These are the 5 economic myths that stand in the way of a more equal world
Many of the economic development ideas the West believed to be long-held truths and major Western contributions to modernity no longer seem so accurate. From the unorthodox rise of China and the increasing economic heft of the developing world, through Brexit and the election of U.S. President Donald Trump , to the continued futile search for market-driven solutions to tackle climate change, the tenets of neoliberalism and “ the Washington Consensus ” no longer seem like good predictors of where the world is going, or pathways to a safer and more equitable world.
The developing world, which has long unthinkingly followed the lead of the West, needs to take the lead in challenging these ideas and devising new approaches.
Many of the economic development ideas the West believed to be long-held truths no longer seem like good predictors of where the world is going.
They are past their sell-by date, and preserving them is the cause of many of the major challenges of the 21st century. They distract us from making the political and economic shifts needed to survive in a crowded, hot, techno-charged and resource-constrained future.
If fresh ideas are to emerge, these five neoliberal myths need to die.
Myth 1: Free market-driven development is the best mechanism to build vibrant economies, using the private sector to encourage growth and more opportunities for all, including the poor.
Whether this comes in the form of deregulation for business, tax cuts for the rich or slashed and privatized public services to limit “dependency,” these policies are the centerpiece of the neoliberal “Washington Consensus,” promoted the world over by Western institutions and development experts. They form the core of the trickle-down economics school of thought.
But the results from this widespread adoption have not all been positive. Growing global inequalities are a stark reminder that the gravy is too thick to “trickle down.” This has fueled social unrest and the global rise of populism , which has caught the imagination of the international media by upturning politics in the West.
Cut government services have entrenched deep poverty amongst the very poor, who lose access to basic needs . Deregulation has led to less security for labor, great consumer risks, significant environmental damage and exhausted resources. Nor do governments give enforcement and monitoring agencies enough resources to do their jobs (leading to tragedies like the London apartment fire ) — or, worse, are co-opted by business-friendly interests (as evidenced by politicians and urban regulators actively enabling the likes of Uber and Airbnb whilst being aware that their operations break existing laws) — meaning that regulations may not be worth the paper they’re written on.
Growing global inequalities are a stark reminder that the gravy is too thick to ‘trickle down.’
There is ample evidence that the so-called Washington Consensus is harmful: countries that aggressively deregulated and liberalized their financial sectors were later hit by major financial crises, as happened in Southeast Asia in 1997 , and in the United States in 2008 . We also know that countries which pursue austerity politics and deregulation in the aftermath of economic crisis tend to do worse than countries that use direct government spending and intervention: compare the post-2008 performance of China (which launched a massive stimulus) and, to a lesser extent, the United States (which pursued a more limited stimulus and government intervention albeit to save its “too big to fail” banking and automotive sectors) with the sluggish performance of Europe (which largely slashed government spending).
Many successful countries have bucked the prescriptions of the Washington Consensus. Even small ones like Malaysia challenged the International Monetary Fund free-market prescriptions during the Asian financial crisis and imposed capital controls that were successful. China, with its more state-driven development strategy and management of markets, has achieved economic success far faster and far more broadly than any other developing countries, although significant economic and environmental challenges remain. Singapore, despite being portrayed as a utopia by conservative economists, supports its public services through forced savings and government management of socially important sectors of the economy, such as health care and housing .
On the other hand, Hong Kong’s adherence to free-market principles with regard to land and housing has created an untenable situation in which it is near impossible for ordinary people to buy or rent an affordable home.
Then you have the Nordic states , which have smartly invested the revenue from their stocks of natural capital into high-quality and universal public services, creating a higher average standard of living than their more free-market Western counterparts.
Myth 2: Countries should sustain their development through foreign direct investment.
The unquestioned assumption is that this investment would rapidly improve productivity in these emerging markets, leading to high growth, more jobs, increasing wages and a growing manufacturing sector with all the trickle-down benefits.
However, the concept of foreign direct investment, or FDI, is fickle and predatory by nature. The reality is that developing countries can end up becoming dependent on this type of investment, and foreign investors can put pressure on and extract outrageous concessions from government and local administrations to ensure they remain. The controversial inclusion of investor-state dispute settlement courts , whereby multinational companies can sue governments often of poorer and weaker nations if their businesses are affected, in multilateral trade agreements like the Trans-Pacific Partnership is one such example of foreign governments and companies pushing through self-serving regulatory change. Often these dependent countries accept them as it is the only way to survive in an FDI-focused world.
FDI is also not targeted at sectors of the economy that foster long-term economic development or meet the needs of the majority, take low-cost housing, sewerage and infrastructure, for example. Foreign investment often concentrates on specific products not meant for the wider population, and also can push countries to focus on extractive primary resources that increase inequality and environmental damage, dangerous manufacturing with low safety standards, or a premature move to a service-based economy which, as the economist Dani Rodrik notes, can have significant economic and political consequences .
