At the end of the twentieth century, neo-classical
economics once again holds unquestioned sway as the basis of economic
policy, just as it did at the end of the nineteenth century. The belief
in the efficacy of the free market which had received a jolt during the
Great Depression of the 1930's was set aside in favour of state intervention
for the next fifty years: In the Keynesian form in the capitalist countries
and central planning in the socialist countries. Mainstream economics
has now returned to the elegant certainties reminiscent of an earlier
period. Yet new doubts are beginning to emerge whether this theoretical
edifice is sustainable in the face of the problems of intolerable debt
burdens in some countries, persistent poverty in many countries, and environmental
degradation worldwide. In dealing with these problems the doorway of the
next millennium may well open into a new way of looking at the relationship
between the individual, state and the market.
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 and political activists
from Raul Prebisch6, Myrdal7 at one end, and Paul Baran8, A.G. Frank9,
Emmanuel10, Samir Amin11, Rosa Luxembourg12 and Lenin13 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. 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.14
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.
The recent experience of Third World countries of
producing according to the policy of "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 1987.19 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".29
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 which while pressurizing borrowing countries to cut down public
expenditure (which often translates into reduced development expenditure),
without specifying policies for accelerating GDP growth, may push such
countries into deeper recession, poverty and debt. Such narrowly conceived
IMF "Structural Adjustment Programs" can be regarded neither as a prescription
for economic efficiency nor of economic stabilization.
Today as we stand amidst the global economic and ecological
crisis, it is evident that twentieth century 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.
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?
Interlocking Crises and the need for New Finance Concepts
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 Wold
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 the systematic transfer of non-renewable
resources from the Third World to the First World and the endemic poverty
crisis will have adverse repercussions at a global level for the preservation
of peace and ecology.
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