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Liberalization agenda’s “promised land” a mirage

by Chakravarthi Raghavan

GENEVA, 1 Feb 2001: The “reform agenda” of liberalization (of trade and investment) summed up in the Washington Consensus and adopted by developing countries has not yielded the results expected; the resulting dissatisfaction, and the strong views from civil society on globalization, have resulted in the call for a new development agenda, according to the Executive Secretary of the UN Economic Commission for Latin America and the Caribbean (ECLAC), Jose Antonio Ocampo.

In a paper titled “Rethinking the Development Agenda”, Ocampo says that the unsatisfactory results of the “reforms” (liberalization of trade and investment) adopted by developing countries and the level of social discontent are leading many experts to rethink the development agenda. And while welcome, it is still at best an incomplete, ongoing process.

Two of the interesting themes in the discussions on the basic concepts behind the call for a new development agenda, Ocampo emphasizes at the outset in his paper, are the calls for a new balance between the state and the market, and the widening of the concept of public policy, hitherto restricted to state actions, to encompass any organized form of action that pursues objectives of collective interest - thus opening up opportunities for participation by civil society.

Ocampo, a distinguished economist of Colombia and a former finance minister of his country, had presented a version of his paper at the January annual meeting of the American Economic Association in a panel “Towards a Post-Washington Consensus on Development and Security.” The present, revised version is now available on the ECLAC website <www.eclac.cl>.

Disenchantment with Washington Consensus

Liberalization, notes Ocampo, was presented to the developing world as a way out of the inefficient strategies  associated with trade protection and high levels of state intervention as well as the rent-seeking behaviour encouraged by those strategies. It was also seen as a means of fully exploiting the opportunities generated by globalization. This view of liberalization constituted a significant break with the idea underlying development strategies of several decades, namely, that “late industrialization” required a significant degree of state intervention. The best summation of the reform agenda was provided in the Washington Consensus, though it did not reflect the most radical version, calling for a minimalist state.

The Washington Consensus was a manifestation of the optimism generated by the reform agenda a decade ago, but over the last few years, the wisdom behind that vision has been called into question.

The Asian crisis, Ocampo says, probably dealt the hardest blow to the reform agenda, making it “patently clear that without adequate institutional setting, financial liberalization could be the source of severe macroeconomic instability.” The strong views of global civil society since Seattle indicate that globalization itself is now being questioned, reflecting a basic substratum of discontent in the industrialized world. In developing countries, disenchantment with reforms is also growing, but its political manifestations are more disorganized and its agenda unclear, Ocampo adds.

[At the recent annual meeting of the World Economic Forum in Davos, outgoing Thai Deputy Prime Minister, Supachai Panitchpakdi, is reported by participants to have made the same point in a more poignant way. Referring to the calls at the WEF for developing countries to pursue reforms, Supachai pointed out that his party and the Thai government which carried out the reforms were defeated in the recent elections and were accused of having betrayed the country by allowing foreign corporations to take over. In every country where the reforms are pursued, he said, the government is turned out by the people.]

In summing up the failure of the reforms to achieve their claims, Ocampo says: “More broadly, dissatisfaction with the results of reforms is on the rise. Trade and foreign  direct investment (FDI) have boomed, but the ‘promised land’ of high growth rates is increasingly regarded as a mirage. In Latin America - the region where reforms have gone the furthest - growth in the 1990s was only 3.2% a year, far below the 5.5% record set during the three decades of state-led development from the 1950s to the 1970s. Sub-Saharan Africa’s performance, and that of the least developed countries in general, continues to be highly insufficient. Many transition economies still have levels of economic activity below those seen prior to the ‘big bang’. Although most of the Asian economies that underwent the crisis did recover, they are still struggling with its financial repercussions. Notable exceptions are obviously China and India, which are certainly not on the list of the most highly reformed economies. Even in the industrialized world, growth in the 1990s was still far from what it was in the ‘golden age’ of 1950-1973; the US did reach those rates, but only during the second half of the decade.”

Distributive tensions, Ocampo notes, are running high and are probably intensifying. Income disparities between developed and developing and least developed countries continue to increase. Income distribution has worsened in a broad group of both developed and developing countries. Countries where income distribution has worsened contain 57% of the world population, and those where it has improved have 16%, with the remainder experiencing no clear trend. The growing skills-based income differential is a worldwide phenomenon. Debate continues as to whether it is the result of trade liberalization, technological trends or a weakening of social safety nets.

“The asymmetry existing between factors that cross international borders (capital, highly skilled labour) and those that cannot (low-skilled labour), together with increasing difficulties governments are having in providing social safety nets, are frequently part of the explanation.”

