If growth is driven or enabled by a basis that is unsustainable, the resultant progress will be transient.
By Piya Mahtaney
This post inaugurates a special CSRwire series based on a new book Globalization and Sustainable Economic Development.
Making the Right Choices on Sustainable Development
Sustainable economic development represents an entire dimension of opportunity that has been largely untapped -- and the capacity of nations to achieve that will determine their economic, social and political progress.
I recall the time when I was a journalist for the Economic Times. The Asian economic crisis of 1997 began and, as with every crisis, it evoked considerable discussion about financial liberalization and the larger issues of growth and development. As I delved into the reasons underlying the crisis, it was evident that we needed to rethink economic policies like liberalization and evaluate where it worked effectively and where it didn’t. This was the subject of my first book but, in the years since, I have continued to study what comprises effective development strategy.
In the sphere of economics, as in others, current circumstances and challenges determine the choices one has. However, in the evolution of an appropriate development strategy, lessons from the past should not be ignored, as these play an important role in reminding us of the mistakes that were made.
Recap of The Past
At this point, a brief recap of the past would be useful.
When the Berlin Wall fell in 1989, it heralded the beginning of a new world order. For those who watched it on TV, the revelry of those around it was unmistakable. For many, it symbolized aspiration and optimism. The 1990s were to be an era of liberalism; trade and financial liberalization seemed to be the “magic wand” to rapid economic progress.
But by the mid-1990s, financial markets were characterized by extreme fluctuations and currency crises had become frequent with Mexico, Argentina and Russia some of the regions that experienced sharp downturns.
Although successful in East Asia and China, where market forces were controlled or regulated by the government, liberalization did not proceed much beyond reductions in tariff barriers and increased inflows of capital. Other developing nations, such as those in Africa and some in Latin America, did experience sporadic spells of economic growth.
However, the poor, particularly in Africa, continued to find themselves mired in poverty and deprivation. The situation remains acute, particularly in a number of food importing nations in Africa that continue to find themselves saddled with high levels of poverty and external indebtedness. Africa’s food trade deficit increased to $13 billion in 2005.
By the end of the 1990s, it became increasingly evident that much more than an increase in economic growth rates was required to step up the momentum of development. Among the more important lessons that can be drawn is that if growth is driven or enabled by a basis that is unsustainable, the resultant progress will be transient.
Credit Boom Leaves Real Investment Behind
Then we headed into the more recent crisis of 2008, a stark consequence of an unsustainable pattern of consumption, production and speculation.
I have not used the word “investment” for a reason: the period 2002-2007 was a time when the global economy found itself amid unprecedented financial buoyancy, but real investment was not the result.
The credit boom that ensued could have given a larger impetus to micro-credit, microfinance and micro-insurance, all of which are instruments that enable the underprivileged and poor to have greater access to capital. Had this happened it would have resulted in significant expansion of employment and opportunity.
Instead, the recklessly inefficient manner in which financial capital was utilized largely for the purpose of speculative gain cannot be called investment. Living unsustainably and paying for it describes the present situation -- but those who bear the worst brunt of the crisis are those who hardly gained from the boom that preceded it.
Low Growth Rooted in How Capital Is Managed, Not Supply
This takes us to the next fundamental lesson: low economic growth rates and a lack of economic progress is not the result of a shortage of capital. Instead, it is the outcome of weaknesses in the way financial and nonfinancial capital is managed and utilized.
Nor will present challenges confronting the world be overcome by rising economic growth rates without a continuous endeavor to strengthen the foundations of economic progress. Stories of economic transformation, such as East Asia during the 1980s and China during the 1990s, tell us that much more is required to propel the transformation that every region in the world requires.
More than one billion people live on less than one dollar a day. Over 2.7 billion struggle to survive on less than two dollars a day. Reducing fiscal deficits has been made a priority after the recession, but the critical task that confronts almost every nation regardless of its level of development (or lack of thereof) is to reduce the deficit of reform that has caused the deficit of development.
Imminent questions arise about this new era of economics, such as the role of globalization, the time that it would take for the present situation of uncertainty to diminish, and for employment and dwindling economic progress in the global economy to increase. The insights expressed through this series will hopefully help to answer some of these questions.
About the Author
Piya Mahtaney is a development economist and author of the new book, Sustainable Development and Globalization, as well as India China and Globalisation and Globalisation Con Game or Reality. She is a former journalist and wrote for the Times of India.