What is the next model of development finance?
If you don’t learn through open competition, you cannot reach economies of scale through too-small domestic markets.
MONEY makes the world go round, so sang Sally Bowles in the famous movie Cabaret.
Money today keeps the global economy ticking, and if the central banks had stopped printing money, we would already be in a 1930s Depression.
So, why is the story of money so powerful and yet mainstream development theory and models ignored the role of finance?
Until the 2008 Global Financial Crisis, mainstream economic models used by central banks and governments and the International Monetary Fund (IMF) or World Bank were built on the Dynamically Stochastic General Equilibrium Model (DSGE) which looked at real economy of production, consumption in value-added gross domestic product (GDP) terms.
Finance was ignored because the financial sector is an intermediary between the real sectors of households, government, corporate and foreigners and its assets and liabilities net out to zero.
This academic and policy Gdp-based blindness to money had three critical blindspots: the underpricing of pollution or planetary costs, the assumption that the political structure would remain the same; and that shocks to the economic system were exogenous (externally-generated) rather than endogenous (internal financial fragility from contagion).
Thus, all three blindspots created a delusion that finance was benign, the global economy was stable and there are no planetary nor political costs from the “no limits” growth model of today.
We are staring at the abyss of crossing three limits:
> debt, whereby the US Federal debt has exceeded US$34 trillion or just over 30% of world GDP,
> social inequality, whereby the rich are getting richer so there are increasing protests by the poor across the world, and > planetary limits in terms of natural resources, where we need 1.7 earths to meet current consumption needs. If everyone on the planet consumes like the average American, five earths are necessary.
Modern development theory stemmed from the Second World War, which evolved four models – the Us-led Washington Consensus free-trade, neo-liberal model; the East-asian export-oriented industrialisation model; the Soviet Union centrally planned model, and the Indian/latin American import-substitution, domestic industrialisation model.
History has proved that the exportbased industrialisation model worked best within the Washington Consensus of free trade and promoted globalisation of trade and investments, but the other two largely failed due to too much inward orientation.
If you don’t learn through open competition, you cannot reach economies of scale through too-small domestic markets.
Now that globalisation has somewhat peaked, with the rich countries becoming more protectionist and concentrating on decoupling or de-risking of global supply chains to make them more “resilient”, what is the next development model?
The game has changed because technology-diffusion, talent migration and climate change/natural disasters have meant that different countries can adopt very different models from the past.
We can decipher that it is not simply West versus the Rest, because the Rest includes two very different, but overlapping parts – China and Russia as one camp of nuclear powers with huge manufacturing and military capacity, and the Middle East (other than Israel), Africa, Latin America, South and South-east Asia forming the Global South.
The BRICS grouping does not just include the large population giants of Brazil, Russia, India, China and South Africa, but also new members such as Saudi Arabia, the United Arab Emirates, Iran, Egypt and Ethiopia.
The Global South can choose to side with either the West or the East depending on which side gives them more goodies (or less threats and costs). The development model cannot be independent of geopolitical strategy. Asean is looking to be non-aligned, but will focus on development and trade, rather than following any geopolitical ideology.
In other words, each society will change over time and must respond to the different challenges it perceives or recognises.
Thus, even though climate warming is a global disaster, it affects different geographies differently, with some island economies sinking under rising seas, whereas others may be affected by huge water, food and energy calamities. There is no general development model that fits all nations.
Furthermore, it is no longer a simple choice between state or market, because non-state players such as terrorists, religious movements, crime syndicates and charitable foundations are today even larger and more powerful than single nations.