Global Policy Forum

By Jeff Mardrick

There has been little headway made in the fight against world poverty in the last decade. Yet when Group of 8 leaders met in Genoa, Italy, two weeks ago, they chastised protesters with warnings that they would only obstruct progress for the poor.

Considering the facts, that was quite a display of arrogance. The World Bank calculates that a third to a fourth of the world's people still live in severe poverty — and this is based on minimal rates of $1 to $2 a day. The overall proportion has fallen only slightly the last 10 years, and poverty levels have risen in many countries. Moreover, in poor regions, except Asia, income inequality has widened.

The insensitivity to the stunning facts is not limited to Western leaders. Mainstream economists have been notable for their silence. At the John F. Kennedy School of Government at Harvard, a weekend seminar was held in June on the Clinton administration's economic policies. Yet hardly a word of criticism was raised about the Treasury's heavy-handed advocacy of the rapid liberalization of capital flows, which many mainstream economists now concede contributed to the Asian financial crisis in 1997 and 1998, sending many into poverty.

Today, Argentina and New Zealand, once models for the liberalizing policies so widely encouraged by economists and global investors, are in serious trouble. Argentina, which linked its currency to the dollar in 1991, amid plaudits from disciplinarians, totters on the brink of a financial crisis that could sweep up Brazil as well. New Zealand's growth rates are among the worst in the Organization for Economic Cooperation and Development. Yet there is little public outcry about mistaken policies.

In June, a small dissenting group of international economists and political scientists met to discuss this absence of a full public discourse. The conference was organized by two Harvard professors, Dani Rodrik, an economist at the Kennedy School, and Roberto Unger, a law professor. In the spring, the two had taught a standing-room-only course at Harvard Law School on alternative development strategies.

The participants essentially found themselves up against a wall. Nations have little leeway to adopt policies that deviate from those accepted by institutions like the International Monetary Fund or those demanded by the financial markets. If they do, capital flees, interest rates rise and loans are not renewed.

But the truly regrettable paradox is that the strategies advocated by the economic and financial mainstream — reduced government spending, privatization, unrestricted capital flows and completely free trade — are not the policies that gave rise to the rapid growth of developing nations in the recent past. Had South Korea, Taiwan, Thailand or Brazil been restricted to the policies considered acceptable today, they would not have been such success stories.

As Mr. Rodrik points out, Taiwan and South Korea adopted aggressive industrial policies to subsidize crucial industries. Many of the fastest-growing nations owned and ran major industries and protected infant industries with high tariffs. Government investment in education was often strong in these nations. Most slowly depreciated their currencies, rather than adopt the floating currencies advocated today (or the fixed-currency regime used by Argentina). In sum, these nations integrated their economies with the advanced world — not right away, but only when they had matured and grown more prosperous.

Moreover, not only are successful policies often abandoned, but as the current plight of Argentina and New Zealand suggests, liberalizing policies often fail, too. Robert Wade, a political scientist at the London School of Economics, argues that few nations that were largely dependent on commodity exports, like New Zealand, have been able to transform themselves into successful producers of advanced goods based on such policies.

For Mr. Wade, such a transformation still requires an industrial policy. At times, to take one example, it may require an import- substitution policy of high tariffs to protect developing domestic industries. But such policies were widely criticized as the main source of failure in Latin America in the 1980's. Mr. Wade counters that it was the indebtedness of many Latin American nations that created crises and poor growth in the 1980's, not import substitution, and that the establishment has essentially twisted the argument in its favor.

Neither Mr. Wade nor Mr. Rodrik, whose most recent book is "The New Global Economy and Developing Countries: Making Openness Work" (Overseas Development Council, 1999), says he thinks there is one policy to fit all sizes. Import substitution may be appropriate to some, but not others. Both argue strongly that local conditions should be allowed to determine the right course, not international institutions with universal formulas.

To Mr. Unger, however, the author of "Democracy Realized: The Progressive Alternative" (Verso Books, 1998), only more sweeping change has a chance to work. Mr. Unger proposes not so much a blueprint but a profoundly new direction that includes high levels of government investment and taxes, required voting and forced savings to buffer states from the influence of international investors.

Mr. Unger says his ideas have certainly not caught on among the establishment, but he is attracting a lot of interest from the younger generation. Given the levels of poverty, this is no surprise.

Yet the protesters in Genoa and elsewhere also naí¯vely denigrate the value of economic growth. Mr. Wade, for example, points out that there is no evidence that local participation in devising economic strategies, so widely advocated by protesting groups, will provide an answer to alleviating poverty unless it is accompanied by other pro-growth strategies.

What is surely the case, however, is that if nations remain under the thumb of single- minded international investors and their institutional surrogates, there will be little room for new ideas. Mr. Rodrik says the financial turmoil in Turkey, for example, has been made worse by the immediate demands by institutions for liberalization. Mr. Wade says serious industrial policy is hard to undertake in current circumstances.

To mitigate the power of the financial markets requires leadership from the powerful themselves. But such leadership is absent not only in Washington and most other Western capitals but also in America's major academic centers.

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