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.