Can financial regime change deliver a more equitable world?

The New Zealand Herald has published a brief but fascinating analysis of the current economic crisis by Robert Wade, New Zealand born professor of political economy and development at the London School of Economics. In the article, Wade sketches the outlines of the crisis and examines its origins, and in so doing clearly identifies the guilty party: the neoliberal ‘Washington consensus’ of the past 30 years.

In the course of the article Wade indicates how the distribution of wealth has changed in that 30 years. In 1980 the highest earning 1% of the US population earned just under one-tenth of disposable income; by 2007 the highest earning 1% had cornered almost one-quarter of disposable income. Such shocking inequity, Wade suggests, might have led to popular unrest but for the easy availability of credit to allow increased household consumption.

Now the credibility of the global Ponzi scheme is in tatters, many governments have suddenly rediscovered intervention, not only to prevent the complete collapse of the financial system but also to maintain their own legitimacy in the face of recession and rapidly climbing unemployment.

Robert Wade has presented his analysis of the crisis in lengthier and more detailed form in the New Left Review. This article, Financial regime change?, is well worth a read. Here’s just a flavour:

Neoliberal economics has powerful antibodies against evidence contrary to its way of seeing things. However, the current crisis may be severe enough to awaken economists from the ‘deep slumber of a decided opinion’, and render them more receptive to proof that the post-Cold War globalization consensus has strikingly weak empirical foundations.

Unfortunately, most New Zealand political parties – in both government and opposition – seem still enslaved to the defunct economists of neoliberalism, and their own deep slumber continues. Deregulation, privatisation and free trade agreements are still very much the vogue, and one can only hope that the wake-up call, when it comes, is not too shocking to the nation’s economy.

Being in possession of a more coherent analysis than most of New Zealand’s politicians, Wade argues that

Scholars today face the challenge of rethinking some of the basic intellectual models that have legitimized policy over the past three decades. The fallout from complex, opaque financial products may persuade many of the benefits of a substantially smaller financial sector relative to the real one, and perhaps of a ‘mixed economy’ in finance, where some firms would combine public and private purposes—operating more like utilities than profit maximizers.

This period of rethinking, he suggests, may

provide space for a wider array of standards and institutions—economic and financial alternatives to the system-wide prescriptions of neoliberalism. This may give the new regime that emerges from the current upheavals greater stability than its predecessor.

More specifically, this would mean ditching the obsession with international trade – an argument that should have particular impact in New Zealand, an economy heavily oriented to export-led growth:

Developing domestic and regional demand would involve greater efforts towards achieving equality in the distribution of income—and hence a larger role for labour standards, trade unions, the minimum wage and systems of social protection. It would also necessitate strategic management of trade, so as to curb the race-to-the-bottom effects of export-led growth, and foster domestic industry and services that would provide better livelihoods and incomes for the middle and working classes. Controls on cross-border flows of capital, so as to curb speculative surges, would be another key instrument of a demand-led development process, since they would give governments greater autonomy with regard to the exchange rate and in setting interest rates.

Finally, given the systemic inequity of neoliberalism noted above, issues of economic justice, such as development in the global South and income equity in the North, also cannot be ignored. But whether a new economic and financial regime provides the basis for a more equitable world will, as Wade puts it, “remain an open question—and an urgent challenge—for some time to come.”

Robert Wade’s analysis provides an excellent starting point for those wanting to see a greater emphasis on economic justice in the prescriptions for recovery; in the New Zealand context it might even serve to wake a few of the slumbering neoliberals sleepwalking to their parliamentary offices each morning.

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