[Corp. Watch] Financial crisis prompts a reassessment of 'junk economics"

[Corporation Watch]

As the "New Economy" Crashes, to What Degree Will Mainstream  
Economists Change Their Stripes?

By Mark Engler

(Alternet, Jan. 3) -- 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 said. "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  
"neo-liberalism" 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. Prof. Chang, an economist at the  
University of Cambridge, opens his book with a bit of personal and  
economic history.

	"Korea [was] one of the poorest places in the world [when] I was born  
[there] on October 7, 1963," he writes. "Today [it is] 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 terms of purchasing power."

	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 based in Washington is 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. Korea moved toward more open trade only when  
its industries were well prepared to compete internationally.

	And it 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 -- became rich on the basis of policies 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. Chang, however, 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', 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, his  
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 bail-outs  
for Wall Street, remain in a state of denial.

	For all their blasé self-confidence, defenders of the so-called  
"Washington Consensus" have failed to answer the most damning charge  
against neo-liberalism -- the fact that the policies of corporate  
globalization have failed to live up to its promoters' central  
promise: robust GDP growth.

	"During 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," Chang says. "Since  
the 1980s, after they implemented neo-liberal 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 neo-liberal programs were implemented  
more thoroughly than in Asia."

	Studies purporting to show that globalizing nations fare better than  
non-globalizing ones fall apart if countries such as 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.

	Hypothetical free-marketeers would 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 first 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, which not long ago 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 such as 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 re-entered 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 21st 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 passé." He calls upon global society to "[think]  
ahead and [act] in unaccustomed harmony."

	Yet even as he proselytizes for this apparently liberal  
internationalist program, Sachs has suffered a withering progressive  
attack on his reputation. In Naomi Klein's 'The Shock Doctrine', he  
appears as one of central villains in the story of neo-liberal  
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.

	To identify Sachs as the embodiment of neo-liberalism is somewhat  
unfair: He has long combined advocacy for debt relief, foreign aid,  
and social safety-nets with his belief in capitalism's power, 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  
Bolivia's hyperinflation, and lauds President Gonzálo de Lozada -- who  
went on to implement more radical and far-reaching neo-liberal  
initiatives than Sachs 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. De Lozada's reshaping of  
the economy  took place amid massive protests, 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."

	"Shock therapy," She writes, "eroded job protection and made daily  
life more expensive, [and] 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: The two were slated to be on the same panel at the 2007  
American Sociological Association conference, but 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 [decreasing] the ability of others 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  
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 these 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 UN 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 decisionmaking. 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 arguments, multiple charts, appeals to long-term self- 
interest, and quotations from John F. Kennedy.

Digging Deeper

	Sachs' ultimate confidence in the world economy will fail to comfort  
many.

	Whereas he dismisses concerns about peak oil on the grounds that "we  
have centuries left of coal and other non-conventional 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, many observers of capitalism's recurrent downturns 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 financial  
and environmental crises virulent enough to raise serious doubt about  
neo-liberalism'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 in industrial nations by the millions of working  
people with bad credit and stagnant wages who now face foreclosure on  
their homes. And it will likely be felt by the poor in the global  
South as well -- those who receive neither enough income nor aid to  
escape hunger and disease.

	These people will be denied prosperity 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 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 of neo-liberalism  
might also thwart Ha-Joon Chang's neo-Keynesian strategy of 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 is a senior analyst with Foreign Policy In Focus and  
author of 'How to Rule the World: The Coming Battle Over the Global  
Economy'