Economic Literacy Activity Pack

Debt and Development Coalition Ireland:
All Hallows,
Grace Park Road,
Drumcondra, Dublin 9
Ph/Fax: + 353 1 857 1828
e-mail: ddc@connect.ie

Written by Emily Kawano
Institute for Popular Economics
Email: e@kawano.freeserve.co.uk

Module Three: Neoliberalism and Trade

This Economic Literacy workshop aims to introduce participants to economics using learner centred and participatory methods. This is intended to be a one day workshop for groups of approximately 8 to 14 people. It is aimed at those with no background in economics. There are extensive facilitator notes included to guide trainers/facilitators through the day.

Suggested format:

10.00 Welcome & warm up exercise (30 min.)

10.30 Shifts in Macroeconomic Policy (1 hr.)

11.30 Tea/Coffee Break (15 mins)

11.45 Neoliberalism & the Celtic Tiger (1 hr.)

12.45 Lunch

1:30 Neoliberalism and 'Free' Trade (1 hr 15 mins.)

2.45 Tea/Coffee Break

3.00 Neoliberalism and SAPs (1 hr.)

4.00 Action (30 min.)

4.30 Ends

TABLE OF CONTENTS

A. Welcome (30 min.)

i. Introductions (10 min.)

Facilitator introduces him/herself - housekeeping items can be mentioned etc. Facilitator can then ask participants to introduce themselves: names, organisation, training background etc.

ii. Activity: Hopes and fears (15 min.)

Objectives:

• To share hopes for the workshop which can help the facilitator shape the agenda.
  
  
• Because economics is often so intimidating, it is very important to give participants a chance to express their fears and anxieties. It gives the facilitator a chance to address and allay the fears, and also participants are usually relieved to see that others have the same fears.

Materials: Flipchart paper, Bluetack, Post-its, Pens

Put up two sheets of flipchart paper, one with hopes and the other with fears as a heading. Circulate pads of post-its. Give participants a few minutes to write their hopes and fears on the post-its - one per post it. (Fears regarding this workshop can include fears that extend beyond the workshop - eg. I am worried that my child wasn't feeling well this morning. These worries can affect concentration and it can be helpful to be able to 'vent' a bit.)

Collect the post-its, read them out and put up on the appropriate heading. Try to group similar comments together. Briefly respond to comments.

iii. Agenda review (3 min.)

Go over the agenda and make changes if appropriate.

iv. Groundrules (2 min.)

Agree the groundrules for the day/session. If you have time you could brainstorm the groundrules. Here are some of the standard ones, ask if there are any additions.

• Respect diversity of opinions, backgrounds and experiences
  
• No side conversations
  
• Allow equal participation
  
• One speaker at a time
  
• Confidentiality - anything personal said in the room stays in the room.
  
• Turn off mobile phones

Materials: Handout 1 - Economic Ideologies

i. Input - Shifts in economic ideology (15 min.)

Note: it would be useful use Handout 1 as an overhead during your input. It always helps to have a visual aid. The handout is a shorter, less detailed version of the text below.

The struggle over economic ideologies

Economics is sometimes called the 'queen of the social sciences' by which is meant that it is closer to a 'real', 'hard' science, such as physics, chemistry or biology, than any of the other social sciences. In reality, economic theories are not based on natural laws analogous to gravity or centrifugal force. Economic theories are social constructions which means they are made by people. The dominant economic model or paradigm has changed throughout history. We've seen hunter-gatherer, mercantilist, feudal, slave based, communist, and capitalist economies - and within each of these there are many variations. In fact, there are always numerous economic paradigms in competition with each for recognition and influence - think of the Cold War: capitalism vs communism. The outcome has more to do with power, politics and struggle than science. We will focus here on the recent shifts in the dominant capitalist economic paradigms and policies.

From Classical to Keynesian economics

Prior to the Great Depression in the 1930s, the Classical school dominated capitalist economics. The Classical school believed that markets were 'self-equilibrating,' which is to say that they will right themselves if thrown off balance. They looked at the upswings and downswings of the business cycle (see Module two) as natural and self correcting.

For instance, according to Classical theory, here's a simplified story of what should happen in the case of a recession: Business investment is down, workers have been laid off and unemployment is high. Workers, worried about their jobs, are willing to settle for lower wages. Falling demand for goods, loans (for business investment) and office space prompts lower prices, interest rates and rents. As the cost of doing business (wages, inputs, interest, rent) falls, the conditions of profitability improve and businesses will eventually start investing and hiring workers, who then create more demand and stimulate further investment, bringing the economy out of the recession. The Classical school's macro-policy prescription then is that the government should do nothing. The economy will right itself as long as the government does not interfere and distort market signals.

