By Arvind Subramanian and Josh Felman/Cambridge
We have suddenly arrived at a tricky stage in global economic development. Emerging markets are losing their dynamism, after a remarkable three-decade-long run during which they caught up rapidly with advanced economies. Moreover, rekindling this vigour requires a new economic strategy. But where will such a model come from, and who will provide the intellectual leadership?
The latest economic forecasts from the International Monetary Fund and the World Bank are sobering, pointing to protracted slowdowns across the board in China, India, Sub-Saharan Africa, and Latin America. Of course, alarmism about the “end of growth” might be as overblown as past hype about emerging markets’ unstoppable rise. But policymakers in developing countries are genuinely concerned and are grappling with how to revive flagging dynamism.
In the past, governments had a ready intellectual solution: the so-called Washington Consensus, a term coined by John Williamson of the Peterson Institute for International Economics, which advocated a broad strategy of macroeconomic stabilisation, privatisation, deregulation, and globalisation.
Some questioned whether and to what extent the strategy worked. But the fact is, there was a template – created by leading Western academic and policy institutions – that was seen as useful by developing-country policymakers. And the high noon of the Washington Consensus coincided with developing countries’ strong performance.
Two of the current strands of thought that might replace the Washington Consensus also originated in the West. The first represents a reaction against the neoliberal approach and is motivated by several disturbing long-run trends: weak growth, rising inequality, an increasingly beleaguered middle class, and collapsing social mobility.
This emerging post-neoliberal consensus questions the primacy accorded to markets. It advocates a larger role for the state, both to generate better market outcomes (for example, via minimum-wage increases and stricter enforcement of antitrust policies) and to correct inequitable outcomes via aggressive redistributive policies. This approach also calls for more proactive fiscal and monetary policy in the short run.
The second strand of thought is associated with Abhijit Banerjee and Esther Duflo, both winners of the 2019 Nobel Prize in Economics. Banerjee and Duflo argue that economic growth is not really influenced by policy changes, or at least not in ways for which we have strong evidence. They therefore advocate a strategy of “going small”: focusing on measures, such as distributing free malaria bed nets and deworming children, that clearly seem to be effective and will produce localised benefits.
But it is not obvious that either approach is of much help to developing countries. The post-neoliberal consensus almost entirely reflects concerns in advanced economies: secular stagnation and unconventional monetary policies are not high-priority problems for governments in poorer countries. Moreover, emerging markets are still growing, not stagnating. And even inequality, which is a common concern, takes a very different form, and requires very different solutions, in developing economies.
Perhaps the biggest drawback of the post-neoliberal approach is the dichotomy that it poses – or, perhaps, presupposes – between states and markets. The reality in developing countries is that both states and markets are weak – the very definition of underdevelopment. So, a policy agenda that focuses on increasing the role of the state may well be unrealistic.
In addition, climate change is a new and critical aspect of the post-neoliberal consensus that is likely to prove increasingly problematic. On one hand, the overwhelming scientific evidence of global warming is a clarion call to action. On the other hand, policies aimed at promoting rapid decarbonisation raise deep concerns in developing countries, because such measures could easily clash with the needs of their energy-deprived citizens.
Similarly, many developing-country policymakers simply cannot afford the luxury of a narrow agenda, making them unlikely to take seriously any advice to focus on the “small and certain.” They have no choice but to strive to achieve rapid growth, which has been a prerequisite for all successful development transitions. Moreover, the experience of the 1980s and 1990s shows that this objective is not a chimera, and that growth can indeed be increased by appropriate policy reforms.
Mahatma Gandhi famously said: “I do not want my house to be walled in on all sides and my windows to be stuffed. I want the culture of all lands to be blown about my house as freely as possible. But I refuse to be blown off my feet by any.” Do developing countries today have the capacity not to be blown off course? Do policymakers have the intellectual and cognitive wherewithal to absorb and assess the new thinking on economic development, adopting what is appropriate to their situation and rejecting what is not? And do they have their own new ways of thinking about the development challenge?
Consider the situation in the two largest developing countries, China and India. China has the intellectual capacity, but is facing the breakdown of its economic model. Chinese policymakers now need to find another approach that both encourages growth and ensures that the Communist Party of China remains in control – all the while preventing the extraordinary build-up of debt from triggering a crisis. It’s not obvious to anyone how they can do this.
Meanwhile, India’s current inward economic turn appears to reflect a broader inclination to be walled in and prevent foreign winds from blowing freely. And this intellectual nativism seems to be more about harnessing technical expertise for political objectives than about valuing it for its own sake.
What is clear is that solutions to the new growth and development challenges in emerging markets will have to be indigenous, rather than coming from Western institutions. Building and maintaining among national policymakers the sort of open, self-confident intellectual capacity that Gandhi espoused could well be the next development challenge. – Project Syndicate
l Arvind Subramanian, a former chief economic adviser to the government of India, is a non-resident senior fellow at the Peterson Institute for International Economics and a visiting lecturer at Harvard’s John F Kennedy School of Government.
l Josh Felman is Director of JH Consulting.
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