These recent events and discontent have spurred a constructive debate and, over the last few years, this has become more pluralistic, with alternative views on development making some headway. New areas of emphasis - institution-building, social safety nets, ‘ownership’ of development policies, etc. - have been brought into the international policy debate. Is this an indication that the development agenda is in fact changing? Perhaps, says Ocampo, but “this is still unclear.”

Though he does not identify or point to any source of the new areas of emphasis, anyone familiar with the economic discussions will perhaps identify these with the attempts of the World Bank and the International Monetary Fund (IMF) in their policy documents and statements.

The new concepts and areas of emphasis, Ocampo explains, are often mere “add-ons” to what is, by and large, the same policy agenda, with new generations of reforms simply being appended to what are regarded as essentially “correct” foundations. “Seen in a less favourable light, they are merely new garments draped over the same ideas,” he adds.

“Markets, particularly financial markets, have not really internalized the need for a new development agenda, and financial agents continue to call for more liberalization at the national and world levels, i.e., plainly for more of the ‘first generation’ reforms. This remains the dominant force in a world of weakened national policies and an even weaker transition to a global polity.”

The call for a new balance between the market and public interest should not be viewed as running counter to the operation of the market, but as actions to ensure an adequate supply of public goods, help complete the market, assist non-competitive markets to function properly, exploit positive and negative externalities or ensure equitable distribution of benefits of development, so as to serve as powerful mechanisms for enhancing market development through a variety of economic, social and political channels.

“An effective public policy approach of this sort will, if correctly applied, be more market-friendly than the alternative approaches that tended to predominate during the first wave of reforms,” Ocampo adds.

As for the wider concept of public policy to include any organized form of action to pursue collective interests, including civil society participation to overcome the crisis of the state affecting the developing world and the world at large, Ocampo explains that such a concept would aim at correcting both market failures and government failures, and more generally at building and rebuilding institutions.

“This is one of the most complex tasks awaiting the developing and transition economies, and is the most pressing task - yet at the same time one that has so far received insufficient attention - in the process of building a better international order.”

“Lopsided” globalization

A more balanced form of globalization, Ocampo says, needs to be based on genuine respect for diversity.

Though technological and economic processes underlie it, the form that globalization has been assuming is largely shaped by explicit policy decisions.

The most troubling aspect of this situation is the “incomplete and even lopsided character” of the current globalization process and the international policy agenda accompanying it, reproducing the longstanding asymmetries in the world economy and creating new ones.

Four issues, he underscores, figure prominently in the current agenda: free trade, intellectual property rights, investment protection, and financial and capital account liberalization. During the recent crises, capital account liberalization has been qualified, including the proviso that it should be well-sequenced and emphasis given to longer-term flows and institutional development.

“In the area of trade,” adds Ocampo, “liberalization is, in turn, incomplete and asymmetric, as ‘sensitive’ items of great interest to the developing countries are subject to the highest levels of protection in the industrialized world.”

Other issues are conspicuously absent from the current agenda: labour mobility; international rules on taxation, particularly of capital (essential to guarantee adequate taxation of this highly mobile factor); the design of truly international competition rules and codes of conduct for multinational firms; and compensatory financing to ensure inclusion of those countries and social groups left behind in the globalization process.

In turn, this is a reflection of the most serious asymmetry of all: “the imbalance between the rapid globalization of some markets and the conspicuous absence of a truly international social agenda”.

The latter is in fact largely confined to the definition of common international principles through UN summits and the as yet incipient emergence of international legislation. The decline in official development assistance (ODA) is one of the most compelling pieces of evidence of the lack of a sufficient commitment to a truly international social agenda.

It is also increasingly being recognized that globalization has underscored the need to provide a number of global public goods. But there is a striking contrast between the recognition of this fact and the weakness of international arrangements to provide such public goods and low level of funding allocated for this.

These asymmetries, Ocampo says, reflect basic political features and aspects of the world’s political economy. The “lopsided” character of the current globalization process and agenda reflects the “predominance of major countries and large multinationals” in the international policy debate. It is associated with not only a weakening of historical mechanisms for concerted action by developing countries (e.g., the Group of 77) but also “policy competition” that globalization has generated.

A complicating feature is the reluctance of most countries to give up economic sovereignty to international organizations. Under the influence of the strong market forces characterizing globalization and tending to weaken nation states, and the simultaneous unilateral national liberalization processes, government regulations have weakened worldwide. While many analysts perceive this as an advance, it is also a source of significant distortions and risks, particularly in the area of finance. And while open regionalism is also a feature of globalization, and strong integration forces have been at work in many parts of the developing world (as in Latin America and Southeast Asia), “this has not led to strong developing-country coalitions.” Except for the EU, and there too only in a limited sense, countries are unwilling to give up their sovereignty to regional organizations.

These political and political-economy features, Ocampo says, will have major implications for international reform: the pressure for substantive reform will be weak, and a more balanced globalization agenda and stronger global governance may not materialize; any balanced negotiation process would be cumbersome, and negotiation processes may underestimate or bypass the interests of certain actors altogether.