But then along came the Great Depression of the 1930s and the 'do nothing' policy prescription saw a recession deepen into a depression that went on and on. British economist John Maynard Keynes (pronounced canes) argued that although wages, prices, interest and rents were falling as predicted by Classical theory, business investment would not revive because businesses had no confidence that they would be able to sell their goods and services given the economic depression. Keynes argued that the government must step in to 'jump start' the economy by stimulating demand. The Great Depression ushered in a period of Keynesian macroeconomic policy which legitimised the active role of government in stabilizing the economy using fiscal and monetary policy.

Governments, including the U.S. and the U.K., implemented public works programs to simultaneously provide employment and to jump start the economy, but they were a drop in the bucket compared to the depth of the Great Depression. It was really only the massive public spending on the Second World War that pulled the economy out of its slump.

Still, Keynesian macro-policies had displaced those of the Classical school. Not only was government intervention in the economy legitimised, but also social welfare programs that addressed 'market failures' - socio-economic problems that the market couldn't remedy - such as affordable housing, unemployment, poverty and healthcare for the poor. Social welfare programs also served as an 'automatic stabilizer' which meant that if the economy went into decline, government spending would automatically rise in the form of unemployment benefits and other social welfare payments, thereby countering the economic downturn.

From Keynesian to Neoliberal economics

The Keynesian economic paradigm held sway through the mid-70s when it was undermined by the problem of stagflation - high inflation and unemployment at the same time. Recall the Phillips curve (Module two) in which inflation and unemployment could be balanced off one another. With stagflation the traditional Keynesian prescriptions offered no relief - only more pain. A central cause of stagflation was the oil shocks in the 70s which saw the price of oil rise steeply due to the ability of OPEC (Organisation of Petroleum Exporting Countries) to curtail the supply of oil. The rise in the cost of oil led to an across-the-board increase in the cost of production causing inflation, but also slimmer profits, cutbacks in investment and rising unemployment - thus the simultaneously high levels of inflation and unemployment.

Stagflation was finally overcome in the early 80s when the U.S. central bank deliberately created the worst recession since the Great Depression and the effect was felt worldwide. Unemployment and economic stagnation reached such unbearable levels, that inflation was finally crushed. To put it simply, the Keynesian goal of achieving growth, full employment and low inflation was thrown out in favour of keeping inflation under control, no matter what the cost on the unemployment front.

Conservative economists and ideologues were able to exploit the economic crisis of the late 70s by ushering in a new economic paradigm - in the U.S. it was called Reaganomics, or supply-side economics, in the U.K. it was called Thatcherism, and now we would recognize it as neoliberalism.

In many ways neoliberalism goes back to the Classical school: markets and the economy are self equilibrating and the government should not intervene in the economy. They would argue against activist fiscal and monetary policy (see Module two) as well as against social welfare programs. In this view, what is important is creating conditions that encourage business investment - 'free markets,' 'free trade,' minimal government intervention, de-regulation, privatisation, cutbacks in social welfare, business friendly unions - these are all hallmarks of neoliberal economics. Neoliberal policy places a priority on controlling inflation in order to achieve growth, while full employment is not a major priority. We will look at neoliberalism in more detail below.

Some aspects of the European Monetary Union (EMU) fall in line with the neoliberal bias against government intervention in the economy. Countries that have joined the EMU have ceded control over monetary policy to the European Central bank which has a mandate to keep inflation under 2%, while full employment is not a priority. They are also obliged by the Stability and Growth Pact to limit national deficits to under 3% of GDP, which severely constrains their ability to use expansionary fiscal policy. Many people are concerned about the loss of national sovereignty (the ability of governments to exercise power over the national economy) as governments' ability to use fiscal and monetary policy has been extremely restricted within the Eurozone.

ii. Small group exercise - Macropolicy shifts (40 min.)

With the rise of neoliberalism, there has been a shift in macroeconomic policy from targeting both moderate inflation and unemployment to prioritizing inflation. This exercise explores why, and who are the winners and losers.

Write up the table below on flipchart. Break into small groups and ask participants and give the participants 10-15 minutes to answering the following questions:

• What do you think the impacts of unemployment and inflation are on these different groups? Good, Bad, or Moderate.
  
  
• Be ready to explain your group's answers.

Discussion (15 min.)

Come back into a big group and ask for their responses. In the interest of time, there's no need for every group to give all their answers. Fill in the table with the correct answers and explain if necessary.

