Tuesday, 16 June 2015


Many people around the world know that Greece has been under "austerity" since May 2010 when PASOK (Socialist party) government under George Panadreou invited the IMF, the European Central Bank and the European Union via the European Commission to propose reforms in everything from public finances to labor policy.  The word is Greek (austeros) and it means (bitter or harsh) conditions that are severe or very strict. Second, the term refers to IMF policy conditions on strict or severe fiscal policy, namely budgetary cuts intended to reduce the size of public spending. This is expecially in the domain of any social spending, wages and benefits for public employees, but not in defense and stimulating big business through tax incentives and subsidies. In the absence of such "conditionality" the debtor member of the IMF cannot receive any credit and it is completely cut off the private markets because the IMF has not deemed it credit worthy.  Third, the word austerity has been identified with the IMF for the past half century because the ultimate goal is to reduce labor costs and all value of assets, especially in the public sector, thus allowing new private capital, domestic and especially foreign to enter and stimulate economic growth. In short, the goal is massive transfer of public sector assets into the hands of the private sector at a substantially reduced cost relative to market value. Fourth, austerity refers to a monetary policy that diminishes any Keynesian (deficit spending) intended to stimulate growth by absorbing surplus capital concentrated in the hands of the wealthiest individuals. Austerity has always resulted in massive capital transfer from the lower and middle income groups into the hands of the top income earners. Fifth, austerity is intended to keep the value of money high - lowering inflation - by raising the cost of borrowing for the public sector. Therefore, the public sector's role in stimulating economic growth diminishes, allowing the strongest elements in the private sector to dominate. For this reason, the term monetarism is invariably associated with austerity or anti-inflationary economics intended to stimulate growth by raising consumption. Austerity lowers mass consumption owing to income transfer from the lower and middle cincome groups into the hands of creditors. 

With the strongest economy and greatest contributions to the ECB, Germany has been the catalyst in these negotiations, although the IMF has also played a role that all of the Western creditors and Germany wish for it to have.  The promise of the IMF-EU was that very shortly Greece would have lower unemployment, higher and sustainable growth, more domestic and foreign investment, lower public debt, and creditworthiness so it could borrow at low rates from the private bond market instead of relying on the IMF and EU governments. Five years later, not a single one of those goals has been achieved, and the opposite of what was promised has taken place. 

The problem is very simple. Greece total public debt to GDP ratio was about 110% in 2010 when the Troika imposed austerity and neoliberal policies, rising to 175% in 2015. Greece had unemployment of just under 10% before the TROIKA, but 27% in 2015. The Greek GDP fell by 25% under TROIKA, while the poverty rate doubled from about 17% to 35%. With a consumer driven economy lacking any major export product such as crude oil, gold, diamonds, etc, Greece cannot possibly service the debt due mostly to foreign creditors, a reality that even the most orthodox austerity and neoliberal ideologues acknowledge. 

Writing off the debt totaling about 320 billion in 2015 would mean losses of roughly 160 billion to German and French creditors, which the respective governments would have to absorb to a large degree; meaning that the taxpayers will bail out the private investors of public bonds. Moreover, there would be other losses to the private sector within Greece as well as outside in case of a return to a national currency in place of the euro, even if there is a plan to keep the euro for international trade and external payments. 

As an importer of just about everything from pharmaceuticals to beef, from electronics to automobiles, Greece would need credit to continue international trade and it would need the backing of hard assets of its own currency. Even if GREXIT takes place, this means that once again, EU has no choice if it wishes but to pour money into Greece because it wants it integrated into the zone; a reality that has its roots in the 1820s during the War of Independence when the first loans were contracted and set the precedent for Greek external financial dependence. 

I have argued in the last three years that the cost of GREXIT to the EU would be at least one trillion euro, and this is a conservative estimate, given that the German Finance Ministry estimates losses to France and Germany at 160 billion. This does not take into account the ripple effect on bank and stock markets, on the value of the euro, on trade between the euro zone and its Asian partners. Even the markets of China and Japan are rattled every time the news about Greek debt negotiations is pessimistic. Nor does this scenario take into account the incalculable political costs, considering that nationalists and leftists in a number of European countries are waiting for the chance to strike against the EU; this is certainly the case in Spain with PODEMOS that shows political promise, and in Poland where nationalists are skeptical about the euro. 

In spite of these harsh realities, the EU governments, Western businesses, Western media and apologist of austerity and neoliberal policies have been perpetuating myths – massive propaganda - about Greece, the EU and the IMF, hoping to inculcate fear and trembling not just in Greece among the public but across Europe and indeed across the world. The reason for this is that they want no compromise on austerity and neoliberal policies, no matter the impact on the weakening middle class, on workers and pensioners who are asked to essentially pay to transfer capital from the periphery to the core countries, from the bottom of the social classes whether in Greece or Germany injecting funds to help Greece repay creditors.  

Western media, business and economic analysts have been urging Western public officials and the IMF to pressure Greece and bring the government to its knees, no matter the consequences on the 11 million people in Greece and the unforeseen consequences at all levels from economic to political on the rest of Europe. Among the sagacious advice of the hard-line neoliberal ideologues are the following:  

a)      Pressure tactics include but not limited to complete and immediate ECB credit cut off and threaten Greece with financial isolation even after it adopts its own currency.
b)      Humiliate the Greek government in a public relations campaign and discourage tourists from visiting Greece.
c)      Boycott Greek products and shipping that is one of the world’s largest.   

