Sunday, April 17, 2011

What Our Financial Disaster Has Taught the World

Nancy Birdsall and Francis Fukuyama have provided an article in the journal Foreign Affairs, The Post-Washington Consensus, that summarizes the lessons learned by the international community from the recent financial crisis.

The authors make the interesting point that whereas the Great Depression caused severe counter-reactions to laissez-faire capitalism, the Great Recession generated no such response. They suggest that most of the developing world had already moved on to a more restrained form, and that the countries that suffered the most were those who had not yet learned lessons from past crises. Capitalism itself was not viewed as the defining issue.
“Many in the developing world agreed with Brazilian President Luiz InĂ¡cio Lula da Silva when he said, "This is a crisis caused by people, white with blue eyes." If the global financial crisis put any development model on trial, it was the free-market or neoliberal model, which emphasizes a small state, deregulation, private ownership, and low taxes. Few developing countries consider themselves to have fully adopted that model.”

“Indeed, for years before the crisis, they had been distancing themselves from it. The financial crises of the late 1990s in East Asia and Latin America discredited many of the ideas associated with the so-called Washington consensus, particularly that of unalloyed reliance on foreign capital. By 2008, most emerging-market countries had reduced their exposure to the foreign financial markets by accumulating large foreign currency reserves and maintaining regulatory control of their banking systems. These policies provided insulation from global economic volatility and were vindicated by the impressive rebounds in the wake of the recent crisis: the emerging markets have posted much better economic growth numbers than their counterparts in the developed world.”
The developing countries see as a lesson learned that they must move in a direction reminiscent of the social democracy put in place in Europe after the war. This, of course, is the opposite direction from the one Washington has been pushing for the last thirty years.
“What the crisis did, however, was to underscore the instability inherent in capitalist systems -- even ones as developed and sophisticated as the United States. Capitalism is a dynamic process that regularly produces faultless victims who lose their jobs or see their livelihoods threatened. Throughout the crisis and its aftermath, citizens have expected their governments to provide some level of stability in the face of economic uncertainty. This is a lesson that politicians in developing-country democracies are not likely to forget; the consolidation and legitimacy of their fragile democratic systems will depend on their ability to deliver a greater measure of social protection.”

“Thus, the American version of capitalism is, if not in full disrepute, then at least no longer dominant. In the next decade, emerging-market and low-income countries are likely to modify their approach to economic policy further, trading the flexibility and efficiency associated with the free-market model for domestic policies meant to ensure greater resilience in the face of competitive pressures and global economic trauma. They will become less focused on the free flow of capital, more concerned with minimizing social disruption through social safety net programs, and more active in supporting domestic industries. And they will be even less inclined than before to defer to the supposed expertise of the more developed countries, believing -- correctly -- that not only economic but also intellectual power are becoming increasingly evenly distributed.”
The authors buttress this consensus by comparing the post-crisis history of the US and the EU.
“Consider how continental Europe has reacted in comparison to the United States. Until now, with the eurozone crisis, western Europe experienced a far less painful recovery, thanks to its more developed system of automatic countercyclical social spending, including for unemployment insurance. In contrast, the jobless recovery in the United States makes the U.S. model even less attractive to policymakers in the developing world, particularly those who are increasingly subject to political pressure to attend to the needs of the middle class.”
Some of the policies developing countries are expected to follow seem to represent a slight step back from globalization as the US has chosen to experience it. The authors also believe that developing countries have demonstrated, at least to their own satisfaction, that their bureaucrats and technocrats are quite capable of providing an economic guiding hand.
“The third consequence of the crisis has been the rise of a new round of discussions about industrial policy -- a country's strategy to develop specific industrial sectors, traditionally through such support as cheap credit or outright subsidies or through state management of development banks. Such policies were written off as dangerous failures in the 1980s and 1990s for sustaining inefficient insider industries at high fiscal cost. But the crisis and the effective response to it by some countries are likely to bolster the notion that competent technocrats in developing countries are capable of efficiently managing state involvement in the productive sectors. Brazil, for example, used its government-sponsored development bank to direct credit to certain sectors quickly as part of its initial crisis-driven stimulus program, and China did the same thing with its state-run banks.”
While the US seems determined to ignore the lessons of history and to continue to pursue its failed economic and social policies, the authors offer a small degree of hope.
“One of the paradoxical consequences of the 2008-9 financial crisis may thus be that Americans and Britons will finally learn what the East Asians figured out over a decade ago, namely, that open capital markets combined with unregulated financial sectors is a disaster in the waiting.”
The Economist provides an interesting footnote to this discussion with an article titled Capitalism’s Waning Popularity. Some interesting polling data are provided.

This summary is provided.
“RISING debt and lost output are the common measures of the cost of the financial crisis. But a new global opinion poll shows another, perhaps more serious form of damage: falling public support for capitalism. This is most marked in the country that used to epitomise free enterprise. In 2002, 80% of Americans agreed that the world’s best bet was the free-market system. By 2010 that support had fallen to 59%, only a little above the 54% average for the 25 countries polled. Nominally Communist China is now one of the world’s strongest supporters of capitalism, at 68%, up from 66% in 2002. Brazil scores 68% too. Germany squeaks into top place with 69%.”

“Capitalism’s waning fortunes are starkly visible among Americans earning below $20,000. Their support for the free market has dropped from 76% to 44% in just one year. The research was conducted by GlobeScan, a polling firm. Its chairman Doug Miller says American business is “close to losing its social contract” with average families.”

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