Raymond Fisman is the co-author of Economic Gangsters: Violence, Corruption and the Poverty of Nations (Princeton University Press, 2008), and the Lambert family professor of social enterprise at Columbia Business School. The views expressed are his own –
A highly incomplete laundry list includes: investment in roads, factories, and other forms of “physical capital”; education and training; the computer revolution and technological progress more generally; new approaches to management and other business innovations; low inflation, sustainable rates of government borrowing and macroeconomic stability; honest government, effective property rights, and good governance; market (rather than government) directed economic activity; and many others.
Each of these has strong conceptual foundations, and some have even found empirical support – there is an embarrassment of riches in plausible explanations. These are by no means mutually exclusive – many may be true at the same time – and they are interdependent, often in complicated ways.
This disagreement over the specifics of what works to help countries grow has sometimes clouded the fact that a set of guiding principles does exist that is largely accepted by economists today as tenets of good policy. Indeed, the World Economic Forum’s Global Agenda Council on Economic Growth and Development, of which I am a member, has agreed upon some of these principles.
In particular, international economic engagement – including, but not limited to, openness to trade – and the reliance on markets as a means of resource allocation (i.e., letting prices decide what gets produced rather than a cabal of bureaucrats) have both have been crucial elements to every development success story in modern history.
Yet these days, these principles are facing increasing doubt and resistance — from Latin America to Africa to Asia to the Middle East, there are calls for strengthened regulation and a return of trade barriers. In understanding this backlash it is useful to remember that much of the developing world has had a long history of state intervention, one that can be traced back to a similar response of nearly a century ago to the economic adversity that came in the wake of the Great Depression.
As William Easterly (another Global Agenda Council member) notes in a recent Foreign Affairs article, the havoc wrought by the Depression created a deep scepticism of markets among development economists, so that, “in Africa, for example, they pushed for heavy taxes on export crops like cocoa to finance domestic industrialisation. In Latin America, Raúl Prebisch pushed import-substituting industrialisation instead of export-led growth.”
The countries that most aggressively followed this inward-looking, government-led approach to running their economies have seen at best limited successes in the decades that followed. And many others – including India, China, and others – took off only after instituting market-based reforms in the 1980s and 1990s.
Why is statism suddenly fashionable once again? The same factors that were responsible the first time around: The large-scale failure of financial markets in the United States, and the pain suffered in recent days by open economies – countries that did everything “right” and are now experiencing currency flight and massive stock market declines – have led many to question the wisdom of economic orthodoxy.
Of course, some regulation is useful – this is a critical complementing role of government – and the global banking system may well be in need of a regulatory tightening. But any nuance to the trade-offs from policy choices has been lost in much of the discussion. Many countries in the midst of this deregulation backlash are starting from positions of already very high levels of bureaucracy. There is thus a danger that over-regulated economies may be about to become even more regulated. Similarly, globalisation brings winners and losers, and while some means of ensuring that the victims of openness are compensated, a return to inward-looking development strategies is a dangerous means of achieving such ends.
What role does the Forum have in preventing a replay of the 1930s? Given its very high level of visibility and connections to global leaders, the Forum can play a pivotal role in thought leadership and in advocating against the return to protectionism and regulation. This is one of the main goals of our Global Agenda Council.
We must, however, be clear that we are not advocates of pure laissez faire. We need to remind policymakers of the successes that market systems have achieved, while understanding the crucial role played by government mediation and intervention.
For example, in infrastructure industries like telecom and transportation, complete deregulation can lead to private monopolies that charge high prices of consumers and retard growth. And recent experience has shown the potential dangers of untrammeled financial market development. Additionally, to encourage broad support for the continuance and extension of growth-promoting policies, it is crucial that efforts be made to spread around the fruits of economic successes.
This may be through employment creation programs, implemented through infrastructure projects – building roads, power plants, and others – that are naturally the government’s domain. Alternatively, well-designed income transfer programs – some version of taxing the rich to give to the poor – may help to better connect a nation’s less fortunate citizens to the growth process.
But these qualifications should not detract from the broader message we wish to convey – markets and globalisation have helped countries grow and pulled many millions out of poverty. While we don’t have all the answers to what drives economic growth – and probably never will – we’ve figured out a few important pieces of the puzzle. We mustn’t forget our past mistakes, and ensure that this time around our knowledge doesn’t go to waste.