«Tamara Lothian* Columbia University – Center for Law and Economic Studies Roberto Mangabeira Unger* Harvard University March 1, 2011 * © Tamara ...»
We shall soon have occasion further to elaborate the content of such of an alternative. What matters for the moment is to appreciate the role that a stimulus can perform in anticipating it. Each of the three directions we have just described combines a target for investment with a principle of reorganization.
Fiscal and monetary stimulus cannot be the core of a program of vigorous and inclusive economic recovery. If properly understood and designed, however, it can represent the first step of such a program. The mistaken view of its potential professed by the Vulgar Keynesians gets in the way.
The false alternative presented by the example of theemerging economies
39 The large emerging economies, especially three of those that have come to be known under the label BRIC -- Brazil, India, and China -- have been relatively successful in dealing with the consequences of the recent crisis. This relative success has sometimes supported the belief that these countries have already discovered the secret of an alternative. To some, it has seemed that we need only to bring into the light of theory, and them to implement as policy, the path that they have already opened up.
Before addressing the program of recovery, to be foreshadowed by the design of the stimulus, we should pause to consider to what extent their experience offers a road map, indeed a short cut, to a recovery plan. For this purpose, we take Brazil as the chief focus: free of some of the complications that attend the experience of its much larger Bric equivalents, its experience enables us directly to grasp something unexpected.
The relative success of the large emerging economies (at least insofar as we can take Brazil as the example) in mitigating the consequences of the crisis, and in averting a slump, fails to provide a model worthy of imitation. It is not so much that the relative success has depended on conditions that are too peculiar to be readily reproduced throughout the world. It is rather that this success is bought at too high price with regard to the task of the future. It illuminates certain vital aspects of the workings of contemporary economies without, however, marking a path to vigorous, broad-based, and socially inclusive recovery. It has helped avoid a greater evil without ensuring access to a yet greater good. It deserves to be understood as a revelation rather than to be followed as an example.
A first factor explaining the relative success of these emerging economies is the use of governmentally controlled banks to ensure the continuation of credit flows. It is a great advantage to count such banks among the instruments of public policy. However, it is not as great an advantage as genuine financial deepening would be: a tightening of the 40 link between finance and production, enhanced by a broadening of access to credit, especially credit for producers, by enterprises in all sectors and of every scale. Better to decentralize and democratize the whole of finance than to use banks controlled by the state to make up for the deficiencies of an unreconstructed banking system.
There is no reason in principle why the governmentally controlled banks could not be used to help fund small and medium-size businesses, start-ups included, and to mimic the work of private venture capital. In this way, they would work -- and in fact they have sometimes worked -as a front line in the deepening and the democratization of finance.
However, in a very divided and unequal society, as the large developing countries generally are, the distribution of subsidized credit has more often favored a relatively small number of big enterprises, with sweetheart relations to the state. In Brazil, for instance, the major part of these resources has been used to benefit a small group of big private business, under the pretext of helping to turn them into “world champions.” In China it has served largely to maintain the funding for governmentally owned enterprises.
Dualism in the credit market – two different markets for credit, organized by different rules and with unequal prices for money -- has been characteristic of these economies. Such dualism has repeatedly created the means with which to favor a few and to disfavor many.
Sometimes the dualism takes the form (as it does now in Brazil or China) of a contrast between an administered market in subsidized credit and a relatively freer market in non-subsidized credit. At other times it takes the form (as it has in economies marked by financial repression) of credit rationing: someone in the government gets to decide who has access to scarce credit. One or another, the expansion of credit under the conditions of credit dualism, although motivated by the effort to prevent a slump, magnifies the impact of the preexisting inequalities.
41 A second factor is relative autarky: the degree to which a national economy is independent of the world economy. Despite the vast changes of recent decades that have brought the large emerging economies into the global economy, they remain relatively autarchic. It is obviously true of Brazil; foreign trade is still only % of GDP. However, it is more surprisingly true even of China, a driving force in the world economy today; its foreign trade still amounts to % of its GDP, by comparison to % for Japan.
A paced and limited integration into the world economy, subordinated to the requirements of a national development strategy, is better than an unconditional integration. By an unconditional integration we mean one that accepts the present allocation of comparative advantage among national economies as the basis for place in the world economy, and then goes on to subordinate national strategy to the constraints imposed by this global niche.
However, the best is a movement that enhances integration but seeks to shape it in the service of a project designed to create new comparative advantages. The most effective way to create them is not dogmatically to choose sectors that are supposedly bearers of the future (as if the future did not have to make its own choices). It is to empower experimentalism: by establishing arrangements that broaden economic and educational opportunity, by giving small and medium-size business access to forms of credit, technology, marketing, and knowledge normally reserved to big businesses, by propagating successful local practice, and, above all, by creating the means and the conditions for pluralism and experimentation in the institutional forms of the market economy – that is to say, in the ways of organizing production and exchange.
Every path of globalization and toward globalization must then be judged by the standard of whether it serves such a program. By this 42 standard, the conditional integration of the large emerging economies into the global economy cannot be judged a success; it is simply the avoidance of a danger, a lesser evil rather than a greater good. Success would have been more integration achieved under the aegis of a systemic project friendlier to experimentalism and to pluralism than the form of globalization that has thus far prevailed.
