Published in The Financial Express on Thursday, 3 September 2015.
EOT: Rethinking on current economic model
The lingering shocks of the 2008-09 global financial crisis are still felt. One of the outcomes of the crisis is that it there is now a rethinking about the market-based development model. Two schools of thought have re-emerged in general. One is the old hard-left school which wants reversal of market-based capitalist system. The other is the moderately left-aligned which wants to minimise dominance of free market by rewriting policies. Of course, thoughts of both the schools are undesirable to capitalists and their fellow-travellers who have full faith in the market. But, they can’t ignore the waves of rethinking on current economic model that puts excessive reliance on free market.
Against this backdrop, an idea titled Economy of Tomorrow (EOT) has been brought into public discourse by Friedrich-Ebert-Stiftung Academic Foundation (FES), an international development and policy thinking institute founded in Germany in 1925. The foundation launched EOT in 2013 as an alternative development model for the next generation.
The basic assumption of EOT is simple: Neo-liberalism brings a disaster in the global economy by inflating financial market and incentivising greed-driven activities. Thus, rally of neo-liberalism and surge of financial engineering should be contained. To do this, a new model of development, within the framework of capitalism, has to be developed where the role of market will be moderate and responsible.
CONCEPT IN BRIEF: In today’s world, growth is considered both the prime means and goal of economic development. Thus growth rate of an economy, represented by the Gross Domestic Product (GDP) or Gross National Income (GNI), becomes a matter of sensitivity. The growth obsession drives many developing countries, including Bangladesh, to adopt neo-liberal policies and implement neo-liberal agendas. Neo-liberalism strongly solicits maximisation of market forces and minimisation of state functions. Drawn upon the principles of neoclassical economics, the framework pursues reducing deficit spending and subsidies, widening the tax base, opening up foreign exchange markets, strengthening financial market and deregulating almost everything.
The growth obsession ignores the uneven distribution of resources and damage of environment and argues that higher growth would automatically channel resources to all sections of people through market. In reality, it doesn’t happen as claimed by the subscribers of neo-liberal policies. The so-called ‘trickle-down effect’ works little to uplift people from poorer status and address widening disparity in the society. Though higher growth enhances the size of an economy and creates more resources, it also fuels income inequality.
Recognising this fact, the EOT model stresses on qualitative growth so that growth could be a strong means for building a better society with less inequality. EOT doesn’t undermine the role of growth but rejects obsession with growth. Green growth is a kind of qualitative growth which calls for linking the growth process with environmental sustainability and creates market for environmental-friendly products.
EOT also rejects blind faith in ‘market mechanism’ and stresses redrawing market rules in line with qualitative growth. It also adds a political dimension by underscoring democratic practise. EOT mentions that market has to function within the purview of democratic state. The state has to act on addressing investment and distribution, not by direct intervention but by policy stimulation.
Thus qualitative growth can be ensured by rebalancing the state-market relationship, as outlined by the EOT model, which also tags the condition of curtailing the role of financial market. Financial market implicitly believes in ‘greed is good’ concept and nurtures excessive speculation. Diversification of products in the market with the help of financial engineering makes it vulnerable and risky. Thus the EOT model stresses on strict control on the financial market.
The EOT model also emphasises dynamic supply and steady demand. It seeks income-driven demand and argues that more equal income distribution will not only stabilise society, but also stimulate balanced consumption. During the phase of economic transformation, society has to face adjustment shocks. Unlike market economy which ignores the shocks and so plights of people, EOT wants to minimise the shocks and reduce the plights.
In a nutshell, the EOT model calls for establishing ‘socially just, sustainable and green dynamic growth for a good society with full capabilities for all.’ The EOT manifesto, drafted by Marc Saxer, argues that socially just growth can be driven by fair incomes and inclusion of all talent. It opines that sustainable growth is driven by stability in the financial sector and natural environment as well as balanced trade and budgets. Finally, green dynamic growth is driven by the greening the old economy and introducing environment-friendly innovation.
POLITICAL DIMENSION: The EOT model has a clear political ideology which is ‘social democracy.’ It supports economic and social interventions to promote social justice within the framework of capitalism. It believes in the ‘welfare state’ approach and so calls for greater redistribution of income and wealth and using capitalism for egalitarian society. Social Democratic Party (SPD, abbreviated German name) in Germany is considered as one of the pioneer of social democracy movement. Its leader Fredrich Ebert was the first president of Germany, known as Weimar Republic that replaced German Empire in 1919.
Advocates of the EOT underscore political transformation of the theoretical or technical development model ‘into a tool for political communication.’ Its manifesto also mentions that ‘the chances for implementation of socially just, sustainable and green dynamic policies depend on the ability of the rainbow coalition to mobilise political muscle with a view of influencing the political calculus of decision makers.’
Here lies the most critical part of the EOT model. On conceptual arena, the model is stimulating on doubt. But when linked with a certain political ideology and the ideology becomes pre-condition for the model to work, it becomes very challenging and to some extent, impossible to implement. Political regimes in most of the countries across the world are very-much linked with neo-liberal agendas. Moreover, very few countries will accept or opt for social democracy as a new political movement.
BANGLADESH CONTEXT: Bangladesh economy has been moving forward with an annual average growth rate of over 6.0 per cent for a decade. During the period, Bangladesh economy had to absorb several external and internal shocks. These include: phasing out of multi-fibre arrangement that pushed the readymade garments industry into quota-free global market, devastating Cyclone Sidr in 2007 and Aila in 2009, and global oil and food price crisis and global recession since 2008. Nevertheless, the country’s growth doesn’t fluctuate like many other countries reflecting internal resilience of the economy. Finally, this year, the country has emerged as a lower middle-income country (LMIC) from lower-income category, as defined by the World Bank.
Against this backdrop, it remains to be asked how much the EOT model suits Bangladesh. A case study done by Professor Mustafizur Rahman, Towfiqul Islam Khan and Muhammad Al Amin of the Centre for Policy Dialogue (CPD) tried to find the answer last year. Analysing the development trends of the last three decades, the authors implicitly concluded that EOT model or part of it cannot be implemented in the country in near future. “The policies of the country will need to undergo significant revisions in order for the economy to develop in a sustainable, socially just, progressive and forward-looking manner,’ said the conclusion of the study paper.
Bangladesh is now vigorously pursuing neo-liberal policies which do not go with the EOT model. The Sixth Five-Year Plan (6FYP), expired this year, was designed to promote fully market-driven development. Outcome of the over-ambitious plan, drafted by economists and planners engaged with the International Financial Institutions (IFIs), is disappointing. Nevertheless, the Seventh Five-Year Plan (7FYP), likely to be launched soon, is presumably designed in the same direction.
The 6FYP clearly said: “The Bangladesh economy will be managed within the framework of a market economy with appropriate government interventions to correct market distortions, to ensure equality of opportunities, and to ensure equity and social justice for all.” It also said: “The government recognises that in a market economy like Bangladesh where the bulk of the economy is privately owned and managed, the role of planning is essentially indicative and strategic in nature. A key focus of the plans will, therefore, be on strategies, policies and institutions to help guide the private sector in helping Bangladesh achieve the goals set in Vision 2021.”
Such assertions in the planning policy document clearly indicate that there is little scope of rethinking beyond market-oriented neo-liberal development path. Nevertheless, many elements of EOT model are not only relevant but also applicable for Bangladesh. Policymakers may consider the relevancy.