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“The promise of well-paid, secure jobs did not come true”
– by Duncan Green, Hans Dembowski
“A pair of flip-flops does not amount to any kind of lasting prosperity”: construction workers on the outskirts of Dhaka.
For decades, market-orthodox ideology dominated international financial institutions. Has prosperity trickled down?
There has not been much trickle down, but plenty of trickle up, and it went along with growing inequality and devastating environmental impacts. The free-market ideology basically led to financialisation in rich nations. The financial sector used to be at the service of the rest of the economy, but today the real economy is at the service of the financial sector, and that applies to the export sectors of developing countries and emerging markets too. A small oligarchy has become richer; the poor are worse off, and their number has grown.
But things are different in developing countries and emerging markets, aren’t they? The purchasing power of poor people has grown, for example in Bangladesh. When I was in Dhaka four years ago, my hosts made me aware of nobody going barefoot anymore. By contrast, I remember seeing the occasional naked adult there 30 years ago – someone too poor to wear clothes even in public.
Yes, some crumbs have been falling off the table – but only very few. If a country has the growth rates of Bangladesh, there will always be more economic activity, and the poor will benefit to some extent. That is the case in India and various other countries too. A pair of flip-flops, however, does not add up to any kind of lasting prosperity. In far too many places, people still depend on the informal sector – not only, but especially in South Asia and Africa. The promise that economic growth would lead to formal jobs with regular wages, labour rights and social protection has not come true for masses of people.
So there was no real progress in the fight against poverty?
Well, things are actually better in some East Asian countries which followed another economic orthodoxy. It is market-driven too, by the way, but they did not simply minimise the role of the state by deregulating markets. They adopted industrial policies to make specific sectors competitive internationally, gradually industrialising their economies. South Korea and Taiwan are early examples, but China or Vietnam later made similar strategic choices. The progress they made in reducing poverty looks more sustainable.
Under what conditions does that happen?
That is very hard to say. There is no magic formula. What we know is that the state must have some autonomy; it must not be captured by vested interests. Private enterprise is important too. Where societies are very unequal, however, state capture is highly likely, with the plutocratic elite simply buying the government decisions they want.
What exactly is the “middle-class”, and what role does it play in development?
In development discourse, it basically means that people are well-off enough to look beyond their immediate needs because they do not have to worry about whether they will eat tomorrow or not. The conventional political theory is that they become politically assertive and demand a say in public affairs. But that is not a given. We have been waiting for some kind of middle-class counterrevolution in China for decades, but it is not happening. On the other hand, South Korea and Taiwan did indeed eventually become democracies. India, however, is a disaster, with very many middle-class people supporting an increasingly authoritarian government. There clearly is no automatism by which economic growth would lead to the emergence of a progressive middle-class. The fundamental issue is who the middle class builds coalitions with. In Brazil, the Workers’ Party (PT) used to be an alliance of the poor with the middle classes, and it was quite powerful for some time. Perhaps it will come back in next year’s elections.
What allows people to escape poverty?
It takes a combination of safety nets and jobs. One lesson of the Covid-19 pandemic is that responding to the disease was easier where some kind of social-protection system was in place and could be scaled up. Perhaps governments will now ratchet up social protection long term. That would be a welcome consequence of this terrible disaster.
What does lasting middle-class prosperity require?
Political stability and the rule of law are very important, and so are various kinds of infrastructure. For example, one should not have to pay bribes to get electric power. Access to education and health care are essential too. The very rich can send their children to Harvard or the London School of Economics, and they will travel to richer countries for medical attention – or merely for shopping. Middle classes cannot afford to do so. They depend on what is available at the local level. Accordingly, they certainly have a potential for assuming a progressive role in national politics. However, they do not always do so.
Do we need action at the national or the multilateral level to eradicate poverty?
We need both. The biggest drivers to reduce poverty are national, and effective governments are essential. At the same time, we need multilateral policies to provide and safeguard global public goods. By themselves, for example, nation states cannot protect the climate. Diseases require a global response. In regard to taxes, the race to the bottom must stop. The list goes on …
The International Monetary Fund (IMF) has been deviating from free-market orthodoxy for some time. It is now in favour of a strong state and massive government spending. Has it really changed?
Well, if you look at what it is doing at the nation-state level, it has not changed much. It is still telling governments to stay within their means et cetera. But at the multilateral level, it has indeed changed, and I think that this reflects the ongoing professional debate among economists. After all, the failure of free-market orthodoxy has become obvious. Massive state spending and budget deficits were supposed to cause inflation, but that didn’t happen after the financial crisis of 2008, nor is it happening now. And as I just said, the big numbers of well-paid and secure jobs never materialised as promised. A few weeks ago, the London-based magazine The Economist argued that the international economic paradigm is changing after 40 years in favour of a stronger role for the state. The way President Joe Biden wants to massively expand US government spending shows that something is indeed happening.
In the past, the IMF largely endorsed White House rhetoric, but this time, it changed its stance before Biden became president.
Well, the geometry of international politics is varying. In the past, non-governmental organisations thought they knew who the good guys and the bad guys were. Today, things are more confusing. Different kinds of coalitions keep arising. In climate affairs, sometimes cities may take the lead, or insurance companies do, or other big investors. Central banks and law courts have begun to take interest in the climate. To build clever alliances, we have to understand persons with completely different backgrounds rather than simply teaming up with like-minded “good guys”.
How do right wing populists fit into the picture? Their approach is bewildering. They agitate against globalisation, telling people who feel left behind that they are being cheated. But when they rise to power, they typically do not use the powers of the nation state to improve the lives of those who voted for them. They are more likely to serve the interests of a rich oligarchy that neither wants to pay taxes nor accept any social or environmental standards. Right-wing populists deny climate change, are not especially good at delivering social services and show more interest in polarising society than solving problems. Multilateral institutions, by contrast, are trying to tackle those problems. In a way, anti-state oligarchs are cleverly using nationalistic rhetoric to rally a frustrated base against a “globalist elite”, which is really more an educated, professional middle class.
Yes, the picture is very confusing. There is indeed an international trend of poor, uneducated people voting right wing, whereas highly educated, prosperous people are increasingly voting for centre-left parties. Marxists have a very hard time explaining that. I don’t agree with you about plutocrats being anti-state, however. They are opportunists. They love the state when they need a bail-out in a crisis, but they do not want to accept any limitations in good times. They do not oppose government per se. They want to capture the state and control it.