Posted
5th August 2001
Looking For Leadership
By
Jeff Madrick, NYTimes August 2, 2001
T There's been little headway made in the fight against world
poverty in the last decade. Yet when Group of 8 leaders met
in Genoa, Italy, two weeks ago, they chastised protesters with
warnings that they would only obstruct progress for the poor.
Considering the facts, that was quite a display of arrogance.
The World Bank calculates that a third to a fourth of the world's
people still live in severe poverty and this is based on minimal
rates of $1 to $2 a day. The overall proportion has fallen only
slightly the last 10 years, and poverty levels have risen in
many countries. Moreover, in poor regions, except Asia, income
inequality has widened.
The insensitivity to the stunning facts is not limited to Western
leaders. Mainstream economists have been notable for their silence.
At the John F. Kennedy School of Government at Harvard, a weekend
seminar was held in June on the Clinton administration's economic
policies. Yet hardly a word of criticism was raised about the
Treasury's heavy-handed advocacy of the rapid liberalization
of capital flows, which many mainstream economists now concede
contributed to the Asian financial crisis in 1997 and 1998,
sending many into poverty.
Today, Argentina and New Zealand, once models for the liberalizing
policies so widely encouraged by economists and global investors,
are in serious trouble. Argentina, which linked its currency
to the dollar in 1991, amid plaudits from disciplinarians, totters
on the brink of a financial crisis that could sweep up Brazil
as well. New Zealand's growth rates are among the worst in the
Organization for Economic Cooperation and Development. Yet there
is little public outcry about mistaken policies.
In June, a small dissenting group of international economists
and political scientists met to discuss this absence of a full
public discourse. The conference was organized by two Harvard
professors, Dani Rodrik, an economist at the Kennedy School,
and Roberto Unger, a law professor. In the spring, the two had
taught a standing-room-only course at Harvard Law School on
alternative development strategies. The participants essentially
found themselves up against a wall. Nations have little leeway
to adopt policies that deviate from those accepted by institutions
like the International Monetary Fund or those demanded by the
financial markets. If they do, capital flees, interest rates
rise and loans are not renewed. But the truly regrettable paradox
is that the strategies advocated by the economic and financial
mainstream reduced government spending, privatization, unrestricted
capital flows and completely free trade are not the policies
that gave rise to the rapid growth of developing nations in
the recent past. Had South Korea, Taiwan, Thailand or Brazil
been restricted to the policies considered acceptable today,
they would not have been such success stories. As Mr. Rodrik
points out, Taiwan and South Korea adopted aggressive industrial
policies to subsidize crucial industries. Many of the fastest-growing
nations owned and ran major industries and protected infant
industries with high tariffs. Government investment in education
was often strong in these nations. Most slowly depreciated their
currencies, rather than adopt the floating currencies advocated
today (or the fixed-currency regime used by Argentina). In sum,
these nations integrated their economies with the advanced world
not right away, but only when they had matured and grown more
prosperous.
Moreover, not only are successful policies often abandoned,
but as the current plight of Argentina and New Zealand suggests,
liberalizing policies often fail, too. Robert Wade, a political
scientist at the London School of Economics, argues that few
nations that were largely dependent on commodity exports, like
New Zealand, have been able to transform themselves into successful
producers of advanced goods based on such policies. For Mr.
Wade, such a transformation still requires an industrial policy.
At times, to take one example, it may require an import- substitution
policy of high tariffs to protect developing domestic industries.
But such policies were widely criticized as the main source
of failure in Latin America in the 1980's. Mr. Wade counters
that it was the indebtedness of many Latin American nations
that created crises and poor growth in the 1980's, not import
substitution, and that the establishment has essentially twisted
the argument in its favor.
Neither Mr. Wade nor Mr. Rodrik, whose most recent book is "The
New Global Economy and Developing Countries: Making Openness
Work" (Overseas Development Council, 1999), says he thinks there
is one policy to fit all sizes. Import substitution may be appropriate
to some, but not others. Both argue strongly that local conditions
should be allowed to determine the right course, not international
institutions with universal formulas. To Mr. Unger, however,
the author of "Democracy Realized: The Progressive Alternative"
(Verso Books, 1998), only more sweeping change has a chance
to work. Mr. Unger proposes not so much a blueprint but a profoundly
new direction that includes high levels of government investment
and taxes, required voting and forced savings to buffer states
from the influence of international investors. Mr. Unger says
his ideas have certainly not caught on among the establishment,
but he is attracting a lot of interest from the younger generation.
Given the levels of poverty, this is no surprise.
Yet the protesters in Genoa and elsewhere also naively denigrate
the value of economic growth. Mr. Wade, for example, points
out that there is no evidence that local participation in devising
economic strategies, so widely advocated by protesting groups,
will provide an answer to alleviating poverty unless it is accompanied
by other pro-growth strategies.
What is surely the case, however, is that if nations remain
under the thumb of single- minded international investors and
their institutional surrogates, there will be little room for
new ideas. Mr. Rodrik says the financial turmoil in Turkey,
for example, has been made worse by the immediate demands by
institutions for liberalization. Mr. Wade says serious industrial
policy is hard to undertake in current circumstances. To mitigate
the power of the financial markets requires leadership from
the powerful themselves. But such leadership is absent not only
in Washington and most other Western capitals but also in America's
major academic centers...
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