Economics is a choice between alternatives all the time. Those are the trade-offs. Paul Samuelson
The absence of alternatives clears the mind marvelously. Henry Kissinger
In the past several years the fear that the world economy has run into systemic growth problems has been compounded by a growing sense that most of the mishaps of the system have not been addressed. And when mistakes are not acknowledged they are almost bound to be repeated in the future.
While there are plenty factors that may have accounted for the “new normal” phenomenon such as higher income inequality or lower productivity growth, there may be a broader reason for the underperformance of the past decade, namely the lack of alternatives in the models of economic development pursued by countries and regions. Perhaps too many countries pursued strategies that simplistically targeted the replication of other models and/or large-scale liberalization without due regard to the issues of ownership of modernization strategies and their compatibility with the path-dependent realities of history, politics and culture.
Some would argue: “why worry about the lack of alternatives, when the main problem afflicting the developing world is the inability to take on board institutions, practices and policies that form part of the standard set employed in the developed world?” After all, arguably there are core economy principles and objectives that are relevant for all economies – efficiency, productivity, profitability – all of which could serve as a foundation of commonality across national economic systems. Many would insist that the core principles of a market economy largely exhaust the possibility set of economic strategies and call for a convergence towards one model of economic development.
But one of the core principles of any market economy is competition and the presence of alternatives across sectors, regions, within and across countries. Arguably, it was that kind of competition between the state and the market system in the post-war period that pushed the market economy towards improving its technological and competitive edge. It is also the competition that may have resulted in the transformation of the capitalist model towards a more humane system, with labour accorded greater rights as may be observed in many European economies, most notably amongst Nordic countries.
It may also be the end of that competition in the 1990s that resulted in excesses and failures of the “convergence” approach. The trends observed in the past 10-15 years were marked by rising income inequality and the weakening of the position of labour and trade unions in the developed world. Paradoxically the unipolar world did not deliver what was widely expected to be the main dividend of “convergence” – the so-called “peace dividend” not only failed to materialize, but military outlays across the world have increased substantially.
Looking now from the past into the future, the course of evolution of the global economy should not be held hostage to the vagaries of one sole development model - there needs be at least some degree of optionality reserved in case the mainstream/core model encounters a dead-end. The lesson of the past decades is that when the mainstream model runs into a systemic crisis, the global repercussions turn out to be substantial, particularly for those parts of the globe that are deeply integrated into the “core” (Asian crisis as well as the 2007-2009 debacle are cases in point).
The domination of one model that other countries are to converge to also deprives these countries of developing strategies that fully take into account their idiosyncratic features pertaining to the history, geography and culture. The result is a pattern of alternating “shock therapy” and populism (observed in Latin America and Russia in the preceding decades) and vain attempts to speedily replicate model systems around the globe instead of a progression along the path that is consistent with the national imperatives of economic development.
The shock of the 2007-2008 crisis has engendered a search for alternatives in the developing world that has advanced to such a degree that currently one may speak of an emerging “Alternative” that includes the following elements:
- “alternative integration”: the formation of such blocks as the BRICS as well as the proposed global platform of “South-South” cooperation such as BRICS plus create possibilities for alternative approaches to integration. Contrary to the “core-periphery” model of globalization the BRICS-plus approach is a more inclusive and a representative framework for economic integration.
- “new global investment players”: throughout the past decades a new force has emerged in the global investment space, which is dominated by developing economies - 14 out of 15 largest SWFs are based in the developing world.
- “alternative market infrastructure”: developing countries’ regional and global financial centers, expansion in the use of national currencies in international transactions, creation of own payment systems and rating agencies, new reserve currencies.
- “alternative institutions”: these have expanded tremendously in the past several years with the emergence of development institutions serving as alternatives to the Bretton Woods block such as the New Development Bank, Asian Infrastructure Investment Bank (AIIB), as well as a host of regional financial institutions created by developing country regional blocks.
Before the beginning of the 1990s a branch of economic science that was one of the more exciting subjects in the economics courses taught in Western universities was “Comparative economic systems”. Its fields of study included the varying models such as the Soviet, the Japanese, or the Nordic development model. After being relegated to the backstage of academic research and curriculum since the 1990s today the return of “Comparative economic systems” seems opportune as the world economy struggles to find alternative paths to regaining its lost growth momentum.
Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.