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Markets and Good Government by Robert Archer
Table of Content CRITIQUE
Vicious circle: markets and the poor William Easterly's telling statistic goes some distance towards answering the questions raised at the end of the last section. The good government approach says that leading economies are characterised by their investment in skilled people, their competent economic management, their predictable economic and political policy environment, and their capacity to accumulate capital. From the perspective of low-income countries, the implications of this are all too clear. A country that starts off with a small, weak market will generate low employment and little wealth for its citizens. This in turn means that revenue from taxes will be low, which implies that public education and also health will be poor: this will affect long-term economic performance. The State's inability to offer good conditions means that the civil service will be less efficient and less able to design and implement policies: this will affect economic performance. For the same reasons, the judiciary will not attract the most able or most honest candidates, and the rule of law will suffer: that too will affect investment and economic performance. This vicious circle turns in almost all dimensions. It is a strength of the model that it is not mechanical: it does not separate out the different processes of development but acknowledges that they interrelate. It recognises that weaknesses in one area of society tend to generate a weakening of performance everywhere else, and that poverty (resulting from a weak market) has long and short-term effects in almost all areas of life. Does the new orthodoxy offer any intellectual or experiential argument to support its claim that market-led growth can generate sustained development for the poorest countries? In theory yes. The theory claims that even the poorest participants can trade successfully in an undistorted market, provided they exploit areas of advantage (lower salaries, cheaper raw materials, low rents, cheap transport etc) and provided the currency is traded at its real international value. In theory a participant can always find some comparative advantage. This assumption certainly has practical value in helping to throw light on reparable distortions that damage economic performance. In many of the poorest countries, misplaced or corrupt government policies do harm very directly the interests of poor people, and economic and financial reform is essential wherever the political and economic structures are adapted to protect the privileges and wealth of an elite at the expense of the needs of the larger economy and the majority of the people. Supposing that necessary reforms were implemented, however, it can still be asked whether the poorest societies would in practise be in a position to generate new economic activity at a speed compatible with the developmental objectives set out in the good government agenda? Is there evidence that the poorest countries will attract the amounts of capital from abroad that they will need for their economic and social development? Will they be able to acquire skills fast enough to sustain economic and technological progress? Will the economy generate the taxes and other resources that are needed to raise standards of government, develop the infrastructure and improve education, health and other services? In searching for examples of success, much of the official case depends on the rapid development of east and south-east Asia - in particular the vertiginous advance of Taiwan, South Korea, Singapore and Hong Kong (and also the post-war progress of Japan). These are important examples (and China will be another one), but it is difficult to show that they have followed the "recipe" laid out in the good government approach - nor is it easy to see how the majority of the poorest states can reproduce the conditions which allowed the southeast Asian economies to be so successful.16 It is true that the Little Tigers were poor after the war. In the 1950s South Korea was the world's principal recipient of food aid. In addition, these states had few exportable natural resources. Trade and manufacturing were the only paths to development available to them. On the other hand, they had access to capital, reserves of entrepreneurial skills, and were of strategic importance.17 The economic transformation that has taken place in these countries is certainly an achievement. The governments of these states could have mismanaged the opportunities that were available to them and, had they done so, would not have developed as they have. But they did not fit the good government model. Though their growth was characterised by strong central management of economic policy and consistent investment in the economic infrastructure and in education, the governments of these successful countries intervened significantly in the market (notably in the strategic allocation of capital), resisted democracy and repressed civil and political rights.18 Moreover, few very poor countries can expect to reproduce the post-war conditions which laid the foundations for East Asia's growth. Most are critically short of many of the skills available to those countries. They are not strategically important to the great powers and therefore cannot "command", as Korea and Taiwan did, a supply of resources and capital for their development.19 Unlike Singapore, they are not points on a trade route vital to the industrial powers. They cannot dream of riding on the back of an industrialising giant like Japan. Nor, like Hong Kong, can they trade into a great market such as China. On the contrary, the evidence suggests that the poorest economies are competing with each other for access to the industrial markets, driving their own prices down; that most will not attract sufficient capital investment to sustain their development; and that the level of international aid from OECD countries is likely to fall in real terms.20 The evidence is therefore thin. Perhaps this is no surprise. It is surprising that proponents of the new orthodoxy have failed to argue this crucial part of their case, when at every level the Washington consensus/good government approach implies that competition has Darwinian consequences for the least well-endowed. The principle of competition is established at the centre of the theory. In a well-run market, weak competitors will fail. While the positive logic of this argument is clear, the negative consequences are ferocious for communities or national economies that are ill-equipped to compete in the market because they lack finance, skills, technology, information or experience. In practise this is a precise description of the situation in which many developing countries find themselves when they compete internationally, and which local producers confront when they face international competition on their domestic markets. In this respect, the competitive market place offers a fair race to all competitors in the same way as the rule of law offers a flat pitch to litigants. Theoretical fairness may evaporate in the real world.21 Numerous examples show how often it does. The theory of markets that lies at the heart of the good government approach indicates clearly that the least endowed and least skilled players will fail - and should fail because they lower economic efficiency. In making this argument, the donors have been painfully consistent in saying (after Lady Thatcher) that markets cannot be bucked. They have rejected arguments in support of subsidy on the grounds that these will reduce efficiency and eventually reduce real wealth. On the same grounds, they have refused to lend public money at low rates to promote private production in poor countries - because this too would amount to a distortion and in the course of time would reduce their efficiency and