The world needs new consensus

The world needs new consensus

By Christopher Lingle

UBUD, Denpasar, Bali (JP): Forget the talk about the "new
economy". That will take care of itself. A more important change
is the "new consensus", which did not come about until the so-
called Washington consensus expressed a dominant view that
countries would prosper through open trade with fewer government
interference in their economies, competitive financial markets
and fiscally prudent macroeconomic policies. Now a new Keynesian
consensus seems to be creeping back into the policy psyche.

This would lead to a shift back toward more active involvement
by governments in markets, including throwing taxpayer money at
public projects and easing credit policy through monetary
expansion. Whereas such actions might sound reasonable, in the
past the result was a widespread phenomenon known as stagflation,
where rising inflation was accompanied by high unemployment.

This shift in consensus is evident in the pronouncements made
after the recent meeting in Washington of finance ministers and
central bankers from the Group of Seven (G7) countries. They
placed new pressure on Japan and Europe to boost their economies
through structural and macroeconomic policies to improve growth
and employment prospects.

In particular, there were suggestions that Japan implement
stimulus measures until growth was restored and use all available
tools to support strong domestic demand-led growth. The trouble
is that such measures have been applied over the past seven years
and have proved to be of no lasting benefit.

At issue here is the nature of the current problems in the
global economy as well as what might be done to correct the
situation. In searching for answers to resolve the crises
afflicting East Asia's economies, one must first offer an
informed diagnosis. Only then can proposed remedies be deemed
appropriate and credible. Like medical doctors with different
opinions on the state and fate of their patients, there are
opposing views on how we got where we are and where to go from
here.

One view portrays the problems arising from the devaluation of
the Thai baht on July 2, 1997, as being cyclical and transitory.
Indeed, this simplistic view led international organizations like
the International Monetary Fund and the World Bank, along with
overly optimistic governments, to suggest there would be no
serious economic downturn. They were wrong on their first
assessment, so it is likely they are wrong to believe the crises
will soon be over.

Such a view assumes the governments of the region had their
fundamentals right, as indicated by their relatively prudent
budgetary and monetary policies in the precrisis period. Many
observers, including the World Bank, point to high growth over
several decades by the region's "miracle" economies to support
this view. Following this logic, recovery only requires a bit of
fine-tuning of policies and deft manipulation of the local
economies.

This cyclical view also allows blame to be placed on outside
conditions, including hints of conspiracies, rather than
assigning responsibility for the problems faced by the economies
on failures of governance. This is a common tactic for
politicians, a breed that specializes in taking credit and
shifting blame.

An opposing view depicts the problems in East Asia's former
"miracle" economies as part of a long-term adjustment process.
The logic of this view is that the ongoing crises resulted from
systemic defects that require structural changes in the
institutional infrastructure. In essence, the problems arose from
the fact that the fundamentals were not in place.

Successes in the past are seen to depend upon a host of
conditions altered by changes in global competition that the East
Asian economies could not overcome.

Frustratingly, this means that the region will have to endure
a long period of slow growth, high real rates of interest, rising
unemployment and perhaps falling per capita income.
Unfortunately, this is the only way excess industrial capacity
and bad debt can be squeezed out.

It should be easy to see that these differing diagnoses
suggest different remedies. Corrective measures associated with
the cyclical view include a variety of policy shifts that leave
the basic institutions of the economies unchanged. The principal
approach is to follow so-called Keynesian remedies that involve
forcing down interest rates and expanding credit to reflate
economies suffering from shortfalls in demand. Other related
policies may include some form of controls on international
capital controls.

In all instances, at least part of the intent of these
policies is to ensure the political status quo remains
unchallenged and unsullied. Malaysia's experiment with capital
controls is being watched eagerly by a variety of regimes that
seek to keep their oligarchic or autocratic systems in place.

Behind these proposals is a presumption that the nature and
level of economic involvement by governments in the region is
basically sound. The Keynesian model projects a world of static
conditions and its remedies assume the economic status quo
remains unchanged.

Those who see East Asia's current problems as the result of
systemic flaws point to a need for structural and long-term
remedies. This requires dramatic reform or the implementation of
domestic institutional arrangements needed for a competitive
market economy.

Some of these proposals are straightforward and reasonably
uncontroversial.

There must be improved reliability in economic data made
available by governments and enterprises, budgets and monetary
policy must be made more transparent and international standards
for accounting methods as well as for disclosure and bankruptcy
need to be implemented. At the same time, there must be reduction
in corruption and greater judicial independence from other
branches of government. This is a tall order for a region where
there is little experience with multiparty democracy and open,
accountable governments.

In all events, the Keynesian consensus provides a poor
diagnosis and the suggested cures are likely to be ineffective,
at best. Or worse, they may be counterproductive by providing
governments with a distraction from the restructuring they must
undertake if they wish to provide the basis for sustainable
growth.

The writer is an independent corporate consultant and adjunct
scholar of the Centre for Independent Studies in Sydney who
authored The Rise and Decline of the Asian Century (Hong Kong:
Asia 2000, 1998). His e-mail address is: CRL@po.cwru.edu.