What I’ve been reading
As mentioned last week, <a href="http://johnquiggin.com/index.php/archives/2005/04/10/what-ive-been-reading/ “In Defense of Globalization” (Jagdish Bhagwati) , along with Diversity in Development: Reconsidering the Washington Consensus There’s a draft of a review article over the fold. Comments much appreciated.
Moving on, I’ve read an advance copy o“Freakonomics : A Rogue Economist Explores the Hidden Side of Everything” (Steven D. Levitt, Stephen J. Dubner) The book contains a chapter defending the (mildly surprising) conclusion that having a black-sounding name like DeShawn is not a disadvantage in the US, once you take account of the class, education and family backgrounds variables typically associated with such a name. My first thought is that, in view the name Levitt and Dubner have given their baby, they must be pretty confident on this point. My second is that, if you haven’t already, you should read Baby’s Named a Bad, Bad Thing
In Australia itâ€™s called economic rationalism, in Britain Thatcherism, in Europe itâ€™s neoliberalism. But in Latin America, and much of the developed world itâ€™s called the Washington consensus. Whatever itâ€™s called it combines a call to open up, deregulate and privatise the economy with an admonition that resistance is futile that, in Thatcherâ€™s words, there is no alternative.
John Williamson of the Institute for International Economics coined the term ‘Washington consensus’ to describe the set of economic assumptions and policy prescriptions favoured by major Washington-based institutions including the IMF, the World Bank and the United States Treasury (Williamson 1990).
The Washington consensus arose following the breakdown of the system of fixed exchange rates adopted by the victorious allies meeting at Bretton Woods in 1945. By the late 1960s, the Bretton Woods system was breaking down under the strain of inflation in the major developed economies (which rendered fixed exchange rates untenable) and the gradual erosion of capital controls through developments such as the ‘Eurodollar’ market (trade in financial assets denominated in US dollars, but outside the control of US monetary authoritiies). The abandonment, during the 1970s, of fixed exchange rates and controls on capital movements paved the way for massive growth in the volume of financial transactions and led to the current era of globalisation.
During the 1970s, governments, particularly in less developed countries, engaged in large-scale borrowing. When the world economy declined at the end of the 1970s, many found themselves unable to service their debt, leading to a series of crises. In responding to these crises, the International Monetary Fund typically required governments to cut public expenditure, sell or close lossmaking public enterprise and remove a variety of regulatory policies. Although these policy responses were far from uniformly successful, it appeared to work better than any alternative, and formed the basis of the Washington consensus.
A central point in the Washington consensus was the belief that the debt crisis was the result of mistaken policies in the debtor countries, and not of problems in the financial markets that had made the borrowings possible. The Washington consensus discouraged the use of capital controls as a way of managing debt problems, and encouraged countries to deregulate their financial systems.
Faith in the Washington consensus reached a peak in the mid-1990s. The breakdown of Communism and strong growth in stock prices, particularly in the United States, supported the view that financial markets were the main engine of liberal capitalism. Less developed countries that had embraced the Washington consensus experienced large inflows of private capital and strong economic growth. Important examples included Argentina, which tied its currency to the US dollar in 1992, and East Asian economies which deregulated financial markets in the early 1990s.
Since the mid-1990s, international financial crises have occurred regularly. The most dramatic was that of Argentina. Following the international debt crisis of the 1980s, Argentina was the leader among South American countries in adopting the policies of the Washington consensus. To demonstrate its unwillingness to pursue an independent monetary policy, with the associated potential for irresponsibly inflationary policy, the Argentine government handed over control of monetary policy to a currency board, which was required to maintain a fixed exchange rate with the US dollar, regardless of the impact on the domestic economy. All controls on capital flows were lifted, and public assets were privatised on a large scale.
The result was rapid capital inflow which permitted the government to run large budget deficits, partly disguised by the use of privatisation proceeds to fund current expenditure. Laudatory articles about the success of the Argentine experiment with currency boards were still appearing in the financial press in 2001, when sentiment suddenly shifted.
In November 2001, there was a run on the Argentine peso and the government fell, as did a string of successors. In 2002, Eduardo Duhalde became Argentina’s fifth president in two weeks. Convertibility of the peso was suspended and banks were closed, leading to widespread economic distress. Output fell by as much as 20 per cent, comparable to the Great Depression. Stability was restored only with the election, in 2003, of the Kirchner administration, which repudiated both the Washington consensus and most of the debts incurred by its predecessors.