As long as the state’s role is to cater to creditors and investors, this is all that matters in society, whether it is a case of a hand full of creditors vs. millions of people as has been the case with Argentina since 2002. This is exactly the mindset that has prevailed throughout the post-WWII period when the US would have the CIA assist overthrow regimes such as Allende’s Chile because he dared pursue national sovereignty rather than integration under the aegis of Western market interests. The same mentality prevails today in the case of Argentina as well as Greece, indicative of the immense influence of capitalists over policy government international financial relations.     


1. Greece has no time to waste and must agree to IMF-EU demands otherwise it will face disaster. In reality, this myth has proved as repetitive as the “cry wolf” story, because we have been seeing it in headlines in the last five years continuously. Now that SYRIZA (claiming the leftist political label) is in office since late January 2015 this “imminent deadline” scenario has become even more prominent. Yet, it keeps getting postponed until the next day, next week, next month, and so it goes proving it is another pressure tactic intended to force Athens into submission of more austerity and neo-liberalism – lower wages, lower pensions, more public workers dismissals, total abolition of workers’ rights, higher indirect taxes, and more public asset sales for a fraction of their actual value to large domestic and foreign investors.   

2. “GREXIT” will have no impact of any sort on Germany, the EU or the West. This is the most frequent myth, massive propaganda that apologists of austerity and neo-liberalism have been producing in order to scare and confuse the public and force Athens to accept what the EU and IMF have put on the table. If indeed a possible GREXIT does not matter, then why are Western markets so impacted on any kind of news on the ongoing Greece-EU-IMF talks? If indeed a GREXIT is a possibility, how do we explain that one month after the January 2015 election of the self-proclaimed anti-austerity SYRIZA government hedge funds were betting on a Greek recovery? These include Third Point, York Capital Management, Alden Global Capital, Greylock Capital Management and Eaglevale Partners. Even more revealing how do we explain that amid the Greek debt negotiations Allianz SE, Europe’s largest insurer and asset manager, increased its holdings of Greek sovereign debt to more than 1.2 billion euros ($1.4 billion) from about 1 billion euros reported in May 2015? Why is PIMCO-Allianz taking such a risk on Greek bonds to become Greece’s second largest bondholder after the European Central Bank? Is GREXIT a reality for PIMCO-Allianz or a remote possibility?

The myth promoters argue that GREXIT is meaningless to the West because a US computer company, for example, ought not to suffer negative consequences because Greece is a mere 2% of the EU economy. While this is true, why then do stock prices of Apple Computer along with all others decline on negative news regarding the Greek debt negotiations? It is not because the Greeks will not be buying American computers made in China and transported aboard Chinese vessels, but because the entire European market will suffer partly because of real impact, partly because markets are driven by psychology –fear and greed – partly because of political instability of what comes after Greece. The myth of Greece does not matter is nothing more than comfort talk for investors not to panic and head for the exits if and when Greece abandons the euro because it has been forced to do so, and it is forced to declare monetary sovereignty.

3. Greece has a radical left-wing government, implying that this is a Socialist regime pursuing socialist policies. Actually, the social policies of Greece are less generous than the social safety net of conservative (neoliberal, pro-austerity) Germany. Moreover, ruling party SYRIZA is self-baptized leftist, but it is made up of diverse elements, that include some committed to social democracy, but only a minority of roughly one-third of elected members who demand an end to austerity and neoliberal policies. In fact, SYRIZA has proved in the last five months that it is willing to follow austerity and neoliberal policies, but not to extend them as the IMF and Germany have been demanding.

After making massive concessions to the EU-IMF, SYRIZA is simply rejecting new tougher measures that would raise the public debt, reduced GDP growth and reduce living standards for Greece to the level of its northern Balkan neighbors currently not in the euro zone and not enduring the high cost of living of the EU that has a hard currency. Even finance minister of Greece Varoufakis has argued that the goal is compromise but not piling up more austerity and neoliberal measures. This from an individual who has described himself as a “neo-liberal Marxist”- a blatant contradiction coming from an economist who s=ought to know better than resort to such nonsense. However, this is indicative of how far this government is from any commitment to Socialism or even to reformism based on a Keynesian model.  

4. Varoufakis and ”Game Theory ” have inhibited negotiations.  I have argued in previous articles that even if Nelson Mandela and Albert Einstein were negotiating together on behalf of Greece the outcome would be about the same because creditors want to make money, even if it means the EU governments and ECB bail them out by purchasing their bonds. Meanwhile, the Greek government wants terms with which it can live in everything from debt reduction to fiscal policy, labor relations, and pensions. Otherwise, there is the fear of a massive popular backlash if poverty rises to 50% of the population. After all, SYRIZA was elected with the campaign promise to stop austerity as a matter of reclaiming national sovereignty.

It is a myth that Varoufakis is the real problem because even after Prime Minister Tsipras sidelined him in May 2015, the negotiation results were exactly the same as before. It is true that Varoufakis is an individual who was a very poor choice for finance minister not because he came from the PASOK camp that had embraced neo-liberalism as policy, but because he lacks credibility in any ideological or political camp. He described himself as an “erratic Marxist” before revising his self-description to “neo-liberal Marxist”, indicative of absence of substance. Although he stands in the camp of neo-Keynesian economics, having worked with the son of John Kenneth Galbraith and influenced by Galbraith’s brand of economic theory, he has associations with neo-liberals and promoted one such candidate to represent Greece at the IMF.

