Economics’ political and social disconnect
NATO is in over-drive to save the world from autocracy and spread democracy around the world. The global trade system has collapsed as collateral damage of the US-led financial and trade sanctions to punish Russia. Developing countries, who had been previously persuaded by Western economists to eschew ‘protection’ and open their borders to financial flows and trade, are being persuaded to tighten their belts to save the US-led regime of global governance.
Democracy is in peril within the US, the putative leader of the global drive for democracy
The US war against Russia had supposedly ended with the collapse of the Soviet Union. Ideological conflict had presumably ended too with the victory of democracy over totalitarianism and the victory of free markets over State interventions in economies. Ideological wars have resumed. Developing countries have noticed that the emperor is not wearing any clothes. The hypocrisy of the war in Ukraine, and about Ukraine, to defend principles of democracy and free markets is clear.
Democracy is in peril within the US, the putative leader of the global drive for democracy. Recent surveys reveal that most US citizens are dismayed with the inability of political parties and elected assemblies, and independent courts too, to stop internal civil wars about fundamental rights, such as citizens’ rights to bear arms to defend themselves against fellow citizens which are enshrined in their Constitution. The last President of the US may face charges of sedition for inciting an armed insurrection.
International trade has broken down. WTO is in the ICU. The Indian government has introduced policies to nurture domestic production and is renegotiating international trade agreements. Economists fear that India is becoming “protectionist” again
The core principle of democracy is equal rights of rich and poor, and the powerful and weak, to shape the rules by which they will be governed. International governance was never democratic. It has always been run on the principle of might is right. Colonial powers had grabbed the lands and natural resources of other countries, and even their human resources as slaves, for the growth of their own wealth. They opened other countries’ markets with the force of their superior arms. The opening of China’s markets for the sale of opium produced by the British in India was an egregious example. With the end of military colonialisation in the last century, their control of international bodies, like the World Bank, IMF, and WTO, where they set the rules for global finance and trade and control of intellectual property, made armies less necessary to open markets for their own capitalists.
Inflation is a warning of an overheated and an unhealthy economy in which its parts have become imbalanced
“Industrial policy”, to nurture domestic industries with which Japan and China, and South Korea and Taiwan too, became economic powerhouses before the 1980s, was declared taboo by the Washington Consensus that formed after the collapse of the Soviet Union. Industrial policy was anathema for free market ideologists because it required the State’s intervention in economies.
International trade has broken down. WTO is in the ICU. The Indian government has introduced policies to nurture domestic production and is renegotiating international trade agreements. Economists fear that India is becoming “protectionist” again, giving up the free-market ideology it had adopted in 1991 at the behest of the Washington Consensus. US Treasury Secretary Janet Yellen’s advocacy of “friend shoring” in April has unsettled free traders and monetarists.
The incompleteness of economics science
An idealistic conception of “free markets” has dominated domestic and international economics since the 1980s. In this paradigm of economics science, the economy is a machine which always seeks an internal equilibrium, and in which prices are determined by imbalances of supply and demand. In this model, it is best to left to the market to find the correct prices for all resources including human effort, rather than governments meddling with wages, price controls, and tariffs.
Industrial policies that nurture the growth of emerging economies increase growth of the whole system
Mathematised models of economies have no room for the messy politics of power. They do not explain the growth of monopolies with suppression of competition by powerful actors controlling the rules of the game within countries and in international relations too. Governments are struggling to regulate competition within and across national borders, in supposedly free markets, to ensure that large producers do not control prices and harm consumers as well as small producers.
Inflation has reared its ugly head everywhere. When organisms, like the human body, or the Earth’s ecosystem, become unhealthy, their temperatures rise. Inflation is a warning of an overheated and an unhealthy economy in which its parts have become imbalanced. It signals internal power shifts amongst sectors and stakeholders. The tools central bankers have can only fix the price of money. Monetary policy is like paracetamol. It can only suppress a symptom of an economy’s poor health. Whereas adjustments of internal sectoral imbalances require “industrial policy”.
The condition of the economy matters too much for citizens for the management of the economy to be left to trade economists and central bankers whose economic theories are incomplete. Good industrial policy, which distinguishes only between domestic and foreign producers, and nurtures the growth of the weaker ones, enables equitable and sustainable global growth.
Economic growth is a process of evolution. Aspirations of human beings, as well as cooperation amongst nations and institutions with different ideas and different sources of power, are the forces driving growth. The healthy growth of the whole global system requires balanced growth of all its parts. The young must be nurtured till they are strong for the species to survive and grow. Industrial policies that nurture the growth of emerging economies increase growth of the whole system. Therefore, the strong must shield the weak for a while, not throw them into the open ring to compete above their weight. If they do that, they must take moral responsibility for the limited economic opportunities in the countries from which migrants are streaming into their countries and being harshly turned away.
Economics science seems stuck in an ideological cul-de-sac. It has become disconnected from social and political realities. The condition of the economy matters too much for citizens for the management of the economy to be left to trade economists and central bankers whose economic theories are incomplete. Good industrial policy, which distinguishes only between domestic and foreign producers, and nurtures the growth of the weaker ones, enables equitable and sustainable global growth. On the other hand, “friend shoring”, which distinguishes foreign producers as either friends or enemies—with Us or against Us—is a naked play of power which is bad for the global economy.
(The writer is a former member of the Planning Commission)