The Heavy Price of Economic Policy Failures

Jayati Ghosh

A lot of the media discussion on the global economy nowadays is based on the notion of the
“new normal” or “new mediocre” – the phenomenon of slowing, stagnating or negative
economic growth across most of the world, with even worse news in terms of employment
generation, with hardly any creation of good quality jobs and growing material insecurity for
the bulk of the people. All sorts of explanations are being proffered for this state of affairs,
from technological progress, to slower population growth, to insufficient investment
because of shifts in relative prices of capital and labour, to “balance sheet recessions”
created by the private debt overhang in many economies, to contractionary fiscal stances of
governments that are also excessively indebted.

Yet these arguments that treat economic processes as the inevitable results of some forces
outside the system that follow their own logic and are beyond social intervention, are hugely
misplaced. Most of all, they let economic policies off the hook when attributing blame – and
this is massively important because then the possibility of alternative strategies that would
not result in the same outcomes are simply not considered.

In an important new book, Failed: What the “experts” got wrong about the global economy
(Oxford University Press, New York 2015), Mark Weisbrot calls this bluff effectively and
comprehensively. He points out that “Behind almost every prolonged economic malfeasance
there is some combination of outworn bad ideas, incompetence and the malign influence of
powerful special interests.” (page 2) Unfortunately, such nightmares are prolonged and even
repeated in other places, because even if the lessons from one catastrophe are learned, they
are typically not learned – or at least not taken to heart – by “the people who call the shots”.

The costs of this failure are indeed huge for the citizenry: for workers who face joblessness
or very fragile insecure employment at low wages; for families whose access to essential
goods and social services is reduced; for farmers and other small producers who find their
activities are simply not financially viable; for those thrown by crisis and instability into
poverty or facing greater hunger; for almost everyone in the society when their lives become
more insecure in various ways. Many millions of lives across the world have been ruined
because of the active implementation of completely wrong and unnecessary economic
policies. Yet, because the blame is not apportioned where it is due, those who are culpable
for this not only get away with it, but are able to continue to impose their power and their
expertise on economic policies and on governing institutions. For them, there is no price to
be paid for failure.

Weisbrot illustrates this with the telling example of the still unfolding economic tragedy in
the eurozone. He describes the design flaws in the monetary union that meant that the
European Central Bank (ECB) did not behave like a real central bank to all the member
countries, because when the crisis broke in 2009-10 it did not behave as a lender of last
resort to the countries in the European periphery that faced payment difficulties. Instead
the most draconian austerity measures were imposed on these countries, which simply
drove these countries further into economic decline and made their debt burdens even
more burdensome and unpayable.

It took two years of this, at a point when the crisis threatened to engulf the entire EU and
force the monetary union to collapse, for the ECB Governor Mario Draghi to promise to “do
whatever it takes to save the euro”. And then, when the financial bleeding was stemmed, it
became glaringly evident that the European authorities, and the ECB, could have intervened
much earlier to reduce the damage in the eurozone periphery, through monetary and fiscal
policies. In countries with their own central banks, like the US and the UK, such policies were
indeed undertaken, which is why the recovery also came sooner and with less pain than still
persists in parts of Europe.

Why could this not have been done earlier? Why were the early attempts at restructuring
Greek debt not more realistic so as to reduce the debt levels to those that could feasibly be
repaid by that country? Why was each attempt to solve the problem so tardy, niggardly and
half-hearted that the problem progressively got worse and even destroyed the very fabric of
social life in the affected countries? Why was the entire burden of adjustment forced upon
hapless citizens, with no punishment for or even minor pain felt by the financial agents who
had helped to create the imbalances that resulted in the crisis?

Weisbrot notes that this entire episode “should have been a historic lesson about the
importance of national and democratic control over macroeconomic policy – or at the very
least, not ceding such power to the wrong people and institutions”. (page 4) Unfortunately,
the opposite seems to be the case, with the lessons being drawn by the media and others
still very much in terms of blaming the victim. Indeed, Weisbrot makes an even stronger
point, that this crisis was used by vested interests (including those in the IMF) to force
governments in these countries to implement economic and social reforms that would
otherwise be unacceptable to their electorates.

The significance of vested interests – finance and large capital in particular – in pushing
economies to the edge to force neo-liberal reforms that operate to their favour, has been
noted in many countries before, especially developing countries facing IMF conditionalities.
The standard requirements: fiscal consolidation led by budget cuts in pensions, health and
social spending; reductions in public employment; making labour markets more “flexible” by
effectively reducing labour protection; cutting subsidies that benefit the poor like food
subsidies while providing more tax cuts and other fiscal incentives to the rich, etc.

Weisbrot notes that such policies are neither necessary to emerge from a crisis (in fact in
most cases they are counterproductive) nor are they conducive to long term development.
He provides concrete examples of countries that did things very differently, and were
successful as a result. The most important such example he provides is that of China, a
country that systematically followed a state-led heterodox strategy for industrialisation, with
the state controlling the banking system and a huge role for state-owned enterprises. The
unorthodox policies it followed brought about the fastest growth in history, lifted hundreds
of millions of Chinese people out of poverty and also pulled along other developing
countries because of its rapidly growing demand for imports.

Weisbrot identifies other successful examples of heterodox policies that helped countries to
emerge from crisis and improve living standards for their people, such as Argentina in the
mid 2000s and a range of other explicitly progressive governments in Latin American
countries that followed alternative approaches to increase wage incomes and formal
employment through active state intervention. One important reason they were able to
implement unorthodox economic policies was the relative decline in the power of the
International Monetary Fund (IMF) in this period. Weisbrot argues that the IMF began to
lose influence in the wake of the Asian crisis of 1998, when it so clearly got both its
assessment of the problem and its proposed solutions completely wrong. The geopolitical
and economic changes that this loss of IMF influence enabled were hugely beneficial for the
citizenry in these countries – and point to the huge costs still being paid by those forced to
live under neoliberal economic orthodoxy.

Weisbrot ends his book on a positive note (other than for the eurozone, where he forecasts
continued pain for the near future). He believes that “in the developing world, economic
policy and the rate of increase of living standards are likely to show improvement in the
foreseeable future”. (page 236) This is largely because of his belief that the existing
multilateral arrangements and institutions that forced orthodox policies upon developing
countries will continue to decline, and they will have freedom and ability to pursue
heterodox policies that served them well in the recent past.

Unfortunately, this belief now seems over-optimistic. In the past year we have witnessed
“emerging markets” in retreat as global finance has pulled out of them, and the
reinforcement of institutions and arrangements (in trade and investment treaties and other
financial agencies) designed to dramatically reduce the autonomy of national policy making.
We are seeing political changes in several countries that suggest a renewed dominance of
neoliberal market-driven economic approaches that privilege the interests of large capital.
And even in China, there are signs of confusion, as the growth process runs out of steam,
with recent moves towards more financial liberalisation that could have huge implications in
terms of future viability of independent economic strategies.

This is somewhat depressing, but it makes Weisbrot’s main argument even more important
and compelling. The standard economic policy model fails, and the costs of such failure are
huge – so it is critically important for more people across the world to be aware of them and
to demand that their governments opt for more democratic and just economic strategies.

Originally published in the Frontline.

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One Response to “The Heavy Price of Economic Policy Failures”

  1. […] By Jayati Ghosh, Professor of Economics and Chairperson at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. Cross posted from The Frontline […]