations by American MNCs help them garner exponential profits from emerging and underdeveloped countries while poor just get access to these new technologies. Secondly, international institutions such as IMF and World Bank are more of money lending machines of the advanced countries than constructive economic interventionists.

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Can the US Form of Capitalism be called ‘Neo-Colonialism’?
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Two points trigger us to conclude this. Firstly, innovations by American MNCs help them garner exponential profits from emerging and underdeveloped countries while poor just get access to these new technologies. Secondly, international institutions such as IMF and World Bank are more of money lending machines of the advanced countries than constructive economic interventionists.

Recently, there was news that India has been removed from the United States ‘currency manipulation’ monitoring list. The US Treasury said the ‘monitoring list’ includes those ‘major trading partners that merit close attention to their currency practices’. China, Japan, South Korea, Switzerland and Germany were also on the list. The US had added India to its ‘monitoring list’ in 2017 for ‘questionable foreign exchange policies’. The Secretary of the US Treasury, Steven Mnuchin had said in a statement that they will continue to monitor and combat unfair currency practices, and encourage policies and reforms to address large trade imbalances. Sources say the Treasury report is required by Congress to identify countries that are trying to artificially manage the value of their currency to gain a trade advantage, for example by keeping the exchange rate low to promote cheaper exports.

This can also be seen in the context of the trade war with China and Trump’s intention to remove India from the GSP regime.

But all this make us wonder why is it that USA has a hold on the world economy like no other country? We never see India or even China or for that matter any other country making an announcement like this in spite of all countries having something like a Treasury Department.

The answer lies in the way the international economic order has been shaped with the emergence of USA as a powerful force in the 1940s which led to the Bretton Woods conference in 1944. In this conference, the participating countries agreed to change over to the dollar standard from the existing gold standard, i.e. from now on the national currencies would be pegged to the dollar which in turn would be pegged to gold. Therefore, the exchange rates were fixed and if the respective currency value became too high, then the central bank would print more currency to reduce the value and if the value was low, then the central bank would buy up the currency from the market to reduce the supply and thus bring it back to normal levels. Also now the countries would redeem their currencies for dollars instead of gold.

All of this meant that the world economy was adjusted to the dollar. As the dollar became a substitute for gold, its value began to increase relative to other currencies even though its worth in gold remained the same. This primacy of the dollar continued even when the Bretton Woods system collapsed as there was no serious challenger to the dollar.

But even more important than the primacy of the dollar argument is the creation of global institutions like the International Monetary Fund (IMF) and the World Bank through the Bretton Woods agreement.

These days the IMF provides loans to help member nations to come out of financial crises and fix balance of payments problems while the goal of the World Bank Group is to provide financial and technical assistance to developing countries around the world in an effort to reduce poverty and support development.

Both the IMF and the World Bank’s policies and roles have been criticized and they have been accused of being a tool for the spread of the liberal capitalist order.

Africa has for long been seen as a poverty stricken continent with corrupt leaders and underdeveloped countries saddled with huge debts and critics have blamed this on neo-colonialism perpetrated by the IMF and World Bank as can be seen in the case of Tanzania mentioned by Investopedia: In 1985 the IMF came to Tanzania with the aim of turning a broke, indebted socialist state into a strong contributor to the world economy. Since that time the organization has run into nothing but roadblocks. The first steps taken were to lower trade barriers, cut government programs and sell the state-owned industries. By 2000 the once-free healthcare industry started charging patients and the AIDS rate in the country shot up to 8%. The education system that was once free started to charge children to go to school, and school enrollment, which was at 80%, dropped to 66%. As a result, the illiteracy rate of the country shot up by nearly 50%. Also, In the period from 1985 to 2000 the per capita GDP income dropped from $309 to $210. This is an example of how the organization failed to understand that a one-size-fits-all strategy does not apply to all countries.

There is a similar story from Malawi in which President Bakili Muluzi says that the IMF forced his government to sell the country’s maize reserves just before a drought hit the country in order to repay its loans. This created a huge food shortage at a time when the reserve stocks could have come to the rescue of the people.