The candidate, Elena Panaritis, has a long-standing record of advancing neoliberal agendas after her experience in Peru during the pro-US dictatorship of Alberto Fujimore. “ Panaritis' reform work in Peru implemented by Alberto Fujimori regime named "Fujishock", while "improving" macroeconomic figures and keeping the global financial community satisfied, led to poverty millions of people after a 10 year governance based on authoritarianism, corruption, human rights violations, mass population sterilisations and mass executions and ended failed in the year 2000 elections.” (http://en.wikipedia.org/wiki/Elena_Panaritis) That SYRIZA actually place a neoliberal ideologue as a candidate to the IMF post is indicative its commitment to going along with much of the neoliberal and austerity agenda. However, it is not enough for the IMF and EU to have SYRIZA compromise to the degree of abandoning its pre-election promise to halt austerity and neoliberal policies, there are new harsher demands that would in essence sink the bottom half of the population into chronic poverty.

5. AUSTERITY is the only solution to the problem. The myth that austerity is the only solution to the debt crisis has been disproved not only by the actual performance of the economy from 2010 to 2015, but by all cases where austerity has been imposed and exacerbated the problem rather than solving it. Of course, austerity does result in massive capital concentration in the hands of the very few domestically and it results in low labor costs and asset values, allowing new investment to take advantage of such opportunities. However, this is to the detriment of workers and the middle class.

Austerity also results in massive capital outflows. Greeks have behaved no differently than all other capitalists in the last five decades when austerity is imposed by taking their money out of the country and placing it in safer places. In other words, money flows out of the country suffering austerity and only comes in after years when there is a clear picture about the stability of the economy that austerity undermines.  

If austerity was such a magic solution to economic crisis, then why did the US adopt a liberal monetary policy under Obama in 2009 in order to help the economy recover? After all, such a policy only adds to the public debt that stands at roughly $17 trillion in the US, or about equal to GDP. If austerity works, then why has it not worked to realize the goals that both the IMF and EU promised Greece in 2010? The myth hides behind it the reality that austerity works to concentrate capital and achieve even greater integration with the global economy which is its real goal.  In short, the myth of austerity working for the benefit of the country undertaking it is exposed by the empirical evidence of the economic performance statistics.

6. Greece risks bankruptcy if it does not meet payments to its creditors.
This is a huge myth because Greece has been in technical bankruptcy since May 2010 when Prime Minister Papandreou invited the IMF and EU to bail out Greece. Default and bankruptcy are technically two different things in this case. Default is failure to meet creditor obligations on time. Bankruptcy is a legal process involving creditors with political authority to oversee the finances of the debtor, something that has been taking place in Greece in the last five years.

If the IMF and EU had not provided funding to meet creditor obligations from 2010 until 2014, Greece would not have been able to meet the debt payment schedule.  Second, the 50% debt “haircut” deal negotiated in November 2011 was further proof of bankruptcy. Third, Greece did not make the IMF payment due in early June 2015, insisting that it was merely postponing and bundling the payments for delayed repayment schedule. If no deal is reached in the summer of 2015, or if a “band-aid temporary solution” – much more realistic possibility – then this too technically is further proof that Greece remains in a chronic state of bankruptcy.

Prime Minister Tsipras has already announced that Greece will not meet the June 2015 debt service obligations, unless the EU and IMF come to an agreement with Athens and release about seven billion euros, money that would be used to meet such obligations to foreign creditors. The private markets are off limits because the 10-year bond hovers at around 12% rate, so the government is at the mercy of public lenders, mostly the EU. That Greece is already bankrupt gives it enormous leverage, because it can now go the next step and default, claiming it will be “bundling” payments until such time as the creditors come to an agreement about the solvency of the Greek debt.

7. Integration of Greece with the EU is insignificant to the EU.  Because it is a mere 2% of EU GDP with a labor force of 1.7% of the EU, Greece is hardly significant argue the neoliberal apologists promoting myths about the reality of the many dimensions of integration. If the issue of Greek integration were merely one limited to the common currency and economy, then why should be much significance? However, the larger question is political, and this is something that SIRIZA, with all of its broken campaign promises, has been arguing. The integrity of the EU as a political entity is at stake, not just the euro as a hard currency. When we consider that the euro-skeptics in a number of countries, including the UK and France, will simply use the Greek crisis as a pretext to give political fuel to their campaigns, then we need to think of the multiple dimensions of this question, rather than limiting it to creditor vs. debtor relationship and funds transferring from Greece to Germany.

The possibility that Spain under the rising popularity of the PODEMOS party (similar to SYRIZA) poses a threat to the European Union’s integrity is real. If Spain resists the austerity-neoliberal route, then others will also follow. Germany knows this very well and it is trying to crush SYRIZA so that it fails and sends a signal to the rest of Europe. No matter how much the EU and IMF tried to make an example of Greece as a center-leftist government that has no choice but to accept austerity and neoliberal policies so that no other country would dare challenge monetarist and neoliberal policies, the voters of Spain have shown defiance. At the same time, the voters of Poland have done the same by electing a euro-skeptic Andrzej Duda.
Euro-skeptics are itching for an excuse to convince their constituents that integration of the EU is not working any longer. Euro-skeptics love to place the burden for the EU super-government on the German hegemonic leadership that plays well as a nationalist-populist issue even Greece has been playing. I have argued many times that Chancellor Angela Merkel does not want to go down in history for undermining the integrity of the EU, even if it means profits to the creditors would not be as high and as immediate as she hopes. It is a myth that Merkel will not do everything possible to prevent a catastrophe than may start in little Greece but spread into the heart of Europe.

