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Five economic myths that stand in the way of a more equal world (Part I)

Five economic myths that stand in the way of a more equal world (Part I)

[size=1.125]Many of the economic development ideas the West believed to be long-held truths and major Western contributions to modernity no longer seem so accurate. From the unorthodox rise of China
[size=1.125]and the increasing economic heft of the developing world, through

[size=1.125]and the election of U.S. President

Donald Trump[size=1.125], to the continued futile search for
market-driven solutions
[size=1.125]to tackle climate change, the
tenets of neoliberalism
[size=1.125]and “the Washington Consensus[size=1.125]” no longer seem like good predictors of where the world is going, or pathways to a safer and more equitable world.
[size=1.125]The developing world, which has long unthinkingly followed the lead of the West, needs to take the lead in challenging these ideas and devising new approaches.


[size=1.125]Many of the economic development ideas the West believed to be long-held truths no longer seem like good predictors of where the world is going.

[size=1.125]They are past their sell-by date, and preserving them is the cause of many of the major challenges of the 21st century. They distract us from making the political and economic shifts needed to survive in a crowded, hot, techno-charged and resource-constrained future.

[size=1.125]If fresh ideas are to emerge, these five neoliberal myths need to die.

Myth 1: Free market-driven development is the best mechanism to build vibrant economies, using the private sector to encourage growth and more opportunities for all, including the poor.

[size=1.125]Whether this comes in the form of deregulation for business, tax cuts for the rich or slashed and privatized public services to limit “dependency,” these policies are the centerpiece of the neoliberal “Washington Consensus,” promoted the world over by Western institutions and development experts. They form the core of the trickle-down economics school of thought.

[size=1.125]But the results from this widespread adoption have not all been positive. Growing global inequalities are a stark reminder that the gravy is too thick to “trickle down.” This has fueled social unrest and the global rise of populism, which has caught the imagination of the international media by upturning politics in the West.

[size=1.125]Cut government services have entrenched deep poverty amongst the very poor, who lose access to basic needs. Deregulation has led to less security for labor, great consumer risks, significant environmental damage and exhausted resources. Nor do governments give enforcement and monitoring agencies enough resources to do their jobs (leading to tragedies like the London apartment fire) — or, worse, are co-opted by business-friendly interests (as evidenced by politicians and urban regulators actively enabling the likes of Uber and Airbnbwhilst being aware that their operations break existing laws) — meaning that regulations may not be worth the paper they’re written on.

[size=1.125]Growing global inequalities are a stark reminder that the gravy is too thick to ‘trickle down.’

[size=1.125]There is ample evidence that the so-called Washington Consensus is harmful: countries that aggressively deregulated and liberalized their financial sectors were later hit by major financial crises, as happened in Southeast Asia in 1997, and in the United States in 2008. We also know that countries which pursue austerity politics and deregulation in the aftermath of economic crisis tend to do worse than countries that use direct government spending and intervention: compare the post-2008 performance of China (which launched a massive stimulus) and, to a lesser extent, the United States (which pursued a more limited stimulus and government intervention albeit to save its “too big to fail” banking and automotive sectors) with the sluggish performance of Europe (which largely slashed government spending).

[size=1.125]Many successful countries have bucked the prescriptions of the Washington Consensus. Even small ones like Malaysia challenged the International Monetary Fund free-market prescriptions during the Asian financial crisis and imposed capital controls that were successful. China, with its more state-driven development strategy and management of markets, has achieved economic success far faster and far more broadly than any other developing countries, although significant economic and environmental challenges remain. Singapore, despite being portrayed as a utopia by conservative economists, supports its public services through forced savings and government management of socially important sectors of the economy, such as health care and housing.

[size=1.125]On the other hand, Hong Kong’s adherence to free-market principles with regard to land and housing has created an untenable situation in which it is near impossible for ordinary people to buy or rent an affordable home.

[size=1.125]Then you have the Nordic states, which have smartly invested the revenue from their stocks of natural capital into high-quality and universal public services, creating a higher average standard of living than their more free-market Western counterparts.

Have you read?

Myth 2: Countries should sustain their development through foreign direct investment.

[size=1.125]The unquestioned assumption is that this investment would rapidly improve productivity in these emerging markets, leading to high growth, more jobs, increasing wages and a growing manufacturing sector with all the trickle-down benefits.

[size=1.125]However, the concept of foreign direct investment, or FDI, is fickle and predatory by nature. The reality is that developing countries can end up becoming dependent on this type of investment, and foreign investors can put pressure on and extract outrageous concessions from government and local administrations to ensure they remain. The controversial inclusion of investor-state dispute settlement courts, whereby multinational companies can sue governments often of poorer and weaker nations if their businesses are affected, in multilateral trade agreements like the Trans-Pacific Partnership is one such example of foreign governments and companies pushing through self-serving regulatory change. Often these dependent countries accept them as it is the only way to survive in an FDI-focused world.

[size=1.125]FDI is also not targeted at sectors of the economy that foster long-term economic development or meet the needs of the majority, take low-cost housing, sewerage and infrastructure, for example. Foreign investment often concentrates on specific products not meant for the wider population, and also can push countries to focus on extractive primary resources that increase inequality and environmental damage, dangerous manufacturing with low safety standards, or a premature move to a service-based economy which, as the economist Dani Rodrik notes, can have significant economic and political consequences.

[size=1.125]It is not perhaps surprising to note that when developing countries were depending on Western FDI, there was often little concern expressed about these countries becoming too dependent on a powerful economic player. Yet, when Western investment is replaced with Chinese investment, as has happened in some regions such as Southeast Asia and Africa, there is sudden concern that China is practicing “neocolonialism.” And when Chinese FDI targets key assets in the West, such as the attempts by Huawei, a Chinese telecommunication firm, to enter the United States, it is seen as a “national security threat.”

