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Economics For The Twenty First Century
Dr.Akmal Hussain
Newspaper: Daily Times
Dated: Thursday, July 11, 2002

At the beginning of the 21st century, neo-classical economics apparently holds unquestioned sway as the basis of economic policy, just as it did in the 19th century. At this juncture it may be useful to recall that the neo-classical belief in the efficacy of the free market had received a jolt during the great depression of the 1930s and was set aside in favour of state intervention for the next fifty years: In the capitalist countries it took the form of Keynesian policy which involved government expenditure to pull the economy out of recession and establish macro economic stability in the market system. In the socialist countries, state intervention took the more radical form of a replacement of the market altogether by centralized planning of resource allocation, production and distribution. Mainstream economics has now returned to the elegant certainties reminiscent of the 19th century. Yet doubts are already beginning to emerge whether this theoretical edifice can be maintained in the face of the new recession in the global economy, the phenomenon of terrorism, rising poverty and intolerable debt burdens in many countries, and environmental degradation worldwide. In dealing with these problems the portals of economic theory may well open into a new way of looking at the relationship between the individual, the market and the state.


Development economics in the post war period emerged from a recognition that the free market mechanism by itself was not an adequate framework for ensuring the development of underdeveloped countries. The structure of the world economy at the end of the colonial period was characterized by the developed countries specializing in manufacturing and the underdeveloped countries specializing in the production and export of primary commodities. A whole range of economists from Raul Prebisch, Myrdal at one end, and Paul Baran, A.G. Frank, Emmanuel, Samir Amin, and Rosa Luxembourg at the other end of the theoretical spectrum were able to show that the so called free market in the twentieth century on a world scale operated as a mechanism of real resource transfer from the under-developed to the developed countries. They showed that the prescription of comparative advantage based on the world market mechanism would simply reinforce the economic structure of raw material exports that was inherited from the colonial period, and which was the fundamental cause of under-development. Out of this charged intellectual atmosphere emerged a consensual view that industrialization was a necessary condition for self-reliant development and this required conscious state intervention.

In those heady days of intellectual ferment while the argument for state intervention in the economy of an under-developed country was formulated with admirable rigour what was not systematically specified was the particular form that such intervention should take. Even less thought was given to the impact on development of a large bureaucracy that was not only inflexible, corrupt and incompetent to "deliver" the results in most cases, but was culturally conditioned to further the metropolitan economic interests rather than the interests of the poor in their own countries.

The economies of most Third World countries continued to be structurally integrated with the global capitalist economy and no fundamental change took place either in the internal distribution of productive assets or in the social basis of the power structure. Therefore, it was eminently predictable that non-productive expenditures and income inequality would increase rapidly. Moreover, it was only a question of time before loan dependence and endemic poverty emanating from these trends would threaten both economic sovereignty and political stability of these states. Thus large budget deficits, heavy debt and growing poverty which are today causing such anxiety in the world community were actually inherent in the form of intervention adopted by Third World regimes in the post war period, i.e., intervention by centralized state structures allied with traditional economic elites on the one hand and locked into the global market on the other. Of course, intervention by centralized states did produce dramatic results in a few countries but these were mostly restricted to cases where traditional economic elites had been overthrown through revolutionary upheavals and where there was a structural delinking from the economies of the advanced capitalist countries. Thus the Soviet Union and China achieved self-reliant industrialization and alleviation of poverty within a relatively short period of time. But even in these countries the inefficiency of centralized bureaucracy resulted in such large resource losses that by the 1980's they were obliged to seek a decentralization of economic decision making. The Soviet Union through Perestroika, and China through the Four Modernization Programmes. The rigidity of the old structures of power and economy however led to the collapse of Soviet State itself while China showing greater flexibility was able to successfully transit into a dynamic, predominantly market based economy. In the capitalist Third World too there were success stories such as the NICs. (New Industrializing Countries) of South Korea, Taiwan, Hong Kong and Singapore. However, because of their small size and massive inflow of multinational capital and technology, their impressive economic performance can be attributed essentially to the phenomenon of internationalization of production and finance rather than an indigenous economic base constructed by the policies and institutions of the Nation State.

