The End of the Washington Consensus?
May 24th, 2008 by SocProf and tagged Development, Economy, Education, Free Trade, Global Governance, Globalization, Health Care, Neo-liberalism, Public Policy, Social Inequalities, Social Stratification, United Nations, Washington Consensus
That’s what Le Monde states, based on a recently released report from the Commission on Growth and Development and titled The Growth Report - Strategies for Sustained Growth and Inclusive Development . The Commission was composed of 21 members, most of them prestigious economists, former heads of state, former prime ministers or finance minister from a variety of countries as well as high-ranking member of the United Nations Development Program (UNDP ) as well as bankers. It was chaired by Michael Spence , 2001 Nobel prize of economics winner. In other words, it was not composed of dirty fucking hippies and anti-globalization types. The goal of the Commission, according to its chairman?
"We chose to focus on growth because we think that it is a necessary condition for the achievement of a wide range of objectives that people and societies care about. One of them is obviously poverty reduction, but there are even deeper ones. Health, productive employment, the opportunity to be creative, all kinds of things that really matter to people seem to depend heavily on the availability of resources and income, so that they don’t spend most of their time desperately trying to keep their families alive."
And according to Le Monde article, the report challenges a number of neoliberal assumptions, often nicknamed the Washington Consensus . So, what’s in that report that is so earth-shattering? The Commission studied the countries that experienced sustained growth since 1950 and created a list: Botswana, Brazil, China, Hong kong, Indonesia, Japan, Malaysia, Malta, Oman, Singapore, South Korea, Taiwan and Thailand and asked, what did they do right? This is especially interesting considering the major differences between these countries, from the giant China to the small Malta, from the open market in Singapore to the state-controlled economy of Malaysia.
The report does not challenge or question the necessity of globalization or economic openness and free trade as the only path to wealth and development. The closing off of national markets and protectionism are not seen as long term solutions. Nothing new or controversial here.
The focus on poverty reduction is new as it is often perceived as the magical side effect of the wonders of the free market. The other novelty is the recognition of the crucial role of public administration in development and growth. So, there should be long-term planning and better paid (that is, less corruptible) public servants. This also means that there should be public investments in infrastructures as well as health and education since those stimulate private investments rather than impede it.
The Washington consensus also turned a blind eye to the social consequences of its policies. The Commission, on the other hand, is convinced that economic insecurity, poverty weaken population support to economic reforms (no kidding) necessary for success in the global context. So, lay-offs should be accompanied by social programs to help the unemployed adapt to the new economic conditions (haven’t we heard that before? Oh yeah, for the past 25 freakin’ years). Similarly, it calls for governments to limit the level of stratification and inequalities that always increase when economies open themselves to the global market.
On the other hand, the Commission has nothing to say as to political regimes and systems and very little to say about the environment. It only states that subsidies to energy and biofuels should stop in core countries. It also incites developing countries to pay attention to greenhouse gases and water pollution without delay.
So, yes, overall, it’s less orthodox than strict neoliberalism, but quite frankly, there is nothing earth-shattering here. It is more of the same, in a nicer packaging, as if someone were riding Jeffrey Sachs’s brand of modernization theory.
So, is this the end of the Washington Consensus? Not likely.
Posted in Development, Economy, Education, Free Trade, Global Governance, Globalization, Health Care, Public Policy, Social Inequalities, Social Stratification, United Nations |
May 25th, 2008 at 5:33 am
Our enormous trade deficit is rightly of growing concern to Americans. Since leading the global drive toward trade liberalization by signing the Global Agreement on Tariffs and Trade in 1947, America has been transformed from the weathiest nation on earth - its preeminent industrial power - into a skid row bum, literally begging the rest of the world for cash to keep us afloat. It’s a disgusting spectacle. Our cumulative trade deficit since 1976, financed by a sell-off of American assets, is now approaching $9 trillion. What will happen when those assets are depleted? Today’s recession may be just a preview of what’s to come.
Why? The American work force is the most productive on earth. Our product quality, though it may have fallen short at one time, is now on a par with the Japanese. Our workers have labored tirelessly to improve our competitiveness. Yet our deficit continues to grow. Our median wages and net worth have declined for decades. Our debt has soared.
Clearly, there is something amiss with “free trade.” The concept of free trade is rooted in Ricardo’s principle of comparative advantage. In 1817 Ricardo hypothesized that every nation benefits when it trades what it makes best for products made best by other nations. On the surface, it seems to make sense. But is it possible that this theory is flawed in some way? Is there something that Ricardo didn’t consider?
At this point, I should introduce myself. I am author of a book titled “Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for America.” To make a long story short, my theory is that, as population density rises beyond some optimum level, per capita consumption begins to decline. This occurs because, as people are forced to crowd together and conserve space, it becomes ever more impractical to own many products. Falling per capita consumption, in the face of rising productivity (per capita output, which always rises), inevitably yields rising unemployment and poverty.
This theory has huge ramifications for U.S. policy toward population management (especially immigration policy) and trade. The implications for population policy may be obvious, but why trade? It’s because these effects of an excessive population density - rising unemployment and poverty - are actually imported when we attempt to engage in free trade in manufactured goods with a nation that is much more densely populated. Our economies combine. The work of manufacturing is spread evenly across the combined labor force. But, while the more densely populated nation gets free access to a healthy market, all we get in return is access to a market emaciated by over-crowding and low per capita consumption. The result is an automatic, irreversible trade deficit and loss of jobs, tantamount to economic suicide.
One need look no further than the U.S.’s trade data for proof of this effect. Using 2006 data, an in-depth analysis reveals that, of our top twenty per capita trade deficits in manufactured goods (the trade deficit divided by the population of the country in question), eighteen are with nations much more densely populated than our own. Even more revealing, if the nations of the world are divided equally around the median population density, the U.S. had a trade surplus in manufactured goods of $17 billion with the half of nations below the median population density. With the half above the median, we had a $480 billion deficit!
Our trade deficit with China is getting all of the attention these days. But, when expressed in per capita terms, our deficit with China in manufactured goods is rather unremarkable - nineteenth on the list. Our per capita deficit with other nations such as Japan, Germany, Mexico, Korea and others (all much more densely populated than the U.S.) is worse. In fact, our largest per capita trade deficit in manufactured goods is with Ireland, a nation twice as densely populated as the U.S. Our per capita deficit with Ireland is twenty-five times worse than China’s. My point is not that our deficit with China isn’t a problem, but rather that it’s exactly what we should have expected when we suddenly applied a trade policy that was a proven failure around the world to a country with one sixth of the world’s population.
Ricardo’s principle of comparative advantage is overly simplistic and flawed because it does not take into consideration this population density effect and what happens when two nations grossly disparate in population density attempt to trade freely in manufactured goods. While free trade in natural resources and free trade in manufactured goods between nations of roughly equal population density is indeed beneficial, just as Ricardo predicts, it’s a sure-fire loser when attempting to trade freely in manufactured goods with a nation with an excessive population density.
If you‘re interested in learning more about this important new economic theory, then I invite you to visit my web site at OpenWindowPublishingCo.com where you can read the preface for free, join in the blog discussion and, of course, buy the book if you like. (It’s also available at Amazon.com.)
Pete Murphy
Author, Five Short Blasts
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