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MISPLACED FAITH IN THE "INVISIBLE HAND" OF THE MARKET

by Someshwar Singh


Geneva,27 Apr 2000 -- Five years after the Social Development Summit in Copenhagen in 1995, when free-market enthusiasts were promising to deliver progress for all, faith in the ability of unregulated markets and neoliberal policies has gone too far, says a forthcoming UN publication.

A new publication called "Visible Hands: Taking Responsibility for Social Development" is being brought out by the Geneva-based United Nations Research Institute for Social Development in June to coincide with the Geneva Conference on Social Development. Over 50 researchers from 35 countries were commissioned to look into institutional and policy reforms taking place in the 1990s.

The report makes a strong case for a new balance between public and private interests, as bending backwards to give a free reign to the forces of the market has brought enough misery already.

Five years after Copenhagen, there is little indication that the fundamental goals and values orienting world development are moving toward greater social responsibility, says the report. Incentive structures in everything from education to investment decisions have been reoriented toward improving the options of the profit-maximizing individual. The investor has become much more important than the worker. And the consumer has gained higher status than the citizen.

According to the overview released by the Institute, global economic liberalization has had the aura of an irresistible force of nature - eventually delivering progress to all. Yet, three decades into this liberal experiment, global growth rates continue to be relatively weak and erratic. Countries lurch from one financial crisis to another. And the Summit goal of eradicating poverty is as distant in 2000 as it was in 1995.

The Social Summit took place in Copenhagen in 1995 at a time when free-market enthusiasts were promising to deliver progress for all, the overview notes.

"But there was widespread discontent with the damage caused by neoliberal policies. Poverty and unemployment were growing rapidly in indebted Third World countries. The collapse of the Soviet Union exposed large numbers of people to the rigours of the market without making adequate provision for social protection. And the welfare state was under threat in OECD countries, where workers were subjected to levels of uncertainty unknown for decades.

Many Summit participants demanded change: a significant increase in economic opportunity, the creation of new and better jobs, a more equitable distribution of income, increased gender equality and inclusiveness. A chorus of well-informed protest also demanded economic policy reform, to reduce crippling instability in global markets and permit robust economic expansion."

In the five years since Copenhagen, events have confirmed the incapacity of the dominant macroeconomic model to meet these challenges, says the report. There has been relatively weak growth of global GDP, with unusually high or low growth in some countries or regions. This has been accompanied by falling real wages and the degradation of working conditions for large numbers of people.

The instability of the global financial system has deepened. The collapse of the Mexican economy, brought about by the uncontrolled flight of capital in late 1994, was followed during 1997 by a still larger economic crisis in some East and Southeast Asian countries. Macroeconomic statistics suggest that these nations have staged a rapid recovery, but millions of their people have not.

The most direct impact of crisis, says the report, has been on jobs. Unemployment rates doubled in Asian countries where the depression of 1997-98 was worst. And in Latin America, unemployment stood in 1998 at its highest level in 15 years. Even those who do manage to find work are often obliged to accept temporary or part-time jobs. Or they are swelling the informal sector - which, in sub-Saharan Africa, for example, already contains at least two thirds of all jobs.

Wages in the current labour market are generally low. Intense competition for employment means that workers have little capacity to bargain in most countries. And in regions struggling to cope with long-term economic stagnation and indebtedness, the remuneration of workers is often inadequate. Real wages throughout much of Latin America and Africa have yet to return to levels considered normal 20 years ago. Even in China, which has experienced unprecedented growth during the past two decades, restructuring implies hardship. Millions of workers in state and collective enterprises are being placed on leave at half pay or less.

Failure to create sufficient employment has undermined the prospects for poverty reduction. The number of people living in income poverty fell in the mid-1990s but then started to rise again in almost all regions. This is not because the world as a whole has been getting poorer but because the benefits of growth are very unevenly spread. There has been a striking increase in inequality over the past decade.