C. Neoliberalism and the Celtic Tiger (1 hr.)

i. Libby Marquette skit (15 min.)
Objectives:

• To introduce the framework of neoliberalism using the example of the Celtic Tiger
  
• To spark discussion of neoliberalism

Materials: Handout 2 - Libby Marquette skit, TV remote control

The facilitator takes the role of Libby. Note that the only tricky part is near the end where Libby needs to make some hand movements, so read this over before performing it. Ask for one volunteer to take the role of the commentator (the easier role). If possible have the commentator read through their part beforehand, maybe over break or even before the workshop if you've managed to tap someone.

The commentator uses a TV remote to freeze Libby, introject some critique and then unfreezes the unsuspecting Libby. It's helpful for the commentator make a 'beep' so that Libby knows when to freeze and unfreeze. The commentator should introduce "Dr. Libby Marquette from the Global Glory Institute, who will talk about globalization and the Celtic Tiger."

This skit is quite dense and lays out a lot of information. The following exercise goes over the main policies of neoliberalism that were raised in the skit to give participants space to process the information.

ii. Past and present: Neoliberal policies and your lives (45 min.)

Objectives:

• To explain the main policies of neoliberalism
  
  
• To make linkages between these policies and people's lives and communities.
  
  
• To question who benefits from trade and investment liberalisation, de-regulation, privatisation and so on

Materials: Overhead projector, Overhead of Handout 3 - Staples of a Neoliberal Diet, flipchart paper, markers

Step 1: Review overhead of Staples of a Neoliberal Diet. (5 min.)

Step 2: Break into small groups. Give the groups a sheet of flipchart paper and markers and ask them to write in one column the way things were in the past (maybe a generation ago although groups can make their own choices) and in the other the way things are in the present. (15 min.)

Step 3: Ask each group to see if there are links between the changes that they have listed and neoliberal policies. If so, put the number of the policy (or policies) next to the change. (10 min.)

Step 4: Reportback and discussion. (15 min.)
Discussion questions: Who do they think is pushing this restructuring? Who benefits?

In the next sections we'll look at how the neoliberal agenda is being promoted through 'free' trade and SAPs.

D. Neoliberalism and 'Free' Trade (1 hr. 15 min.)

i. Free Trade Web (10 min.)

Objectives:

• Quick brainstorm to get out people's thoughts on what is free trade and how does it affect them.

Materials: Large sheet of paper (a piece cut from plain wallpaper lining works well or tape together two sheets of newsprint on the wall), bluetack, markers

Do a web exercise using free trade as a starting point. Write free trade in the middle of the paper. Ask participants to give causes (or who's pushing 'free' trade) and effects. Write down the comments with arrows to show if it's a cause or an effect - some will be very ambiguous or the arrow may run in both directions. Don't worry about being too precise. People can also point out linkages between causes and effects, knock-on effects, etc. After a few minutes you'll have a big tangled web of interconnections. This should be an energetic, free flowing exercise that gets out ideas, thoughts and realisations. (see Introduction for an example.)

ii. The WTO: What is it and who runs the show? (5 min.)

Objectives:

• Overview of the WTO

Briefly go over Handout 4 - The WTO as an overhead or handout.

iii. So what's so good about "free trade?" The theory of comparative advantage (25 min.)

Objectives:

• Understand and critique the theory of comparative advantage which underpins the rationale for free trade

Materials: - props: 4 cups each of rice and beans, 8 plastic cups (clear ones work best), table, and Riceland and Beanland signs.

1. Dr. Freetrade lecture on comparative advantage (10 min.)

"Hello and thank you so much for coming. After hearing the following analysis, I'm sure you will come to understand that free trade is a win-win situation. In order to explain this, we will be learning about the theory of comparative advantage. It is to the credit of the theory that it has stood the test of time and still underpins trade policies today. To illustrate the theory of comparative advantage, I'll need four volunteers to help me act out the scenario. You two are farmers in Riceland - one is a rice farmer and one is a bean farmer. (Assign roles) You two are farmers in Beanland - one is a rice farmer and one is a bean farmer. (Assign roles)

Now, Riceland is better suited to growing rice than beans. The rice farmer can grow twice as much rice as beans. Beanland is better suited to growing beans than rice. One worker can grow twice as much beans as rice. However, since rice and beans are complementary proteins, each country eats both rice and beans.

Thank the farmers of Riceland and Beanland, give them a round of applause and then de-role for the next section.

2. Discussion & Critique (15 min.)

As a big group, have participants comment on what is wrong with this picture. Write comments on flipchart. Try to link comments to the points in the facilitator's notes if possible.

iv. Trade impact card exercise (25 min.)

