STAFF NEWS & ANALYSIS
World Bank's 'Wrong Advice' Left Silos Empty in Poor Countries
By - December 11, 2008

Inside and out, the rusted towers of El Salvador's biggest grain silo show how the World Bank helped push developing countries into the global food crisis. Inside, the silo, which once held thousands of tons of beans and cereals, is now empty. It was abandoned in 1991, after the bank told Salvadoran leaders to privatize grain storage, import staples such as corn and rice, and export crops including cocoa, coffee and palm oil. Outside, where Rosa Maria Chavez's food stand is propped against a tower wall, price increases for basic grains this year whittled business down to 16 customers a day from 80. "It's a monument to the mess we are in now," says Chavez, 63. About 40 million people joined the ranks of the undernourished this year, bringing the estimate of the world's hungry to 963 million of its 6.8 billion people, the Rome-based United Nations Food and Agriculture Organization said yesterday. The growth didn't come just from natural causes. A manmade recipe for famine included corrupt governments and companies that profited on misery. Another ingredient: The World Bank's free- market policies, which over almost three decades brought poor nations like El Salvador into global grain markets, where prices surged. "The World Bank made one basic blunder, which is to think that markets would solve problems of such severe circumstances," said Jeffrey Sachs, director of the Earth Institute at Columbia University and a special adviser to UN Secretary-General Ban Ki- moon. "But history has shown you need to help people to get above the survival threshold before the markets can start functioning." – Bloomberg

Dominant Social Theme: Grave questions about free markets arise, worldwide.

Free-Market Analysis: The problem with this sort of analysis – as seen above – is it begins with the faulty presumption that the world's markets are free. They are not. The basis of a free market is free and honest money, and without it, all other assumptions are suspect. How can you have free-market policies when the money-stuff you are counting on is fixed by a handful of central bankers? You can't.

The conclusions are thus specious; unfortunately, those writing them down don't seem to take the time to tease out the various contradictions. Let's take the statement of Jeffrey Sachs, director of the Earth Institute and a special UN advisor. He says that people have to get above the "survival threshold" before "markets can start functioning."

This is a seemingly odd statement in that it makes the basic presumption that the marketplace does not function when one is engaged in survival. On the contrary, markets can be seen to function in the rawest and most basic way when the issue is survival. Hunters will trade food for shelter or arms, or ammunition. The shopkeeper will trade store goods for wild game. Others, even those who are engaged in near-subsistence farming will find ways to eke out a harvest that includes some reserve for trading purposes. Markets exist at every level of human endeavor.

The argument over markets and the assumptions that markets are regularly subject to breakdowns is a canard continually broached and elaborated on by those who wish to impose their solutions and need to justify their conclusions. In fact, the iron law of neoclassical economics tells us that price fluctuates at the margins and that there is not a force on earth, save the marketplace, that is capable of delivering the fine adjustments in supply and demand that goods and services require.

Neoclassical economics is based on marginal utility, which is a pretty much a universally accepted concept. But since human beings have the ability to carry two completely contradictory thoughts in their heads at the same time, it is apparently quite possible for most people to admit that the marketplace alone can set prices and properly ascertain supply and demand and then blithely go on to accept the idea that government can adjust those same prices by fiat – without consequences. Governments absolutely cannot.

It is unfortunately this sort of analysis that crops up continually and infects the above article excerpt as well. In pursuing apparently laudable goals, the World Bank adopted a laissez faire approach to food prices – and now that this laissez-faire has proven an evident failure, the fundamentals of the marketplace are once again called into question. No. What should be called in to question is the World Bank itself. It is an entity that seeks to manage the industrial and nutritional environment of billions of people via government force. It may adopt a laissez faire approach or it may not. But in either case, the World Bank's brief is dependent on the flawed idea that it can impose industrial solutions, absent individual human action, that will result in increased wealth.

After Thoughts

The World Bank, a profoundly anti-democratic and anti-market entity is turning away from market solutions to the intractable problems of hunger and poverty. This is damaging enough. But by avoiding a discussion of what central banks do to inflate the money supply, the World Bank only adds to the confusion people feel about economic systems and free-market economics. It is this sort of confusion that marks the conversation over the larger financial crisis as well.

The lack of financial literacy is so bad that socialist economist John Maynard Keynes is being resurrected, and versions of his policies are being applied to try to help fix what is currently wrong. It is a lack of financial literacy that keeps people from confronting the wrongheaded policies and regulations of their leaders. Above all, it is a lack of financial literacy that keeps people from taking actions to protect themselves in the current environment. Not understanding the business cycle or the role of central banks in making the cycle far more destructive than it would otherwise be, they may make bad investment decisions, seeking to time the bottom of markets that may not have a bottom for several years to come. Or faced with continued and aggressive inflation, these same individuals may turn to the bond market and to Treasurys rather than honest money, gold and silver.

These individuals certainly may not comprehend the history of honest money or gold and silver ‘s role as a store of value. And these same people may nod wisely when they read about the World Bank abandoning free-market oriented policies because of "market failures." These free-market failures don't exist, but they will be promoted anyway. And people will adopt their conclusions because they still, in this Age of the Internet, apparently don't know any better.

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