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The End of History

by Ravi Kanbur

When the Berlin Wall fell in 1989, it was famously heralded as "the end of history" the end of all "big" debates on the organization of economies and society. Triumphalism aside, there is no doubt that in the early 1990s there was a sense that a consensus could be reached on key issues of economic policy, distribution and poverty. But the 1990s saw the disastrous consequences of mismanaged transition in the formerly communist economies, the financial crises in Mexico, East Asia and Russia and, finally, the debacle in Seattle. In the year 2000, the governors of the World Bank and the IMF—organizations whose self-stated mission is to promote poverty reduction and growth—could only meet under police protection, under siege by those who believe that the policies they espouse benefit the rich and powerful. The end of history lasted such a short time!

The street demonstrations that now accompany global summits can be easily but mistakenly dismissed as being unrepresentative. But they are the tip of a whole iceberg of disagreement which includes vigorous debate in the leading newspapers, passionate involvement of faith-based organizations, as well as the genteel cut and thrust of academic discourse. The real question we face is why? Why are there such deep disagreements on key aspects of economic policy despite seeming agreement on the objective of poverty reduction?​

Finance Ministries versus Civil Society

It is argued here that the reasons lie deep in the perspective and frameworks of analysis adopted by different groups. To simplify matters, and in full recognition of the fine texture of differences in individual views, we consider two groups; A and B, characterized as the "Finance Ministry" and "Civil Society" tendencies. Group A types are those who tend to believe that the cause of poverty reduction is best served by rapid adjustments to lower inflation and external deficits and the use of high interest rates to achieve these ends, internal and external financial sector liberalization, deregulation of capital controls, deep and rapid privatization of state owned enterprises and, perhaps the strongest unifying factor in this group, rapid and major opening up of an economy to trade and foreign direct investment. On each of these issues, Group B types tend to lean the other way.

Before exploring these disagreements, it is as well to record here growing areas of agreement and consensus across these groups in such areas as international public goods, the importance of education and health in conceptualizing and addressing poverty, and the key role of institutions in determining the impact of economic policy. Moreover, there is not as much of a sharp and general divide on the "markets versus state issue"—there is recognition of specific instances of market and government failure on both sides. However, these growing areas of agreement throw into sharp relief the remaining deep disagreements on economic policy, distribution and poverty.

Much of the reason for these deep differences lie in differences in perspective and framework on three key features characterizing assessments of economic policy, distribution and poverty: Aggregation, Time Horizon, and Market Power. First, Group A tends to view the consequences of economic policy in much more aggregative terms than Group B. Group A typically focuses on national measures of poverty. But it happens quite regularly that improvements in national level statistics hide a worsening for large sections of the population. This was the case, for example, for the Chiapas region in Mexico in the early 1990s. Just looking at the national statistics (which improved) could not have predicted the rebellion that was to come. The same is true, perhaps less dramatically but no less significantly, for gender and ethnic disaggregations of national poverty data.

Time Horizons

Second, Group B's major concerns are with the consequences over a time horizon which is both much shorter and much longer than the "medium term" horizon (five to seven years) which Group A typically adopts. For those who work with the daily reality of poor people's lives, and for the poor themselves, short run survival trumps medium term benefits every time, if the family is actually on the edge of survival. Many in Group A now accept this and support safety nets in general terms. However, they would nevertheless want to press ahead with economic reforms even if safety nets were not immediately in place, anticipating the medium term benefits. Over the longer term of fifty to a hundred years, many in Group B fear environmental consequences of unchecked economic growth. Group A, while agreeing that specific "corrections" are called for, are essentially techno-optimists, pointing to history to argue that predicted environmental disasters have not actually come to pass.

Third, and most potent of all, Group A instinctively approaches the distributional consequences of economic policy through a competitive market structure, while Group B instinctively thinks of a world in which market structure is characterized by pockets of market power, and economic policy feeds through this non-competitive structure to the consequences for the poor. Group B sees this imbalance at all levels, ranging from the power of the village moneylender over the poor peasant, to the power of the big corporations in a global setting. Group A essentially does not think that the much reviled multinational corporations are actually big enough in the global market place to be truly monopolistic—the basic theory and analysis of competitive markets, where no player is large enough to have market power is thus applied.​

Dialogue is Needed

It is as well to consider a seeming disagreement, that on "growth". There is less here than meets the eye. Very few in Group B would argue that the disaster in transition economies had nothing to do with the negative growth experienced there, or that the disastrous impact on poverty of the East Asia crisis was nothing to do with the collapse of per capita income (i.e. negative growth which accompanied the crisis). In general, the disagreements are not about growth in its technical sense—an increase in per capita income. Who could be against that? The real disputes are about the distribution of this growth, its long run consequences for the environment, and what policy packages actually get you equitable and sustainable economic growth. The tendency among some in Group A to show the strong correlation between poverty reduction and increases in per capita income (a correlation which cannot be doubted), and to then criticize those in Group B as being "anti growth" is unfortunate. The disagreements are not on the correlation, but on the policy packages, and on Aggregation, Time Horizon, and Market Power.

Given these deep differences, the way forward is through mutual understanding and comprehension. Unfortunately, many on both sides are adopting the stance of negotiation rather than dialogue. My focus here is on Group A. Especially since Seattle, a "line in the sand", "this far, no further", mentality seems to have gripped elements of Group A—in the IFI's, in the G7 Treasuries, in the Financial Press, and among some in academia. "Give them an inch of nuance and they'll take a mile of protection" seems to be the mindset. This is unfortunate. Trying to understand legitimate alternative views on economic policy, being open and nuanced in messages rather than closed and hard, is not only good analytics, it is good politics as well. History is clearly not at an end.

Ravi Kanbur is T.H. Professor of World Affairs and Professor of Economics at Cornell University. This article is based on his WIDER Public Lecture 'Economic Policy, Distribution and Poverty: the Nature of Disagreements', given on 12 June in Helsinki. The text on which the lecture is based can be found at Professor Kanbur's home page: www.people.cornell.edu/pages/sk145, and is also published in the June edition of the journal World Development (Volume 29 No.6).