Objectives:

• Review main policies of trade liberalisation
  
• Look at the impact of trade liberalisation

Materials: a set of Trade impact cards (print out the two pages of Trade Impact Cards and cut into cards), bluetack, markers

Step 1: Put the policy headings up on the wall and explain them. You can tell participants that they don't need to copy these - they're in a handout. (5 min.)

Trade liberalization policies

1.) Reduction of protectionist tariffs and quotas
Countries use protectionism such as tariffs and quotas to protect industries and jobs from competition. Forms of protectionism include:

• Import Tariffs - taxes placed on imports
  
• Quotas - quantitative limits on imports

2.) Elimination of "non-tariff barriers to trade"
'Non-tariff barriers to trade' means anything that critics argue gives an 'unfair advantage' to local industries. For example:

• Subsidies to domestic industries or agriculture.
  
• A wide range of policies enacted by countries to protect their citizens, the environment, human rights, etc. that have the effect of restricting imports that don't meet these standards.

3.) Elimination of restrictions or requirements on foreign investment
This is meant to make it easier for industry and financial capital to move around the globe by phasing out capital controls and other regulations. Capital controls are various ways of controlling the inflow or outflow of capital. For example:

• Controlling the outflow of capital by the limiting the ability of a TNC to move production abroad (e.g. payment of compensation, 'exit' taxes, a lengthy notification requirement, limits on foreign currency exchange, etc.)
  
• Controlling the inflow of capital, for instance, requiring a certain percentage of local ownership in foreign enterprises, or sourcing inputs locally.

4.) TRIPS (Trade-related Intellectual Property Rights)
Strengthens the hand of patent holders. The life of patents has been extended to twenty years.

Step 2: Break into small groups. Divide the trade impact cards among the groups along with a bit of bluetack. Have the groups mark each card with the number of the relevant policy. (10 min.)

Step 3: Have each group put up their cards, reading each one aloud - slowly and clearly. Make corrections if necessary - all the trade impact cards are in Handout 5. Some are completely obvious and some are ambiguous, fitting perhaps in more than one category. The trickiest one is the "Irish industry has been decimated by foreign companies and competition…" This really straddles policy 1 (cheap imports) and policy 3 (the influx of foreign businesses) which together served to put local industry out of business. (10 min.)

v. Summarize impacts (10 min.)

As a big group summarise the impact of trade liberalisation.

E. Neoliberalism and SAPs (1 hr.)

Recall that, in addition to 'free' trade, the neoliberal agenda is being pushed through IMF imposed Structural Adjustment Programmes (SAPs). Countries that are heavily indebted are forced to 're-structure' their economies as a condition of further loans.

Before getting into the SAP role play, we'll review a couple of concepts that you'll need: devaluation and tight monetary policy.

[Note: if you have the time (which you probably won't), you could do the exercises in Appendix A, which get into more detail and are more interactive.]

i. Input - Nuts and Bolts of SAPs (10 mins)

Objectives:

• To give participants an understanding of two of the more technical conditions of SAPs: devaluation and tight money.

1. Devaluation

Devaluation is meant to boost exports and discourage imports. Currency devaluation means that the home currency is worth less. For instance, if the euro is devalued, it would be worth fewer pounds sterling. Therefore Irish exports become cheaper in terms of pounds, while imports into Ireland become more expensive. A boost in export earnings (along with a decrease in imports) means that there's more hard currency with which to repay foreign debt which is a central aim of SAPs.

In reality, devaluation may backfire because while cheaper prices may boost the quantity of exports, the lower price also means that the total earnings of foreign exchange may decrease. It all depends on whether or not the fall in price is offset by the increase in the quantity of exports.

One assured effect of devaluation is that it raises inflation because all imported goods become more expensive. It hardly needs to be pointed out that the higher cost of living hits the poorest the hardest.

2. Tight money

Tight money means that the central bank tightens or restricts the money supply. This leads to an increase in interest rates and a downturn in the economy. Why would the central bank want to risk bringing about a recession?

• First it would force people to spend less on expensive imports, which means more foreign exchange to repay foreign debt.
  
  
• Second, in a recession the high unemployment creates a downward pressure on wages which is good for businesses and also helps to put the brakes on inflation.
  
  
• Third, the whole belt tightening, austerity package of recession and government cutbacks is considered a good tonic of market discipline, sort of like fasting - cleans out the system.