8. Greece has no options other than Western integration. Greece has options of diversifying its integration model, but the EU and US will not allow it. After all, China already controls Greek ports and wants even greater integration of Greece, as does Russia using the gap pipeline as a catalyst. In May 2015, the Greek government revealed that the US demanded prolonging anti-Russia sanctions, despite the detrimental impact on the weak economy of Greece to the tune of 4 billion euros annually and long-term contracts at risk. Defense Minister Panos Kamenos, an conservative noted the following:  "I was asked to support the prolongation of the sanctions, particularly in connection with Crimea. I explained the Ukrainian issue was very sensitive for Greece as some 300,000 Greeks live in Mariupol and its neighborhood, and they feel safe next to the Orthodox Church.”

Russia has been Greece's ally and a friendly country interested in expanding commercial relations for various reasons, including breaking the Western sanctions solidarity. Kamenos noted that: “Annually about 1.5 million Russian tourists visit Greece. We export agricultural products to Russia. I explained that the European Union does not reimburse losses to Greek farmers on these issues.” Russia and Greece have been improving economic cooperation largely because the US and EU has decided to impose austerity on Greece without providing any alternative to stimulating economic growth. President Vladimir Putin invited Athens to become the sixth member of the BRICS New Development Bank. Greece immediately stated that it was interested in the offer.  

In April 2015 when Tsipras visited Putin, they agreed on a number of deals, including participation in the Turkish Stream gas pipeline delivering Russian gas to Europe. On 19 June 2015, Tsipras again meets with Putin and other Eurasian leaders, putting additional political pressure on the West to ease on austerity demands. This does not mean that Greece is about to become a Russian economic satellite because Germany currently holds that honor, while the US has continued to hold the honor of using Greece as a strategic NATO partner. Because of its economic and strategic dependence on the West, the integration options of Greece are limited to whatever the West will permit. Moving toward a multilateral model of economic relations has been a dream of Greek centrists since the early 1960s, but the West always obstructed it, arguing there is no choice for Greece but to remain faithful to its existing partners.  

9. The US favors Greece against Germany in the negotiations.  This is a myth that the media has promoted, owing largely to the underlying tensions between Germany and the US over a number of issues ranging from US-Russia relations over the Ukraine and sanctions that have not worked to the best manner of dealing with the situation in Syria and the Middle East. It is true that Germany and the US do not see eye to eye on many issues, and it is also true that the US has been urging a compromise on Greece. However, the US has been using the IMF to promote its own agenda, which is neoliberal policies and strategic interests in Greece. For its part, Greece has been trying to use the US as a political bargaining chip against Germany, but that has not worked at all. Greek strategic dependence on the US and NATO makes it vulnerable, so Greece cannot directly criticize the US, although it has made noise about Washington’s unreasonable stance on Russian sanctions.  

Greece is to blame for high defense spending that does not permit savings to meet creditors’ obligations, largely because of the enormous bribes involved as we have seen by the guilty verdict the Greek court issued against former defense Minister Akis Tsochatzopoulos, one of the very few pillaging with the cooperation of German and other Western defense contractors. Throughout the austerity years, Greece did not slash defense because the US would not allow it, and Western European – French and German - defense contractors did not wish to lose the lucrative contracts. German newspaper Frankfurter Algemeiner Sonntagszeitung recently noted that the Europeans finally agreed with Tsipras about defense cuts as a means of reducing budgetary spending so that creditor obligations could be met. However, the IMF, presumably acting on behalf of the US, vetoed that agreement, arguing defense cuts are off the table. The savings from such cuts were about $500 million, a small amount but significant enough to meet some short-term debt obligations. Although Merkel and French President François Holland signed off on Juncker’s compromise plan to cut Greek defense budget, the IMF refused to go along, accusing the EU officials of sidelining them.

As different as the interests of the US and Germany may appear to the unsuspecting observer, they have a great deal more in common and it is in their interest to keep Greece as dependency as it has been throughout its modern history than to fight over. Clearly, the Greek defense cut is an issue of catering to creditors vs. catering to US-NATO demands and here we see disagreement. However, there is no disagreement on the larger issue of keeping Greece well integrated in the Western camp, only about how to achieve that goal.

10. No one is making money as a result of the Greek public debt crisis. According to the former IMF representative of Greece, Panayiotis Roumeliotis, the delaying tactics of the IMF and the EU in reaching a deal with Greece are intentional to give time to the German banks holding an estimated 35 billion euro in Greek bonds, and to French banks holding 60 billion in such bonds to dump them in 2012. Such delaying tactics are continuing as are the myths intended to influence the direction of bond yields, the currency and securities markets.

Besides a massive transfer of private capital estimated in the hundreds of billions from Greece to northwest Europe, austerity has also resulted in transfer of public capital from Greece to the banks of northwest Europe as well. The IMF and EU loaned Greece 252 billion euros. Of this amount, 150 billion paid debt and interest to bondholders, 48 billion was used to bail out the Greek banks – owned mostly by Greek millionaires - and 35 billion was used as incentive to private investors so they would accept the 2012 debt restricting deal.  The remaining 25 billion euros went for domestic needs of the bankrupt government to meet various obligations, including high defense spending that benefited German and French defense contractors.

There have been Greek millionaires that have made a great deal of money as well, benefiting from the sale of everything from public lottery that was very profitable under state control to prime sea-side real estate that the government sold ten times lower its assessed value. The reason that on 16 June 2015, Prime Minister Tsipras accused the IMF of having “criminal responsibility” for the situation in Greece is because the IMF was the vehicle that the wealthy within Greece and abroad used to score profits in the billions at the expense of the general population. "Right now, what dominates is the IMF's harsh views on tough measures, and Europe's on denying any discussion over debt viability. The fixation on cuts... is most likely part of a political plan... to humiliate an entire people that has suffered in the past five years through no fault of its own." Because Tsipras knows firsthand that billions of euros have transferred from the general population to the pockets of a few wealthy individuals and institutions inside and outside of Greece, he chose to lash out at the IMF that even his European counterparts view with tremendous suspicion and skepticism.  

