NYTimes.com Article: Mainstream Economists Deny Basic Facts About Povert

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Mainstream Economists Deny Basic Facts About Poverty

By JEFF MADRICK



THERE has been little headway made in the fight against world
poverty in the last decade. Yet when Group of 8 leaders met in
Genoa, Italy, two weeks ago, they chastised protesters with
warnings that they would only obstruct progress for the poor.

 Considering the facts, that was quite a display of arrogance. The
World Bank calculates that a third to a fourth of the world's
people still live in severe poverty — and this is based on
minimal rates of $1 to $2 a day. The overall proportion has fallen
only slightly the last 10 years, and poverty levels have risen in
many countries. Moreover, in poor regions, except Asia, income
inequality has widened.

 The insensitivity to the stunning facts is not limited to Western
leaders. Mainstream economists have been notable for their silence.
At the John F. Kennedy School of Government at Harvard, a weekend
seminar was held in June on the Clinton administration's economic
policies. Yet hardly a word of criticism was raised about the
Treasury's heavy-handed advocacy of the rapid liberalization of
capital flows, which many mainstream economists now concede
contributed to the Asian financial crisis in 1997 and 1998, sending
many into poverty.

 Today, Argentina and New Zealand, once models for the liberalizing
policies so widely encouraged by economists and global investors,
are in serious trouble. Argentina, which linked its currency to the
dollar in 1991, amid plaudits from disciplinarians, totters on the
brink of a financial crisis that could sweep up Brazil as well. New
Zealand's growth rates are among the worst in the Organization for
Economic Cooperation and Development. Yet there is little public
outcry about mistaken policies.

 In June, a small dissenting group of international economists and
political scientists met to discuss this absence of a full public
discourse. The conference was organized by two Harvard professors,
Dani Rodrik, an economist at the Kennedy School, and Roberto Unger,
a law professor. In the spring, the two had taught a
standing-room-only course at Harvard Law School on alternative
development strategies.

 The participants essentially found themselves up against a wall.
Nations have little leeway to adopt policies that deviate from
those accepted by institutions like the International Monetary Fund
or those demanded by the financial markets. If they do, capital
flees, interest rates rise and loans are not renewed.

 But the truly regrettable paradox is that the strategies advocated
by the economic and financial mainstream — reduced government
spending, privatization, unrestricted capital flows and completely
free trade — are not the policies that gave rise to the rapid
growth of developing nations in the recent past. Had South Korea,
Taiwan, Thailand or Brazil been restricted to the policies
considered acceptable today, they would not have been such success
stories.

 As Mr. Rodrik points out, Taiwan and South Korea adopted
aggressive industrial policies to subsidize crucial industries.
Many of the fastest-growing nations owned and ran major industries
and protected infant industries with high tariffs. Government
investment in education was often strong in these nations. Most
slowly depreciated their currencies, rather than adopt the floating
currencies advocated today (or the fixed-currency regime used by
Argentina). In sum, these nations integrated their economies with
the advanced world — not right away, but only when they had
matured and grown more prosperous.

 Moreover, not only are successful policies often abandoned, but as
the current plight of Argentina and New Zealand suggests,
liberalizing policies often fail, too. Robert Wade, a political
scientist at the London School of Economics, argues that few
nations that were largely dependent on commodity exports, like New
Zealand, have been able to transform themselves into successful
producers of advanced goods based on such policies.

 For Mr. Wade, such a transformation still requires an industrial
policy. At times, to take one example, it may require an import-
substitution policy of high tariffs to protect developing domestic
industries. But such policies were widely criticized as the main
source of failure in Latin America in the 1980's. Mr. Wade counters
that it was the indebtedness of many Latin American nations that
created crises and poor growth in the 1980's, not import
substitution, and that the establishment has essentially twisted
the argument in its favor.

 Neither Mr. Wade nor Mr. Rodrik, whose most recent book is "The
New Global Economy and Developing Countries: Making Openness Work"
(Overseas Development Council, 1999), says he thinks there is one
policy to fit all sizes. Import substitution may be appropriate to
some, but not others. Both argue strongly that local conditions
should be allowed to determine the right course, not international
institutions with universal formulas.

 To Mr. Unger, however, the author of "Democracy Realized: The
Progressive Alternative" (Verso Books, 1998), only more sweeping
change has a chance to work. Mr. Unger proposes not so much a
blueprint but a profoundly new direction that includes high levels
of government investment and taxes, required voting and forced
savings to buffer states from the influence of international
investors.

 Mr. Unger says his ideas have certainly not caught on among the
establishment, but he is attracting a lot of interest from the
younger generation. Given the levels of poverty, this is no
surprise.

 Yet the protesters in Genoa and elsewhere also naïvely
denigrate the value of economic growth. Mr. Wade, for example,
points out that there is no evidence that local participation in
devising economic strategies, so widely advocated by protesting
groups, will provide an answer to alleviating poverty unless it is
accompanied by other pro-growth strategies.

 What is surely the case, however, is that if nations remain under
the thumb of single- minded international investors and their
institutional surrogates, there will be little room for new ideas.
Mr. Rodrik says the financial turmoil in Turkey, for example, has
been made worse by the immediate demands by institutions for
liberalization. Mr. Wade says serious industrial policy is hard to
undertake in current circumstances.

 To mitigate the power of the financial markets requires leadership
from the powerful themselves. But such leadership is absent not
only in Washington and most other Western capitals but also in
America's major academic centers. 

http://www.nytimes.com/2001/08/02/business/worldbusiness/02SCEN.html?ex=997743781&ei=1&en=113c1a2a8207a8d1

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