Wider Perspectives on Global Development

Institutions and the way they evolve shape economic performance. Institutions affect economic performance by determining (together with the technology employed) the cost of transacting and producing. They are composed of formal rules, of informal constraints and of their enforcement characteristics; while formal rules can be changed overnight by the polity, informal constraints change very slowly. Both are ultimately shaped by the subjective perceptions people possess to explain the world around them which in turn determine explicit choices of formal rules and evolving informal constraints. Institutions differ from organizations. The former are the rules of the game; the latter are groups of individuals bound together by a common objective function (economic organizations are firms, trade unions, cooperatives; political organizations are political parties, legislative bodies, etc.).

I would like to discuss improvements in our understanding of economic development, in particular the emergence of what is sometimes called the ‘post-Washington Consensus’. My remarks elaborate on two themes. The first is that we have come to a better understanding of what makes markets work well. The Washington Consensus held that good economic performance required liberalized trade, macroeconomic stability and getting prices right (see Williamson, 1990). Once the government dealt with these issues -essentially, once the government ‘got out of the way’ — private markets would allocate resources efficiently and generate robust growth. To be sure, all of these are important for markets to work well: it is very difficult for investors to make good decisions when inflation is running at 100 per cent a year and highly variable. But the policies advanced by the Washington Consensus are not complete, and they are sometimes misguided. Making markets work requires more than just low inflation; it requires sound financial regulation, competition policy and policies to facilitate the transfer of technology and to encourage transparency, to cite some fundamental issues neglected by the Washington Consensus.

This chapter addresses one of the most important economic issues facing our societies and the world as a whole: rising income inequality. There is a widely held belief that rising inequality is inevitable. Increased inequality is the result of forces, such as technological change, over which we have no control, or the globalization of trade, which people believe, despite historical evidence to the contrary, to be irreversible. Kuznets (1955) suggested that income inequality might be expected to follow an inverse-U shape, first rising with industrialization and then declining. Today, the Kuznets curve is commonly believed to have doubled back on itself: the period of falling inequality has been succeeded by a reversal of the trend. Seen in this way, the third quarter of the twentieth century was a Golden Age not just for growth and employment, but also for its achievement in lowering economic inequality. On this basis, the marked rise in wage and income inequality observed in the United States and the United Kingdom in recent decades will unavoidably be followed by rises in other countries, and indeed worldwide. Policy can make little difference.

I am overwhelmed by the generosity of Professor Pohjola’s welcoming remarks. It is customary to say, on such occasions, that my mother would have believed every compliment that he directed at me, that she might even have considered the praise wanting, but that I realize that I do not deserve it. But that is unlikely to work tonight. Too many of you know well my wife, Padma Desai, who directed a successful project for UNU-WIDER some years ago and is also a frequent visitor to Finland in other capacities. So you can believe me that, if she were present, she would have responded mischievously, since she moves between putting me on a pedestal and putting me in my place: ‘Professor Pohjola, you have said nothing that my husband does not say better about himself.’

Current thinking about development places individuals firmly at the centre of concern, the basic building block for analysis and policy. This is as true of the innovations led by Amartya Sen, which move us away from a focus purely on incomes to incorporate wider perspectives on well-being, as of the more traditional neoclassical welfare analysis which underpins most development policy. The present overriding concerns with reduced poverty and inequality, which stem from both types of analysis, are equally individual-focused. The Millennium Development Goals (MDGs), for example, are concerned with the numbers of individuals in poverty in the world as a whole, not with who they are, or where they live. Measures of inequality relate to the ranking of individuals (or households) within a country (or sometimes the globe). The issues of individuals’ poverty and inequality are, of course, extremely important, but they neglect a vital dimension of human well-being and of social stability: that is, the group dimension.

The world has seen two globalization booms over the past two centuries, and one bust. The first global century ended with the First World War and the second started at the end of Second World War, while the years in between were ones of anti-global backlash. This chapter reports what we know about the winners and losers during the two global centuries, including aspects almost always ignored in modern debate — how prices of consumption goods on the expenditure side are affected, and how the economic position of the poor is influenced. It also reports two responses of the winners to the losers’ complaints. Some concessions to the losers took the form of anti-global policy manifested by immigration restriction in the high-wage countries and trade restriction pretty much everywhere. Some concessions to the losers were also manifested by a ‘race towards the top’ whereby legislation strengthened losers’ safety nets and increased their sense of political participation. The chapter concludes with four lessons of history and an agenda for international economists, including more attention to the impact of globalization on commodity price structure, the causes of protection, the impact of world migration on poverty eradication and the role of political participation in the whole process.

For some time I have been working on the problem of international labour standards, labour rights and child labour, and in particular the tensions between global intentions and local aspirations and freedoms. This gives rise to a host of practical problems concerning what the ILO should do, what the WTO could potentially do and what the global policy options are for the US government or the Finnish government. But I plan to dwell relatively little on these practical matters and spend more time on the abstruse theoretical questions that underlie this practical debate. I believe the theoretical debate is important to ensure that our interventions do not go wrong, do not hurt the very constituencies they are meant to help. The impatience that international bureaucrats and policy makers show with abstract debates in their muscular desire to get on with the business of legislating and crafting policy can do much harm. And UNU-WIDER, perched uncomfortably between academe and the world of policy, is a good place to debate some of the abstract principles of economics that underlie global and national-level interventions to uphold minimal labour standards and worker rights.