Government can, and has, played an essential role not only in mitigating these market failures but also in ensuring social justice. Market processes may, by themselves, leave many people with too few resources to survive.
In countries that have been most successful, in the United States and in East Asia, government has performed these roles and performed them, for the most part, reasonably well. Governments provided a high-quality education to all and furnished much of the infrastructure—including the institutional infrastructure, such as the legal system, which is required for markets to work effectively. They regulated the financial sector, ensuring that capital markets worked more in the way that they were supposed to. They provided a safety net for the poor. And they promoted technology, from telecommunications to agriculture to jet engines and radar. While there is a vigorous debate in the United States and elsewhere about what the precise role of government should be, there is broad agreement that government has a role in making any society, any economy, function efficiently—and humanely.
There are important disagreements about economic and social policy in our democracies. Some of these disagreements are about values—how concerned should we be about our environment (how much environmental degradation should we tolerate, if it allows us to have a higher measured GDP); how concerned should we be about the poor (how much sacrifice in our total income should we be willing to make, it if allows some of the poor to move out of poverty, or to be slightly better off); or how concerned should we be about democracy (are we willing to compromise on basic rights, such as the rights to association, if we believe that as a result, the economy will grow faster). Some of these disagreements are about how the economy functions. The analytic propositions are clear: whenever there is imperfect information or markets (that is always), there are, in principle, interventions by the government—even a government that suffers from the same imperfections of information—which can increase the markets’ efficiency. As we saw in chapter 7, the assumptions underlying market fundamentalism do not hold in developed economies, let alone in developing countries. But the advocates of market fundamentalism still argue that the inefficiencies of markets are relatively small and the inefficiencies of government are relatively large. They see government more as part of the problem than the solution; unemployment is blamed on government setting too-high wages, or allowing unions too much power.
Adam Smith was far more aware of the limitations of the market, including the threats posed by imperfections of competition, than those who claim to be his latterday followers. Smith too was more aware of the social and political context in which all economies must function. Social cohesion is important if an economy is to function: urban violence in Latin America and civil strife in Africa create environments that are hostile to investment and growth. But while social cohesion can affect economic performance, the converse is also true: excessively austere policies—whether they be contractionary monetary or fiscal policies in Argentina, or cutting off food subsidies to the poor in Indonesia—predictably give rise to turmoil. This is especially the case when it is believed that there are massive inequities—such as billions going to corporate and financial bailouts in Indonesia, leaving nothing left for those forced into unemployment.
In my own work—both in my writings and in my role as the president’s economic adviser and chief economist of the World Bank—I have advocated a balanced view of the role of government, one which recognizes both the limitations and failures of markets and government, but which sees the two as working together, in partnership, with the precise nature of that partnership differing among countries, depending on their stages of both political and economic development.
But at whatever stage of political and economic development a country is, government makes a difference. Weak governments and too-intrusive governments have both hurt stability and growth. The Asia financial crisis was brought on by a lack of adequate regulation of the financial sector, Mafia capitalism in Russia by a failure to enforce the basics of law and order. Privatization without the necessary institutional infrastructure in the transition countries led to asset stripping rather than wealth creation. In other countries, privatized monopolies, without regulation, were more capable of exploiting consumers than the state monopolies. By contrast, privatization accompanied by regulation, corporate restructuring, and strong corporate governance1 has led to higher growth.
My point here, however, is not to resolve these controversies, or to push for my particular conception of the role of government and markets, but to emphasize that there are real disagreements about these issues among even well-trained economists. Some critics of economics and economists jump to the conclusion that economists always disagree, and therefore try to dismiss whatever economists say. That is wrong. On some issues—like the necessity of countries living within their means, and the dangers of hyperinflation—there is widespread agreement.
The problem is that the IMF (and sometimes the other international economic organizations) presents as received doctrine propositions and policy recommendations for which there is not widespread agreement; indeed, in the case of capital market liberalization, there was scant evidence in support and a massive amount of evidence against. While there is agreement that no economy can succeed under hyperinflation, there is no consensus about the gains from lowering inflation to lower and lower levels; there is little evidence that pushing inflation to lower and lower levels yields gains commensurate with the costs, and some economists even think that there are negative benefits from pushing inflation too low.2
The discontent with globalization arises not just from economics seeming to be pushed over everything else, but because a particular view of economics—market fundamentalism—is pushed over all other views. Opposition to globalization in many parts of the world is not to globalization per se—to the new sources of funds for growth or to the new export markets—but to the particular set of doctrines, the Washington Consensus policies that the international financial institutions have imposed. And it is not just opposition to the policies themselves, but to the notion that there is a single set of policies that is right. This notion flies in the face both of economics, which emphasizes the importance of trade-offs, and of ordinary common sense. In our own democracies we have active debates on every aspect of economic policy; not just on macroeconomics, but on matters like the appropriate structure of bankruptcy laws or the privatization of Social Security. Much of the rest of the world feels as if it is being deprived of making its own choices, and even forced to make choices that countries like the United States have rejected.
