At the beginning of the 21st century, neo-classical economics
apparently holds unquestioned sway as the basis of economic policy, just as it
did in the 19th century. At this juncture it may be useful to recall that the
neo-classical belief in the efficacy of the free market had received a jolt during
the great depression of the 1930s and was set aside in favour of state intervention
for the next fifty years: In the capitalist countries it took the form of Keynesian
policy which involved government expenditure to pull the economy out of recession
and establish macro economic stability in the market system. In the socialist
countries, state intervention took the more radical form of a replacement of the
market altogether by centralized planning of resource allocation, production and
distribution. Mainstream economics has now returned to the elegant certainties
reminiscent of the 19th century. Yet doubts are already beginning to emerge whether
this theoretical edifice can be maintained in the face of the new recession in
the global economy, the phenomenon of terrorism, rising poverty and intolerable
debt burdens in many countries, and environmental degradation worldwide. In dealing
with these problems the portals of economic theory may well open into a new way
of looking at the relationship between the individual, the market and the state.
POST WAR ECONOMIC POLICY Development
economics in the post war period emerged from a recognition that the free market
mechanism by itself was not an adequate framework for ensuring the development
of underdeveloped countries. The structure of the world economy at the end of
the colonial period was characterized by the developed countries specializing
in manufacturing and the underdeveloped countries specializing in the production
and export of primary commodities. A whole range of economists from Raul Prebisch,
Myrdal at one end, and Paul Baran, A.G. Frank, Emmanuel, Samir Amin, and Rosa
Luxembourg at the other end of the theoretical spectrum were able to show that
the so called free market in the twentieth century on a world scale operated as
a mechanism of real resource transfer from the under-developed to the developed
countries. They showed that the prescription of comparative advantage based on
the world market mechanism would simply reinforce the economic structure of raw
material exports that was inherited from the colonial period, and which was the
fundamental cause of under-development. Out of this charged intellectual atmosphere
emerged a consensual view that industrialization was a necessary condition for
self-reliant development and this required conscious state intervention.
In those heady days of intellectual ferment while the argument for state intervention
in the economy of an under-developed country was formulated with admirable rigour
what was not systematically specified was the particular form that such intervention
should take. Even less thought was given to the impact on development of a large
bureaucracy that was not only inflexible, corrupt and incompetent to "deliver"
the results in most cases, but was culturally conditioned to further the metropolitan
economic interests rather than the interests of the poor in their own countries. The
economies of most Third World countries continued to be structurally integrated
with the global capitalist economy and no fundamental change took place either
in the internal distribution of productive assets or in the social basis of the
power structure. Therefore, it was eminently predictable that non-productive expenditures
and income inequality would increase rapidly. Moreover, it was only a question
of time before loan dependence and endemic poverty emanating from these trends
would threaten both economic sovereignty and political stability of these states.
Thus large budget deficits, heavy debt and growing poverty which are today causing
such anxiety in the world community were actually inherent in the form of intervention
adopted by Third World regimes in the post war period, i.e., intervention by centralized
state structures allied with traditional economic elites on the one hand and locked
into the global market on the other. Of course, intervention by centralized states
did produce dramatic results in a few countries but these were mostly restricted
to cases where traditional economic elites had been overthrown through revolutionary
upheavals and where there was a structural delinking from the economies of the
advanced capitalist countries. Thus the Soviet Union and China achieved self-reliant
industrialization and alleviation of poverty within a relatively short period
of time. But even in these countries the inefficiency of centralized bureaucracy
resulted in such large resource losses that by the 1980's they were obliged to
seek a decentralization of economic decision making. The Soviet Union through
Perestroika, and China through the Four Modernization Programmes. The rigidity
of the old structures of power and economy however led to the collapse of Soviet
State itself while China showing greater flexibility was able to successfully
transit into a dynamic, predominantly market based economy. In the capitalist
Third World too there were success stories such as the NICs. (New Industrializing
Countries) of South Korea, Taiwan, Hong Kong and Singapore. However, because of
their small size and massive inflow of multinational capital and technology, their
impressive economic performance can be attributed essentially to the phenomenon
of internationalization of production and finance rather than an indigenous economic
base constructed by the policies and institutions of the Nation State. Notwithstanding
the relative success of NICs, so far the post war development attempts in much
of the Third World, have succeeded neither in overcoming poverty nor in establishing
a sustainable basis for rapid economic growth. What then is the solution? It is
clear that the radical alternative of state ownership of the means of production
by regimes claiming to represent the proletariat, can by no means be propounded
with the same confidence that marked the first half of the twentieth century.