Other crises occurred in developing and formerly-communist countries including Mexico in 1994, a large number of Asian countries in 1997 and 1998, Russia in 1998, and Turkey in 2001. The developed countries have mostly not been directly affected However, the failure of Long Term Credit Management, an unregulated ‘hedge fund’ based in the United States, threatened the solvency of a number of major banks and raised the possibility that even developed countries were not immune from serious financial breakdown.
The crises of the 1990s exposed weaknesses in the Washington consensus approach to financial stabilization. In general, the crises arose much more rapidly than in the 1980s. More importantly, the countries affected were generally perceived, at least prior to the crises as having followed the policy prescriptions of the consensus. Far from rewarding countries that followed sound policies, financial markets appear to have contributed to the crisis, first by financing unsound investments and then by facilitating capital flight when the crises began.
The Washington consensus has been disappointing in a number of other respects. Economic growth in Latin America was weaker in the 1990s, when Washington consensus policies were in place, than in the bad old days of import substitution. And what growth there was yielded very unequal benefits – the rich got richer and the poor got poorer. With authoritarian government no longer a viable option, policies that generated such results are unsustainable.
The breakdown of consensus has led both policymakers and policy analysts to look for alternative directions. Governments in Venezuela, Brazil, Bolivia and elsewhere have backed away from policies of privatisation, and sought to attack poverty more directly, while generally resisting a return to the import-substitution policies of the past. Even in Chile, the most successful exemplar of Washington consensus policy, there has been a gradual shift towards an increased role for government.
Both supporters and critics of the original Washington consensus have been looking for alternatives. There is a surprising amount of common ground. Although emboldened by the breakdown of the consensus, few critics of the consensus are willing to advocate a return to the policies of the 1950s and 1960s. At the same time, supporters of globalisation have modified their views on some issues, or at least see the need for strategic retreat from positions that are, for the moment, indefensible.
One of the most persuasive advocates of globalisation over the past decade has been Jagdish Bhagwati of Columbia University, who has published a string of books on the topic, most recently In Defense of Globalization. Not surprisingly perhaps, the book bears some signs of having been produced in a hurry. For example, Bhagwati cites, as factual, a report of a radical British NGO, protesting that it has been put out of business by American competition, noting Â«The report goes on to say that the groupâ€™s spokesperson, Nigel Wilkinson, â€œbelieves that global anarchy movements such as the ones responsible for the G7 riots in Seattle are to blame for forcing out smaller, independent operations like hisâ€¦. These large American anti-capitalist movements have effectively taken over the militant scene in this country.â€? As if this were not amusing enough, the report goes on to say: …â€?Wilkinson has seen his groupâ€™s membership dwindle by almost 70 percent over the last two years, from a peak of three members to one – himself .â€? Â» A quick check reveals, as many readers will have already suspected, that this amusing report is derived from UrbanReflex.com, a satirical site similar to The Onion. Embarrassing as such errors are, they are minor flaws in a generally powerful and well-argued piece of work.
Bhagwati begins by separating the issues of free trade and free movement of capital, closely linked in the Washington Consensus viewpoint. Bhagwati sees foreign direct investment as generally beneficial for developing countries, but argues that short-term speculative flows can be destabilising and that liberalisation of capital markets should be taken gradually.
Bhagwati is similarly critical of the element of trade policy that dominated the debate over the US: Australia Free Trade Agreement: so-called intellectual property. The expansion and enforcement of the monopoly rights granted to owners of intellectual property through patents, copyrights and trademarks has been a central demand of the United States in trade negotiations of all kinds. As Bhagwati observes, the issue has nothing to do with trade, and the two have been linked by simple fiat, turning intellectual property into â€˜Trade Related Intellectual Propertyâ€™ (TRIPs).
As Bhagwati observes, nearly all economists agree that the 20-year patent length built into the TRIPs agreement is both inefficient and exploitative of less developed countries. Exactly the same point can be made into the 70-year extension of copyright incorporated in the US-Australia FTA, and the 99-year extension included in the Sonny Bono copyright act in the US, which attracted condemnation from economists as eminent and diverse as Kenneth Arrow and Milton Friedman.
Bhagwati cleverly ties his opposition to the linkage of trade and intellectual property with a more general opposition to linking labour and environmental issues to trade negotiations, a central demand of the anti-globalisation protestors in Seattle. He makes some good points here, but the feeling is one of a case for a predetermined conclusion, rather than an open-minded exploration of the issues. This is especially true when he defends the intervention of the World Trade Organisation into what appear to be essentially domestic environmental issues, such as the European ban on hormone-enhanced beef.
