The United Kingdom’s vote to leave the European Union and the United States’ election of Donald Trump have laid bare the dissatisfaction of developed countries’ citizens with globalisation. Rightly or wrongly, they blame globalisation for stagnating incomes, rising unemployment, and growing insecurity.
The citizens of developing countries have been expressing similar feelings for much longer. Though globalisation has brought many benefits to the developing world, many object to the neoliberal economics that has guided its management.
In particular, the so-called Washington Consensus, which calls for unfettered liberalisation and privatisation, and macroeconomic policies that focus on inflation rather than employment and growth, have attracted much criticism over the years. Is it time to revise the conventional economic wisdom?
The Swedish International Development Cooperation Agency thought it was a question worth considering. So it invited 13 economists from around the world (including the authors of this article – four former chief economists of the World Bank) to do just that.
We concluded that some of the ideas underlying traditional development economics may indeed have helped to create some of the economic challenges the world faces. In particular, it is now evident that simply maintaining balanced national budgets and controlling inflation, while leaving the market to do the rest, does not automatically generate sustained and inclusive growth. With that in mind, we identified eight broad principles that should guide development policy.
First, GDP growth should be viewed as a means to an end, not an end in itself. Growth matters mostly because it provides the resources needed to bolster various dimensions of human wellbeing: employment, sustainable consumption, housing, health, education, and security.
Second, economic policy must actively promote inclusive development. Rather than expect the development tide to lift all boats, policymakers should ensure that no group is left behind.
Beyond the moral imperative, such an approach would help to maintain economic performance, which can be threatened by excessive income inequality via social tensions, political turbulence, and even violent conflict.
Third, environmental sustainability is not an option. At the national level, income growth that comes at the cost of environmental damage is unsustainable, and therefore unacceptable. At the global level, climate change is a threat to health, livelihoods, and habitats. It is imperative that climate change mitigation and adaptation policies be an integral part of development policy, not an addendum, at both the national and international levels.
Fourth, there needs to be balance among market, state, and community. Markets are fundamentally social institutions and require regulation to allocate resources efficiently. In the past quarter-century, under-regulated markets have been the root cause of many adverse economic outcomes, including the 2008 financial crisis and untenable levels of inequality. For markets and non-market actors alike, the state is indispensable to effective regulation. Civil society institutions, for their part, are essential to ensure that the state functions efficiently and fairly.
Fifth, macroeconomic stability demands policy flexibility. Traditional policy advice fetishised a balanced budget – sometimes to the detriment of macroeconomic stability. A better approach would regard fiscal and external balances as medium-run constraints. That way, fiscal stimulus, such as public investment, can help to invigorate sluggish economies and lay the groundwork for longer-term growth. The key is to ensure that public debt and inflationary pressures are well managed during the good times.
Sixth, the impact of technological change on inequality demands special attention. Recent technological advances have displaced labour, increasing capital’s share in income and, thus, the level of inequality.
Unfortunately, what is fundamentally a labour-versus-capital problem has often been portrayed as a labour-versus-labour problem, with some in advanced economies claiming that developing countries are taking their jobs. This has contributed to the rejection of trade openness and calls for protectionism. What is really needed, however, is action to enhance human capital, to adapt and improve income-redistribution instruments, and to promote equality in market incomes.
Seventh, social norms, values, and mindsets affect economic performance. An economy works better when there is trust among people. Social norms can also help to curb corruption and encourage fair practices. Civil society and governments should, therefore, promote conducive values and norms.
Eighth, the international community has an important role to play. Global forces and national policies create externalities that constrain policy options. Perhaps the most talked-about recent example is the impact of advanced country monetary policies on capital flows into and out of emerging economies. Other examples include migration restrictions, trade policies, and regulations on tax havens.
Only international institutions can manage the externalities created by such policies. The key to ensuring that they do so fairly and effectively is to amplify the voice of developing countries within them.
Past economic development, together with advances in economic thinking, have provided us with a wealth of insight into what works and what does not. That knowledge should be at the core of the new approach to development that the world needs.
Kaushik Basu is professor of economics, Cornell University in the United States, François Bourguignon is professor emeritus of economics, Paris School of Economics in France, Justin Yifu Lin is professor, Peking University in China and Joseph E. Stiglitz is professor, Columbia University in the United States.
Copyright: Project Syndicate, 2016