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Robert Wade on the Global Financial Crisis

2009; Wiley; Volume: 40; Issue: 6 Linguagem: Inglês

10.1111/j.1467-7660.2009.01564.x

1467-7660

Alex Izurieta,

Global Financial Crisis and Policies

Robert Wade, Professor of Political Economy at the London School of Economics, is a scholar and intellectual activist who should need no introduction for Development and Change readers. He has had a remarkably prolific career in the field of economic development, authoring numerous influential articles and books on themes as varied as irrigation and politics, industrial policy, (global) income distribution and, recently, the global crisis. His book Governing the Market, winner of the American Political Science Association's award for Best Book in Political Economy in 1992, became a life-raft for many scholars and students who opted to jump out of the single intellectual ship that was allowed to navigate in the neoclassical seas of development studies for many years. The second edition (2004) brought the story up to date, including the trajectory from 'miracle' to crash and from crash to recovery. Its publication was welcomed by those who, like me, found themselves reading photocopies of photocopies of heavily marked first edition originals; it was also a corroboration of the indefatigable commitment of Professor Wade. When the East Asian crisis hit in 1997–98 he wrote a series of papers about the crisis and its aftermath, which raised the bar on the political analysis of financial markets. He managed to explain the crisis in the same framework he had earlier used to explain the success of 'governed market' strategies in East Asia. For his work on the political economy of the multilateral organizations (WTO, World Bank and IMF), on world income distribution and on industrial and technology policies in developing countries, Professor Wade was awarded the annual Leontief Prize for Advancing the Frontiers of Economic Thought in 2008. Robert Wade has been a long-time critic of the malfunctioning of global financial markets; he recognized early on the growing financial fragility, the huge but neglected systemic risk of financial globalization and the steady build-up to a big crisis. AI: Could you describe how you entered and moved through the study of economic development? RW: I first encountered tropical places and very rich and very poor people as a 12-year old, when my father, a New Zealand diplomat, was posted to Sri Lanka. That encounter set the direction of my life. I began research at the hands-on end of the scale in 1964/5 while still an undergraduate student of economics in New Zealand, with a field study of the 'economy' of Pitcairn Island in the South Pacific, home to descendants of the Bounty mutineers (population: eighty). In 1967 I set out for Britain to do a PhD in development economics. But en route, in India, I decided that what I understood to be economics (based on microeconomics textbooks which contained virtually no word on a real economy) had limited value for understanding India's development. On arrival at Sussex University, home of the newly founded Institute of Development Studies, I announced that I wished to switch to a PhD in anthropology, a subject I had barely studied, and Sussex was flexible enough to accommodate. To the extent that I have a distinctive approach to economic questions it is because I studied economics at undergraduate and Masters level but never underwent PhD marination in it; and because as the son of dedicated civil servants, I have always been suspicious of scholars who work with models based on self-seeking as the only motive of behaviour. More by accident than design, I ended up doing fieldwork in the hardship post of rural Tuscany. The research started out as a study of the impact of the post-Second World War land reform (the biggest non-communist expropriative reform in the world). It morphed unexpectedly into a study of how the cleavages of Italy's 'centrifugal democracy', which seemed unbridgeable at the national level, were cross-cut by ties of kinship, neighbourship and voluntary associations as one came down towards towns and villages at the 'base'; hence Italy was a much more stable democracy than it looked from the outside (Wade, 1975). The research was in effect a study of 'social capital', but to my regret I did not think to coin the term. I joined the Institute of Development Studies as a Fellow in 1972 and did research in India in 1975–80. I chose to investigate the operation and maintenance of large canal systems, on the assumption that 'water reform' might be more feasible than land reform. Long after starting it dawned on me that I had been taking for granted that the engineers aimed to improve farmers' water supply but faced external constraints like tight budgets, bad communications, aggressive irrigators and the like. The dawning happened one day when I did what I should have done months before: I added up the amounts of money that