What does the future hold is what everyone wants to know? Greece has been integrated with the West ever since its creation as a nation-state in 1832. The benefit vs. risk scenario for both Greece and EU is what is examined by all sides. Greece cannot leave and go to another planet. It will remain a European country and in some manner integrated with Europe, just as Mexico is integrated with the US because of geography. There is no question that no matter what happens, the pensioners, workers and middle class of Greece will pay the price. Beyond this reality, the option of leaving the euro as a reserve currency has as many risks for the Europeans as making some compromises to keep milking the Greek cow whose milk is running out and it must option its future well into the 21st century.

Capital controls could be part of the temporary band aid deal so that negotiations drag out longer and Greece is forced to accept all austerity and neoliberal measures. In short, they would accept much lower living standards with few prospects of growth and development, in exchange for stability and knowing they are in the EU. Another option is that of Iceland 2008 when the three largest banks were nationalized because they defaulted. Tsipras is on record saying that creditors have pillaged Greece, making money right and left during the crisis, while Greece is saddled with debt for the next 50-100 years.  

Do the Greek political and financial elites have any responsibility for the current crisis, or is all the fault of foreign predatory creditors? Greek government officials – everyone from defense ministers to the lowly customs port official - have been among the most corrupt in the world, taking bribes at every turn. Public and private sector corruption accounted for the tremendous growth of the subterranean economy that is estimated at one-third, for massive tax evasion from shipping tycoons to the small store owner, for squandering billions of EU subsidies intended for growth and development but instead finding their way into private consumption for the most part. In other words, the capital culture of Greece immersed in systemic corruption contributed to the current crisis. However, to argue that Greece, which was well integrated into the EU, is alone responsible for the current crisis would be to ignore the empirical evidence of the role of EU officials, the EBC, and oversight organizations that knew all along about the problems but were silent because large private firms such as Siemens were making money.

The only leverage Greece has ever had in the last six years is the threat to leave the eurozone, but it never used it because entrenched political interests representing a few thousand families who own more than 80% of the wealth have gone along with the EU and IMF austerity and neoliberal policies. In January 2015, SYRIZA, claiming it is leftist ideologically and representing the workers and middle class, came to office with the solid campaign promise to end austerity and neoliberal policies that were responsible for a 25% GDP decline from 2010 to 2015 and official unemployment of 26%.

Ever since I began writing about this topic in 2010, I did not see GREXIT, no matter the rhetoric from various political and financial interest groups that apologists of austerity and neo-liberalism follow. On behalf of EU Commission president Juncker, Austrian Chancellor Werner Faymann is negotiating with Tsipras so the two sides can come to an arrangement that is politically and economically feasible to the two sides. There are parallel efforts from behind the scenes by various other actors, including the US trying to find a way to keep stability in the EU by keeping Greece integrated. This will take time and something along the way could always go wrong, but as I have stated above, Greece is not going anywhere and Europe will have to deal with it one way or another the day after with the cost about the same no matter what course of action is followed.


Sunday, 7 June 2015


The question of "Development Models"
In the post-Communist era now more than two decades old, many people around the world are questioning what is the best economic development model? One reason for such a question is the very deep recession of 2008-present that has thrown many economies into a downward spiral of unemployment, rising public and private sector debt, and lack of rapid growth in the remainder of the decade.  So, what are some models of modern economic development and to what degree do they improve people's lives, and do economic growth and development alone account for human happiness - with the broader meaning of the latter term?

The mode of production that determines the social order has been capitalism that has evolved from the Commercial Revolution in the 16th century to globalization in the late 20th-early 21st century. Under the world-system of capitalism, there have been different models of development in the history of capitalism, determined to a large degree by the shifts from the primary sector of production (agriculture, forestry, mining and fisheries) to the secondary sector (manufacturing) and to the tertiary (service) and high tech/biotechnology sector.

Before analyzing some models of economic development, it is instructive to consider the following questions about “development economics”.
a) What development model best serves the needs of the people, presumably all people and not just the financial and or political, military, bureaucratic elites?
b) Is it possible to separate politics from economics and speak in terms of pure economics instead of a system of political economy and social structure?
c) Is there such a thing as "the perfect" or 'ideal' system that can be applied perfectly in practice as it may appear in theory, whether such a system is market-based, statist, or some model based on a mixture?
d) Different countries would require to adopt variations of different models depending on their natural resources, labor force, level of current development.
e) Change is required to models of political economy to keep up with changes in the real economy and society."
f) As perfect as they may be in theory for any given  society, economic models in practice do not mean very much, simply because the decision on what policies to pursue are always taken by those who command economic and political power. Add to the equation the factor of corruption and the model is coffee table reading material.
g) There is no such thing as the ideal model in theory that is not in practice a mixture of several theories. For example, is the US  a "free market model" economy when in essence it has been practicing corporate welfare economics for decades? Is Indonesia a neoliberal economy under an Islamic regime, similar to Malaysia, Turkey, and now Egypt and Tunisia? Is China a statist economy or a mixed economy that allows a heavy dose of free enterprise?

Can there be a development model that serves all people based on social justice?
In the 19th century, there were a number of intellectuals from Adam Smith to Karl Marx who believed that it was possible to have an economic system that best served all people. However, Smith was an advocate of free market economic development, while Marx believed only Communism, the natural state of human beings, can best serve the people by eliminating elites, not reinforcing them.

