- Global financial crises have shaken faith in the market as panacea. Today, the world is grappling for a new consensus to meet the challenges of globalization, development and poverty.
It may sound paradoxical to join two such apparently contradictory words as ‘optimal’ and ‘crisis’. I heard the expression for the first time from the Director of the Institute for International Economics, C. Fred Bergsten, in Washington, D.C. He explained that it was becoming increasingly common there, in
the sense of the crisis being grave enough to force the mighty to finally do something without being so serious as to render the action useless and too late.
We may be approaching an optimal point. For even the most enthusiastic prophets of the brave new world of globalization (for instance, participants in the World Economic Forum at Davos) are beginning to question the wisdom of their blind beliefs, and to look for a human and social dimension to add to their world-view.
One of the advantages of crises is that they can play a catalyzing role in changing our perception of things. And so, it seems, in the face of crisis we are now witnessing growing signs of a new turning point.
This new current addresses humanity’s future in terms of globalization, development and poverty, and asks a fundamental question: what is the nature and sense of the economy? Is it an autonomous and largely self-regulating mechanism like the galaxies or the planetary system, or is it a product of culture and society, the result of societal choices based on values?
Once more the impulse for change is coming not so much from academic debate but from reality itself, from the huge gaps between the rich and the poor. To cite just one example: basic education for all would cost $6 billion a year. By comparison, $8 billion are spent annually on cosmetics in the United States alone.
Such grotesque, even obscene, contrasts show dramatically that the twin problems of development and poverty are still very much with us more than a decade after the Washington Consensus claimed to have reached ‘universal convergence’ around ‘the common core of wisdom embraced by all serious economists’. In broad terms, this approach recommended that governments should: (i) pursue economic stability in the sense of balancing the budget and eliminating balance-of-payments deficits; (ii) open their economies to the rest of the world through trade and financial liberalization; and (iii) promote free market capitalism through privatization, deregulation, and other measures of liberalization.
Propagated through the International Monetary Fund (IMF) and the World Bank, the Washington Consensus has been the dominant paradigm for development from the early 1980s until the mid-1990s. Its introduction entailed a total shift from earlier thinking, usually seen as a shift from state-led dirigisme to market-oriented policies.
Over the last few years, two important challenges to the Washington Consensus have emerged: firstly, the UNDP’s sustainable human development approach and, secondly, an emerging ‘ Southern Consensus’, founded on analyses made from the perspective of countries undertaking late industrialization and seeking to catch up with rich countries in the global economy. This Southern Consensus has not yet been sufficiently elaborated to incorporate predominantly agricultural economies of Africa and the least developed countries. But it can be deduced from the increasing convergence between the Latin American experience and East Asian development models.
The overselling of globalization
The sustainable human development approach espouses a set of values different from those underpinning the Washington Consensus. Whereas the Washington Consensus focuses on the promotion of gross domestic product growth and has been implemented through a top-down, donor-conditionality-driven and outside-expert-led approach, the sustainable human development approach argues that development should improve the nature of people’s lives, and that it should be founded on participation and a more equal partnership between developing countries and aid donors.
Moreover, the Washington Consensus has cracked in the practical sense that real differences of opinion have emerged in Washington, between the IMF and the World Bank, on the causes of the Asian crisis and how best to handle it. The Chief Economist of the Bank, Joseph Stiglitz, has argued that there is a need for a ‘post-Washington Consensus’ to achieve broader objectives - higher living standards and equitable, sustainable and democratic development - using a wider range of instruments to correct market failure, to foster competition, and to control short-term capital flows.
It may be too early yet to announce the final demise of the Washington Consensus despite Stiglitz’s critique, UNCTAD’s work in favour of a Southern Perspective or the renewed emphasis on poverty eradication resulting from the 1995 Copenhagen Summit for Social Development.
The emerging new consensus will be driven by the main ‘workable’ alternative, East Asian models, strengthened through their convergence with Latin America experience, and adapted to Africa and the least developed countries. There are still serious obstacles facing efforts to develop a more comprehensive consensus that would finally be able to overcome and reconcile the old ideological antinomies: market versus state, price stability versus economic growth, capital accumulation versus income distribution, competition and open integration into the world economy versus national industrialization and consolidation of a strong local productive capacity.