farmers told me they were paying the engineers under the table for better water supply (a phenomenon I had previously treated as incidental, thinking that too much attention was focused on the epiphenomenon of corruption in Indian life). The amounts aggregated across the command area were staggering. If the engineers were receiving anything like these amounts, which dwarfed their salaries, what were they doing with the loot? And how did the possibility of such loot affect the way they operated and maintained the canals — and hence the productivity of India's irrigated agriculture? Maybe the better assumption was that engineers operated the canals so as to worsen farmers' expectations about water supply, because the more uncertain they were, up to a point, the more they would pay the engineers to shift the scarcity elsewhere. This change of perspective led me to unravel a well-institutionalized system of corruption centred on the auction of the 'franchise' to posts (different posts had different potentials for black money), which had been under my nose from the beginning; and which turned out to operate in many other 'wet' (well-financed) departments too, not just Irrigation. I shall never forget the sudden chill in the room as I realized how dangerous this knowledge could be. Indeed, as I pressed my queries and the word got around among the engineers they became noticeably less keen to talk to me and threatened to cut off water to villages where they saw me visiting. Later, when I worked at the World Bank in Washington (by which time my findings about the bureaucratic corruption system had been well publicized; see Wade, 1985), the Bank's India Irrigation Division refused to allow me to set foot in the country, on grounds that my safety could not be assured. It did not help that the Bank's resident representative in India at the time was surnamed Waide, and he wanted to minimize the alarm among politicians and officials when told that Mr Waide from the World Bank wished to speak to them. In the intervening years, the Andhra Pradesh irrigation engineers (who were my prime focus) have adopted my name into the codes with which they conduct conversations about corruption, as in 'the Robert Wades [mid-level staff] divide up the maintenance budget in such-and-such a way'. Most of them have no idea where the name comes from. Meanwhile, a side study of how some villages co-operated to provide themselves with village-level public goods (including 'village irrigators' to spread water evenly over the land at times of scarcity, taking this critical decision out of farmers' hands), while other villages nearby did not, yielded the book Village Republics: Economic Conditions of Collective Action in South India (Wade, 1988). I moved from irrigation in India to irrigation in South Korea in 1979, and a study of a parastatal agency which operated one of Korea's biggest canal irrigation systems. I was amazed by the Korean passion for organization, expressed in a whole array of collective and individual incentive mechanisms, in contrast to bureaucratic stasis in India. This became a study of the role of the Korean state in agriculture and by extension in industry — a study of how capitalist Korea could be seen from another perspective as 'one farm' and 'one capital'. A book with the clunky title, Irrigation and Agricultural Politics in South Korea (Wade, 1982) was one product. From South Korea to Taiwan in 1983 and 1988, and — always moving up scale — a study of industrial development and the organization of the state for promoting industrial growth and diversification, with a particular interest in the trade and investment regime. At this time Taiwanese and foreign scholars were banging the drum about Taiwan being an exemplar of how almost all societies could achieve rapid economic growth if they invested in education and adopted 'neoliberal' free market policies (though the term was not yet in use). Ian Little, Hla Myint, Gus Ranis, John Fei, Shirley Kuo and many others banged out this message, and government officials handed out copies of their books and articles to visitors. I realized that these scholar-advocates were exercising selective inattention to data which would upset their way of seeing, and declared, 'The Emperor's wearing no clothes!'