Search­ing for new devel­op­ment model

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AS we go through the fog of moder­nity, con­fused by threats of war, toxic pol­i­tics, ter­ror­ism, tech-led job dis­rup­tion, nat­u­ral and hu­man dis­as­ters, what is the right devel­op­ment model go­ing for­ward?

In the post-Sec­ond World War pe­riod, devel­op­ment was de­fined by the US-led Bret­ton Wood mul­ti­lat­eral in­sti­tu­tions frame­work, com­pris­ing the IMF, World Bank and the World Trade Or­gan­i­sa­tion (WTO).

As long as de­vel­op­ing coun­tries play by global rules, open­ing their mar­kets to free trade and follow ortho­dox fis­cal and mone­tary dis­ci­pline, they would be able to join the global mar­ket place and en­joy growth. Devel­op­ment was achieved through open­ing up to trade, in­vest­ment, in­no­va­tion and tal­ent.

This creed out­lined by the Wash­ing­ton Con­sen­sus was se­verely tested by the Asian Fi­nan­cial Cri­sis of 1997.

Asian economies which ap­peared to be do­ing very well through open­ing up to trade and in­vest­ments sud­denly went into cri­sis due to sharp cap­i­tal with­drawals, ac­com­pa­nied by spec­u­la­tive at­tacks which caused sharp de­val­u­a­tions, bank fail­ures and deep re­ces­sion.

It was not helped by ini­tially wrong pol­icy pre­scrip­tions by the IMF, whose ortho­dox call for tighter fis­cal dis­ci­pline and higher in­ter­est rates ex­ac­er­bated the down­turn.

Look­ing through the long lens of his­tory, if the pe­riod of mer­can­til­ism be­fore the In­dus­trial Revo­lu­tion in the 18th cen­tury (be­fore Adam Smith) can be called Cap­i­tal­ism 1.0, and the In­dus­trial Revo­lu­tion Cap­i­tal­ism 2.0, the phase of glob­al­i­sa­tion from the late 19th to 2007 can be called Cap­i­tal­ism 3.0.

This was the pe­riod when the West pushed glob­al­i­sa­tion un­der the creed of free mar­kets, first led by the Bri­tish em­pire (Ver­sion 3.1) and then by the US, the dom­i­nant mil­i­tary, eco­nomic and fi­nan­cial power since World War Two (Ver­sion 3.2).

Un­der Cap­i­tal­ism ver­sion 3.3, glob­al­i­sa­tion was truly achieved through the rapid spread of mar­kets, made ob­vi­ous by China join­ing the WTO in 2001 and cre­at­ing new heights in global trade and in­vest­ments.

The Global Sup­ply Chain, of which there are two ob­vi­ous wings – one transat­lantic be­tween Europe and US and another be­tween East Asia and US/Europe, but with raw ma­te­ri­als and com­po­nents sourced from ev­ery­where, was es­sen­tially cre­ated through tech­no­log­i­cal im­prove­ments in ship­ping, air and land trans­port, telecom­mu­ni­ca­tions and since 1991, the In­ter­net.

The ar­rival of the In­ter­net ac­cel­er­ated the net­work­ing of trade and in­vest­ment, but more im­por­tantly, fi­nance and dig­i­tal data. Since fric­tion costs (another term for trans­ac­tion costs) are higher for phys­i­cal goods than vir­tual goods, fi­nance and knowl­edge spread faster, helped by tech­no­log­i­cal im­prove­ments in so­cial me­dia and smart­phones.

By 2007, Cap­i­tal­ism 3.3 ap­peared unas­sail­able. The ac­cepted devel­op­ment model for all emerg­ing mar­kets was to plug into the global sup­ply chain, com­ply with WTO rules and Bret­ton Wood’s ad­vice and ev­ery­one was ca­pa­ble to take off. Any fail­ure to do so could be at­trib­uted to pol­icy mis­takes or bad pol­icy ex­e­cu­tion, through ei­ther in­com­pe­tence, bad gov­er­nance or out­right cor­rup­tion.

The global fi­nan­cial cri­sis of 2007 shat­tered ev­ery­body’s con­fi­dence in Cap­i­tal­ism 3.0, be­cause it re­vealed mas­sive so­cial in­equities (doc­u­mented by Piketty) and in­abil­ity to deal with ris­ing cli­mate change, fun­da­men­tal­ism in the guise of pop­ulism, and most of all, the clear in­ad­e­qua­cies of main­stream eco­nomic the­ory to ex­plain and deal with such crises.

It was not sim­ply po­lit­i­cal cap­ture of fi­nance and devel­op­ment, but worse, the in­tel­lec­tual cap­ture of ev­ery­one that Cap­i­tal­ism 3.0 was nat­u­ral and or­dained.