According to an article in Foreign Policy in Focus “structural adjustment saddled Africa with low investment, increased unemployment, reduced social spending, reduced consumption and low output, all combining to create a vicious cycle of stagnation and decline.”

The IMF and the World Bank have pushed for lesser governmental control over the economy. But in practice this has been seen to be suicidal for African economies like the case of Tanzania.

The World Bank’s 2008 World Development Report itself says that the structural adjustments dismantled the elaborate system of state agencies that were in place to provide the farmers with access to credit, insurance and cooperatives. The report says that the expectation was that the entry of private players which would reduce the state burden and improve quality. However, that did not happen and small farmers were exposed to risks and vagaries of the international market in a way not seen earlier. Western entry helps the western MNCs to sell their products to huge new markets and repatriate profits back to their home countries without benefitting these third world countries.

The ensuing agricultural crisis and food shortage allowed Western companies to move in and capture a new market because of their much cheaper products helped by government subsidies.

Critics of the IMF and World Bank say this is the manifestation of what the former US Agricultural Secretary, John Block once said, “The idea that developing countries should feed themselves is an anachronism from a bygone era. They could better ensure their food security by relying on US agricultural products which are available, in most cases at lower cost.”

Also it is said that their involvement in Africa has actually increased debt and kept poor countries poor so that the richer countries can keep exploiting their resources and earn through the mounting interests. Till the time real transformation and recovery does not come about, the suspicion that these banks are trying to sell loans and trying to open up new projects and markets for western companies to serve the liberal-capitalist order will continue.

And theoretically speaking, Immanuel Wallerstein’s World Systems theory of international relations, i.e. of the ‘core’ countries exploiting the ‘periphery’ would continue.

FDI in general, is typically seen as a good thing for low-income countries attracting FDI in order to grow the economy and create jobs can be crucial.

However, less talked about is the fact that foreign investment is not necessarily positive for the countries involved.

One of the main effects is the increase and consolidation of transnational corporations’ power because of capturing new markets, access to cheap labour etc and again to be remembered is that most of these corporations are based in the West.

This is good for the companies involved – and usually for the economies of the countries in which they are based.( home country of the MNC).

To get the right benefits out of privatization, the IMF, World Bank and the government of the country have to identify the “right’ industries, companies and products according to the domestic situation, i.e. whether the country has the right kinds of infrastructure, raw materials and skills) and the global market conditions. Governments should not just concentrate on physical production but also about industrial services such as designing, marketing and branding as these are becoming increasingly profitable.

Multinational companies have been careful not to share the profitable parts of the knowledge they have built up over the years. For example, foreign companies may outsource their low-value activities but keep their R&D at home, meaning the benefit for the FDI-receiving country will be limited. Even in a country like India, there has been a proliferation of mobile phone assembling plants but the level of technology transfer and R&D coming to India is abysmal. China has tried to get US companies like Apple and IBM that do a lot of their manufacturing in China to agree to technology transfer in return for market access but these companies as well as the US government are staunchly against it as they believe that these local partners would then turn into competitors. There is also the issue of lack of watertight Intellectual Property Rights laws in these countries as has been highlighted in the case of Huawei.

Therefore, to conclude it can be said that for a fairer world many of these existing anomalies have to be overcome. The path is definitely not easy but cooperation and understanding will have to be developed over time. A better path can also be pursued by alternative international institutions like the ADB, AIIB and the BRICS bank.

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Author Bio

Rajesh Saravanan is a student at Hindu College, University of Delhi. He has a keen interest in foreign policy and aims to be a diplomat.  He is doing his internship with the Policy Times and occasionally blogs at Indian Zest.

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Can the US Form of Capitalism be called ‘Neo-Colonialism’?
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Two points trigger us to conclude this. Firstly, innovations by American MNCs help them garner exponential profits from emerging and underdeveloped countries while poor just get access to these new technologies. Secondly, international institutions such as IMF and World Bank are more of money lending machines of the advanced countries than constructive economic interventionists.
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The Policy Times