. This research came together in the book Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization (Wade, 1990a). At a time when the neoliberal current was in full flood I was all the more delighted that the American Political Science Association awarded it the prize for Best Book or Article in Political Economy for the three years 1989–91. Taiwanese government officials have never handed out copies of the book — a nice irony, because it says that government 'intervention' had a strongly positive role. They prefer visitors to believe Taiwan's success was all down to the free market and 'fair' competition, a belief which defends them from accusations of government intervention and unfair trade practices. In the meantime I joined the World Bank as an economist in 1984 to research and advise on institutional aspects of irrigation systems. The research was semi-aborted when the Research Committee declined to fund it until I had demonstrated, quantitatively, that organizational variables mattered for irrigation performance, as compared to soils, climate, prices and the like — a requirement which the Research Committee knew was impossible to meet. The committee was influenced by the Bank's irrigation engineers, who did not like my emphasis on 'institutional factors', especially 'corruption', a subject the Bank still refused to talk about, and by the Bank's neoclassical economists, who had heard — by corridor whispers — of my positive findings about East Asian industrial policy and thought I should be encouraged to seek employment elsewhere. I later moved to the Trade Policy division to write a study of East Asian trade regimes, in order to draw lessons about how other economies could emulate East Asia's trading success. But that too was semi-aborted when it became clear that the division chief — who went on to a very successful career in the Bank, achieving vice president rank — wanted me to write only on export promotion and keep silent on import controls, and I insisted that the two sides of the trade regime were like the two wings of a bird. In 1988 I left the Bank for the more honest atmosphere of the US Congress' Office of Technology Assessment. Intrigued by my lived experience of the Bank's processes of paradigm maintenance, I undertook research for the World Bank History project in the mid-1990s, treating the Bank as I had earlier treated Pitcairn Island, Italy, India, Korea and Taiwan. My topic was the forced marriage between 'development' and 'environment', as the Bank attempted to add environmental sustainability to its established objectives of growth and poverty reduction, to make a tripos (Wade, 1997; see also Wade, 2009a). Then the East Asian crisis hit, and I turned to analysing it as it unfolded month by month (Wade, 1998a, 1998b, 2000a, 2000b; Wade with Veneroso, 1998). As it subsided I moved on up scale to write more papers on the governance of the international financial system and on trends in world growth, poverty and inequality. Based on this work I have been expecting a big debt crisis in the West for several years — and not just in the sense that one expects a clock to pass 12 twice a day (Wade, 2007a, 2007b, 2008a, 2008b, 2009b). AI: Your book, Governing the Market, establishes, based on the East Asian experience, that capitalist states can use their power to impart directional thrust to growth and development via directed market mechanisms. Mainstream critics responded to your analysis by arguing that even if all this worked in East Asia, it has not worked and would not work elsewhere. What are the enduring general lessons for development from Governing the Market and what is your response to this claim (by the mainstream) to 'East Asia's exceptionalism'? RW: In the years since Governing the Market was published many people have reacted to the argument with some variant of 'East Asian industrial policy was just hand waving' (it made no difference to what would have happened anyway), or else, 'They could make it work in East Asia [for reasons variously identified as cultural Confucionism or political authoritarianism] but no one else is like them, so no one else should try the same thing'. Then there was the senior British Treasury official, now Master of an Oxford college, who brayed, 'We know it couldn't have made any difference in East Asia because we tried the same thing here and it failed'. The World Bank's interpretation, set out in its 1993 The East Asian Miracle, was telling (see Wade, 1994, 1995, 1996). The Bank study was made in response to Japanese government pressure. The government had been stung by the Bank's criticism of its support for directed credit programmes in South East Asia, on grounds that they caused 'distortions'— automatically a bad thing. It asked the Bank to do a study of directed-credit through the whole region, which then expanded into a request for a much broader study of economic development in the whole region, something which the Bank, with its country by country focus, had never done. The Japanese government offered US$ 1.2 million to cover expenses. It hoped, of course, for confirmation that state 'intervention' could promote development goals (Exhibit A being its own efforts through the 1930s to the 1980s). But by the early 1990s the Bank had neoliberal economic principles embedded in its DNA. The East Asian Miracle twists and turns as it tries to reconcile the conflicting pressures upon its authors. It concludes that (1) East Asia was successful mainly because it followed 'sound fundamentals' (macro stability, micro liberalization of trade and prices, and education); (2) industrial policy instruments did not work; but (3) 'credit programmes directed at exports yielded high social returns and, in