[size=1.125]The argument is not that FDI is innately bad in all circumstances, but rather that it should be seen as a means to the intended end, rather than as an end in itself.

[size=1.125]For a long time, Western-led FDI has in effect been a threat to the natural economies of many developing nations, given the non-level playing field written into contracts. But beggars could not be choosers. The argument is not that FDI is innately bad in all circumstances, but rather that it should be seen as a means ― and only one means, at that ― to the intended end, rather than as an end in itself.

[size=1.125]In China, the government did use FDI as it opened to the outside world, but it used it to quickly get experience with foreign practices and technology. China then understandably used that knowledge for its own factories and companies helping to give it a globally competitive manufacturing sector. By virtue of its size, Beijing was thus able to wed its FDI to an industrial policy with an objective, and not be at the mercy of foreign investors.

[size=1.125]Such a policy was often accompanied by accusations of infringing copyrights and patents: both China and India still remain on the United States’ “watchlist” for countries not protecting intellectual property. China has recently been accused of “stealing” tech from clean energy companies, while India is routinely pressured to implement American-style drug patents and clamp down on affordable generics.

[size=1.125]Patents, copyrights and other intellectual property protections have become legal tools that seek to lock in a market advantage and try to prevent others ― usually less developed countries ― from progressing with their own innovations on the back of existing global advances. It is a form of using FDI to keep recipients dependent on foreign capital and technology, especially as countries like America start putting more and more things, from business practices to design choices, under the umbrella of protected intellectual property.

Myth 3: Large-scale urbanization is necessary and an inevitable step for developing countries seeking to modernize through industrialization, manufacturing and sustained productivity growth.

[size=1.125]This myth argues that migrants from underproductive rural communities would enhance economic productivity by being employed in the urban manufacturing and service sectors. This conveniently ignores the policies and decisions that deliberately help make rural life untenable and unproductive. Throughout the developing world, there has been massive overinvestment in urban areas aimed at fostering economic growth, along with a corresponding massive underinvestment in rural areas. Chinese policy in the 90s, for example, often favored cities over the countryside, which widened the ratio between urban and rural incomes later on in the early 2000s. While government programs over the past decade have narrowed the gap slightly, it remains true that urban employment opportunities and social services such as education are better in cities than in the countryside.

[size=1.125]There is also the continued failure to pass land reform in many countries, which concentrates land in a few rich landholders. This leads to situations like India, where studies show that 5 percent of India’s farmers control about one-third of the country’s farmland. In many developing countries, critical rural investment to enhance economic activity, such as irrigation, transport and health care, have lagged far behind what has been invested in cities. These policies depopulate the countryside, and lead it to be put to work by large agribusiness and primary resource companies, as most of the economy and jobs are increasingly centered in a few major cities.

[size=1.125]In reality, this massive wave of migrants is stretching developing cities to their breaking point.

Roads are congested, with traffic jams lasting for hours. There is not enough housing, leading to rapidly growing slums and dangerous, cramped and illegal apartments. Those living in insecure housing have poor access to electricity, clean water, sanitation and waste disposal. What is obvious is that the basic infrastructure to house tens of millions in crowded cities in the developing world is simply unaffordable. We need to stop pretending that these monster cities will magically get richer and fix these challenges.

[size=1.125]Our warming climate hurts these cities even more. Combine the effects of global warming and the urban heat island effect, and tropical cities are ending up being around three degrees higher than their surroundings. They are becoming unlivable. Urban dwellers who can afford it are being forced to shelter inside climate-controlled homes ― which will consume more electricity and emit even more heat ― while the majority swelters in an uncontrolled, unbearable environment, with noise and sleep deprivation having a serious impact on the productivity and health of citizens.

The lesson is not that urbanization is bad on the whole, but rather that it should be managed more carefully, with interventions and brakes as necessary.

[size=1.125]Uncontrolled urbanization also hurts rural communities. The lack of economic opportunities hollows out the countryside, as the best and brightest leave for better jobs in the city. This leaves behind the old, the young and the unskilled, leading to stagnation and decline. This can result in entrenched poverty for those who remain, with worse social, health and educational outcomes. The region may become more desperate for investment of any kind, leading to riskier and more environmentally damaging economic activity, such as extractive farming, unsafe manufacturing or polluting resource extraction. If urbanization becomes too centralized in a few cities, small towns and secondary cities are underinvested in and can suffer the same fate as rural areas.

[size=1.125]This has led to political resentment against the city ― much of the rise of populism around the world can be seen in this light. Nor is this solely apparent in advanced economies, where urbanization is largely irreversible. Thailand’s politics have been rocked by Bangkok’s urban elite trying to preserve their political and economic privileges against a rural population that largely feels it has been ignored yet toils on the land to feed the urban masses.

[size=1.125]The lesson is not that urbanization is bad on the whole, but rather that it should be managed more carefully, with interventions and brakes as necessary. Developing countries should pursue a managed urbanization ― one that spreads economic activity across multiple cities and a network of secondary towns (up to 1 million people) ― that does not corrode the countryside and that keeps rural areas economically viable.

To be continued..........

凡事唯有投入,結果才能深入; 凡事唯有付出,結果才能傑出; 凡事唯有磨鍊,結果才能熟練; 凡事唯有不煩,結果才能不凡。
你雖不能改變環境, 但卻可以轉換心境;你雖不能樣樣勝利,但卻可以事事盡力。
Dr. Chao Yuang Shiang (PH.D in management), Assistant Professor,Dep. of Finance & Institute of financial management, Nan Hua University.
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