The world needs new consensus<\/p>\n
By Christopher Lingle<\/p>\n
UBUD, Denpasar, Bali (JP): Forget the talk about the \"new
\neconomy\". That will take care of itself. A more important change
\nis the \"new consensus\", which did not come about until the so-
\ncalled Washington consensus expressed a dominant view that
\ncountries would prosper through open trade with fewer government
\ninterference in their economies, competitive financial markets
\nand fiscally prudent macroeconomic policies. Now a new Keynesian
\nconsensus seems to be creeping back into the policy psyche.<\/p>\n
This would lead to a shift back toward more active involvement
\nby governments in markets, including throwing taxpayer money at
\npublic projects and easing credit policy through monetary
\nexpansion. Whereas such actions might sound reasonable, in the
\npast the result was a widespread phenomenon known as stagflation,
\nwhere rising inflation was accompanied by high unemployment.<\/p>\n
This shift in consensus is evident in the pronouncements made
\nafter the recent meeting in Washington of finance ministers and
\ncentral bankers from the Group of Seven (G7) countries. They
\nplaced new pressure on Japan and Europe to boost their economies
\nthrough structural and macroeconomic policies to improve growth
\nand employment prospects.<\/p>\n
In particular, there were suggestions that Japan implement
\nstimulus measures until growth was restored and use all available
\ntools to support strong domestic demand-led growth. The trouble
\nis that such measures have been applied over the past seven years
\nand have proved to be of no lasting benefit.<\/p>\n
At issue here is the nature of the current problems in the
\nglobal economy as well as what might be done to correct the
\nsituation. In searching for answers to resolve the crises
\nafflicting East Asia's economies, one must first offer an
\ninformed diagnosis. Only then can proposed remedies be deemed
\nappropriate and credible. Like medical doctors with different
\nopinions on the state and fate of their patients, there are
\nopposing views on how we got where we are and where to go from
\nhere.<\/p>\n
One view portrays the problems arising from the devaluation of
\nthe Thai baht on July 2, 1997, as being cyclical and transitory.
\nIndeed, this simplistic view led international organizations like
\nthe International Monetary Fund and the World Bank, along with
\noverly optimistic governments, to suggest there would be no
\nserious economic downturn. They were wrong on their first
\nassessment, so it is likely they are wrong to believe the crises
\nwill soon be over.<\/p>\n
Such a view assumes the governments of the region had their
\nfundamentals right, as indicated by their relatively prudent
\nbudgetary and monetary policies in the precrisis period. Many
\nobservers, including the World Bank, point to high growth over
\nseveral decades by the region's \"miracle\" economies to support
\nthis view. Following this logic, recovery only requires a bit of
\nfine-tuning of policies and deft manipulation of the local
\neconomies.<\/p>\n
This cyclical view also allows blame to be placed on outside
\nconditions, including hints of conspiracies, rather than
\nassigning responsibility for the problems faced by the economies
\non failures of governance. This is a common tactic for
\npoliticians, a breed that specializes in taking credit and
\nshifting blame.<\/p>\n
An opposing view depicts the problems in East Asia's former
\n\"miracle\" economies as part of a long-term adjustment process.
\nThe logic of this view is that the ongoing crises resulted from
\nsystemic defects that require structural changes in the
\ninstitutional infrastructure. In essence, the problems arose from
\nthe fact that the fundamentals were not in place.<\/p>\n
Successes in the past are seen to depend upon a host of
\nconditions altered by changes in global competition that the East
\nAsian economies could not overcome.<\/p>\n
Frustratingly, this means that the region will have to endure
\na long period of slow growth, high real rates of interest, rising
\nunemployment and perhaps falling per capita income.
\nUnfortunately, this is the only way excess industrial capacity
\nand bad debt can be squeezed out.<\/p>\n
It should be easy to see that these differing diagnoses
\nsuggest different remedies. Corrective measures associated with
\nthe cyclical view include a variety of policy shifts that leave
\nthe basic institutions of the economies unchanged. The principal
\napproach is to follow so-called Keynesian remedies that involve
\nforcing down interest rates and expanding credit to reflate
\neconomies suffering from shortfalls in demand. Other related
\npolicies may include some form of controls on international
\ncapital controls.<\/p>\n
In all instances, at least part of the intent of these
\npolicies is to ensure the political status quo remains
\nunchallenged and unsullied. Malaysia's experiment with capital
\ncontrols is being watched eagerly by a variety of regimes that
\nseek to keep their oligarchic or autocratic systems in place.<\/p>\n
Behind these proposals is a presumption that the nature and
\nlevel of economic involvement by governments in the region is
\nbasically sound. The Keynesian model projects a world of static
\nconditions and its remedies assume the economic status quo
\nremains unchanged.<\/p>\n
Those who see East Asia's current problems as the result of
\nsystemic flaws point to a need for structural and long-term
\nremedies. This requires dramatic reform or the implementation of
\ndomestic institutional arrangements needed for a competitive
\nmarket economy.<\/p>\n
Some of these proposals are straightforward and reasonably
\nuncontroversial.<\/p>\n
There must be improved reliability in economic data made
\navailable by governments and enterprises, budgets and monetary
\npolicy must be made more transparent and international standards
\nfor accounting methods as well as for disclosure and bankruptcy
\nneed to be implemented. At the same time, there must be reduction
\nin corruption and greater judicial independence from other
\nbranches of government. This is a tall order for a region where
\nthere is little experience with multiparty democracy and open,
\naccountable governments.<\/p>\n
In all events, the Keynesian consensus provides a poor
\ndiagnosis and the suggested cures are likely to be ineffective,
\nat best. Or worse, they may be counterproductive by providing
\ngovernments with a distraction from the restructuring they must
\nundertake if they wish to provide the basis for sustainable
\ngrowth.<\/p>\n
The writer is an independent corporate consultant and adjunct
\nscholar of the Centre for Independent Studies in Sydney who
\nauthored The Rise and Decline of the Asian Century (Hong Kong:
\nAsia 2000, 1998). His e-mail address is: CRL@po.cwru.edu.<\/p>",
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