However, what is equally clear is that the solution does NOT lie in the other
extreme of laissez faire. This view is rooted explicitly in the nineteenth century
theory that the free market mechanism is the best framework of resource allocation. IS
THE IMF PRESCRIPTION FEASIBLE?
The recent experience
of Third World countries of producing according to the policy of static "comparative
advantage" within the framework of IMF loan conditionality, points to the
potentially devastating consequences of such a policy. For example, the IMF pressure
on African countries to service their heavy debt through the export of primary
commodities, forced these countries to over-use their fragile soils resulting
in rapid desertification. According to the United Nations Report of the World
Commission on Environment, the consequence was that almost one million people
died of famine and the survival of 35 million people was put at risk during the
period 1984 to 1987. The report indicates that this "recent destruction of
Africa's dry land agriculture was more severe than if an invading army had pursued
a scorched earth policy". Similarly, in Latin America the debt servicing
obligations through primary exports has resulted in a situation where "the
region's natural resources are now being used not for development but to meet
financial obligations of creditors abroad." The Report goes on to show that
such a policy requires "relatively poor countries simultaneously to accept
growing poverty while exporting growing amounts of scarce resources".
With
the lowering of tariffs on imported manufactured goods under the WTO agreements,
many developing countries will be unable to face the challenge of international
competition due to poor governance and inadequate infrastructure: They are consequently
likely to suffer a sharp slow down in economic growth, increased poverty and intensification
of their debt servicing problem. Under these circumstances, IMF stabilization
programmes of the kind practiced in the last decade are not only being re-evaluated
by developing countries but by the IMF itself. These programmes while pressurizing
borrowing countries to cut down public expenditure (which often translated into
reduced development expenditure), without specifying policies for accelerating
GDP growth and better governance, may have pushed such countries into deeper recession,
poverty and debt. Such narrowly conceived IMF "Structural Adjustment Programs"
could be regarded neither as a prescription for economic efficiency nor of economic
stabilization. In the face of such criticism the IMF was obliged to support Growth
with Poverty Reduction Programmes in a number of countries. However the theoretical
basis of this hurried change of policy has yet to be developed in the IMF. Clearly
the emphasis in the new theory will have to shift from presumed perfect markets
to institutions and governance.
TWENTY-FIRST CENTURY
ECONOMICS
Today as we stand amidst the global economic,
social and ecological crisis, it is evident that contemporary mainstream economics
needs to be transcended by a new economics for the twenty first century. This
economics would contribute to achieving a new relationship between human beings,
nature and growth. Such a relationship would be sought in a world where nations
struggle to achieve a decentralized democracy within states, local communities
are empowered, and global cooperation is undertaken to preserve the ecology of
our planet, to maintain peace and to overcome poverty and thereby terrorism.
Human
Community as the Focus
The focus of economics must
shift from mere resource allocation and higher GNP as the end product. Economics
will need to focus on the problems of fulfillment of the human potential, within
the context of culture, social organization and environmental conservation. The
emphasis would therefore shift away from short term profit maximization at the
micro level and value indices of GNP at the macro level. Instead the new performance
criteria would be the quality of life within an inter-generational perspective.
What is needed is a wide ranging measure that takes account of specific features
of the quality of life and the mechanisms of change. For example, how many more
people have been provided with clean drinking water, what is the state of housing,
transport and education, what new forms of production organization and cultural
norms have emerged that unleash the creative possibilities of the individual and
which enable control by the local community over its economic, social and ecological
environment?
Resolving the Interlocking Crises of
debt, poverty and ecology.
The new economics must
come to grips at the global level with the interlocking crises of economy and
ecology. Mechanisms of finance, production and distribution must be found, which
can enable nation states to achieve a selective delinking from the current centralized
processes of finance and accumulation. At the same time forms of international
finance must be developed that ease the capital constraint of Third World countries
without locking them into a crippling debt trap. The debt write off scheme for
HIPCS (Highly Indebted Poor Countries), devised by the advanced industrial countries
is a recognition of market failure for such countries. Yet the scheme itself only
provides in effect a one time grant. It addresses neither the structure of international
finance and capital flows, nor the economic structure of developing countries,
which reproduces the problem of intolerable debt burdens. International financial
relations must reflect our awareness that within the existing globalized market
mechanism, the systematic transfer of non-renewable resources from the Third World
to the First World and the endemic poverty crisis will have adverse repercussions
for political stability as well as environmental conservation. |