Jagdish Bhagwati decries comparing the twin crises with the Berlin Wall collapse
When the twin crises erupted on Wall Street and Main Street, each fierce in itself but jointly interactive and ever more frightening, the populists rushed forward to celebrate the Demise of Capitalism and to plunge their pitchforks for added gratification into the dead corpse. They have had their champagne parties.
By now, the fizz is gone, however, and we are left with tattered myths and egregious fallacies that invite scrutiny and refutation.
Myth # 1: The crisis is a defining moment like the collapse of the Berlin Wall
I can do no better than begin by citing a prominent economist today, who would like to drive a stake through capitalism and globalisation (which is viewed, not without some justification, as an international extension of capitalism since it is hard to imagine a robust economic globalisation without capitalism being at the bottom of it).
This is none other than my Columbia colleague Joe Stiglitz. He made a much-cited claim that the current crisis was for capitalism (and markets) the equivalent of the collapse of the Berlin Wall. Now, we know that all analogies are imperfect. But this one is particularly fatuous.
When the Berlin Wall collapsed, we saw the intellectual bankruptcy of both the authoritarian politics of communism and the economics of extensive, almost universal, ownership of the means of production and of central planning. We saw a wasteland.
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But, when Wall Street and Main Street were shaken by crisis, we were witness to a pause in prosperity, not an end to devastation. We had enjoyed almost two decades where the liberal reforms undertaken by nearly half the world’s population, in China and India, had produced unprecedented prosperity and, this must be emphasised, had finally made a significant impact on poverty as well, just as we reformers had asserted.
The rich countries, with a steady expansion of liberal policies during the 1950s and 1960s, had also registered substantial prosperity, to be interrupted by exogenous circumstances like the success of the OPEC in 1971 and the Volcker-led purging of the consequences in the 1980s, but with general resumption of robust growth thereafter. Besides, an increasing number of the poor countries had turned to democracy, starting from a situation where India had been the “exceptional nation” to have embraced and retained democracy after Independence.
But then some critics shift ground, claiming that higher growth is beside the point: we need to judge capitalism by whether it works for the poor. But, slowly-growing or stagnant economies cannot rescue the poor from their poverty on a sustained basis. In countries with massive poverty such as India and China, the principal solution had to be provided by rapid growth of incomes and jobs. This is, of course, common sense: just as firms that make losses cannot finance corporate social responsibility, countries with stagnant economic performance cannot rescue people from their poverty. This “growth strategy” to address poverty has therefore been described by me as a radical, activist “pull up” strategy, not a conservative, passive “trickle down” strategy .
After the liberal economic reforms, they did register accelerated growth rates; and finally this did pull up nearly 500 million above the poverty line during the last twenty years. However grim the current crisis has been, it cannot be used to deny and destroy this elemental truth.
But has the fate of the poor in the rich countries been less comforting? The labour unions such as the AFL-CIO in the US are convinced that trade with the poor countries has produced paupers in the rich countries by depressing real wages. But this dire conclusion is unsupported by empirical analysis. My own analysis, dating back at least a decade (and extended in my 2004 Oxford book, In Defense of Globalization), argued that, if anything, the fall in wages which labour-saving technical change and other domestic institutional factors would have brought about, had been moderated by trade with the poor countries. This benign conclusion has been re-asserted by Robert Lawrence of Harvard’s Kennedy School in recent years.
So, neither for overall prosperity nor for effects on poverty in the poor countries and the wages of the poor in the rich countries, we have reason to be apologetic for what liberal policies and reforms accomplished. To compare the interruption of this remarkable record to the collapse of the Berlin Wall, therefore, is like drawing a parallel between a terrifying tsunami and a monsoon that has brought rain and a rich harvest to parched plains.
Myth #2: The end of market fundamentalism
But the critics also argue that the crisis spells the end of “market fundamentalism”. But the presumption from which these critics start is that we were in the pragmatic centre and have moved to the market fundamentalist right, letting markets rip and rip us apart. But this is totally wrong for much of the world, certainly for the developing countries. Many of the developing countries had been into “anti-market fundamentalism” — there was extreme hostility towards markets and much knee-jerk interventionism such that Adam Smith’s Invisible Hand was nowhere to be seen. When they realised that this model was not working and had cost them dearly, they moved to the pragmatic centre. So, the reality is that we shifted in recent years, not from pragmatism to market fundamentalism as Stiglitz and Soros would have us believe, but from anti-market fundamentalism to the centre.
Myth #3: The end of “Washington Consensus”
A related myth is the notion that somehow there was a consensus in Washington, in the Bretton Woods institutions, that had driven the world into liberal reforms that included market fundamentalism. But anyone familiar with the economic reforms that were undertaken with gusto in Soviet Union (and then Russia), in India and in China, which add up to a gigantic share of the world population, has to know that these were endogenous.
The reformers in all these countries were driven by their increased awareness that, without these reforms, they would continue to stagnate. The Russian expert Padma Desai has written how Gorbachev and Shevardnadze finally decided that, without reforms, Soviet decline would continue to get worse and a superpower would be reduced to a super-beggar in world politics.
None of these reformers cared, however, what Bretton Woods institutions, or Washington more generally, thought and felt. Washington Consensus is therefore little more than Washington Conceit, spread by Western media at first and then by the anti-market fundamentalists and the anti-globalists who find that the phrase, and the anti-Americanism which it invokes, gets them greater mileage than the content of their critique actually merits.
The author is University Professor, Economics and Law, at Columbia University and Senior Fellow in International Economics at Columbia University. He is the author of In Defense of Globalization (Oxford, 2004, reissued with an Afterword in 2007). This article is based on a longer essay appearing in World Affairs Journal (Washington DC, October issue). This is the first in a two-part series. The second part will appear tomorrow