the cases of Japan and Korea, other directed-credit programmes also may have increased investment and generated important spill-overs' (World Bank, 1993: 356). Notice something odd. Industrial policy did not work, but directed-credit did work in some places and for some purposes. Isn't directed-credit one type of industrial policy? To understand the inconsistency one has to understand that directed-credit was the instrument that the Japanese Ministry of Finance (the Bank's interlocutor) was most keen for a positive evaluation of, while the Bank was most keen for a negative evaluation of industrial policy. The inconsistency allowed both the Bank and the Japanese Ministry of Finance to declare a measure of victory. Once The East Asian Miracle was published, the Bank made a big push to say, 'OK, now we know that East Asia got rich by adopting sound fundamentals (=Washington Consensus), so we must redouble our efforts to get all our borrowers, especially in Africa, to adopt these sound fundamentals'. Suggestions from me and others that The East Asian Miracle was not the end of the story for East Asia and that the Bank should launch more research on East Asia were rejected with all the disdain the Bank could muster. By this time the articulate and energetic Japanese Executive Director who had initiated the project had gone back to Tokyo and been replaced by someone in the usual passive and inarticulate mode. The Bank's position notwithstanding, there is a strong prima facie case for the government giving more support to some sectors or to some functions than to others, given market failures and acute shortage of relevant resources in developing countries. The principle can be applied pragmatically, on a smaller or bigger scale depending on the resources available and on the capacity of the state; the suit can be cut according to the cloth. Also, the government can 'bet on success' (bet on some private sector ventures which look as though they could be successful with a bit more support), a role which could be called 'government followership of the market'; or it can 'lead the way' (commit public investment to a venture which private entrepreneurs would not otherwise want to undertake), which we could call 'government leadership of the market'. Hence, a two by two matrix, with 'big/small' on one axis, and 'followership/leadership' on the other. Korea's Posco steel plant would be in the 'big–leadership' cell; but plenty of East Asian industrial policy would be in the 'small–followership' cell (Wade, 1990b, 2005, 2009c, forthcoming). The knee-jerkers ignore such distinctions. Having said all this, I agree that quantitative tests of the impact of industrial policies, of the kind done by Howard Pack, for example, have not picked up much effect one way or the other (Pack and Saggi, 2006). The evidence I adduce in support of a positive steerage role of the state in East Asia is of a different, more qualitative kind. This is a case of paradigms talking past each other —'parrot times' (Wade, 1992). Still, there remains much more to economists' rejection of industrial policy and directional thrust than the lack of knock-out evidence in its favour. From my participant-observation among the economists I conclude that they operate with a cognitive map derived from engineering (two of the founding fathers of neoclassical economics, Walrus and Pareto, were trained as engineers) and based on the assumption that markets can be analysed 'scientifically' through the beautiful mind of mathematics, whereas unpicking the messiness of government processes is a Piranesian nightmare; an assumption which tips, quite wrongly, into the conviction that 'markets are smart and governments are stupid'. John Hicks, professor of economics at Oxford and author of Value and Capital (1946), one of the seminal works in microeconomics, made an explicit defence of a priori reasoning on grounds that it was legitimate to build a theoretical edifice on the basis of certain assumptions about firms and consumers which were chosen (over alternative assumptions) because they were necessary for mathematical models with determinate solutions: '[I]t has to be recognized that a general abandonment of the assumption of perfect competition … must have very destructive consequences for economic theory. Under monopoly [and oligopoly] the stability conditions become indeterminate; and the basis on which economic laws can be constructed is therefore shorn away … . It is … only possible to save anything from this wreck — and … the threatened wreckage is that of the greater part of general equilibrium theory — if we can … suppose … that marginal costs do generally increase with output at the point of equilibrium [that is, increasing returns do not generally exist]. [T]hen the laws of an economic system working under perfect competition will not be appreciably varied in a system which contains widespread elements of monopoly. At least, this get-away seems well worth trying … . I doubt if most of the