The 2008/09 financial breakdown, precipitated by the US housing mortgage crisis, triggered an extended stagnation in the developed economies. Meanwhile, stagnation was initially postponed in much of the developing world by high primary commodity prices until 2014. Yet, the financial crisis and protracted economic slowdown since have not led to profound changes in the conventional wisdom or policy prescriptions, especially at the international level, despite global economic integration since the 1980s.
To be sure, the spread of the crisis caused the G20 — comprising important economies selected by the US — to convene for the first time at a heads of government level in a mid-November 2008 White House summit prompted by the then French president Nicolas Sarkozy. Various national initiatives to save their financial sectors were followed by a Gordon Brown UK initiative to significantly augment International Monetary Fund (IMF) resources.
Soon, however, the appearance of supposed “green shoots of recovery” led to a premature abandonment of fiscal recovery efforts, reinforced by the eurozone’s fiscal rules, powerful influence of financial rentier interests and bogus academic claims of impending doom due to public debt growth.
Weak response, weak recovery
The uneven and lacklustre economic recovery and worsening conditions for many in the world since then have been accompanied by a tremendous new concentration of wealth. Meanwhile, there has been a growing realisation in the West that economic conditions for the working people, which had been improving rapidly in the post-war decades, have been slowly but steadily deteriorating in recent decades.
This has been associated in the popular imagination with globalisation and some of its major manifestations, including increased inflows of cheaper goods and migrants. Widespread political, social and cultural reactions were summarily dismissed by political and media establishments as unfounded populisms of one kind or another.
To be sure, the dominant tendencies have often been xenophobic, culturally chauvinistic and intolerant, and sometimes, downright racist. Ostensibly to secure electoral majorities and to move with the times, most European social democrat leaders have joined the consensus of the financial rentiers, discrediting the “centre-left” and strengthening the “popularity” of the “far right” and exceptionally, the left.
Despite this vortex of globalisation, financial crisis, stagnation, rising inequality and populism — somewhat reminiscent of the 1930s — there has been no leadership and no comparable policy or analytical response comparable to, say, former US president Franklin D Roosevelt’s New Deal or the Marshall Plan.
Some rethinking, but to no end
Besides the brief rediscovery of Hyman Minsky’s work, Joseph Stiglitz, Robert Shiller, Thomas Piketty and other dissenters have received far more attention, thanks to the crisis. Meanwhile, some distinguished mainstream economists have been forced by recent realities to reconsider elements of the conventional wisdom, without requiring abandonment of the creed.
Since the leadership of IMF managing director Dominic Strauss-Kahn, the Fund’s Research Department has contributed to such rethinking, especially on financial regulation, fiscal policy and income inequality. The Fund has been re-legitimised in the eyes of some of its critics, who are elated by its research findings and their policy implications. In some instances, the nature and significance of the research findings have been exaggerated by erstwhile critics, pleasantly surprised by the researchers’ apparently critical turn.
Such research results have broadened the scope of what is deemed acceptable economic policy discourse. But in fact, these research findings have had rather limited and mixed consequences for its operations, including its policy advice and conditionalities.
Meanwhile, the IMF has already begun to back-pedal on some of its bolder critical publications, for example, on neo-liberalism’s responsibility for slower growth and greater inequality in its Finance and Development periodical in June last year. Thus, while there has undoubtedly been a welcome shift in the Fund’s research findings, it is important not to exaggerate their actual significance for its role, impact and operations.
Before his passing a decade ago, neoclassical economics guru Paul Samuelson had raised concerns about the biased, one-dimensional and exaggerated claims of the benefits of international trade liberalisation. But even now, the Washington Consensus presumption, that trade liberalisation raises all boats without any need for compensatory mechanisms, continues to be the conventional wisdom.
One step forward, two steps back
Worse still, the so-called free trade agreements have less and less to do with reducing barriers to trade and instead, have become major instruments for advancing powerful corporate interests abroad, and certainly not for enhancing the prospects for sustainable development and food security. Meanwhile, as economist Jagdish Bhagwati has long emphasised, the prospects for multilateral trade liberalisation are being undermined by non-trade conditionalities as well as bilateral and plurilateral agreements driven by other considerations.
Much more remains to be done if economic research and policy advice are to rise to meet the challenges of our times. Unfortunately, for the time being, it is not clear that political conditions and leadership are conducive to such shifts in the near future.
To be sure, some of the recent rethinking is significant, with important policy implications, and could lead to state and collective international intervention mechanisms to rein in the neo-liberal paradigm in extremis. But most actual policy and regulatory reform initiatives have been limited in scope so far, and continue to be deeply compromised by powerful rentier interests and their proponents in the “deep state”, academia and the media.
Jomo Kwame Sundaram, a former economics professor, was United Nations assistant secretary-general for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007
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