As Bhagwati notes, the crucial test of the environmental linkage issue is likely to arise in relation to climate change. The Kyoto protocol which came into force in February, binds signatory countries in the developed world to reduce emissions of carbon dioxide and other greenhouse gases. Nonratifying countries, including Australia and the United States, have a potential competitive advantage through untaxed and unrestricted use of carbon-based fuels. In the current version of the Kyoto protocol, operative until 2012, this advantage is shared by less-developed â€˜Annex Aâ€™ countries, most notably India and China.
It remains to be seen whether negotations that have now commenced can induce less developed countries to join a successor to Kyoto. If they did, and the US or Australia continued to hold out, there would be a strong case for sanctions. This would provide an interesting test case. As Bhagwati points out, most of the pressure for environmental linkage so far has come from rich countries seeking to impose constraints on exports from poor countries. Taxes on carbon consumption embodied in exports would have the opposite property.
On labour, Bhagwati makes a strong case against requirements for firms in poor countries to offer wages and conditions in excess of those prevailing in the general labour market. However (like many of his opponents) blurs distinctions between minimum wages and process conditions, such as the right of workers to join unions, that are universally valid. It may be distressing that only the worker who sews a $100 shirt receives only 80 cents, but it will do her no good to boycott such products if the best alternative wage is 50 cents. On the other hand, the case for restricting imports of the products of prison labour, debt bondage and so on does not seem to be affected by such arguments.
To sum up, Bhagwatiâ€™s main concern is to defend free trade, from its critics who would impose environmental and labour constraints but even more from purported supporters who would burden the free trade case with indefensible claims for unrestricted financial deregulation and apparently limitless claims for monopoly rights over intellectual property. In effect, Bhagwati abandons the Washington Consensus, in which capital markets play a crucial role, for the older free trade agenda the characterised the earlier postwar period, from the General Agreement on Trade and Tariffs to the establishment of the World Trade Organisation.
The viewpoint of critics of the Washington Consensus is well represented in a recent volume Diversity and Development: Reconsidering the Washington Consensus published by the Forum on Debt and Development in the Netherlands. Itâ€™s striking that, on many points, the FONDAD writers are in agreement with globalisers like Bhagwati.
Traditional themes like the unfairness of trade, and the need for state-driven industrialisation based on import substitution are notable for their absence or explicit repudiation. Indeed, the opening chapter by Wing Thye Woo identifies the central element of the East Asian success story as trade-driven development based on the maintenance of a permanently undervalued exchange rate. Other contributors express some justified scepticism about such a single-factor account, and support a wider range of industrial policy interventions. Nevertheless, the preferred model for these writers, as for Bhagwati is clearly that of East Asia, before external pressure led to ill-judged financial liberalisation and the resulting crisis of the late 1990s.
It is not surprising that the members of the FONDAD group share Bhagwatiâ€™s scepticism about the desirability of unrestricted capital flows. Charles Wyplosz gives a particularly good treatment of the issues, contrasting the simplistic prescriptions of the Washington consensus with the reality of a need for some government intervention in management of the exchange rate and of the requirement for emergency instruments such as exchange controls and taxes on international transactions.
Criticism of the Washington consensus does not extend, however, to foreign direct investment, once a favorite target of dependency theorists and other critics of global capitalism. On the contrary, the problem considered by Amar Bhattacharya and Stephany Griffith-Jones is that of mobilising larger, and more stable and long-term flows of private capital. The main difference with the standard Washington consensus view is a greater willingness to consider active state involvement in the process, including the currently fashionable idea of public-private partnerships.
A more general theme, evident in the title of the work is a rejection of the view that â€˜there is no alternativeâ€™ to rigid adherence to the tightly-defined set of policies embodied in the Washington consensus. There was always a contradiction at the heart of this claim. The strongest evidence adduced in favour of the claim was the success of capitalism in North America, Europe and East Asia, but these successful economies manifested a range of policies far broader than those admitted as feasible by the Washington consensus. On exchange rates, as Wyplosz observes, developed countries have employed free floats, dirty floats, currency unions and everything in between. Similarly, while the Washington consensus prescribes privatisation, and this policy was generally fashionable in the 1990s, developed countries have managed to prosper with all sorts of combinations of public ownership, private ownership, joint ventures and regulation.
More broadly still, itâ€™s evident that the question we are facing is not whether to support or oppose globalisation. Virtually everyone involved in the debate agrees that globalisation, in the form of expanded global flows of goods, services, capital and labour is both inevitable and desirable. The question is: what kind of globalisation? The one-size-fits-all model embodied in the Washington consensus has been rejected, but the alternative is still a work in progress.