SUNS  4307 Thursday 22 October 1998



DEVELOPMENT: NEW PARADIGM STILL CENTRED IN WASHINGTON

Geneva, 20 Oct (Chakravarthi Raghavan) -- The Asian financial crisis, which has now spread to most of the South and lapping on the shores of the North, and the failure of the Washington
prescribed remedies may have set off a "rethinking" of the Washington Consensus, but attempts to evolve a new paradigm still seems to centre around Washington, and its institutions.

While the World Bank's Chief Economist, Joseph Stiglitz, in his Prebisch lecture at UNCTAD this week, brought the weight of his office and his standing in US academia, to question some of the
myths surrounding the Washington consensus, his attempts to sketch out some ideas on how to go beyond them, left the impression that the outcome of this "debate" within the Washington-based
institutions (American and international) could well be repackaged old remedies - development involves transformation of societies and this is best achieved by opening up of developing economies to the outside world through trade and foreign investment.

Stiglitz words and views, about development and development strategies and policies achieved probably the more difficult one of pleasing both the Jekylls and Hydes of the international community in the Geneva-based institutions, and within UNCTAD too.

There were many words of comfort from Stiglitz for those who for more than a decade now have been challenging and criticising the neo-liberal policy advices (of the Bretton Woods institutions and
more recently of the WTO), and particularly financial and capital liberalization, pushed on the developing world, eastern Europe and Russia and other former Soviet republics, with such disastrous consequences.

And some of Stiglitz's words would also have been music to those who believe and advocate that the road to development lies via the transnational corporations and foreign investment.

There is probably little to quarrel with Stiglitz's views, as broad objectives, but the problems that developing countries have been faced with over the four decades of development expertise from the Washington institutions has been of periodic changes in development "fashions", with the developing countries as "borrowers" left saddled with the foreign debts accumulated by such changes - running from Black's and George Woods Presidency at the World Bank in the 1950 and 1960s, through Robert McNamara, and his successors who ushered in Reaganomics and Neo-Liberalism, to the Bank viewing the movement of money and functioning of foreign exchange markets 24 hours, at one part of the world or the other, as proof of emergence of a multi-polar world, its advocacy and use of its funding and policy advice to push the Washington consensus, and now the doubts about it under Wolfensohn and Stiglitz.

An African NGO, Mr. Yash Tandon of the SEATINI (in Harare), pointed out that for the last 25-30 years, World Bank officials have been making policies for the African countries, who had not only
suffered as a result, but had a debt over-hang. Why should the weight of these debts not be put around the neck of the Bank and its officials who were responsible for the misguided orthodox
policies pushed on the African countries, he asked.

Stiglitz who earlier had spoken critically of moral hazards caused by the internationally orchestrated "rescue" packages in Asia, and how foreign banks as 'marginal' lenders shared even more of the
blame than the borrowers, was unable to respond, merely talking of every lender having a borrower -- implying perhaps that the African countries should not have borrowed the monies lent by the World Bank.

To other questions about why the World Bank had been so late in discovering the deficiencies of the Washington Consensus, Stiglitz remarked that by the time the consensus became orthodox, there had been doubts raised within the academic community. When the policy prescriptions of the consensus did not work in one or two or more countries, it could be blamed on wrong implementation. But when it became clear that it countries that followed its prescriptions did not succeed in developing, while those who did not were successful, the issue had to be addressed in terms of problems with the policy.

This was what was happening and the way to prevent new orthodoxies from coming up, backed by the power of the pursue (in the World Bank) was to engage in open debates.

Though at one stage, in response to some critical questions and comments from the floor, Stiglitz spoke of the need to have an open debate on the issues, some of the remarks in his prepared text,
suggest that while the Bank may have learnt something from the Asian crisis, it still is deaf to contrary evidence and views from outside.

For example, in his call for a firm stand against "new protectionism" in the West, Stiglitz in his prepared text raised his voice against use and misuse of anti-dumping and countervailing duty instruments in the North, but put in the same basket "barriers to genetically-altered products, which are likely to become steadily more important as developing country exports." And added, in explanation, that allowing such imports, new technologies and knowledge into a country, while bans reduce the incentives for absorbing new scientific knowledge.

This view of Monsanto and Cargill and US Agricultural Department promoting genetic soya exports, there is quite a respectable weight of scientific opinion which has raised its voice against release of
such genetic organisms. They are not Luddites either, but serious scientists, including many from US academia, with expertise in biology and immunology -- who considered the issues of bio-safety
under the Biodiversity Convention and said the scientific community does not know enough about the consequences and unlike other products, once released can't be called back, and the precautionary principle should apply for the present.

And the imports of genetically engineered seeds (that with the new technology blocks replication and forces farmers to buy every season new seeds from seed companies) and which under the WTO-TRIPs rules monopolises the process and product, does not bring in new knowledge, but blocks traditional knowledge used in cross-breeding, and promotes imported seed monopolies.

And his advocacy of developing countries "opening up to the outside world" is reminiscent of the Bank views about "open" economies growing faster - and the 7-volumes of the East Asia miracle study.

Opening up to the outside world leads to improvement in the technology of production, with "technology" implying not merely blueprints of production of any given good but also "market and
non-market institutions and modes of organizing production."