Ok, now that we're clear about devaluation and tight money, we can get back to the SAP role play.

ii. SAPland Role Play (50 mins)

Objectives: To examine the impact of Structural Adjustment Programmes on women.

Materials: Handout 7 - SAP role play

Step 1: Distribute Handout 7 - SAP role play. Assign the roles. There should be at least two per household. If you have extra people, they can play other members of the household. If you don't have enough people, you could cut some roles. (3 minutes)

Step 2: Very briefly review the SAP policies that the government of SAPland has been forced to accept. (2 minutes)

Step 3: Explain that Women's Hour on local TV has invited a panel men and women from SAPland to talk about the impact of these policies on women. Each household or group has 15 minutes to caucus and come up with their presentation. Each household or group will have two minutes for their presentation. Men can speak, but remind participants that the focus of the meeting is on the impact of women. (15 min.)

Step 4: Regroup for the TV show. The facilitator should play the role of the TV host, introducing the household/groups and allowing each group equal time. (15-20 min.)

Discussion: Ask General reactions/observations? (10 min.)

F. Action (30 min.)
Here are some approaches to challenging neoliberalism and trade liberalization. In small groups, assess and critique. Are there other approaches that are preferable? (15 min.)

1. Anti-globalisation protests
2. Drop the Debt campaigns
3. Lobbying EU to level the playing field with respect to agricultural subsides, protectionism and dumping
4. Working with NGOs to reform WTO
5. Working to change domestic neoliberal and free trade economic strategy

Reportbacks and discussion. (15 min.)

APPENDIX A

Devaluation and Tight money (20-30 min.)

Materials: Flip chart, pens, fun money or monopoly money. Or you can just use fake checques.

1. Why Devalue?

a. Break into small groups of about 3 to 4 people. Some are British and some are Irish. Give each British group 100 pounds sterling and each Irish group 100 Euro. Facilitator plays the banker. Write the exchange rate on the flipchart:

• €1.4 to the pound sterling
  
• £.60 stg. to the euro.

Each group asks the banker for so many pounds or euro in exchange for the currency they are holding. (So pound holders get €140 and the euro holders get £60 pounds.)

b. Now write this new exchange rate up:

• €1.6 to the pound sterling
  
• £. 40 stg. to the euro.

Ask participants if the euro is stronger (appreciated) or weaker (devalued).

Answer: the euro is weaker, the pound is stronger.

Hint: think of the exchange rate as the price of the currency. So the price of the euro in pounds has fallen from £.60 to £.40 - it has gotten weaker. The price of the pound in euro has risen from €1.40 to €1.60 - it has gotten stronger.

c. Now each group asks the banker for so many pounds in exchange for the currency they are holding. (So the pound holders get 160 euro and the euro holders get 40 pounds.)

d. Have each group analyze how this affects:

• Exports from Ireland to the UK
  (Answer: Good - Irish exports have gotten cheaper. A €100 Irish sweater now costs a British importer £40 compared to £60)
  
  
• Imports from UK
  
  (Answer: Bad - UK imports have gotten more expensive. A £1 English pen now costs €1.6 instead of €1.4).
  
  
• Inflation
  (Answer: Bad - inflation rises because the imports have gone up.)

e. Why is this desirable from the point of view of the IMF?

Conclusion:

• The IMF pushes devaluation because, in theory, it is good for the balance of trade (exports minus imports). It boosts exports and decreases imports. This means that there's more hard currency with which to repay the debt. And remember, the IMF serves as the international debt collection agency. In reality, devaluation may not work. Even if the quantity of exports increases this may be offset by the fall in the value of the exports.
  
  
• Devaluation leads to inflation which hits poor people the hardest

2. Why raise interest rates (tight money)?

Ask people what happens when the central bank raises interest rates?

Write answers on flipchart: puts a squeeze on purchases/transactions financed by loans: business investment, mortgages, cars and other big ticket items.

Draw out the following story: Lack of consumer demand leads businesses to cutback even more by laying off workers. These unemployed workers then cutback their spending which means even less consumer demand, which leads to more layoffs and so on down along a downward spiral. The result of this would be a recession.

Why in the world would the central bank and the IMF want to cause a recession?

• First it would force people to spend less on imports, which means more foreign exchange to repay foreign debt.
  
  
• Second, in a recession the high unemployment creates a downward pressure on wages which is good for businesses and also helps to put the brakes on inflation.
  
  
• Third, the whole austerity package of recession and government cutbacks is considered a good tonic of market discipline, sort of like fasting - cleans out the system.

[1] Central Bank Survey of Foreign Exchange and Derivatives Market Activity, Bank for International Settlements, 1998.