But while the commitment to a particular ideology deprived countries of the choices that should have been theirs, it also contributed strongly to their failures. The economic structures in each of the regions of the world differ markedly; for instance, East Asian firms had high levels of debt, those in Latin America relatively little. Unions are strong in Latin America, relatively weak in much of Asia. Economic structures also change over time—a point emphasized by the New Economy discussions of recent years. The advances in economics of the past thirty years have focused on the role of financial institutions, on information, on changing patterns of global competition. I have noted how these changes altered views concerning the efficiency of the market economy. They also altered views concerning the appropriate responses to crises.
At the World Bank and the IMF, these new insights—and more important, their implications for economic policy—were often resisted, just as these institutions had resisted looking at the experiences of East Asia, which had not followed the Washington Consensus policies and had grown faster than any other region of the world. This failure to take on board the lessons of modern economic science left these institutions ill-prepared to deal with the East Asia crisis when it occurred, and less able to promote growth around the world.
The IMF felt it had little need to take these lessons on board because it knew the answers; if economic science did not provide them, ideolo
gy—the simple belief in free markets—did. Ideology provides a lens through which one sees the world, a set of beliefs that are held so firmly that one hardly needs empirical confirmation. Evidence that contradicts those beliefs is summarily dismissed. For the believers in free and unfettered markets, capital market liberalization was obviously desirable; one didn’t need evidence that it promoted growth. Evidence that it caused instability would be dismissed as merely one of the adjustment costs, part of the pain that had to be accepted in the transition to a market economy.
The Need for International Public Institutions
We cannot go back on globalization; it is here to stay. The issue is how can we make it work. And if it is to work, there have to be global public institutions to help set the rules.
These international institutions should, of course, focus on issues where global collective action is desirable, or even necessary. Over the past three decades there has been an increased understanding of the circumstances under which collective action, at whatever level, is required. Earlier, I discussed how collective action is required when markets by themselves do not result in efficient outcomes. When there are externalities—when the actions of individuals have effects on others for which they neither pay nor are compensated—the market will typically result in the overproduction of some goods and the underproduction of others. Markets cannot be relied upon to produce goods that are essentially public in nature, like defense.3 In some areas, markets fail to exist;4 governments have provided student loans, for instance, because the market, on its own, failed to provide funding for investments in human capital. And for a variety of reasons, markets are often not self-regulating—there are booms and busts—so the government has an important role in promoting economic stability.
Over the past decade, there has been an increased understanding of the appropriate level—local, national, or global—at which collective action is desirable. Actions the benefits of which accrue largely locally (such as actions related to local pollution) should be conducted at the local level; while those that benefit the citizens of an entire country should be undertaken at the national level. Globalization has meant that there is increasing recognition of arenas where impacts are global. It is in these arenas where global collective action is required—and systems of global governance are essential. The recognition of these areas has been paralleled by the creation of global institutions to address such concerns. The United Nations can be thought of as focusing upon issues of global political security, while the international financial institutions, and in particular the IMF, are supposed to focus on global economic stability. Both can be thought of as dealing with externalities that can take on global dimensions. Local wars, unless contained and defused, can draw in others, until they become global conflagrations. An economic downturn in one country can lead to slowdowns elsewhere. In 1998 the great concern was that a crisis in emerging markets might lead to a global economic meltdown.
But these are not the only arenas in which global collective action is essential. There are global environmental issues, especially those that concern the oceans and atmosphere. Global warming caused by the industrial countries’ use of fossil fuels, leading to concentrations of greenhouse gasses (CO2), affects those living in preindustrial economies, whether in a South Sea island or in the heart of Africa. The hole in the ozone layer caused by the use of chlorofluorocarbons (CFCs) similarly affects everyone—not just those who made use of these chemicals. As the importance of these international environmental issues has grown, international conventions have been signed. Some have worked remarkably well, such as the one directed at the ozone problem (the Montreal Protocol of 1987); while others, such as those that address global warming, have yet to make a significant dent in the problem.
There are also global health issues like the spread of highly contagious diseases such as AIDS, which respect no boundaries. The World Health Organization has succeeded in eradicating a few diseases, notably river blindness and smallpox, but in many areas of global public health the challenges ahead are enormous. Knowledge itself is an important global public good: the fruits of research can be of benefit to anyone, anywhere, at essentially no additional cost.