It is not perhaps surprising to note that when developing countries were depending on Western FDI, there was often little concern expressed about these countries becoming too dependent on a powerful economic player. Yet, when Western investment is replaced with Chinese investment, as has happened in some regions such as Southeast Asia and Africa, there is sudden concern that China is practicing “ neocolonialism .” And when Chinese FDI targets key assets in the West, such as the attempts by Huawei, a Chinese telecommunication firm, to enter the United States , it is seen as a “ national security threat .”
The argument is not that FDI is innately bad in all circumstances, but rather that it should be seen as a means to the intended end, rather than as an end in itself.
For a long time, Western-led FDI has in effect been a threat to the natural economies of many developing nations, given the non-level playing field written into contracts. But beggars could not be choosers. The argument is not that FDI is innately bad in all circumstances, but rather that it should be seen as a means ― and only one means, at that ― to the intended end, rather than as an end in itself.
In China, the government did use FDI as it opened to the outside world, but it used it to quickly get experience with foreign practices and technology . China then understandably used that knowledge for its own factories and companies helping to give it a globally competitive manufacturing sector. By virtue of its size, Beijing was thus able to wed its FDI to an industrial policy with an objective, and not be at the mercy of foreign investors.
Such a policy was often accompanied by accusations of infringing copyrights and patents: both China and India still remain on the United States’ “ watchlist ” for countries not protecting intellectual property. China has recently been accused of “ stealing ” tech from clean energy companies, while India is routinely pressured to implement American-style drug patents and clamp down on affordable generics.
Patents, copyrights and other intellectual property protections have become legal tools that seek to lock in a market advantage and try to prevent others ― usually less developed countries ― from progressing with their own innovations on the back of existing global advances. It is a form of using FDI to keep recipients dependent on foreign capital and technology, especially as countries like America start putting more and more things, from business practices to design choices, under the umbrella of protected intellectual property .
Myth 3: Large-scale urbanization is necessary and an inevitable step for developing countries seeking to modernize through industrialization, manufacturing and sustained productivity growth.
This myth argues that migrants from underproductive rural communities would enhance economic productivity by being employed in the urban manufacturing and service sectors . This conveniently ignores the policies and decisions that deliberately help make rural life untenable and unproductive. Throughout the developing world, there has been massive overinvestment in urban areas aimed at fostering economic growth, along with a corresponding massive underinvestment in rural areas. Chinese policy in the 90s, for example, often favored cities over the countryside , which widened the ratio between urban and rural incomes later on in the early 2000s. While government programs over the past decade have narrowed the gap slightly , it remains true that urban employment opportunities and social services such as education are better in cities than in the countryside.
There is also the continued failure to pass land reform in many countries, which concentrates land in a few rich landholders. This leads to situations like India, where studies show that 5 percent of India’s farmers control about one-third of the country’s farmland . In many developing countries, critical rural investment to enhance economic activity, such as irrigation , transport and health care , have lagged far behind what has been invested in cities. These policies depopulate the countryside, and lead it to be put to work by large agribusiness and primary resource companies, as most of the economy and jobs are increasingly centered in a few major cities .
In reality, this massive wave of migrants is stretching developing cities to their breaking point . Roads are congested, with traffic jams lasting for hours. There is not enough housing, leading to rapidly growing slums and dangerous, cramped and illegal apartments. Those living in insecure housing have poor access to electricity, clean water, sanitation and waste disposal. What is obvious is that the basic infrastructure to house tens of millions in crowded cities in the developing world is simply unaffordable. We need to stop pretending that these monster cities will magically get richer and fix these challenges.
Our warming climate hurts these cities even more. Combine the effects of global warming and the urban heat island effect , and tropical cities are ending up being around three degrees higher than their surroundings. They are becoming unlivable. Urban dwellers who can afford it are being forced to shelter inside climate-controlled homes ― which will consume more electricity and emit even more heat ― while the majority swelters in an uncontrolled, unbearable environment, with noise and sleep deprivation having a serious impact on the productivity and health of citizens.
The lesson is not that urbanization is bad on the whole, but rather that it should be managed more carefully, with interventions and brakes as necessary.
Uncontrolled urbanization also hurts rural communities. The lack of economic opportunities hollows out the countryside , as the best and brightest leave for better jobs in the city. This leaves behind the old, the young and the unskilled, leading to stagnation and decline. This can result in entrenched poverty for those who remain, with worse social, health and educational outcomes. The region may become more desperate for investment of any kind, leading to riskier and more environmentally damaging economic activity, such as extractive farming, unsafe manufacturing or polluting resource extraction . If urbanization becomes too centralized in a few cities, small towns and secondary cities are underinvested in and can suffer the same fate as rural areas.
This has led to political resentment against the city ― much of the rise of populism around the world can be seen in this light. Nor is this solely apparent in advanced economies, where urbanization is largely irreversible. Thailand’s politics have been rocked by Bangkok’s urban elite trying to preserve their political and economic privileges against a rural population that largely feels it has been ignored yet toils on the land to feed the urban masses.
