Nobel-winning economist urges post-crisis Africa to look East

Nobel-Prize winning economist Joseph E. Stiglitz has called for Africa to make a clean break with the so-called Washington Consensus policies of financial liberalisation and unfettered markets and instead embrace the “developmental state” as part of a post-global crisis strategy for the continent.

In a hard-hitting address delivered at the African Bank for Development headquarters in Tunis recently, the author of the widely read Globalisation and its Discontents pointed out that the market fundamentalism that had led US regulators to ignore warning signs that the markets were out of control showed the “incoherence” of prevailing doctrines of “rational expectations” and “rational behaviour.”

The crisis, he said, showed that unfettered financial markets are not necessarily self-correcting, stable or efficient at managing risk and allocating capital.

Effects of the crisis

Not only has the crisis called into question the efficacy of markets, he said, capital and financial market liberalisation helped the rapid spread of the crisis around the world, while some of the policies pushed on developing countries “exacerbated the magnitude of the downturn,” undermining the authority of the Western institutions and individuals who pushed those policies.

Those countries most integrated into the global system were most affected; however, countries with social safety nets, more regulated financial systems and capital controls did better than others — underlining the fact that markets on their own won’t lead to development. And indeed, without government intervention, the world would have been in a major depression.

Africa’s post-crisis strategy, he said, must proceed from a recognition of this fact, allied with the realisation that globalisation has fundamentally transformed the economic geography of the world, leading to a new global balance of power. Growth in Asia, especially China, continues to be robust, creating opportunities for commodity exporters; Africa should particularly look to Asia for new markets — but with a recognition of the need to break out of commodity dependence, it should also look East for new sources of investment funds.

Alongside this “global diversification,” such new investments should be directed at sectoral diversification within the continent, which was devastated by the market fundamentalism of the 1990s in the shape of the structural adjustment programmes that led to the de-industrialisation of the continent — so much so that in 2006 the share of manufacturing in total , at 14.3 per cent, was less than that in 1965 — 15.9 per cent.

But the “developmental state,” in pursuing this new strategy of development, will need to recognise that what separates developing countries from developed is not only a gap in resources but also a gap in knowledge. This will mean the pursuit of what Prof Stiglitz described as LIT – Learning, Industrial and Technology policies.

With liberalisation of capital and financial markets discredited by the crisis and private financial markets not being notorious for a developmental orientation, development banks such as AfDB and the currently distressed East African Development Bank will be key to providing the preconditions for private sector-led growth in the shape of physical and institutional infrastructure, education and health.

LIT policies

LIT policies also apply to agriculture, whose development still remains the only way to address poverty and meet the Millennium Development Goals, as so large a majority of Africa’s population depends on it. Here too, the damage done during the years of the Washington Consensus has taken the form of lack of investment in physical infrastructure — roads, irrigation and technology — and a weakening of institutional infrastructure – credit markets, marketing and extension services.

Prof Stiglitz pointed out that current trend of globalisation, which is deepening economic inequalities around the world, and thus weakening global effective demand, has entrenched the likelihood of further crises ahead. What is worse, the industrialised countries have not addressed the fundamental problems, with their banking sectors even more concentrated, exacerbating the “too big to fail” syndrome; with global imbalances little improved and scant progress on addressing climate change.

Preparing for the next crisis, then, will be the core objective of the diversification strategy, “Even if we had managed this crisis perfectly, there will be crises in the future,” concluded Prof Stiglitz.

“We need to be prepared.”