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Economic uplift as self-discovery

February 14, 2012


THE ‘Washington Consensus’ economic model imposed by the US and IMF on developing countries since 1980 has caused more damage than good.

Emphasising market freedom, the model assigns a minimalist role for governments consisting of ensuring security and the rule of law, maintaining macroeconomic stability through fiscal and monetary discipline and encouraging trade, financial and capital liberalisation, deregulation and privatisation.

While acknowledging the importance of these concerns, dissenting voices criticise the exaggerated fallibility assigned to governments and infallibility assigned to markets by this model. They bemoan the fact that macroeconomic stability becomes a goal in itself under this model rather than as a means for achieving equitable development.

Critics accept some of these prescriptions as sensible policies for some countries at particular points in time but vehemently oppose their mass-scale, one-size-fits-all application. The model’s architects, forced grudgingly by irrefutable evidence to accept its shortcomings, have added new dimensions, such as institutional development, to it under a Washington Consensus-plus model.

However, these cosmetic changes have failed to address its basic inability to help developing countries achieve the fundamental prerequisite for sustained development, i.e. producing increasingly technologically sophisticated and high-value goods nationally.

More sensible economists recognise that this prerequisite cannot be achieved merely on the basis of the rule of law and macroeconomic stability but also requires creative industrial policies which can help developing countries purposefully climb the technological ladder.

Such policies are frowned upon under the Washington Consensus as they assign a substantial role for governments in the economic development process — a role well short of the government role under communism but well beyond the skeletal role suggested by the Washington Consensus.

Among the most such cogent ideas are those provided by Dani Rodrik, the Harvard-based Turkish economist, who views development as a process of self-discovery where governments help private-sector groups in identifying and entering new technologically advanced and profitable sectors. He argues that venturing into advanced sectors for developing country entrepreneurs is risky because of the competition from advanced countries.

Venturing into these new sectors would require substantial upfront entry costs from entrepreneurs. This heavy investment may be all lost if entrepreneurs fail and may be lost partially even if they succeed since late-entering firms can then benefit from their ground-breaking work without having to incur the heavy initial cost.

Thus, to encourage entrepreneurs, governments must provide them significant incentives until they become profitable. While the relevant incentives vary from country to country, examples of such incentives include R&D help, cheap credit, and protection from local and foreign competition.

The constraints imposed by WTO, IMF and US bilateral trade and investment treaty rules make it increasingly difficult for developing countries to offer such incentives and climb the development ladder, inspiring Ha-Joon Chang, the Cambridge economist, to accuse developed countries of kicking away the ladder for developing countries.

Such policies have been employed successfully by East Asian countries. However, there are also dozens of other governments which have flopped miserably at them, in the process setting up expensive rent-providing avenues for cronies. Washington Consensus supporters flag these failures to dissuade developing countries from adopting such policies.

However, this argument ignores the fact that in almost any field, the same phenomenon occurs — a lot of entities try the same path but only those few succeed who do things properly.

Thus, wisdom lies not in abandoning such policies but in implementing them properly since, as Ha-Joon Chang convincingly shows, almost every country that has developed to-date has adopted such policies initially.

How applicable is this approach for Pakistan, a regular IMF client for the last 20 years though one which has rarely ever implemented IMF advice fully because of their high political infeasibility? To answer this question one must first analyse whether these policies are right for Pakistan and secondly whether Pakistan is right for them.

With respect to the first question, East Asian countries have followed such policies in pursuing a development model where national consumption and equity issues are sacrificed initially in order to maximise exports and accumulate massive foreign exchange reserves. East Asian countries got away with this lopsided model because of their high degree of ethnic homogeneity. However, for multi-ethnic Pakistan already afflicted with ethnic tensions, such high disregard of equity even initially would be dangerous. Thus, Pakistan should prioritise national consumption and equity right from the start and pursue exports only to the extent needed to maintain an external balance and pay off its external debts.

The second question relates to whether Pakistani governments can implement such sophisticated policies. Clearly, for governments famous for dispensing crude patronage among supporters, such sophisticated economic engineering will not be easy.

Pakistan did adopt such policies during the so-called ‘golden era’ of the 1950s and 1960s when the bureaucracy’s efficiency (though not necessarily its contextual effectiveness since its policies unleashed ethnic tensions) was high.

Institutional islands of excellence exist even today within the large sea of Pakistani institutional mediocrity where provided sufficient support and freedom. As Rodrik argues, the task is feasible for weak governments if they start small and set up an independent and capable institutional configuration for supporting daring entrepreneurs which has strong backing at the very highest governmental levels.

Starting small, Pakistan could initially help entrepreneurs climb the technological ladder within existing export sectors where it is currently restricted to low-end products, e.g. textiles; then help domestically cost-efficient sectors, e.g. petrochemicals, become export-competitive; and then finally tackle other challenging sectors.

Pakistani governments have shown some finesse recently in delivering reasonable quality municipal services. Such sophisticated economic engineering could, with some effort, be the next step in their intellectual and managerial growth.

The writer is a political economist at the University of California, Berkeley.