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Wednesday 14 December 2011

Consensus building capacity must catch up with complexity of reform agenda

Consensus building capacity must catch up with complexity of reform agenda
By Arun Maira 

Two ideas, with increasing strengths, have been contending in the last 25 years to shape the structure of societies and economies. One is the idea of democracy and human rights. The other is the idea of global markets and free trade. In practice, they are not always compatible. 

Advocates of unrestricted flows of finance and trade across national boundaries rail against democratically-elected governments who, prodded by domestic concerns, resist the prying open of their markets to foreign investors. These trade evangelists say that free trade will improve efficiencies and global output because each country will produce only what it can most efficiently and buy the rest of its needs from other countries that produce those. With all resources being used most productively, global output will increase. 

The problem is how to get to this ideal from where we are, with people employed in activities they should stop because someone in another country can perform them more efficiently. Bakers in India should stop baking and make candles to export. Dani Rodrik had calculated that to obtain a dollar gain in overall global output by such shifts of production, as many as seven dollars of incomes will have to be shuffled around within countries. He points out that Adam Smith's example of the baker and candlestick-maker was set within a village economy where local societal institutions and local governments can moderate the effects on society of this purely economic idea. 

Actions by national and local governments to adjust economists' solutions to their social conditions create various local rules. Free traders do not like such local rules because they increase transaction costs at the borders. They dismiss countries that impose local rules on trade as 'protectionist' and anachronistic. Thomas Friedman bemoaned in The Lexus and the Olive Tree that such countries were unwilling to join the beautiful flat world emerging, by remaining rooted in ancient ideas of their people's identities and needs. 

The concern now is that ideas of the world as an economy and society as a set of economic transactions have been carried too far since the 1980s. According to these ideas, the goodness of governments' actions must be gauged by the effect they have on investors' sentiments and by what the stock market thinks of them. In this era, capitalism turned into 'super-capitalism', says Robert Reich in Supercapitalism: The Transformation of Business, Democracy and Everyday Life. And, according to Rodrik, globalisation became 'hyper-globalisation'. 

Reich shows that trends of growth of incomes of the poorest Americans as well as reductions in inequalities within the US have reversed since the 1980s. And Rodrik reveals that global economic output had increased faster until the 1980s, pre-WTO, when national governments' sovereign rights to limit free trade and investments across their borders were respected. 

Democracy is government for the people and by the people. Governments must be accountable to people, not international investors. They must respond to people's concerns which will depend on the condition of the society. There can't be a universal solution when conditions vary. Practical solutions must be developed locally. Good governance requires national governments; and in large countries, federal structures; and strong local governments too.

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