Top economists challenge free-market mantra
Promoting unfettered markets and narrowly focusing on growth have contributed to global crises. Leading economists say regulation is needed to redistribute wealth and protect the environment.
Kaushik Basu’s concept of convening a small group of leading economists to discuss a new direction for global development immediately caught Sida’s attention. The Swedish aid agency invited Basu, who was at the time completing his final weeks as Chief Economist at the World Bank, to hold the meeting outside Stockholm at the seaside town of Saltsjöbaden.
The result of these discussions became the Stockholm Statement, a vision of principles for policymaking. (See Summary Below)
Basu says in an interview with Development Today that Saltsjöbaden had symbolic significance for the gathering, being the site of a historic agreement between trade unions and employers in 1938.
“It seemed like a wonderful location for this exercise,” says Basu, “since our discussion was centered around cooperative solutions to society’s challenges, which was also the spirit behind the Saltsjöbaden Accord.”
Four of the last five World Bank chief economists (minus Nicholas Stern, who was invited but could not attend) were joined by nine others in Saltsjöbaden, including Finn Tarp of UN-WIDER and Kalle Moene of University of Oslo.
THE STOCKHOLM STATEMENT
Basu explains how the idea came about. “I had been speaking to several economists, most prominently with [the Nobel laureate] Joe Stiglitz. We felt that the way the global economy and global politics are going is very troubling,” he says. “Inequality in the world is at an unconscionable level and there are many governments which have been lurching towards a neoliberal ideology, and a kind of old-fashioned, market fundamentalism that even mainstream economists have now abandoned. We wanted to alert the world that we need a policy platform that is progressive and inclusive.”
He adds, “because of the unexpected outcome of the US Presidential election, the Stockholm Statement has turned out to be even more relevant and urgent than we anticipated.”
The Swedish influence on the final statement goes beyond its name. Basu says the economists at this meeting were in agreement about many aspects of the Nordic/Scandinavian model, in particular, its inclusiveness: “Of course, developing countries and emerging economies cannot simply jump to such a welfare state. But there is a lot to be learned from the experiences of Sweden, Norway and Finland in creating a society that is reasonably equitable and where the state carries the responsibility for guaranteeing certain basic standards of living and welfare.”
At its core, the Stockholm Statement argues that rising inequality, environmental degradation and climate change are the main global development challenges today. In part, these have been caused by “traditional” economic thinking that encouraged policymakers to concentrate on a few basic fiscal and monetary policies and leave the market to deliver the rest. The Stockholm Statement recognises that the market and individual enterprise have important roles to play, but there is also a need for regulatory interventions by the state to protect the environment and to redistribute wealth.
Basu underlines that there is no time to lose in combating climate change and environmental degradation. Consideration of environmental impact must be integrated into economic policy making, rather than viewing these as “two separate worlds.”
Basu admits that he personally came to this realisation late in his career. “The earlier view economists had - that there is a trade-off between the needs of the poor and what is good for the environment - is the wrong way to look at things. In fact, the damage that has been done to the climate is huge and the biggest suffering is borne by the poor. So for the sake of the poor, we must have our primary focus on the environment.”
The statement also calls for policies that encourage inclusive democracy. The sharp rise in inequality of income and wealth witnessed in recent decades is “ethically indefensible” and ultimately weakens democracy because it excludes the poor and robs them of voice, the statement suggests.
Basu insists that the World Bank has largely come around to this thinking. As evidence, he says the three other former chief economists at the Swedish gathering – Joseph Stiglitz (1997-2000), Francois Bourguignon (2003-7) and Justin Lin (2008-12) - were saying more or less the same thing while they were at the bank. The work on inequality that was done in the bank during Bourguignon’s term as Chief Economist provided the foundation for some of Basu’s own initiatives, he says.
In 2012 when Basu became Chief Economist, the World Bank moved from the long-standing goal of mitigating poverty to the twin goals of “eradicating poverty” and “promoting shared prosperity.” He says this did mark a seismic shift because it was the first time that the bank put curbing inequality in its mission statement. “When you talk of mitigating poverty, it sounds like something that concerns poor people in far-away places. When you bring in the idea of ‘sharing’, that suggests that you are involved, that there can be an element of sacrifice and I think that puts some people’s antennas up.”
Basu insists that some form of redistribution from rich to poor is necessary; such levels of inequality at birth as exist today can have no moral justification. Some conservative economists claim that the bulk of inequality is a matter of choice—some prefer hard work, some prefer leisure. “This claim is patently false. We have a collective responsibility in the world to correct this. A full correction is not possible, I realise. But policies that give people a more equitable start in life surely merit trying. Currently we are a far cry from this,” he says.
INEQUALITY AT BIRTH
Basu is, for example, in favour of inheritance tax, brushing aside the argument that this is money on which tax has already been paid. “Even if taxes have already been paid on the money, not having an inheritance tax means that you are giving a whole lot of people a head start in life; and a whole lot a start with zero. This tax aims to correct such imbalance at the start of life,” he says.
Basu says the World Bank has largely abandoned the “traditional” trickle-down thinking of which he is a critic. Civil society organisations that monitor the World Bank Group are skeptical. They point to new mega-projects like the Grand Inga Dam in the Democratic Republic of Congo and the Simandou project in Guinea that bear the hallmarks of that “old” thinking aimed primarily at rapidly increasing GNP as a way of developing a country. They say the bank’s safeguards, which had been the standard among financial institutions, have been watered down. And recent research shows that the International Finance Corporation is, through its intermediaries, heavily invested in new coal projects around the world.
Basu will not comment on individual projects, or on the new safeguards which were approved as he was leaving. He admits that in the Bretton Woods system there remain a few “conservative thinkers”, but he would like to believe that his former employer would back the Stockholm Statement.
He admits, however, that the International Monetary Fund (IMF) was slower to come round. The East Asian crisis which started in 1997 shook up some of IMF’s conventional ideas.
He credits Stiglitz’s “relentless criticism” of IMF for the changes that eventually occurred. Over the last couple of years, “even IMF has been aware that the market needs regulation, that capital flow cannot be left completely uncontrolled,” he says.
Basu says he and the other signatories of the Stockholm Statement are not seeking endorsement from the World Bank, or even from Sida, though the Swedish aid agency has published the statement on its web site.
THE STOCKHOLM STATEMENT
GDP growth is not an end in itself.
Wellbeing is multidimensional, and policy should therefore aim for a variety of goods, not just income. Otherwise, the statement warns, growth can come at the expense of key goods like pre-school nutrition and basic health care. Growth, moreover, does not necessarily eradicate oppression and discrimination. “These usually require deliberate interventions.”
Development must be inclusive.
The sharp rises in inequality of income and wealth witnessed in recent decades and the observed level of inequality of opportunities in access to basic services like health and education are “ethically indefensible.” According to the Stockholm Statement, inclusive development is the “only socially and economically sustainable form of development.”
Environmental protection is a requirement.
Environmental sustainability is “not an option,” the economists state. They say that protecting the environment should be the “central objective” of policymakers. These are problems that cannot be left to the free market to solve. Regulatory interventions by the state and a certain amount of multi-country policy coordination are indispensable.
Balancing market, state and community.
The economists underline that unfettered markets are at the root of many of today’s problems. Markets are social institutions that need to be regulated, while the state is indispensible in setting the rules of the game, they say.