And while speaking of the incomplete but growing knowledge of how trade and foreign direct investment (FDI) work, Stiglitz underlined the importance of capital coming into a country through FDI and said "it typically comes in a package with management expertise, technical human capital, product and process technologies, and overseas marketing channels -- all of which are in scarce supply in developing countries.

While similar affirmations can be found in UNCTAD's World Investment Reports that promote TNCs, this is not anything new, but found in standard University textbooks of the 70s on Development Economics. Michael Todaro's Economic Development in the Third World (1977, 1981), for e.g. on the positive side of FDI says that TNCs "are believed to supply a 'package' of needed resources including management experience, entrepreneurial abilities, and technological
skills which can then be transferred to their local counter-parts by means of training programs and the process of learning by doing."

"... if the society puts in place appropriate complementary policies and structures, FDI can give a boost to the technological level and growth of the host country," Stiglitz said adding that the old fears of (the 1969s and 1970s) of FDI was based on fears of its being an "enclave phenomenon", but that in its "more modern incarnation, which is typically better integrated into the surrounding society, FDI is something to attract not fear," Stiglitz said.

Stiglitz threw no light on or sketch out the "appropriate complementary policies and structures" that a society must put in place to ensure that FDI does not create an enclave economy but one fully integrated into the host.

The available evidence of FDI integration into surrounding society is mostly based on experience of US FDI in Europe, and evidence of this in the developing world is at best mixed. As against, for e.g.
studies of Swedish economist Blomstrom about TNC role in modernizing and restructuring automobile industry are studies by Mortimer of ECLAC that shows the TNC-restructured Mexican
automobile industry, in terms of productivity and technology, was the equal of that in the US, but that it destroyed the domestic ancillary industry.

And any "appropriate complementary policies" of a society (country) would run foul of the WTO rules, framed to constrain such policies.

In adding his voice to the views out of Washington (US treasury and the IMF) blamed the Asian crisis on the borrowing countries and their "crony capitalism", Stiglitz said that to the extent they
were marginal lenders, foreign banks deserved even more of the blame.

Everyone had known of the highly leveraged firms in Korea, and of their debt-equity ratios being far higher than would be called prudent. "Yet suposedly well-managed banks, supervised by supposedly sophisticated regulatory authorities, made these loans.

Moreover, these loans were not driven by government pressure. Nor was there any evidence of government pressure associated with the real estate loans in Thailand. Is there some suggestion that in some countries bad loans are only the result of crony capitalism, while in others, they result from the natural working of market processes."

Stiglitz also focused on the recent rescue of the Long Term Capital Management Fund, which with a capital of about five billion dollars, he noted had created, before its crash, an exposure of
more than a trillion dollars and asked whether it was a case of crony capitalism or a commentary on the supervisory capacity of the regulators or a case of "cover-up" and a deliberate attempt by all
participants to restrict transparency?

The World Bank Vice-President referred to the frequency of currency crises, affecting both developing and developed countries and the lack of intellectual coherence in the arguments for liberalized capital markets.

In looking beyond the Washington consensus, and for a new paradigm, Stiglitz stressed that changes in societies could only be catalyzed and not forced, and underlined the importance of "ownership and participation" in reforms. He also underscored the importance of knowledge and information in transforming societies, and the need as part of a development to pay particular attention to the public sector to assess what a government should do and should not.

In terms of implications of a new paradigm of development and the responsibility of the developed countries, Stiglitz noted that the outcome of the Uruguay Round had produced no benefits for Africa, but rather a net loss of welfare and that it had produced relatively little in the way of new market access for products that Africa could export.

Stiglitz also called for a balance between interests of producers and users in relation to the Intellectual Property Rights issue, but did not elaborate in detail.

He underscored though the importance of giving incentives to innovators by ensuring them a return on their investments in R & D, but that "excessive protection" of IPRs may end the virtuous cycle
of knowledge transmission and regeneration in the developing world.

While there were no easy answers, it should not stop us from asking questions, he added.

But the process of finding a new paradigm was as important as good policies, Stiglitz said. The processes should be fair and open. Without the latter, the developing world would retreat from its
reform of the past decades and, worse still, the perception of hypocrisy reinforced the sense of unfairness.

Stiglitz added: "Even as the more developed countries preach the doctrine of openness, they engage in restrictive practices. Even as they preach that countries must undertake the painful measures of liberalization - which may entail losses of jobs and industries - developed countries use anti-dumping and safeguard measures to protect their own industries that are adversely affected.

"Moreover they do so often when their economies are at full employment, so that the risks of extended unemployment are minimal, in market contrast to the situation in many less developed
countries, where unemployment is high and safety nets are inadequate.

"And even as the developed countries dismiss the political problems facing the less developed countries they justify their own resort to these protectionist measures as necess ary to overcome even worse protectionist sentiments within their own countries....

"The pendulum of opinion has swung before, and it now risks swinging too far back in opposition to openness. Our task to lessen the momentum of this pendulum swing, by increasing the equity of
the international architecture for trade and finance. Retreat from openness in the developing world would unacceptably delay the development transformation that it so sorely needs."