In Review

Contagious Defections

How far will mainstream economics go in breaking with the increasingly discredited Washington Consensus?

By Mark Engler

This is a web-only article from the website of Dollars & Sense: The Magazine of Economic Justice available at http://www.dollarsandsense.org



Back in March 2008, before the financial crisis had reached historic proportions, concerned observers of the global economy had already begun reaching for metaphors of ill health. An article that appeared in Der Spiegel, Europe’s most influential newsweekly, worried that the United States’ declining fortunes had already harmed the European economy, and that worse was to come: “It’s like the beginning stage of the flu, when the patient still appears healthy and strong,” the article explained. “But the virus is already replicating in the body, and the patient is beginning to feel the effects of joint pain and crippling fatigue.” The final result could be “a collapse of the global financial system.”

The world economy is now well beyond the early stages of a cold. But Der Spiegel’s analysis could today be applied to the battle of ideas—its diagnosis an apt assessment of the intellectual underpinnings of corporate globalization. These days, the doctrine of market fundamentalism still has enough defenders for a few to perceive a healthy disposition. Yet its ample defectors and ever-more vocal detractors will make most people suspect that its constitution is seriously compromised.

One can witness an evolving debate about globalization both in public discussion and in several of the books about the global economy published in 2008. These bolster the sense that once-dominant economic neoliberalism may never recover the strength it recently possessed. Two such works are Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism by Ha-Joon Chang and Common Wealth: Economics for a Crowded Planet by Jeffrey Sachs. Although they differ significantly in their outlooks, both indicate an intellectual climate in which it is preferable to be perceived as a critic of the runaway market economy, rather than a champion of it.

Kicking Away the Ladder

Bad Samaritans is the more radical of the two books, yet the type of neo-Keynesian propositions it lays out are increasingly becoming the norm in economic debates. Chang, an economist at the University of Cambridge, opens with a bit of personal and economic history. “Korea, one of the poorest places in the world, was the sorry country I was born into on October 7, 1963,” he writes. “Today I am a citizen of one of the wealthier, if not wealthiest, countries in the world.... During my lifetime, per capita income in Korea has grown something like 14 times, in purchasing power terms.” Noting that it took the United States a century and a half to realize a similar advance, he writes, “The material progress I have seen in my 40-odd years is as though I had started life... as an American grandfather born while Abraham Lincoln was president.”

The account of Korea’s economic history long preferred by the international financial institutions in Washington, DC held that the country sparked its miraculous growth by embracing the free market: keeping tight control of inflation, limiting the role of the state, lowering trade barriers, and inviting foreign investment. Advocates of corporate globalization, in short, hold up the country as a model of neoliberal economics. They then preach that countries wanting to replicate its success should hew to the International Monetary Fund’s “free trade” dictates.

Yet the truth of Korea’s success hardly fits the pattern they would like it to. “What Korea actually did during [the past four] decades,” Chang explains, “was to nurture certain new industries, selected by the government in consultation with the private sector, through tariff protection, subsidies and other forms of government support.” Blatantly violating the policies regularly prescribed for poor nations, the state also owned all the country’s banks, kept tight control over the flow of foreign currency in the country, and ran its own businesses in key areas where it felt the private sector had invested insufficiently. The country’s leaders moved toward more open trade only when its industries were well prepared to compete internationally.

Korea, as it turns out, is hardly an exception. Chang’s wider point is that “practically all of today’s developed countries, including Britain and the United States, the supposed homes of the free market and free trade, have become rich on the basis of policy recipes that go against the orthodoxy for neoliberal economics.” Drawing on a 1841 quote from German economist Friedrich List, Chang charges that advanced industrial nations are guilty of “kicking away the ladder”—prohibiting developing countries from using the very tactics that allowed them to ascend in the global economy.

Given capitalism’s foundational and often-celebrated exaltation of self-interest, one might surmise that wealthy countries are motivated in their ladder-kicking by a crass desire for greater market access for their own goods and services. However, Chang takes a gentler stance. He argues that, in the late stages of their economic development, countries like the United States and Britain have rewritten their economic histories to make themselves seem like paragons of free market virtue when “in fact, for a long time they were the most protectionist countries in the world.” The great majority of free market politicians, he contends, are genuinely well intentioned but have been duped by this revisionist history. Thus, they have become bad Samaritans, “making the lives of those whom they are trying to help more difficult.”