problems we shall have to exclude for this reason are capable of much useful analysis by the methods of [neoclassical] economic theory'. (Hicks, 1946: 84–5, emphasis in original) In other words, economists can legitimately ignore phenomena which might challenge the prior commitments to formalization and the virtues of competitive markets. It sounds like no more than an innocent application of Occam's Razor, but the argument had a profound effect on conclusions about the real world. It injected a bias in favour of the hypothesis that market failures are self-correcting and against the hypothesis that market failures are (often) self-reinforcing. This in turn supports a deeply reassuring conception of a moral social order based on voluntary exchange between self-reliant and competing individuals, bolstered by the value assumption, often disguised as a factual proposition, that the pursuit of self-interest within the rules and conventions of society also promotes the public interest. This is a moral order without power. Hence the model of the competitive market is the lodestone — for in a perfectly competitive market no actor can influence the aggregate outcome. Such a conception is fundamental to the western 'conservative' world view — as distinct from 'liberal' world view, in the American sense (Lakoff, 2002) — and the resonance between the engineering conception of the economy, the notion of equilibrium, and the conservative moral order helps to explain why mainstream economics is so wedded to the idea of 'market solutions'. It also helps to explain why mainstream economics has been so uninterested in income inequality, let alone class — for if inequality is mostly a by-product of a social order based on competition between autonomous individuals and firms, treating inequality as a 'problem' risks eroding the moral fibre of society. Willem Buiter, Professor of Economics at the London School of Economics, was only being more explicit than most when he declared: 'absolute poverty bothers me. Inequality does not. I simply don't care'. He also described Europe as occupied by 'dirigiste, stultifying, anaemic societies' (Buiter, 2007). There is a feedback loop: as the engineering-modelling techniques became increasingly complex, a high degree of mathematical ability became increasingly necessary to master them, and graduate courses lengthened and became more intellectually demanding, which led to the increasingly held assumption that only the brightest could become economists. It led to a growing recruitment into the profession of people who were less driven to try to explain how the world actually works or how policy could make it work better and more motivated to prove themselves as members of an elite group of masters of an arcane craft.1 Given all this, no eyebrows are raised by the prevalence of a vocabulary drenched in value judgements in support of free markets, such that a phenomenon cannot even be described without using words which imply whether it is a good or a bad thing by free market standards. 'Price distortions' and 'financial repression' are favourite examples. Also, 'protectionism', the 'ism' signalling that those who do not condemn protection out of hand treat it as a whole philosophy, a valued end in itself — a caricature deployed to make it easy to flag that the user of the word is a firm free trader. More in-built evaluation comes by equating industrial policy with 'picking winners', followed by the obligatory jeer, 'bureaucrats can't pick winners', 'governments can't run businesses'. No more thought needed. When all else fails, contrary evidence can be labelled a mystery and left at that, with minds firmly closed. William Easterly, a development economist formerly at the World Bank and now at New York University, illustrates how to do it. Acknowledging that the median economic performance of developing countries was much better in the 1960s and 1970s than in later decades, despite the earlier period being a time of bad 'import substitution' and other 'government interventions', he declared: 'It is a bit of a mystery why they did well [in the 1960s and 1970s, as compared to later]. It surprised everybody … the question had a lot of mystery for me … . It is mysterious to those [like me] who advocate hands-off markets' (Easterly, 2002). AI: Over recent years your research agenda and advocacy work have widened considerably, going much beyond (East Asian) industrial and trade policies and industrialization. Specifically, you have undertaken a serious critique of the growing world income inequality, which you attribute chiefly to the neoliberal, pro-market strategies that have come to dominate the global political economy agenda. You have also been calling for a halt to the Doha trade round as promoted by the advanced countries on the basis that signatory developing countries would find themselves in a worse condition. Lastly, you have been criticizing the global financial architecture which you consider has given a few countries, especially