Because people have differing views on what best serves society, that is, best serves every person equally in every respect in institutional terms, most economic models are necessarily based on what best serves interest groups within society. There are of course economic development models that claim to best serve everyone, including Socialist and Communist models, but in practice some sectors and some individuals are better served even by those models, as history has clearly demonstrated in the 20th century, than other groups in society. In short, as Jean-Paul Sartre and many others correctly maintained, there will always be elites in society, and that means that no economic model can possibly be free of that reality. Another way to view this is that there is no such thing as an economic development model that is "objective", because models are rooted in everything from investment to terms of trade that invariably benefit certain groups and not society as a whole.

Should GDP growth be the sole criteria for human happiness?
It is true that in world public opinion polls the top ten "happiest countries" are those that we consider developed economically, that is, those with diversified economies and high incomes. This is an indication that in the age of materialism where the value system is rooted in wealth and the security provided to maintain it people believe their happiness hinges on things associated primarily with material possessions. However, national economic growth and development do not necessarily translate into individual happiness, if a percentage of the population, anything above 10%, lives in chronic poverty.

Moreover, human happiness is also predicated on spiritual fulfillment for many non-Western societies. In the early 1970s, Bhutan rejected GDP as the sole criterion for progress, asserting that quality of life, social progress and the psychological well being of people are significant indicators to take into account. The Bhutan example became the UN standard as well. Although this is something that can be used as distraction by those trying to justify socioeconomic injustice by arguing why do people need material improvement when they have spiritual fulfillment, it is important to note that we cannot use the Western material criterion alone for it does not reflect the human experience worldwide.

Defining "Development"
The term development in economics does not mean the same thing for an advocate of "dependency theory" as it does for a monetarist. Nor does it necessarily mean the same thing for an advocate of sustainable development in India vs. one in Canada. For this reason, I need to lay some groundwork for this synoptic perspective of what the term means to intellectuals and politicians who do not share common views.

1. Centrally-planed models.
The old Soviet centrally-planned economy from the 1920s until the early 1980s was a model in which the command economy was rooted. The government decided on productivity and investment by sector as well as absorption of the surplus labor force from one sector by the other, not to satisfy consumer demand, but rather to meet the greater societal or national needs as the state defined them. In varying degrees, this model became a prototype for Eastern Europe after 1945, and for Cuba, Vietnam, North Korea, and China under Mao.

Development was measured by the state in terms of meeting production quotas, though in practice, the bureaucracy falsified reports to make productivity appear much better than it was. In the end, such a non-consumption-geared economy did not translate into rising living standards across the board, but it did absorb the surplus labor force and it tried to meet essential needs such as housing, health, and education. Command economies had enormous problems, not only because their civilian economies failed to meet mass consumer demand, but also because of the emphasis on durable goods focus vs. consumer goods, and heavy military spending that absorbed resources otherwise needed for the civilian economy. In practice, the politically-connected elites (the 'new class' linked to the Communist Party) benefited, while the broader masses lagged behind and lacked basic freedoms that many of them valued, such as freedom of worship, expression, and others that are common in open societies of the Western World.

2.  Quasi-statist and neo-corporatist models.
Government permits free enterprise, but invests heavily in certain industries and/or subsidizes others even if they show chronic deficits instead of profits, because it deems it is in the 'national economic' interest. It is difficult to argue that quasi-statism and neo-corporatism, both of which are inter-related and have many aspects to them, are alike in South Korea as in Brazil, or in Russia as in Argentina and Venezuela. The common denominator is heavy government involvement in investment with the intent to promote certain sectors, trade regulation intended to promote national capitalism and not permit international capital to determine economic planning, and strengthening the state structure so that the private sector, especially foreign capital does not have a dominant role.

After the Second World War, a number of countries, including Japan, South Korea, Taiwan, among others, began to adopt 'top-down' development models so they can help build sectors such as steel industry, shipbuilding, and others. This model in varying degrees found expression in Brazil, Argentina after 2001, post-Communist Russia, even Spain in the late 1980s-early 1990s before the wave of neoliberalism swept the EU that had itself aspects of corporatism and quasi-statism as a regional bloc rooted in heavy subsidies of certain sectors.

The quasi-statist model is also operating in a number of countries as different as Norway and Saudi Arabia. There is the Norwegian development model, (to some extent also practiced in other Scandinavian countries) essentially a variation of Keynesian economics, is rooted in a strong state structure that relies on a solid welfare state with a private competitive sector backed by the social-democratic state.
The benefits of this model are that there is a sense of national control over the economy, vs. foreign capital control, thus it is an issue of national sovereignty prevailing in the age of globalization. Another benefit is that the state helps to plan for the country's future with the intent of long-term development that presumably would meet the needs of the majority of the people. Moreover, the nation retains a strong national capitalist class that is able to compete internationally instead of becoming subservient to exporters from developed core countries.

How well has this model worked? The examples of South Korea, Taiwan, all of the BRICS (Brazil, Russia, India, China and South Africa) indicate that the national economies experience phenomenal growth. This does not mean, however, that the wealth is evenly spread across the population.It is true that South Korea, and Taiwan developed a middle class on the basis of this model and it is also true that the fastest middle class growth is taking place in the BRICS. However, the world's largest percentage of poor live in the BRICS. With the promise that national economic growth and development will some day in the future translate into individual prosperity the quasi-statist countries can continue to operate as they do until such time as the broader masses rise up and demand results filter down to them.