Those deeply in­volved in the tech revo­lu­tion are al­ready map­ping out In­dus­try 4.0 or the Fourth In­dus­trial Revo­lu­tion.

The Davos World Eco­nomic Fo­rum as­so­ci­ated In­dus­try 1.0 to the steam age, the sec­ond to the elec­tri­cal age, the third to the Dig­i­tal Revo­lu­tion and the Fourth to new In­ter­net of In­dus­try. Today, tech­no­log­i­cal break­throughs in robotics, nano-tech­nol­ogy, biotech­nol­ogy and ar­ti­fi­cial in­tel­li­gence cre­ate new goods and ser­vices, re­quir­ing new forms of gov­er­nance.

The prob­lem with In­dus­try 4.0 (re­ally Cap­i­tal­ism 4.0) is whether emerg­ing mar­kets will be able to cope with the speed, scale and scope of tech­no­log­i­cal change, on top of ris­ing cli­mate change nat­u­ral dis­as­ters, ur­ban con­ges­tion and pol­lu­tion and other prob­lems. In­dus­try 4.0 seems to be cre­at­ing in new age of even more dom­i­nance by the gi­ants.

Cap­i­tal­ism 3.0 be­came cap­i­tal friendly and dis­as­ter for labour be­cause in­stead of bring­ing pros­per­ity for all, it brought life bet­ter for the 1%.

Pop­ulism arose be­cause even the mid­dle class in ad­vanced coun­tries re­alised that Cap­i­tal­ism did not ben­e­fit all. If rich coun­tries who have the re­sources to deal with both tech­no­log­i­cal dis­rup­tion and nat­u­ral dis­as­ters have trou­ble cop­ing with Cap­i­tal­ism 4.0, what is the new model for emerg­ing mar­kets (Devel­op­ment 4.0)?

Last week­end, I was at the In­sti­tute for New Eco­nomic Think­ing (INET) An­nual Con­fer­ence in Ed­in­burgh, the home­town of Adam Smith, the Scot­tish econ­o­mist and philoso­pher.

The Com­mis­sion on Global Eco­nomic Trans­for­ma­tion (CGET) was launched un­der the co-chair­man­ship of No­bel lau­re­ates Joseph Stiglitz and Michael Spence. The man­date of the Com­mis­sion is to tackle global eco­nomic chal­lenges from stag­nat­ing growth and in­equal­ity to mi­gra­tion and cli­mate change.

Both co-chairs are em­i­nently qual­i­fied to lead this search for Devel­op­ment 4.0, be­cause Joe Stiglitz led a UN-com­mis­sioned re­port on Re­forms of the In­ter­na­tional Mone­tary and Fi­nan­cial Sys­tem in 2009 to ex­plore why the global fi­nan­cial sys­tem failed in 2007 (mis­takes of pri­vate sec­tor and mis­guided and failed poli­cies of the pub­lic sec­tor) and how to fix the sys­tem.

Mike Spence on the other hand chaired the Growth Com­mis­sion, spon­sored by the World Bank, to ex­am­ine var­i­ous as­pects of eco­nomic growth and devel­op­ment that pro­duced its re­port in 2008.

In the light of pro­found changes in tech­nol­ogy, cli­mate change and our un­der­stand­ing of in­equal­ity and global im­bal­ances, the time has come to take stock and help emerg­ing mar­kets un­der­stand what op­tions there are for devel­op­ment in the New Econ­omy.

In Ed­in­burgh, I won­dered whether Adam Smith would have turned in his grave if he re­alised that free mar­ket ide­o­logues used his ideas in “Wealth of Na­tions” to al­low a small elite to get rich at the ex­pense of oth­ers.

In omit­ting the word “po­lit­i­cal” out of “eco­nomics”, the neo-clas­si­cal free mar­ket ide­o­logues pro­moted pos­i­tive eco­nomics that pushed “ra­tio­nal man”, as­sum­ing away all the im­por­tant parts of hu­man be­hav­iour, pol­i­tics, psy­chol­ogy, so­ci­ol­ogy and an­thro­pol­ogy.

In other words, in the search for the physics of eco­nomic be­hav­iour, main­stream eco­nomics missed the whole point of po­lit­i­cal econ­omy – that man is not a ma­chine.

In short, Devel­op­ment 4.0 is not about more money, but how to live hap­pily, peace­fully and pros­per­ously in har­mony with each other, na­ture and con­tin­u­ally to evolve with tech­nol­ogy and each other. Devel­op­ment 4.0 is not go­ing to be a one­size-fit-all model, but di­verse ways to think about the fu­ture of man. Map­ping these path­ways would be an achieve­ment in it­self.


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