But because of the incomplete nature of the relevant international arrangements, Ocampo says, “weaker actors should continue to demand national autonomy in crucial areas, particularly in choice of crucial economic and social development strategies.” Also, national autonomy is the only system consistent with promotion of democracy at the world level. “Development can only come ‘from within’, and support for endogenous processes, respect for diversity and design of rules that allow it to flourish are essential elements of a democratic, development-oriented world order.”

No international architecture, Ocampo insists, is neutral in terms of the equilibrium of international relations. And an international system relying on a very small number of world institutions will be less balanced than one relying on a network of regional institutions. Countries with very limited power in the international arena will be better off if they are active participants in regional schemes.

Lessons on economic policy

In terms of economic policy, there is a need for a broader view of macroeconomic stability and the role of counter-cyclical policies.

Drawing some lessons from recent experiences, Ocampo says that real instability can be very costly and a narrow view of targeting inflation may be as damaging as past macroeconomic practices that underestimated the costs of inflation. Recessions, he notes, entail a significant loss of resources with some long-run effects. Volatile growth leads to a high average rate of under-utilization of production capacity, thus reducing productivity and profits and adversely affecting investment. The associated uncertainty will consequently have stronger effects on capital accumulation than moderate inflation.

A second lesson to be drawn is that private deficits are as costly as public-sector deficits, and risky private balance sheets as damaging as flow imbalances. In financially liberalized economies, they may interact in non-linear ways, with capital account shocks.

The two lessons are inter-connected, as financial boom-bust cycles have been the predominant source of business cycles in developing countries, the ECLAC chief notes. The essential task of macroeconomic policy is thus to manage them with appropriate counter-cyclical tools. Managing volatility requires a combination of three policy packages: consistent and flexible macroeconomic fiscal, monetary and exchange rate policies to prevent public or private agents from accumulating excessive debt levels; a system of prudential regulation and supervision with clear counter-cyclical orientation; and a liability policy aimed at ensuring appropriate maturity profits are maintained for domestic and external public and private commitments.

However, macroeconomic policies alone are not enough. The view that fiscal balances and low inflation by themselves would spur growth has not been borne out. The orthodox interpretation that this is due to the fact that the markets have not been sufficiently liberalized, runs up against the fact that periods of fastest growth in the developing world during the post-war era, as well as the longest-lasting episodes of rapid growth - in East Asia and most recently in the Chinese and Indian ‘miracles’, or in the past experiences of Brazil or Mexico - did not coincide with phases of extensive liberalization.

There are other determinants of aggregate economic growth or market failure: inadequate institutional development or human capital, and the fact that efficient, liberalized markets require full-fledged ‘mesoeconomic’ policies, i.e., active competition policies, public regulation of non-competitive markets or markets with strong externalities, and correction of market failures in factor markets, particularly markets for long-term capital, technology, labour training and land.

A central feature of successful development experiences in the past involved a strong industrialization drive built on solid state/business sector partnerships.

Asks Ocampo: “Will opening markets with neutral incentives, arm’s-length government-business relations and multilateral  (Uruguay Round) constraints on traditional development instruments produce the same results? Or, to be more precise, will opening markets provide a substitute for active productive development policies?”

“It remains to be seen,” he answers, “but the results so far are not encouraging, although they may be biased by certain features of the transition period. The ‘destructive’ elements generated by the adverse structural shift in the growth/trade deficit trade-off and the breakup of domestic linkages and national innovation systems have been stronger than the ‘creative’ opportunities generated by the still insufficient market access and innovations introduced by the spread of the multinational firms.

“In any case, if the past is a correct guide and structural interpretations are valid, then the use of explicit productive development strategies aimed at encouraging innovation (in the broadest sense of the term) and helping to build up complementarities would appear to be a better route to take, even in the open developing economies of today. The international community should regard such strategies as an essential ingredient for successful development and should continue to search for instruments for implementing such strategies that do not degenerate into ‘beggar-thy-neighbour’ competition for footloose production activities.”

Discussing the issues of improved social linkages, and for social policy to be guided by the basic principles of universality, solidarity and efficiency, and the need to realize that development comprises broader goals like “human development” or the more recent concept (of Amartya Sen) of “development as freedom”, Ocampo says: “The enormous intellectual challenges and practical tasks involved in the recognition of these factors should foster a sense of humility.”

He concludes: “The idea that ‘we already know what must be done’ is nothing more than a sign of arrogance on the part of the economics profession, which has only worsened since the rise in dominance of orthodox development thinking in the 1980s. A consideration of the unsatisfactory results of reforms and of the existing level of social discontent should - and is - leading many experts to rethink the development agenda. This is most welcome, but it is at best an incomplete, ongoing process.” (SUNS4827) 

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

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