the United States, too much control of global economic affairs and which has triggered the systemic instability now at the root of the current global crisis. Why have you begun to take on your shoulders such a wide spectrum of crucial issues? And how are these related to your earlier work? RW: Even if no one else can detect it, I see a straight line from my research on Indian irrigation bureaucracy, to South Korean bureaucracy, to East Asian industrial policy, to global economic regimes. I started off implicitly buying into the common social science presumption that the causes of a phenomenon in unit A (India, or even an Indian village) are to be found within unit A. A lot of development studies still reflect this view. It sees development as a marathon race in which the speed and rank of each country is a function of its demography, stock of knowledge, and institutional structure, the latter providing the incentive structure that directs economic and political activity. Older modernization theory made much the same assumption: countries are travelling down the same river, in the Japanese metaphor, or through the same 'stages of growth', in Walt Rostow's phrase. From this perspective we can be fairly confident that by 2100 Bangladesh will be as wealthy as Holland is today, because in the end it is knowledge which counts, and knowledge knows no boundaries. Then it will make sense for Bangladesh to devote serious resources to environmental protection, argues Bjørn Lomborg of Sceptical Environmentalist fame, but not till then. The World Bank and the IMF still buy into this basic idea. They pay remarkably little attention to the global economy, instead taking the country as the unit and seeing the world economy as an aggregate of countries. The whole thirty-year run of the World Bank's flagship, The World Development Report, takes the country as the unit of observation and prescription, and says very little about the international system in which countries have to operate. The recent push away from macroeconomics towards thinking small reinforces the same tendency. As Shahid Yusuf observes, currently prevailing approaches: 'favour the framing and testing of narrow hypotheses and are greatly preoccupied with the minutiae of economic plumbing. They assume that if we can gain a better understanding of every bend and twist of the pipes that are already there and a sense for the ones that are missing, it will become easier to comprehend and to manage economic forces' (Yusuf, 2009: 45). Indeed, neither the World Bank nor the IMF are 'global' organizations in the sense of taking the world economy as the unit. Amazingly, after decades of full-blown globalization we still have no global economic governance organizations with real resources behind them. As I moved up scale I became more questioning of this whole way of seeing, and more interested in understanding phenomena observed in unit A in terms of the relations between unit A and other units — more interested in seeing the world economy from the moon, rather than from Britain or the US looking up (the implicit perspective of western economics). At the same time, I have tried to retain the anthropological commitment to iterating between big scale and small scale, to anchoring generalizations in micro details (as distinct from the conventional and foolish claim that only macroeconomic propositions rigorously derived from rational choice propositions about individual behaviour are valid). This means, as a matter of research procedure, seeking to understand a trade regime by spending time 'soaking and poking', 'sticky beaking' with people who operate through the trade regime — as distinct from looking at statistics and trade rules and aiming to reduce country X's trade regime to a single point on a scale of liberalization. I take inspiration from the saying, 'In a drop of dew can be seen all the colours of the sun'. Two of my leading questions have been: (1) how were East Asian states organized so as to allow them effectively to give a 'directional push' to their economies' evolution; and (2) how would global regimes have to change in order to accommodate the directive role of the state in East Asia, so that present-day developing countries could use the same pragmatic approach and some of the same instruments? My working hypothesis — which echoes my working hypothesis about Indian irrigation engineers — is that the developed countries see no national or collective interest in having developing countries catch up with them (in terms of achieving average incomes equal to, say, 75 per cent of theirs), although they see a strong interest in claiming the opposite (Wade, 2007c, 2008c). It says that elites in top countries promote global rules of free trade, free capital mobility, 'most favoured nation' and 'national treatment' because they see how this 'neoliberal' regime boosts the relative economic power of the top countries' big industrial and financial groups by giving them easier access to new