That’s No Way to Grow

Chang’s publishers somewhat disingenuously market him as a fresh new voice on the economics scene. In fact, although still relatively young, he has been involved in writing or editing over a dozen books. The most prominent, Kicking Away the Ladder, actually took its name from the aforementioned List quote, and it advanced many of the same ideas as Bad Samaritans, if in a more technical manner. At this point, Chang’s historical argument seems so solidly documented and sensibly put to be almost pedestrian. Its urgent relevance becomes clear only when it is placed against the unrelenting “free-trade” advocacy of laypeople like Thomas Freidman and the editorial board of The Washington Post, or against the work of party-line economists who, even in these days of government bailouts for Wall Street, remain in a state of denial.

For all their blasé self-confidence, defenders of the Washington Consensus have failed to answer the most damning charges against neoliberalism. The fact that most consistently nags is that the policies of corporate globalization have failed to live up to its promoters’ central promise: robust GDP growth. Chang notes, “[d]uring the 1960s and 1970s, when they were pursuing the ‘wrong’ policies of protectionism and state intervention, per capita income in the developing countries grew by 3.0% annually.... Since the 1980s, after they implemented neoliberal policies, they grew at only about half the speed” seen previously. “Growth failure,” he notes, “has been particularly noticeable in Latin America and Africa, where neoliberal programmes were implemented more thoroughly than in Asia.”

Studies purporting to show that globalizing nations fare better than non-globalizing ones fall apart if countries like China—which, as Chang reminds us, has steadfastly protected its economy—are not misleadingly categorized as “free trade” exemplars. The reason is clear. Chang compares the act of forcing developing countries to prematurely adopt “free trade” policy with the prospect of sending his six-year old son out into the open labor market to learn the value of hard work and thrift. Hypothetically, free-marketeers might contend that putting the boy into the workforce would allow him to overcome the dependency of parental care and to thwart market-distorting subsidies like public education. In the short term, the kid would probably bring in more cash than the average deadbeat first-grader. But obviously, his life choices—and future income—would be noticeably constricted.

Ultimately, Chang is not against trade or movement toward open markets—if appropriately timed and planned. At the same time, he seems to relish the opportunity to take shots at some of the most hallowed tenets of the corporate globalizers. He argues that foreign direct investment (the holy grail of conventional development economics) is not actually very helpful to poor countries in many circumstances. He reminds us that some of the world’s most efficient enterprises are state-owned (think Singapore Airlines, repeatedly voted the world’s favorite carrier), and that many now-private businesses became world-class firms under state control. And he makes a damning case against intellectually property laws designed by self-interested lobbyists at corporations such as Disney.

Chang is not alone in voicing many of these views. Even some his foils, such as Columbia University economist Jagdish Bhagwati, are critical of overzealous protections for corporations’ intellectual property. And the prevalence of this criticism is part of a wider trend. In the decade since the Asian financial crisis, the accumulating failures of neoliberal mandates have led to a dramatic increase in the number of mainstream economists who are willing to speak out against them. Arguments once commonplace at the protests and teach-ins of the global justice movement—but taboo within economics departments—have moved to far more central places in the public debate.

The increasing prominence of Chang can be considered part of this shift. The more prototypical example of it is his mentor, Nobel Prize-winning economist Joseph Stiglitz, who made a swift transition from being chief economist at the World Bank to being an outspoken critic of market fundamentalism and a persistent thorn in the side of the IMF.

The policy alterations that have accompanied the changing intellectual scene have already proven significant. Witness the changing fate of the IMF: not long ago the institution was the head of a powerful Washington cabal in development policy. To escape its grasp, developing countries have paid off their loans to the IMF early and built up large currency reserves in recent years so as never to have to return to Washington in the event of future emergencies. Today, the Fund’s recommendations are regarded as ideologically suspect at best. The institution thus became a shadow of its former self—and is now desperately trying to use the new financial crisis to reinvent itself. Allied bodies like the World Bank are facing difficulties of their own, and the American electorate has clearly grown suspicious of unchecked deregulation, making the terrain of globalization debate at the start the post-Bush era very different from that seen at the end of the Clinton years.

An Unrepentant Convert?

Another individual that many think of as a defector from the beleaguered Washington Consensus is Jeffrey Sachs, currently the director of the Earth Institute at Columbia University. Sachs first came to prominence in the late 1980s as the wunderkind Harvard economist who, in his early thirties, was called in to fix the imperiled economies of countries including Bolivia and Poland. He treated these patients with what has since become known as “shock therapy”—the all-at-once imposition of a slate of free market initiatives—with controversial results.