3. Neo-classical (free enterprise) model.
The classical free enterprise system theory of Adam Smith and its apologists in the 20th century, from the neo-classical advocates (Robert Solow and T. W. Swan) to Milton Friedman and the Chicago School that rejected Keynesian economics in favor of rigid monetarism that is an integral part of the neo-classical movement. Productivity and capital accumulation based on a fiscal system that favors capital, allows maximal freedom of capital movement and investment and limits organized workers' rights that inhibit capital expansion and accumulation are at the core of this school of thought.

With many variations, the neo-classical school and its advocates ranging from supply side economics to neoliberalism and monetarism as expressed by IMF-World Bank economists as well as purists of the classical theory made a major comeback in the 1980s and they have triumphed ever since. In practice, the theory never worked as its advocates claim, because the state became a vehicle to transfer massive income from the welfare state to corporate welfare, thus a form of statism was part of this model. Moreover, the model in practice proved to have many flaws as it permitted numerous scandals from banking to corporate corruption and investor fraud on which fortunes of the very few were built at the expense of the general economy.

The market-oriented growth and development model is presumably one that takes place under an open, free and democratic society where free market forces trade, invest and consume with minimal government intervention. This is the theory. In reality, the role of government is very heavy in every aspect from monetary to fiscal policy, and society is not nearly as free and open as one would argue in theory. The quasi-police state methods of the US, everything from illegally tapping into the private phone records of millions of people to denying due process to anyone that government has the right to brand terrorist indicate a slippery slope toward authoritarian capitalism. "The National Security Agency and the FBI are tapping directly into the central servers of nine leading U.S. Internet companies, extracting audio and video chats, photographs, e-mails, documents, and connection logs..."

Putting aside the reality that economic models necessarily work within a political system that makes all kinds of lofty claims about what best serves "the people", let also consider that many people actually believe that if the "national economy" is performing well, so will they, because they identify with the nation-state, even though they as individuals may be in the lower socioeconomic strata and derive no benefits from any growth and development. This is the case in many countries, most notably the US. The latest (June 2013) Department of Labor report shows that labor costs are the lowest since 1947 when the US began keeping records. Hourly compensation continues to sink, most notably in the manufacturing sector that was historically the best-paying sector for workers. This trend of downward socioeconomic mobilization has been a reality for the past three decades, but the US economy continues to develop and grow, though without such development translating into income growth for the middle class and workers.  

There are variations of authoritarian capitalist models found in many non-Western countries such as Saudi Arabia but also in a number of African nations. This model allows for free enterprise, it rests on one or very few sources for economic growth and development, and it has a strong state monopolized by authoritarian regimes, invariably more corrupt than countries where there is some semblance of checks and balances. There is the Indonesian, Malaysian, Turkish model of neoliberalism under Islamic regimes; something that is now spreading across other Muslim nations, including Tunisia and Egypt. This model is an integral part of the neoliberal one under globalization.

Clearly, there are models today that result in tremendous GDP growth, but that does not translate to upward socioeconomic mobility and the qualitative and quantitative growth of a middle class. For example, the result of globalization, especially from 2007 to the present, is that the middle class in the US and EU has been shrinking, while it has expanded in Asia and to some degree in Latin America and parts of Africa. Therefore, versions of the neoliberal model of development that the US and EU have been pursuing has resulted in downward socioeconomic mobility for the most advanced nations as well as semi-developed ones in Southern Europe. Nevertheless, more than half of the middle class in in North America and EU, while the vast majority of the poor are in the non-Western world.

According to OECD statistics, "In 2009 the middle class included 1.8 billion people, with Europe (664 million), Asia (525 million) North America (338 million) accounting for the highest number of people belonging to this group. ...  The size of the “global middle class” will increase from 1.8 billion in 2009 to 3.2 billion by 2020 and 4.9 billion by 2030. The bulk of this growth will come from Asia: by 2030 Asia will represent 66% of the global middle-class population and 59% of middle-class consumption, compared to 28% and 23%, respectively in 2009..."

One paradox in economics is that it is possible to have growth without development (vertical growth), or growth accompanied by underdevelopment as in the case of African, Latin American and some Asian countries that are relying on one or two export products, while using the proceeds to import everything else. This kind of dependency has been characteristic of the core-periphery divide in the capitalist world system for the past five centuries; for there is a vast difference between an undeveloped country enjoying self-sufficiency and an underdeveloped that one that is financially, commercially and industrially dependent on the advanced capitalist (core) countries. Moreover, there is a vast difference between a country experiencing ephemeral growth owing to the availability of some export product –let us say oil – and sustainable development that leads to diversified economic development and greater self-sufficiency.

Alternatives from the Interwar: Keynes and Polanyi 

The IMF, World Bank, US Federal Reserve, European Central Bank, OECD, banks and corporations, the media and governments have been arguing in the last three decades that there is no alternative to neoliberal policies that have been followed religiously in the postwar era, especially from the Reagan-Thatcher era to the present. The idea that “there is no alternative” to an economic development model implies that God handed it to a prophet down here on earth and all the faithful must obey it in the same manner they observe religion, otherwise they are sinners and must be demonized. Is there anything sacred about the neoliberal model that emerged in Europe during the 1930s but exploded in the 1980s? Is the market system above history, one that always existed, and “natural” thus compatible to human nature and society because it serves people’s interests? Two interwar economists certainly felt otherwise, namely Keynes and Polanyi, though they did not agree on the alternative development model.