Analysing the causes of failure, the report says "Faith in the ability of unregulated markets to provide the best possible environment for human development has gone too far. Too great a reliance on the 'invisible hand' of the market is pushing the world toward unsustainable levels of inequality and deprivation. A new balance between public and private interests must be found." Efficient markets, functioning in a way that promotes widespread well-being, require the contributions of a well-run public sector, the report argues. They require a healthy, well-educated and well-informed population. And they require the social stability that grows out of democratic governance and an acceptable level of social security.

"In fact, the greater the degree of openness of a market economy-the greater its exposure to market forces-the more important is the role that must be played by national governments in the field of social policy," says the report.

"Yet, the thrust of much of the neoliberal agenda has run directly counter to this dictum. For decades, the prevailing orthodoxy has counselled a reduction of state functions. And for decades, governments without the capacity to resist this pressure have been abandoning essential elements of public social provision."

The report observes that in response to obvious failures in the current development model, the international community has begun to move in various directions. "There is little coherent orientation to this process. In fact, even within a single institution, it is usual to find initiatives that contradict each other- so that what may be accomplished through trying one new approach is largely offset by what may be lost through another."

A renewed emphasis on poverty alleviation is perhaps the most visible new departure, says the report. Although this is of vital importance, "most agencies and governments are adopting a technocratic approach to a highly complex social problem." "Their focus is narrowly remedial and is all too easily associated with an attack on the principle that public services should be extended to all citizens equally. Creating a dual structure of social services-one aimed at the poor and funded by the state, and one aimed at everyone else and provided by the private sector, is good neither for social integration nor for the quality of public services."

Public provision is under attack from other quarters as well, the report adds. "Both the aborted Multilateral Agreement on Investment and discussions in the WTO would convert basic public services into commodities - subject to the same competitive bidding as any other item in the general category of 'trade in services'.

To offset the divisive incursion of market forces into areas that are essential for social security and stability, there has been renewed support during the past five years for some form of global social standard-setting, the report observes. When linked to trade sanctions, this has proved extremely controversial. Since increasing globalization requires the elaboration of shared social norms, it is necessary to find a way out of this impasse.

As the social and political nature of the market becomes obvious to a wider group of thinkers and policy makers, there is an incipient return to the kinds of integrated approaches to development that were in vogue in the 1960s and 1970s, says the report.

At the same time, there is much talk of creating a new institutional setting at the international level, a new context for stimulating broadly based growth and reducing unacceptably high degrees of volatility and risk in the global economy. "Useful as it may be, this discussion is concerned above all with ensuring the stability of the system. Movement toward alternative development models is not visible," the report says.

Moreover, there is complete silence on how to go about creating the social development architecture that would have to underpin the central vision of he Social Summit, the report contends. "Yet social policy today remains largely detached from economics, or is seen as an add-on intended to remedy the ill effects of misconceived economic development. Until this changes, it is unlikely that the 'society for all' envisioned by signatories of the Copenhagen Declaration will be within our grasp."

Too much confidence in the "invisible hand" of an unregulated market has been matched by too little understanding of the necessary relation between public policy and development, the report affirms.

"Efficient markets require the contributions of a well-run public sector. They require a healthy, well-educated and well-informed population. And they require the social stability that grows out of democratic governance and an acceptable level of public provision."

The UNRISD report explores recent efforts to reassert the value of equity and social cohesion in an increasingly individualistic world.

"Markets in themselves have no capacity to imagine a decent society for all people, or to work in a consistent fashion to attain it. Only the 'visible hands' of governments and public-spirited people can do that.

Looking at the travails of the public sector, the report notes that between 1945 and 1980, the public sector enjoyed unprecedented expansion. Most people wanted their governments to play a central part in national development. During the 1980s and 1990s, however, some states disintegrated and many were affected by free-market reforms. The most pervasive and far-reaching reforms have been those that aim for fiscal stability - concentrating particularly on cutting public expenditure. It is significant, says the report, that in the advanced industrialized democracies, states did not succeed in cutting expenditures by much. They faced stiff resistance from citizens who defended existing social services and entitlements.