In 2005 Sachs reentered the limelight, this time as an anti-poverty crusader, with a book entitled The End of Poverty. It was a staunch defense of foreign aid and of the United Nations’ Millennium Development Goals. It championed the cause of ending extreme poverty as the defining challenge of our generation. The best-selling book’s success has solidified Sachs’ standing in the celebrity humanitarian circles inhabited by the likes of Bono and Angelina Jolie.

If Sachs gives the impression that he has lived a dual life, his distinct identities have each been brought into relief in the past year. On the one hand, he has just released a new book, Common Wealth: Economics for a Crowded Planet. In addition to reiterating his calls for a resolute international effort to address poverty, the book expresses concern about global environmental problems, especially climate change. He argues that in the twenty-first century, “The challenges of sustainable development—protecting the environment, stabilizing the world’s population, narrowing the gaps of rich and poor, and ending extreme poverty—will take center stage. Global cooperation will have to come to the fore. The very idea of competing nation-states that scramble for markets, power, and resources will become pass�.” He calls upon global society to “[think] ahead and [act] in unaccustomed harmony.”

On the other hand, even as he has set out to proselytize for this apparently liberal internationalist program, Sachs has suffered a withering progressive attack on his reputation. In Naomi Klein’s The Shock Doctrine, Sachs appears as one of central villains in the story of neoliberal capitalism’s forceful and undemocratic rise. Dubbed “The New Doctor Shock,” he is held up as second only to Milton Friedman in his responsibility for spreading the ravages of the unrestrained free market in past decades.

Now, to identify Sachs as the embodiment of neoliberalism is somewhat unfair: he has long combined advocacy for debt relief, foreign aid, and social safety nets with his belief in capital’s powers, and he has had his fair share run-ins with the IMF over the years. Yet Klein is accurate in portraying Sachs as the more liberal face of market orthodoxy. And those who might think that Sachs is currently atoning for past sins need only to look at his unrepentant attitudes toward the countries he previously advised.

In The End of Poverty and elsewhere, Sachs takes credit for ending Bolivian hyperinflation. He has lauded President Gonz�lo “Goni” de Lozada—who went on to implement more radical and far-reaching neoliberal initiatives than Sachs himself had recommended—as a “genius” under whose guidance Bolivia “made a fundamental turn toward macroeconomic stability... [and] economic growth.” Poland, in Sachs’ view, was an even more unqualified success. He writes, “By 2002, Poland was more than 50% richer in per capita terms than it had been in 1990, and it had logged the most successful growth record of any post-communist country in Eastern Europe or the former Soviet Union.”

In her criticism of Sachs, Naomi Klein rightly points out that most Bolivians see their history very differently. Goni’s reshaping of the economy took place amid massive protests, reforms exacerbated the country’s deep inequalities, and the poor were disproportionately made to bear the anguish of the changes. Klein sees Poland as an even greater affront: As of her writing, the country had the highest unemployment rate in the European Union, and “40% of young workers were unemployed in 2006, twice the EU average.” She writes, “Shock therapy, which eroded job protection and made daily life more expensive, was not the route to Poland’s becoming one of Europe’s ‘normal’ countries (with their strong labor laws and generous social benefits) but to the same gaping disparities that have accompanied the counterrevolution everywhere... from Chile to China.”

Sachs is reportedly upset by his portrayal in Klein’s book. Unfortunately, the public has yet to benefit from a head-to-head debate: When the two authors were slated to be on the same panel at the American Sociological Association conference in Manhattan during the summer of 2007, Sachs backed out—due to a scheduling conflict, he says.

Hi-Tech Re-branding

Whatever the case, the makeover that Sachs continues with Common Wealth is less a defection than a re-branding exercise. In the new book, he repeatedly states that the market alone is not enough: “The pressure of scarce energy resources, growing environmental stresses, a rising global population, legal and illegal mass migration, shifting economic power, and vast inequalities of income are too great to be left to naked market forces and untrammeled geopolitical competition among nations.” Yet Sachs isn’t so much critiquing the harm that markets can do as he is suggesting that they need to be nudged every once in a while with some government-sponsored “incentives” to work in the public good.