International humanitarian assistance is a form of collective action that springs from a shared compassion for others. As efficient as markets may be, they do not ensure that individuals have enough food, clothes to wear, or shelter. The World Bank’s main mission is to eradicate poverty, not so much by providing humanitarian assistance at the time of crisis as by enabling countries to grow, to stand on their own.
Although specialized institutions in most of these areas have evolved in response to specific needs, the problems they face are often interrelated. Poverty can lead to environmental degradation, and environmental degradation can contribute to poverty. People in poor countries like Nepal with little in the way of heat and energy resources are reduced to deforestation, stripping the land of trees and brush to obtain fuel for heating and cooking, which leads to soil erosion, and thus to further impoverishment.
Globalization, by increasing the interdependence among the people of the world, has enhanced the need for global collective action and the importance of global public goods. That the global institutions which have been created in response have not worked perfectly is not a surprise: the problems are complex and collective action at any level is difficult. But in previous chapters we have documented complaints that go well beyond the charge that they have not worked perfectly. In some cases their failures have been grave; in other cases they have pursued an agenda that is unbalanced—with some benefiting from globalization much more than others, and some actually being hurt.
Governance
So far, we have traced the failures of globalization to the fact that in setting the rules of the game, commercial and financial interests and mind-sets have seemingly prevailed within the international economic institutions. A particular view of the role of government and markets has come to prevail—a view which is not universally accepted even within the developed countries, but which is being forced upon the developing countries and the economies in transition.
The question is, why has this come about? And the answer is not hard to find: It is the finance ministers and central bank governors who sit around the table at the IMF making decisions, the trade ministers at the WTO. Even when they stretch, to push policies that are in their countries’ broader national interests (or occasionally, stretching further, to push policies that are in a broader global interest), they see the world through particular, inevitably more parochial, perspectives.
I have argued that there needs to be a change in mind-set. But the mind-set of an institution is inevitably linked to whom it is directly accountable. Voting rights matter, and who has a seat at the table—even with limited voting rights—matters. It determines whose voices get heard. The IMF is not just concerned with technical arrangements among bankers, such as how to make bank check-clearing systems more efficient. The IMF’s actions affect the lives and livelihoods of billions throughout the developing world; yet they have little say in its actions. The workers who are thrown out of jobs as a result of the IMF programs have no seat at the table; while the bankers, who insist on getting repaid, are well represented through the finance ministers and central bank governors. The consequences for policy have been predictable: bailout packages which pay more attention to getting creditors repaid than to maintaining the economy at full employment. The consequences for the choice of the institution’s management have equally been predictable: there has been more of a concern with finding a leader whose views are congruent with the dominant “shareholders” than with finding one that has expertise in the problems of the developing countries, the mainstay of the Fund’s business today.
Governance at the WTO is more complicated. It is the voices of trade that are heard. No wonder, then, that little attention is often paid to concerns about the environment. Yet while the voting arrangements at the IMF ensure that t
he rich countries predominate, at the WTO each country has a single vote, and decisions are largely by consensus. But in practice, the United States, Europe, and Japan have dominated in the past. This may now be changing. At the last meeting at Doha, the developing countries insisted that if another round of trade negotiations was to be initiated, their concerns had to be heard—and they achieved some notable concessions. With China’s joining the WTO, the developing countries have a powerful voice on their side—though the interests of China and those of many of the other developing countries do not fully coincide.
The most fundamental change that is required to make globalization work in the way that it should is a change in governance. This entails, at the IMF and the World Bank, a change in voting rights, and in all of the international economic institutions changes to ensure that it is not just the voices of trade ministers that are heard in the WTO or the voices of the finance ministries and treasuries that are heard at the IMF and World Bank.
Such changes are not going to be easy. The United States is unlikely to give up its effective veto at the IMF. The advanced industrial countries are not likely to give up their votes so that the developing countries can have more votes. They will even put up specious arguments: voting rights, as in any corporation, are assigned on the basis of capital contributions. China would long ago have been willing to increase its capital contribution, if that was required to give it more voting rights. U.S. Treasury Secretary Paul O’Neill has tried to give the impression that it is the American taxpayers, its plumbers and carpenters, who pay for the multi-billion-dollar bailouts—and because they pay the costs, they ought to have the vote. But that is wrong. The money comes ultimately from the workers and other taxpayers in the developing countries, for the IMF almost always gets repaid.
Globalization and Its Discontents Revisited Page 42