The lesson is not that urbanization is bad on the whole, but rather that it should be managed more carefully, with interventions and brakes as necessary. Developing countries should pursue a managed urbanization ― one that spreads economic activity across multiple cities and a network of secondary towns (up to 1 million people) ― that does not corrode the countryside and that keeps rural areas economically viable.
Myth 4: The best way to understand productivity so as to grow economies is to measure it as how quickly and how cheaply we can produce something.
High “productivity” — the ability to produce a lot of goods cheaply, efficiently and quickly to promote relentless consumption — has led to a vast increase in the amount we can produce and consume and has improved, in theory, average living standards around the world.
However, this narrow definition of productivity misses the huge external costs to the environment and the effects on the poor majority in the developing world, and it does not reflect the realities of our time. It might have been an appropriate measure around 100 years ago when the world had over 1.5 billion people and natural resources were abundant. But we live in a very different world today, one with 7.5 billion people and one in which abundance has been replaced by scarcity. If these external costs were instead paid by businesses, many of the world’s major industries could no longer make a profit .
An illustrative example is a comparison between industrial farming and organic farming. The former, by relying on chemical fertilizer, economies of scale and mechanization, has driven its business costs down far enough to undercut other farmers on price. This has made small-scale farming uneconomical in many parts of the world. However, industrial farming has a high external cost and results in the scourge of over-consumption and food wastage (which, if it were a country, would be the third largest emitter of carbon emissions). It has transformed diets and eating habits: industrial corn and soya bean farming in the United States is the classic example of this, which led to the world being flooded with junk snacks. Organic farming, on the other hand, relies on intense labor and natural inputs to achieve smaller yields than industrial farming, with higher business costs yet lower external costs.
If we are to understand how our economy actually consumes resources, we need a more honest assessment of how ‘productive’ it actually is.
Our narrow view of productivity would deem industrial farming more productive than organic farming, due to its ability to produce more food for less. However, industrial farming has significant social and environmental repercussions. Fertilizer runoff can pollute water sources, endangering sources of drinking water and encouraging the growth of harmful algae blooms. The monocultures grown by industrial farms — necessary to achieve scale — lead to soil exhaustion, requiring agribusinesses to use even more fertilizer to replenish the soil. The mechanization and automation of some farming tasks lowers employment in the area, which in turn has economic effects on the wider community. Finally, large industrial farms need more and more land to lower costs even further, pushing smallholder farmers off their property ( sometimes illegally ). If any of these costs were tabulated and included, the industrial farm would no longer seem as “productive” as the smaller and slower, yet cleaner and employment-generating, organic farm.
This is true of the entire economy. The only reason some industries and sectors appear productive is that they make other people pay some of the costs, selectively removing them from their business models. It is the same with carbon emissions, whose effect is only now more widely understood. If we are to understand how our economy actually consumes resources, we need a more honest assessment of how “productive” it actually is.
We need to challenge the continuous drive for productivity increases in developing country factories by replacing people with automation. This is another example of an inappropriate definition of productivity resulting in social consequences that governments need to take action about. Why would a large country like India , with so many still seeking work, look to displace labor with mechanization, just for the sake of lowering the cost of production? Even some technology business leaders are starting to worry about the social repercussions of automation and digitization. Bill Gates, for example, has called for a tax on robots .
Myth 5: We can fight climate change through the free market and technological innovation instead of actual hard limits on carbon emissions and consumption.
The argument is that market forces will encourage sustainability: as resources become scarcer, they will increase in price, encouraging energy- and resource-efficiency, lowered emissions and, thus, lowered resource use. Market-driven approaches would, in theory, allow everyone to preserve their high living standards while protecting the Earth.
While we can understand why those working against action on climate change would subscribe to these views, even supporters of action on climate change are unwilling to speak plainly. They justify action on climate change by referring to “green jobs” or “the renewable economy,” and criticized the U.S. withdrawal from the Paris climate agreement as much on lost economic opportunities than any social or environmental damage.
This turns climate change action into an economic cost-benefit analysis. It would deem action on climate change a failure if it shaves, say, 1 percent off of economic growth even though from an environmental and social stability standpoint, that is a small price to pay for a sustainable planet.
The only way to reduce carbon emissions is not to consume and produce more efficiently, but to actually consume and produce less.
The only way to reduce carbon emissions is not to consume and produce more efficiently, but to actually consume and produce less. Neither the free market nor a faith in technological development will encourage the restraint we need. Companies will also not be a vehicle to a more sustainable lifestyle, as their businesses are predicated upon people consuming more, not less.
These myths all serve to sustain an economic model that does not distribute wealth creation equitably and is at the same time at war with the planet. Yet the developing world is rushing to embrace them, often faster and on a bigger scale than even the developed world.
The effects of these neoliberal myths have already caused a great deal of harm, but it would catastrophic if they are embraced by the world’s largest economies ― all of which, with the exception of the United States , are in the developing world. If this happens, the world will continue to see an escalation of social unrest and will face a bleak future as it continues to pursue a resource-intense economic model. It’s time for these myths to die, and for the developing world to create bold new ideas that better fit its circumstances.
SOURCE: World Economic Forum