Developing countries faced less well-organized civic opposition and cut expenditures much more sharply. Their resolve was stiffened by pressure from international financial institutions. In fact, budgetary reforms have been the single most important condition imposed in conjunction with structural adjustment loans over the past two decades.

Between 1990 and 1997, public expenditure as a proportion of GDP fell from 26 to 22% in sub-Saharan Africa. Meanwhile, in the OECD countries it rose from 45 to 47%. The privatization of public enterprises was another strategy employed to reduce budget deficits. Developing and transition countries privatized public enterprises worth $155 billion between 1990 and 1996. Governments in Latin America led the way - accounting for more than half these sales.

With the encouragement of the World Bank and the IMF, governments have also aimed to increase the efficiency of the public sector, the report adds. In this, they have been guided by theories of new public management, which apply principles of economics to political and bureaucratic processes. Generally, this means breaking activities into more manageable parts-creating new agencies and quasi-markets within the administration, as well as contracting services out.

Such systems can only work if there is effective monitoring based on sound budgeting and regular flows of accurate information-areas in which many governments of developing countries are weak.

"In these circumstances, the new systems may create little more than an empty managerial shell," the report says. "Effective public sector reform requires a skilled cadre of people who are well educated and well paid. Yet public servants in the majority of developing countries have seen their real wages fall steeply, and systems of higher education in poorer countries are often in crisis. University buildings are decaying, equipment is non-existent and teachers - whose salaries have slumped - are leaving in droves for the private sector or for opportunities overseas. This is in part an outcome of forcing a trade-off between improving 'basic education' and supporting secondary and university instruction."

Reforms of the public sector should be firmly grounded in what citizens see as the mission for their state, the report advises. In the last analysis, these missions are not managerial; they are social. People want to move toward societies that are more prosperous, equitable and harmonious.

Having ambitious managerial targets may be a part of this - but only a small part. "Indeed, focusing too rigidly on market-driven reforms, without building broad political consensus for change, is likely to perpetuate the incidence of failed states, civil wars and developmental stagnation."

Commenting on the role of TNCs, the report says that in the past, transnational corporations were rarely called upon to have explicit social policies. But that is changing. Today, TNCs find themselves embroiled in many of the most vexed social issues, from global warming to child labour to genetically modified food.

There are a number of reasons for this. One is the sheer scale of transnational operations: some 60,000 corporations now account for one third of world exports. This inevitably gives them a higher public profile. But corporations have also come under much closer scrutiny from non-governmental organizations, particularly those concerned with the environment and human rights.

In response, TNCs have developed a series of voluntary initiatives-including codes of conduct, environmental and social certification and auditing systems, and compliance with various international standards. They have also started to work in partnership with their critics, as well as with agencies of the United Nations.

This may occur because corporations believe it is their duty. "More likely,", the report suggests, "it is a strategy of reputation management, deployed either to gain a competitive advantage through a cleaner, greener, image or to avoid negative publicity and the risk of consumer boycotts. Although only a few consumers will go out of their way to buy ethical goods, many more will shun companies, which have been accused of environmental destruction or of employing child labour."

Many companies have mastered socially responsible rhetoric, but few have taken comprehensive action, the report notes. Only a small proportion of companies have introduced codes of conduct. These tend to be narrow in scope and are often not independently verified. "Some of the most inflated claims come from corporations that say they are contributing to sustainable development - which generally means merely that they are making some efforts to achieve eco-efficiency."

Corporations want to avoid "hard" regulation and would prefer "soft" approaches through voluntary initiatives and partnerships, the report observes. "But left to their own devices, TNCs are likely to fulfil their responsibilities in a minimalist and fragmented fashion. Ultimately, most corporations will only respond to stronger regulation, and to close monitoring by NGOs, trade unions and consumer groups."

The book also sheds light on gender issues, sustainable development and role of civil society. (SUNS4656)

The above article first appeared in the South-North Development Monitor (SUNS) of which Chakravarthi Raghavan is the Chief Editor.

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