Fundamental lessons

Events affecting nearly all the economies of the world have occurred over the past year -- events of a nature and magnitude to mark the end of an ideology which had dominated mainstream economic thinking over the past three decades. From the early 1980s, monetarism, supply-side economics, Reaganism/ Thatcherism and, finally, in 1989, the Washington Consensus (WC) have provided the ideological foundation for propagating a system of unfettered capitalism, market fundamentalism and extreme liberalism under the basic premise that markets are self-regulating and self-correcting.  

The WC consisted of a set of specific economic policy prescriptions -- privatisation, fiscal discipline, deregulation, property rights, tax reforms, public expenditure reform, liberalisation of interest rates, trade, exchange rates and inward foreign direct investment -- that was imposed by Washington-based institutions like the International Monetary Fund (IMF) and the World Bank (WB) as a standard ‘reform’ package on developing economies facing a crisis.

This ‘reform’ package, reinforced by conditions such as those accompanying foreign investment, intellectual property rights and so on severely undermined an economy’s capacity to develop independently of the globalisation process.

Neo-liberal model

Though the trigger for the meltdown may be attributed to the crisis originating in the sub-prime sector in the US and its spread throughout the financial system (and stock markets) and then to the real estate sector as well, it is the nature of the growth occurring in the neo-liberal model itself that is responsible for the economic crisis.
The model of free markets run by financial institutions allocating credit had promoted rent seeking and speculation, with capital gains emanating from the financial sector providing the foundation for new credit to further inflate asset prices in a continual credit-debt mechanism. The keystone of the growth process was, till the meltdown, expanding balance sheets based critically on asset prices rising faster than debts. The peculiar nature of the neo-liberal ‘growth’ was such that it was rooted neither in addition to physical and industrial capacity nor higher technology and productivity. The result has been the first decline in global output since the 1930s. ‘Globalisation’ and ‘deregulation’ -- the two major components of the neo-liberal model have ensured that the crisis spread throughout the world in both developed and developing countries, including India.

The Wall Street’s financial meltdown marks the end of the neo-liberal era -- not only because the nature of the growth it engendered was in the nature of a ‘bubble’ that could not be sustained beyond some point in time but also because of the nature of response to the economic crisis in the countries that have been the biggest purveyors of neo-liberal policies. The neo-liberal regimes across the world, in sharp contradiction to their own oft professed doctrines, have deployed a range of fiscal and monetary policy initiatives since the crisis first emerged, including bailouts for major banks and corporate firms.
That the neo-liberal model was a fraudulent exercise to convince other economies to impose self-destructive fiscal, financial and trade policies is exposed by the US response to the financial crisis. At the time of the East Asian financial crisis of 1997, the IMF strongly demanded that the affected governments sell their financial institutions (including banks), as well as industry to foreign investors -- primarily of the US -- at distress prices that were a fraction of their real worth. The US, however, has refrained from imposing on itself the WC model of ‘shock’ therapy and austerity regimes that it so strongly advocated to other countries.

The $700 billion bailout of Wall Street’s ‘toxic’ loans, the federal bridging loan of $85 billion to AIG, subsidies to the big three automakers (General Motors, Ford and Chrysler) suggest that the US has suddenly identified a strong interventionist role for the government in the functioning of free markets.

 Clearly, as long as the pain of ‘reform’ under the IMF/WB structural adjustment programmes was confined to the developing world it was ‘understandable,’ ‘acceptable’ and, indeed, ‘necessary’ but there are no more calls for ‘self-correction’ when it comes to the USA’s own economy. 

At the meeting of G-20 countries in London, the host Prime Minister Gordon Brown was compelled to declare that the Washington Consensus was over and that a New Consensus has been reached. It is questionable as to whether the pledges and agreements will be enforced at all especially in respect to protectionist measures by member countries.

More importantly, the basic thrust of the London consensus is to revive ‘confidence’ and ‘trust’ of the markets. There has been no critical questioning of the basic premises underlying neo-liberalism though the immense bail-outs along with the fiscal stimulus packages being put in place by the advanced market economies have severely damaged the credibility of the philosophical underpinning of neo-liberalism and exposed it as a mere political doctrine serving certain global interests. 

Lessons for Budget

In India, what is alarming is the fact that, even now, despite all that is happening elsewhere in the world economic system, an attempt is still being made by the policy establishment to paper over the crisis and refuse to ensure that there is no reverting back to the failed system.

If the development process in India is to be inclusive and economic growth to be of benefit to the common people then the policy makers have to drastically review their faith in self-regulating markets, free trade and asymmetric globalisation. The coming Union Budget will be an important indicator of whether the appropriate lessons have been learnt from the ongoing global economic crisis.

(The writer is an associate professor, department of economics, Kirorimal College, University of Delhi)