Notwithstanding the relative success of NICs, so far the post war development attempts in much of the Third World, have succeeded neither in overcoming poverty nor in establishing a sustainable basis for rapid economic growth. What then is the solution? It is clear that the radical alternative of state ownership of the means of production by regimes claiming to represent the proletariat, can by no means be propounded with the same confidence that marked the first half of the twentieth century. However, what is equally clear is that the solution does NOT lie in the other extreme of laissez faire. This view is rooted explicitly in the nineteenth century theory that the free market mechanism is the best framework of resource allocation.


The recent experience of Third World countries of producing according to the policy of static "comparative advantage" within the framework of IMF loan conditionality, points to the potentially devastating consequences of such a policy. For example, the IMF pressure on African countries to service their heavy debt through the export of primary commodities, forced these countries to over-use their fragile soils resulting in rapid desertification. According to the United Nations Report of the World Commission on Environment, the consequence was that almost one million people died of famine and the survival of 35 million people was put at risk during the period 1984 to 1987. The report indicates that this "recent destruction of Africa's dry land agriculture was more severe than if an invading army had pursued a scorched earth policy". Similarly, in Latin America the debt servicing obligations through primary exports has resulted in a situation where "the region's natural resources are now being used not for development but to meet financial obligations of creditors abroad." The Report goes on to show that such a policy requires "relatively poor countries simultaneously to accept growing poverty while exporting growing amounts of scarce resources".

With the lowering of tariffs on imported manufactured goods under the WTO agreements, many developing countries will be unable to face the challenge of international competition due to poor governance and inadequate infrastructure: They are consequently likely to suffer a sharp slow down in economic growth, increased poverty and intensification of their debt servicing problem. Under these circumstances, IMF stabilization programmes of the kind practiced in the last decade are not only being re-evaluated by developing countries but by the IMF itself. These programmes while pressurizing borrowing countries to cut down public expenditure (which often translated into reduced development expenditure), without specifying policies for accelerating GDP growth and better governance, may have pushed such countries into deeper recession, poverty and debt. Such narrowly conceived IMF "Structural Adjustment Programs" could be regarded neither as a prescription for economic efficiency nor of economic stabilization. In the face of such criticism the IMF was obliged to support Growth with Poverty Reduction Programmes in a number of countries. However the theoretical basis of this hurried change of policy has yet to be developed in the IMF. Clearly the emphasis in the new theory will have to shift from presumed perfect markets to institutions and governance.


Today as we stand amidst the global economic, social and ecological crisis, it is evident that contemporary mainstream economics needs to be transcended by a new economics for the twenty first century. This economics would contribute to achieving a new relationship between human beings, nature and growth. Such a relationship would be sought in a world where nations struggle to achieve a decentralized democracy within states, local communities are empowered, and global cooperation is undertaken to preserve the ecology of our planet, to maintain peace and to overcome poverty and thereby terrorism.

Human Community as the Focus

The focus of economics must shift from mere resource allocation and higher GNP as the end product. Economics will need to focus on the problems of fulfillment of the human potential, within the context of culture, social organization and environmental conservation. The emphasis would therefore shift away from short term profit maximization at the micro level and value indices of GNP at the macro level. Instead the new performance criteria would be the quality of life within an inter-generational perspective. What is needed is a wide ranging measure that takes account of specific features of the quality of life and the mechanisms of change. For example, how many more people have been provided with clean drinking water, what is the state of housing, transport and education, what new forms of production organization and cultural norms have emerged that unleash the creative possibilities of the individual and which enable control by the local community over its economic, social and ecological environment?

Resolving the Interlocking Crises of debt, poverty and ecology.

The new economics must come to grips at the global level with the interlocking crises of economy and ecology. Mechanisms of finance, production and distribution must be found, which can enable nation states to achieve a selective delinking from the current centralized processes of finance and accumulation. At the same time forms of international finance must be developed that ease the capital constraint of Third World countries without locking them into a crippling debt trap. The debt write off scheme for HIPCS (Highly Indebted Poor Countries), devised by the advanced industrial countries is a recognition of market failure for such countries. Yet the scheme itself only provides in effect a one time grant. It addresses neither the structure of international finance and capital flows, nor the economic structure of developing countries, which reproduces the problem of intolerable debt burdens. International financial relations must reflect our awareness that within the existing globalized market mechanism, the systematic transfer of non-renewable resources from the Third World to the First World and the endemic poverty crisis will have adverse repercussions for political stability as well as environmental conservation.

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