How developed is development model?
Top of pageThe last key element of the so-called Washington Consensus is development. The development model that is advocated by Washington Consensus for all countries, especially poor and emerging countries, is generally of the type practiced in western countries, US included. The principal features of this model are free market, free international flow of goods, services, funds, free capital markets, sound financial and banking system operating on the basis of profit maximisation and underpinning of such system being democracy, independent judiciary, autonomous central bank, price and exchange stability and fiscal balance. In short, this design of development is closely akin to the one practiced in the USA giving free reign to the market forces.
It is claimed that with this design of economic development American economy today is outpacing all its rivals. It is the lean and flexible American model that is deemed triumphant today as United States enjoys rapid growth, low unemployment and low inflation. Until very recently both the mainstream economists and political leaders were eloquent in claiming that the new economy has proved its superiority over countries in this respect. Washington Consensus, in its exuberance has not only embraced but also prescribed this model as the best one to follow by all countries of the world. But is it true? Has USA really won the beauty contest of development models? Are there reasons to question the widespread assumption that American's economic models automatically delivers the best results? Let us delve into the questions further.
If the American model is compared with other models operating within capitalist system like German Social Market model, the Swedish model, the New Zealand model, the Dutch model, the East Asian model, American model does not automatically come out on the top. A study was undertaken to find out the performances of the three big economies of USA, Germany and Japan in terms of GDP per head, job creation and productivity during a ten-year period including one recession. The results indicated that in GDP per capita American rate was 1.6 per cent per year, which was almost about the same as the other two economies. In job creation America was well ahead of other two economies, but it has lost its position since 2000AD. America's average productivity was on the whole not much higher than Germany and Japan. On the whole, America did not come out a big winner in this study. If at all, existing prolonged recession, and growing unemployment shows that her position has worsened since then.
US model of development administered to Russia after collapse of Soviet rule under the aegis of US Treasury and the IMF and World Bank has also failed and brought miseries to ordinary people and quickly created a number of billionaires enabling them to establish their grip over the political and economic policies of the government. According to 1992 report of the UN commission for Europe the development model based on liberatlisation of economies has led to much deeper and longer recession, lower living standards in East European countries. Above all, the so-called "shock therapy" given to Russia and those countries rendered a large part of their capital stock and industrial capacity inoperative while the absence of institutional, organisational and managerial preparedness for market oriented system led to lack of supply side response.
In Latin America also, the new policies of development failed to increase exports or real GDP. Argentine, which until recently, was the poster country of success story of free market economic development, has been inflicted, for the last few years, with severe financial crisis leading to massive devaluation of the currency, high unemployment, inflation, massive cut in welfare benefits to the people and the consequent political turmoil .
In USA, where private enterprise is almost worshipped, number of people below poverty line is not declining significantly. Income disparities between the rich and the poor are at all time high. Consolidation of monopolies is taking place with more and more mergers and takeovers. Thirty-four million people have no health insurance, homeless people are still roaming the streets in large numbers in big cities. Fees for physician and prices of medicines are going up and up even though the number of physicians has increased.
This has led Newsweek (Sept 6, 1993) to say that what could better show that in health care market free market logic stood on its head. The ongoing recession in USA has proved that the country has not been able to put boom and bust behind its back. In the span of a few short years and one giant stock market deflation the phrase, "New Economy" has changed from Mantra to epithet. The giddy optimists of 1990s including a few eminent economists who claimed that information technology could free the United States from the shackles of the business cycle are now finding that, what people have got instead are bankrupt telecomm, pointless online pet food suppliers and those who invested in tech-stocks incredible shrinkage of portfolios.
The growing stronghold of monopolies over the economy has belied the conception of perfect competition. The exposure of fraud perpetrated by the biggest companies in complicity with the internationally renowned accounting firms have once again established before the eyes of the people that uncontrolled greed is still propelling American capitalism and the American economy now looks like a casino table where winners take all leaving nothing for the losers; and where all gains are privatised and all losses are socialised.