Such a project would put free trade in its place as a means rather than an end. It would take as its goal not the maximization of free trade but the construction of an open world economy in forms allowing for the coexistence of alternative national development strategies and alternatives experiences of civilization. It would reject the institutional maximalism that now characterizes the trajectory of globalization -- the requirement that trading countries accept, as the condition of engagement in an open world economy, a particular version of the market economy: the version suiting the interests and the prejudices of the dominant powers. In the place of this institutional maximalism, it would put an institutional minimalism: the maximum of economic openness with the minimum of restraint on institutional diversity and innovation. It would attenuate the contrast between the freedom accorded to things -- and then to money -- to cross natural frontiers and the denial to labor of any such equivalent prerogative. And it would require such respect for rights and labor standards as could assure that free labor, as the human basis of the world economy, be really free, not servile subordination under the disguise of the employment contract.
In no area is the contrast between the lesser evil and the greater good more striking than with regard to finance itself. A simple reason why many of the large emerging economies -- and the Bric economies in particular -- did relatively better in the crisis than the advanced economies is that they had refused fully to open their capital accounts. In this way, they limited their vulnerability to the national effects of international financial turmoil.
43 Consider, again, the case of Brazil. Brazil had generally followed the major Latin American economies in accepting what was in effect a proxy for the nineteenth-century and early twentieth-century gold standard. Of gold standard it has been rightly said that its guiding purpose was to make the level of economic activity depend on the state of business confidence -- confidence, that is to say, also in the policy of the government. Most of the Latin American republics had accepted in the closing decades of the twentieth century a constellation of policies and ideas yielding a similar effect: acquiescence in a low level of domestic saving, consequent dependence on foreign capital, and openness to foreign capital, whether loan capital or portfolio capital, including greater freedom for capital to enter and leave. The practical result was to make the national government relatively more dependent on international financial confidence. However, this dependence rather than being seen as a problem was embraced as a solution: it tied the hands of national governments, inhibiting, or so it was supposed, the pursuit of economic adventurism in the double form of populist handouts and trade protectionism.
There was, however, an exception to this surrender to the functional equivalent of the gold standard, in the form of continuing limits to the openness of the capital account. These limits proved important in explaining the relative success of these emerging economies in resisting the effects of the crisis of the early twentieth century.
Nevertheless, in accord with the spirit of our argument, closure to world finance is not as desirable as openness to it on the basis of financial deepening, a mobilization of national resources (in a direction of a which a war economy without a war is the limiting case,) and an institutional broadening of economic and educational opportunity. Such a basis provides elements of a strong national project. The dangers of 44 financial openness do not grow simply, as the conventional discourse assumes, in proportion to the absence of regulatory precautions. They grow, also and above all, in proportion to the avoidance of conditions that bring the national economy to its knees by making it dependent on foreign finance and financial confidence.
A third factor accounting for the relative success of some of the large emerging economies but not others was the boom in commodity prices. It is a factor that, among the Bric countries, was wholly pertinent only to Brazil. Russia’s extraction of rents from nature, in oil and gas, was narrowly focused and made the Russian economy susceptible to volatility in the price of those natural resources. Brazil’s established comparative advantage was already secure over a wide spectrum of primary products, from food stuffs to minerals and fuels, and it found in China a market of almost boundless appetite. China in turn was able to use the export of manufactured goods as an alternative to the deepening of its internal market.
The significance of an extended boom in commodity prices was and is relative to what came next. Would the wealth generated from the production and export of primary products be used to help finance a qualitative change oriented to total higher labor and total factor productivity and to the generalization of advanced, experimentalist practices of production? Or would it turn into the opposite, an easy escape from the need to undertake any such transformation? The bounty of nature was again not the best, only a second best and a temptation, until converted into a resource for reconstruction.
We cannot find in the recent and relative success of the large emerging economies the lineaments of a program of recovery and reconstruction of enduring and general interest to humanity. What we can find is a record of fragmentary insight and luck in the avoidance of disaster: a series of distant second bests rather than the demarcation of a 45 reliable path.
Recovery: a direction
A crisis of the size that the global economy has undergone is an opportunity to remake the market through institutional innovations designed to serve two commanding aims: to place finance more fully at the service of the real economy and to organize a national and global growth strategy based on a broadening of economic and educational opportunity. Such a project is distinct from both vulgar Keynesianism and market fundamentalism. It differs as well from an equally traditional emphasis on public works to rebuild infra-structure, whether or not associated with the cause of a "green" recovery. Such a program is likely to face the same limits that constrain expansionary fiscal and monetary policy.
The alternative we need is one shaped by two overriding and connected goals. The first goal is to prevent the productive potential of saving from being wasted in a financial casino by placing finance more effectively at the service of production than it is under the established institutional arrangements. The second goal is to prevent the constructive potential of the labor from being squandered or diminished by the denial of economic and educational opportunity to the majority of working men and women. The keynote to the fulfillment of these goals lies in a trajectory of innovations in the institutional arrangements of the market economy.