Is the teacher out of his depth or the classroom has changed beyond recognition? At a time when the Covid-19 crisis has devastated the world economy, thrown economic pundits for a loop and made the lives of citizens around the word hard to bear, this question was to be expected. The World Economic Outlook Report of the International Monetary Fund (IMF) that just came out speaks of a remarkable recovery where the world economy is likely to grow by 6% this year only moderating to a 4.4% growth in the year 2022. But a careful reading of the report tells you and it is also the report’s constant refrain, that nothing much can be said with certainty. This is how it should be given the number of variables that have entered the picture. The sheer scale and scope of the Covid crisis, even if foretold in the margins of research literature, for all practical purposes is what Nassim Nicholas Taleb calls a black swan incident. Even the best planners among us could not come up with a plan to pre-empt something this big. But it tells you that the teacher needs to revise his curriculum and notes because this class of students is dealing with issues dramatically different than the previous ones. But I get ahead of myself. Let us start at the beginning.
The economic world order that we have grown accustomed to is still based in Washington despite some competition from China recently. The institutions that look after global economic wellbeing are the IMF, the World Bank and the US Department of Treasury. The standard reform guidelines, a set of 10 commandments, offered to the countries in economic distress in exchange for financial help are often referred to as the Washington Consensus named so in 1989 by British economist John Williamson. The list appears to be fairly simple and makes a lot of sense. It includes fiscal policy discipline, improved government spending by replacing indiscriminate subsidies with targeted if small ones, focusing on the vulnerable, broadening and reforming the tax net, competitive exchange rate, trade liberalisation, opening of the economy to foreign direct investment, market determined interest rates, offloading of state-owned enterprises, deregulation and legal protection for private property. Pakistanis must be aware of this set of recommendations because over the past many decades repeated governments signed up for these reforms whenever they went to the IMF for a bailout and gave up after some initial attempts. Consequently, the country resembles a landfill of abandoned reform initiatives, broken promises and dreams and massive external debt.
Before I move any further let me point out where I stand on the debate about institutions like the IMF and the World Bank. I do so because in our conspiracy theories prone neck of the woods there is no dearth of detractors. I am tired of people quoting books like Confessions of an Economic Hit Man back at me when I tell them that the policy recommendations of these institutions stem from a good place. As I have humbly pointed out in past cases of conspiracy theories like QAnon, you can suspect anything you want but your suspicions would almost always be based on conjecture, half-truths and misinformation which in the end would make life a living hell for you. I believe that when governments approach these institutions, they are offered a recipe that the chefs truly believe in. Also, may I point out that during the Covid-19 crisis these institutions have been of great support to countries like Pakistan. That said, there are some serious issues with the teacher’s curriculum.
I have mentioned above that Covid-19 has introduced several new variables into the debate. Consider this: Covid-19 is basically not a crisis of either demand or supply. It is primarily a crisis of labour. When your workforce cannot come to work out of fear of getting infected everything else goes south. We face this crisis right when automation and numerous other dynamics are already killing jobs. Then there is the issue of vaccination efforts. In a brief period where we have witnessed the impressive development of vaccines to combat the virus, we have also seen the emergence of variants and the limitations of immunity. Pfizer tells us the effects of its vaccine may last for six months. What happens if the virus along with its mutant forms refuses to go away at the end of that period and all countries must periodically administer more vaccines? Consider also other challenges like population growth and technological change. When the Bretton Woods system came into existence in 1944, the world population was roughly around 2.4 billion. When the term Washington Consensus was introduced in 1989, we were around 5.2 billion. Now the world population is estimated to have reached the 7.9 billion mark. When transformations like the use of AI in business are giving birth to the idea of universal basic income and when blockchains and cryptocurrencies are taking monetary controls away from governments, where does the consensus stand?
There is nothing inherently wrong with the market fundamentalist or the monetarist worldview. But right when policymakers in Washington are adhering to the new Keynesian model, expecting struggling economies to adhere to the old recipe seems counterintuitive if not dangerous. The point is, every dogma originates from good intentions, but then it can prove regressive. Two examples should suffice to make the point. Evidence has recently surfaced that the Indian government based its demonetisation drive which shaved a substantial part of demand, purchasing power, micro, small and medium industries off at the very least on the assessments of the World Bank. Similarly, the recently introduced farmer laws were inspired by the IMF. The reason why both policies backfired royally is down to a disconnect from the systemic limitations of a postcolonial bureaucracy, complications of a diverse society and a populist regime. Because these institutions are so convinced of their belief system, they are less likely to worry too much about the human cost and the fallout at the grassroot level. If the purpose of the Washington Consensus is to trim fat in troubled economies to make them more efficient, the architects of the world economy will have to consider the all-pervasive and inevitable decline of nation-states. The fear is that in trying to cut fat you may end up cutting critical muscles which gives a government power to make life easier for its citizens. When too many factors are unknown you are bound to reconsider the parameters of your experiments.
The central argument in this piece is not of doing away with the Washington Consensus but to improve it. We need a new Washington Consensus. This can be accomplished through a broad-based debate, wide-ranging consultations and hectic efforts to learn more about the emerging trends and ground realities of each country. Maintaining, reforming and monitoring the world economy is no more a nine to five job. The Washington based economic institutions will need more manpower, improved access to data and technology and the global brain trust. All preconceived notions and biases like a single model approach, decoupling, the new cold war will have to be set aside to build consensus for future challenges.