viability. In line with this view the World Bank has continued to argue that its funds should be spent on social and physical infrastructure rather than on financing private enterprise.22 The theory implies that the most efficient economies will increase their share of economic growth, while the least efficient will become steadily less competitive. It likewise suggests that, within a national economy, the most modern sectors will show high rates of growth, whereas communities that are uncompetitive will suffer sharp, even catastrophic falls in revenue. This is precisely what has been happening, as the World Bank and UN institutions have carefully documented. It is acknowledged that most of the world's skills and investable surplus will continue to flow to Europe, North America and Japan/East Asia, with secondary flows to some Latin American, East European and Southeast Asian countries. The poorest countries will not attract the finance and skills they need to start along the virtuous circle of development. The World Bank, IMF, UNDP, UNCTAD, have separately confirmed that the Least Developed countries (LDCs) are likely to receive fewer resources during the 1990s than they need to maintain their present precarious living standards. World Bank figures suggest, for example, that Sub-Saharan Africa faces a shortfall of about US$3.5bn per year during the 1990s and it is estimated that, to meet the needs of the LDCs, the OECD countries would need to increase the resource flow from 0.3 per cent to 2 per cent of GNP per year. Instead, levels of international aid have been falling. Donors also acknowledge that trading conditions for the poorer countries - those that do not benefit from the "virtuous circles" of good government, and depend most heavily on exports of unprocessed commodities - are not likely to improve during the 1990s even if the new Uruguay Round (GATT) is signed. Poor producers are exporting more and more to the developed economies but receiving less and less for what they sell. It will be even harder for the poorest countries to trade their way out of poverty, as the World Bank has been urging them to do during the 1980s. Least Developed Countries are set to become still more marginal to the "global market" in which they are expected to compete.23 Finally, Structural Adjustment Programmes (SAPs), designed to stimulate trade and make local economies more competitive, have sharply reduced the living standards of many poor communities and bankrupted some traditional producers. Few SAPs can be described as successful at this stage - and some have had such drastic effects that they have destabilised the governments that introduced In the words of two analysts: "...OECD countries tend to pursue inconsistent objectives andcontradictory policies with regard to the external environment in which adjustment must take place. They have tended to undermine their aid policies with ungenerous debt (and export credit) policies, by practises which reduce the quality of the aid and by the pursuit of protectionism. They have stated that they favour policies of "adjustment with growth" without being willing to accept the financial implications."24
Pointers for the 1990s? As it has been defined, therefore, the good government approach fails in practise: it fails the poorest people everywhere and it fails the poorest countries - even though it recognises an important and positive role for government, as neo-liberalism did not. There are signs that development and donor institutions are already sensitive to the inconsistency exhibited by a development policy that validates economic and political marginalisation of the poorest and most vulnerable in society. Though the broad parameters of the good government approach are now written into World Bank, EU and national policies in a way that cannot rapidly be changed, it is likely that some revision will be made during the 1990s to take account of this problem. Where are adjustments likely to be made? The first likely response, positive from a number of angles, is already discernible: donors will reinforce their commitment to poverty alleviation. The World Bank has taken a lead, and has been followed by the EU and other donors. This amounts to an admission that in the poorest countries market reforms have failed to deliver growth at anything like the rate required - and that in all developing countries they have failed to benefit the poorest people. Since the late 1980s, the World Bank has sharply increased the amounts it spends on alleviating poverty connected with structural adjustment. It remains to be seen whether donors do indeed focus more aid on the poor as they have undertaken to do. The evidence suggests that governments do not yet have accurate measures for targeting aid accurately; that budget pressures and the likely falls in aid flows will cause governments to look more closely at the effectiveness of aid; and that most governments spend a low proportion of official aid on meeting basic needs (as defined by the United Nations Development Programme). This issue is certain to be a matter for debate between governments and NGOs during the 1990s. Targeting aid towards poverty alleviation has a number of implications - particularly if aid levels fall in real terms during the 1990s as they are expected to do. It is already apparent that the sharpened emphasis on aid quality (rather than volume) will cause donors to emphasise monitoring, reporting and accounting procedures, and cause them to put more resources into strengthening capacity - into training people rather than building things. Secondly donors are likely to redistribute resource flows, reducing official aid to countries that can attract private investment in order to concentrate aid in countries that cannot.25 This implies a pattern of development in which societies will be divided almost formally between those that can aspire to be rich and those that are too poor for such ambition. Those developing economies that have a competitive edge (because they control valuable resources, possess skills densely, or are geographically well-placed) will be encouraged to prosper through the market. Those that do not - that are too small or unfortunately situated or too poor - will subsist (as much of Sub-Saharan Africa is beginning to do) on aid: a world underclass supported by welfare from the international donor community. In such a scenario, more emphasis than in the 1980s will be placed on the social factors of development - the protection of social structures, of culture, respect for rights, the transmission of values, the needs of women, the provision of education and health, the encouragement of "civil society". These are the critical determinants of social stability, the collapse of which (as we have seen in Somalia, Yugoslavia, Angola and Liberia) generates emergencies that are immensely destructive and hugely expensive to manage. In this context, the debate now taking place in developed countries about the limits of public responsibility in social matters will have important implications for developing countries, including the poorest. In all the OECD countries, a major debate has started about the sustainability of State-funded welfare provision and how social responsibility should be allocated between the family, employers and the State. It will be fascinating to see whether the "anglo-saxon" approach (US-UK), dominant in the 1980s, will give ground during the 1990s to the European "social democratic" tradition (France-Germany-Nordic countries) or to the East Asian model (Japan). The first places primary responsibility on the individual (and asks little of the employer); the second expects more from the State; while the third has given employers a larger role. The US and East Asian traditions are both relatively illiberal in their determination of state responsibility towards the very poor.
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