There will be a special difficulty in devising strategies for long-term development in a world of globalized money where speculative attacks and financial volatility can unravel and destroy in a matter of weeks the economic growth and poverty reduction achieved in 30 years, as happened recently in Indonesia. In other words, here is where the problems of development and poverty coincide with the challenge of globalization.
After the fall of the Berlin Wall almost 10 years ago, globalization was oversold to the public as a sure way of bringing more accelerated growth and prosperity for all. But the record of economic growth in the 1990s has been a dismal one, not only much inferior to the exceptional rates of the 30 Glorious Years of the post-war period but disappointing even in comparison with the troubled 1970s. Still worse, we are approaching the year 2000 without a solution to the aggravation of the two most serious failures of the twentieth century: mass unemployment and growing inequality inside and among nations.
One of the problems with the conventional approach to globalization is that it is too narrow. It usually reduces and impoverishes a complex phenomenon to just one of its components, the economic unification of commercial markets, investment opportunities and financial markets on a planetary scale. In that reductionist way, we miss the rich diversity of what actually is an historic process with a very strong cultural element. Arising out of the breakthroughs in electronics and telecommunications which constitute the first scientific revolution to change our perceptions of time and space, unlike the previous ones that dealt basically with energy and matter, globalization represents the unification of the planet for human interaction and mutual knowledge.
But scientific and technological breakthroughs are no guarantees in themselves that the new techniques will be used not to dominate but to liberate and promote human beings. In the past, it was precisely the scientific revolution of Galileo and Newton which gave the West the technological superiority that made colonialism and imperialism possible.
The situation now is certainly more decisive in terms both of promise and threats. Indeed, never before has knowledge become so crucial as to constitute the very condition for development. As we move away from a type of economy where success was determined by capital, cheap labour or abundance of resources towards one that is knowledge-intensive, the monopoly of information and technology may easily become a frightening weapon for domination and oppression, the roots of inequality.
We are beginning to understand the first principles of a new branch of economics, information economics. The old presumption was that information had a zero or negligible cost. We now know that information has a cost and that this cost of transaction may be the difference between economic success or failure. Without access to information there will be no access to markets. The market solution will not always be the optimal solution because markets are systems to process and convey information and they are never perfect in performing this task. Firms and economic actors, people and governments, have to deal with information and some will prove more able at it than others. Those who are well educated and who have good access to information and knowledge will prevail in a highly competitive world.
What will happen then to the legions of losers in the global competition, unskilled workers in rich countries or marginalized countries and continents like Africa? To take care of them, we will have to redefine the concept of competition as a game that not only needs clear rules and an impartial arbiter, as in the World Trade Organization, but also, like all games, requires training, preparation and education. In the same way as one has to learn how to play a game, nations need to learn how to produce, how to trade, how to compete. Governments and international organizations must strive to make information and knowledge available to all in an equal way.
The return of Adam Smith
Even if we find how to share information and knowledge in such a way as to allow widespread economic development of all or most countries, this will not guarantee per se a fair and balanced distribution of the results among all categories of citizens. Accelerated economic growth is certainly a necessary condition for rapid poverty reduction, as was demonstrated in China and Asian countries in general. It is not, however, a sufficient condition, as we have learned from some Latin American examples of extreme concentration of wealth and income and from what is now happening in many industrialized societies.
We still do not know enough about how to balance growth and distribution, or reward initiative with relative equality. Development, poverty and globalization are problems that will only be solved if we go back to the original approach to economics as ‘political economy’, as part of what Adam Smith taught: moral philosophy, that is, the economy as a product of the ‘polis’, the city of human beings. Not as the planetary system whose laws we cannot change, but something that is the result of societal choices based on shared values. And the first of all values is that the economy was created for man and not man for the economy. This is the only way to promote genuine hope, and faith that the future will be better than the past.
Rubens Ricupero is Secretary-General of the United Nations Conference on Trade and Development (UNCTAD). Reprinted with permission from The UNESCO Courier, March 1999.