Chang characterizes Sachs’ earlier writing on economic integration as “more balanced and better informed” than Jagdish Bhagwati’s, “but ultimately flawed.” In the end, Sachs retains the belief that trade, commerce, and technological progress will inexorably lead to growth and prosperity. In fact, in Sach’s view, technological progress and prosperity are what make eliminating poverty possible. In one tidy paragraph, he dismisses exploitation as a significant force in the world economy. Instead, Sachs writes, “technology has the wonderful property of being non rival; each person, business, or country can adopt the technology without the ability of other to adopt technology as well.” Thus, all can thrive.

“The central solution to ending extreme poverty,” Sachs explains, “is to empower the poor with improved technology so that they can become productive members of the world economy.” Since the poor cannot afford these technologies on their own and are stuck in “poverty traps,” wealthier nations must provide generous foreign aid to help them to their feet. His heroes in this endeavor are philanthropists like John D. Rockefeller and Bill Gates, who have seen the wisdom of investing in humanity’s common well-being.

Technological boosterism also infects Sachs’ prognosis for global climate change, making him a less-than-convincing environmental guru. Common Wealth provides a familiar overview of the rise in atmospheric CO2 levels and the potentially disastrous consequences of global warming, warning that “a business-as-usual path... will not carry us to safety.” Sachs then preoccupies himself with demonstrating that “powerful technologies”—including improved hybrid cars and devices that can collect excess carbon dioxide from the atmosphere—“will likely be available to enable us to mitigate the climate shocks at a very modest cost.” With some dedicated public effort, “modest economic incentives,” and investment in research and development, he tells us, we can beat global warming on the cheap. As for the type of political resistance that has vexed previous climate negotiations, this, too, can be easily overcome: “Yes, there will be a fight over allocating costs, but it need not be a huge battle,” he imagines.

As his book progresses, not only do Sachs’ reassurances begin to seem Panglossian, but his can-do rhetoric grows bland. Common Wealth suffers from the lack of memoir and storytelling elements that made The End of Poverty appealing, if problematic. The new volume ends up reading something like a political campaign book—perhaps for someone running to head the United Nations Development Program.

Sachs is at his best when he takes up some of the grit of political polemics, like when he blasts the religious right and the Bush administration for undermining U.N. family planning efforts shown to effectively empower women, promote reproductive health, and curb runaway population growth. But lobbyists and special interests are too seldom found in Sachs’ account of political decision-making. Rather, he presents bad policies as the result of “ the declining sense of global responsibility felt by U.S. politicians” —something that can presumably be remedied by his impassioned argumentation, his many charts, his appeals to long-term self-interest, and his quotations from John F. Kennedy.

Digging Deeper

As global markets weather a new period of turmoil and instability, Sachs’ ultimate confidence in the world economy’s abundance will fail to comfort many. Whereas Sachs dismisses concerns about peak oil on the grounds that “[w]e might run out of conventional petroleum in a few decades, but we have centuries left of coal and other nonconventional fossil fuels, such as tar sands and oil shale”—which new technology, of course, will allow us to effectively exploit—there is no shortage of analysis suggesting that limits on natural resources are real and that the consequences are dire. Likewise, there are ample observers of capitalism’s recurrent downturns who will note that the unfettered market is not just limited in its ability to do good, as Sachs would have it. It can also do ill, creating crises—financial and environmental—virulent enough to raise serious doubt about neoliberalism’s sustainability.

While global capitalism itself may be adaptable enough to survive the demise of its most recent laissez-faire incarnation, the transition will mean real pain for people across the globe. This will be felt by the millions of working people in advanced industrial nations with bad credit and stagnant wages who now face foreclosure on their homes. And it will likely be felt by poor in global South as well—those who receive neither enough aid nor enough income to escape hunger and disease. These people will be denied because countries that are clashing over oil resources and adopting beggar-thy-neighbor economic policies in an attempt to soften the downturn at home are those least likely to engage in Sachs’ cooperative, multilateral campaign to end poverty.

That a reinvigorated charity drive will not suffice to solve global economic problems is almost certain. The more difficult question is whether the financial and environmental problems neoliberalism has created might also thwart Ha-Joon Chang’s strategy of neo-Keynesian, neo-developmentalist engagement with the global economy. We must ask whether there is still space for more countries to replicate the economic success of past winners in a world of peak oil, global warming, and geopolitical instability—or whether these challenges will demand a more creative and thorough-going set of changes for an international order that, in a time of crisis, is rapidly being made obsolete.

Mark Engler, senior analyst with Foreign Policy In Focus, is author of How to Rule the World: The Coming Battle Over the Global Economy (Nation Books, 2008). He can be reached via his web site DemocracyUprising.