The large number of countries, which willingly or unwillingly have hitched their wagons to Washington Consensus, could not save themselves from being savaged from recurrent currency and economic crisis leading to GDP and other loses. According to the World Bank count in 1980 there have been 45 major systemic banking crises in which most or all of banking system capital has been wiped off. In the 1990s there were 63 major banking crises, most of which were accounted for by emerging countries.
Instances of this nature can be multiplied. But even the instances cited above amply demonstrate that the current development process that are being administered by USA and other Western developed nations are not working well and are certainly not appropriate for universal application to all developing countries lagging in developed institutions, proper infrastructure, adequate per capita income or literacy and skills. Without attending to these long range problems, free market based development will not work,
It is now increasingly realised by development practitioners that the policies emanating from the so-called Washington Consensus are too much homogenous and have failed to allow adequately for regional, national and social differences to the nature of the economic challenges faced by various countries. In fact, Washington Consensus has to take a larger share of the blame for disappointing outcomes like repeated crises, lost growth and continuation of high poverty and increasing disparity between the incomes of the rich and the poor. Belatedly, IMF is also now admitting "that accelerating growth is a much more complex process than simply accumulating physical capital (plant, equipment, roads and bridges).
Now-a-days, it is recognised that "soft factors" -- such as institutions and governance -- matter just as much -- probably a lot more. No matter how much capital is poured into an economy strong growth is impossible if individuals and companies do not enjoy meaningful property rights, reliable courts and other market institutions". (Kenneth Rogaff in Straight Talk published in IMF journal Finance and Development June 2003).
From the above discussion it is abundantly clear that a new paradigm of development is necessary in place of the existing one, both for emerging countries and perhaps USA as well. The new development strategy should be built up on the following concerns:
how frequent crisis can be avoided, what major corrections are needed in the existing agenda of development, and broadening the reform agenda to include a concern with more equitable distribution of income and alleviation of poverty. While working out the details of such a development programme, particular attention should be given to the following:
how effectively each country can be engaged to maintain not only fiscal balance but also build budget surplus in some years to run deficits in other years, how to deal with the cycle of booms and busts, whether regional grouping of countries can be formed under the umbrella like Masstrict Treaty in Europe to maintain fiscal, monetary and exchange stability, how increase in market access of poor countries for their goods and services can be improved, how flexibility of labour markets can be improved without prejudice to the interest of organised labour and without 'breaking' the Union as often suggested by the IMF and the World Bank in their own conditionalities now, how institutional reforms may be made more country specific and how political reforms can be initiated in conformity with the reality on the ground and yet consistent with social and cultural ethos of the people in each country, whether, and if so, what changes are called for in the functions and responsibilities of IMF and World Bank including voting powers of their shareholders. This is no doubt a tall order. But then the proposed task is very important for maintaining stability of the world. Last, but not the least, in a detailed deliberations of such a new programme all countries should be allowed to speak and participate freely so that there is a sense of wide consensus and ownership of the final decisions and the stand that an individual country should take should not depend on where it sits at the conference table.
Finally, America, before advocating for its system of capitalism, should address the challenges it faces today. There is the lurking threat of depression and inflation -- the still for from resolved problem of instability of its economic system. There is the newly arisen challenge of globalisation of the market altering the economic geography of production that threatens the foundations of many states. There is the tethering issue of the dependency of the poor countries on the richer ones. There is the ambivalent promise of technology bringing material wellbeing as well as ecological danger of economic growth and employment shrinkage, equitable distribution of wealth and technology generated by USA among all nations. I have discussed these problems more elaborately in my book earlier (USA Today and Tomorrow by AKN Ahmed. Pustika, 1998). The success of American international foreign policy will depend, a lot on how she domestically comes to grips with these problems. Otherwise the present gap between her profession and practice will continue.
The acid test of any development model and programme is whether it generates adequate sustainable growth and ensures equitable distribution of wealth generated without hurting the economy and damaging the ecology. Washington Consensus development plan does not pass this test now. Nor does USA (AKN Ahmed. The Daily Star, August 29, 2003).
Development Program
Home