In the classic study of capitalist political economy undergoing rapid change during the Industrial Revolution, Karl Polanyi, argued that the “market system” is hardly the norm in human civilization, but instead the exception.   “Previously to our time no economy has ever existed that, even in principle, was controlled by markets . . . gain and profit made on exchange never before [the nineteenth century] played an important part in human economy.” (The Great Transformation: The Political and Economic Origins of Our Time. 1944). 

Polanyi’s study points to capitalism as a cruel system that generates “market efficiency” translated into greater concentration of capital at the expense of creating greater misery among people. It is true that this work comes from the experiences of a European intellectual who lived during the Great Depression and saw Europe destroyed during the Second World War. Polanyi was a contemporary of John Meynard Keynes whose economic development model (in the form of the New Deal in the US) was intended to “save capitalism” from its predatory self-destructive tendencies through reforms that entailed deficit financing and greater statism that would act as a pillar of the fragile system. 

Unlike Keynes, Polanyi was not interested in saving the system that dehumanized society because it was predicated on uneven and unequal development. Whereas neither Keynes nor Polanyi trusted markets to go unchecked, Keynes wanted the state to play the catalytic role as arbiter so they may thrive and at the same time make sure there is a social safety net that in essence acts both to stimulate the economy through consumption. This would ensure a broad popular base of support for the political system under which capitalism operates. Market manipulation by capitalists necessarily entails rationalizing the system with the state’s regulatory intervention has its limits. Polanyi opted for a clean development alternative that did not aim at saving markets but people, because the goal of markets is indeed to serve the people not to perpetuate themselves through capital concentration and centralization.

While it is understandable that capitalists would have nothing but contempt for Keynes and Polanyi, politicians, the media and many mainstream economists and social scientists followed the lead of the markets. This is not just because there is no reward criticizing those who money and power, but also because the neoliberal model appeared to be gaining ground largely owing to the political failures of Soviet Communism and China’s embrace of capitalism. In short, the markets triumphed, therefore why not let them loose, give them all they want, everything from utility companies and government contracts, to direct subsidies and tax breaks. In the last two decades or so, there have been some who have dared to question the neoliberal model and even bring the works of Keynes and Polanyi. 

I do not believe that history repeats itself because it is like a river where the same water is never there. However, the similarities of our times with the Gilded Age (1870s-1900) and with the 1920s are rather striking, especially since we have a decentralized political and economic power structure with East Asia increasingly playing a role in determining global affairs. At the same time, the dwindling middle class in the Western World and the rise of social unrest in many parts of the world has many people wondering about the breaking point in the political economy. While a dose of Keynesianism is always an option for governments in the future that run into sociopolitical trouble, I believe that Polanyi’s alternative of human-based economics is a model on which a real systemic alternative could address social justice issues rather than glorifying market strength for its own sake and to have a few dozen billionaires own as much wealth as half of the earth’s population.


The idea that there is any model that can possibly reflect "human behavior" and its idiosyncratic proclivities assumes that there is such a thing as a "uniform generic model" of human behavior, rather than "atomic action constraints, as determined genetically and by cultural conditioning". In fact, the reason I argue that there cannot be a perfect model, is because I made certain assumptions about human nature, namely that the irrational tendencies play a far greater role than the rational. 

This is a very old argument rooted in the philosophical debates that goes back to the 17th century (Hobbes and Locke) and continuing in the Age of Reason as well as the 19th century when Marx and Mill who relied on the rationalist tradition to formulate significant political theories on which society could build. In short, just as a scientific theory can provide solid and unquestioned answers, similar philosophical models of political economy could do the same, at least this was the assumption. But can scientific certainty be applied to economic models, given that they must in the end apply to human beings that are neither neutrons nor algebraic equations? 

Are the domains of economics, political science, sociology and social science as "scientific" as mathematics, chemistry and physics, or are we ultimately dealing with a question of societal structure based on a social contract? To what degree is the social contract itself modeled after rationalist assumptions, as was the case for both Jon Locke and Karl Marx and F. Engels, is a legitimate issue. However, the matter of societal organization, mode of production, is subject to historical dynamics (dialectical materialism, to be sure, but certainly not limited to it).  

Is there a single development model that works best to serve the people of all countries around the world; like us say the neoliberal that IMF, World Bank, European Central Bank, US and EU governments are promoting globally as the panacea? Economic development models, whether like that of the US, or regional bloc one like the one of the European Union, are always designed down to the smallest detail to serve and promote the privileged socioeconomic and political elites, within the boundaries of what the middle class and working class will tolerate so there would not be social unrest or revolt. 

Development models under capitalism are not intended to foster greater upward socioeconomic mobility, but to further concentrate capital in the hands of the privileged elites that enjoy policy influence. The social safety net, social welfare measures within varying degrees that have been in place in many countries around the world are now threatened by the neoliberal model that encourages the erosion of welfare measures amid an era of downward pressure on wages and limited opportunities for youth suffering high unemployment. These are explosive social conditions that could result in social upheaval if the trend continues.

Lower global poverty, gender equality, basic education and health care, and a sustainable future for all people are desirable goals of many human-centered rather than market-focused people for the past two centuries. The question is which development model can achieve such goals i9f the political economy is structured to serve narrow class interests. Not any time in the near future, or in the next half century do I expect systemic changes in the neoliberal political economy. On the contrary, statistics indicate that there is regression in the areas of social progress. Why? I repeat that people who have economic and political (military/police) power always prevail, while the broader masses of the population, middle classes and workers continue to demand social justice. The social dialectic (Marxian-based "dialectical social theory") leads me to conclude that concessions will be made to the broader masses only when absolutely necessary to preserve the status quo.