ONLY history will make clear as to how deep and lasting the current financial meltdown in the United States will turn out to be. That said, it is obvious that it has already resulted in the demise of what we should perhaps call hyper-capitalism.
For a quarter of a century, the United States saw astounding growth in its economy. This was done by deregulating markets, reducing tax rates, promoting growth, letting industries migrate to places that had abundant supplies of cheap but skilled labour, allowing capital to flow freely across international frontiers, and encouraging the development of new lines of financial products that spread the risk taken by entrepreneurs. As one commentator wrote recently, “across wide swath[e]s of the economy — from airlines to banks to energy to telecommunications — Washington stood aside, while fewer regulations… [produced] broad prosperity, even at the cost of greater income inequality”.
Alan Greenspan, the long-serving chairman of the US Federal Reserve — the country’s central bank — became the most articulate exponent of this point of view. “It’s hard to overemphasise how important President Ford’s deregulation was”, he wrote later in his autobiography, The Age of Turbulence. “True most of the benefits took years to unfold — rail freight rates, for example, hardly budged at first. Yet deregulation set the stage for an enormous work of creative destruction in the 1970s: the break-up of AT&T and other dinosaurs, the birth of new industries such as personal computing and overnight shipping, the mergers and acquisitions boom on Wall Street, and the remaking of companies would be the hallmarks of the Reagan era. And, we would ultimately find, deregulation also greatly increased the economy’s flexibility and resilience”.
Greenspan’s book was published last year while his reputation was still high, when the ‘resilience’ of the US economy of which he wrote so proudly had not been challenged by the financial meltdown in the country. The approach he espoused came to be known as ‘Reaganism’ or ‘Thatcherism’ depending upon which side of the Atlantic you happen to be. The same line of thinking was sold to the developing world as the ‘Washington Consensus’. It got that name because of the analytical work that was done at some Washington-based institutions such as the World Bank, the IMF and the Institute of International Economics.
The economists who were employed by these institutions had come to the conclusion that the state had to step out of the way and allow the private sector to play its role freely. Adam Smith, the father of modern economics, became the patron-saint of this ideology. The fact that he had emphasised that the state had a role to play to protect the weak from the profit-seekers in the marketplace was conveniently glossed over. Instead, the private sector was allowed to move forward without hindrance and constraint. For more than two decades, the strategy worked as the American economy grew at unprecedented rates and as disparate economies in several parts of the globe became closely integrated.
Pakistan was among the several developing economies that signed on to this philosophy of unrestrained laissez-faire. It did that for two reasons. The first was the influence of the IMF with which the country signed an agreement to stabilise its errant economy in return for badly needed financial support. In the Fund’s language, Islamabad “entered into a programme” that mandated sharp fiscal and monetary adjustments to restore macroeconomic stability. Pakistan was under the programme for three years at the beginning of the period of President Pervez Musharraf. Stability was achieved but at a great cost. The IMF programme squeezed growth out of the Pakistani economic system.
The other reason for the adoption of Reaganism or Thatcherism or the Washington Consensus was the enormous influence of one man over economic policymaking during the Musharraf period. First as finance minister and later as both prime minister and minister of finance, he allowed the private sector a free hand. Having spent his formative years in Citibank, it is not surprising that he followed that approach. It was a simple-minded belief that what is good for Citibank is also good for a developing country such as Pakistan that led him to adopt this strategy.
However, a decade after his return to Pakistan, it transpired that what was good for Citibank at one time was not good for Citibank all the time. In late 2008, this bank, along with several other large financial institutions, is struggling for its life. The most grievous consequence of the application of this approach to Pakistan was to weaken the state and make it a less effective manager of the economy, particularly during periods of high stress.
It is a fine strategy to give a free hand to the private sector but it should not come at the cost of the state or by weakening the regulatory system under which private entrepreneurs must operate. The United States is now moving away from the system that won so much praise from Alan Greenspan and other people who believed that the state’s economic role is minimal. In several different ways, the state is returning to the fore as the manager of the economy. The Federal Reserve has ventured into areas few thought it would get involved in.
The economic crisis in Pakistan is as deep as the economic crisis that is gripping the West. Pakistan will also need a strong state to guide the economy back towards solvency, development and sustained growth. The capacity the state lost during the Musharraf period will need to be recreated at several different places and at several different levels. Parliament will need to develop the capacity to get involved in the making of economic policies. It has never played that role since it was never encouraged to get involved.
The Planning Commission needs to play the role for which it was set up — to come up with economic strategies that meet the goals set by society at large. Goal-setting should be the job of parliament; the Planning Commission should be tasked to translate these goals into policies. The finance ministry should be responsible for finding the resources needed to implement parliament’s goals and the Planning Commission’s strategy.
Finally, the provinces should be given much greater autonomy to raise resources and formulate detailed plans for their development within the Planning Commission’s framework. In sum, in order to move forward, Pakistan must have the state play a prominent role.
Source: Daily Dawn, 14/10/2008