Posted by Joshua on Friday, November 13th, 2009
Omar S. Dahi Critiques Ehsani and “Neoliberalism”
For Syria Comment
Omar S. Dahi is Assistant Professor of Economics, Hampshire College.
With an estimated 40% of the total population of 80 million Egyptians living under the poverty income line of $2 per day, despite five years of strong economic growth in Egypt, many people depend on heavily subsidized bread provided at distribution centers and bakeries across Egypt. When prices doubled in early 2008 because of a variety of inflationary factors, even more people relied on the subsidized bread than normal, forcing Egyptian leader Hosni Mubarak to convene emergency cabinet meetings and even to order the army into action baking bread for the country’s poor. Egypt’s goal is to cut the proportion of people living on under $1 a day to 12.1 percent by 2015, from 20.2 percent now , a U.N. document said. Between 2000 and 2005 the absolute poverty rate rose to 19.6 percent from 16.7 percent of the population. Poverty is widespread in Egypt, affecting 40 percent of the population, and there are deep pockets of poverty. During 2000–2005, absolute poverty increased, but there was a reduction in the number of near-poor, leading to a decrease in the ‘all poor’ ration. —Arab Republic of Egypt Poverty Assessment Update, World Bank, 2007
According to arguments made by Ehsani on this blog, and elsewhere by other like-minded scholars, government officials, business people, and private citizens (henceforth the neoliberals), the solutions to the failures of the Syrian economy are straightforward. Decades of socialist state led management have resulted in widespread developmental problems. Aside from the clear failures of the State Owned Enterprises (SOEs), a culture of handouts, a stifling of private initiative and entrepreneurship, and rampant corruption mean that the current economic structure has reached a dead end and must be dismantled. An opening up of the economy, coupled with a structural shift from state-led to private sector led development, as well as the lifting of barriers for private initiative domestically as well as trade and capital flow barriers externally is the solution. This is a painful process: “The Baath has been in charge of economic policy for over 40 years. Undoing the damage caused by extensive reliance on subsidies amid a population explosion and persistently weak economic growth will not be easy.” Various iterations of the meta-narrative include mystical effects of openness, such as an unearthing of an entrepreneurial spirit that lays latent inside Syrians who, if only given the chance, can prosper through their own initiative. This spirit too has been crushed, but it can be revived, if only the government would get out of the way. Indeed, casual observations and empirical evidence from Syria seems to support the criticism mentioned above. However, does the trinity of deregulation, liberalization, and privatization hold the promise of rapid social development and prosperity in Syria? In short the answer is: no.
The neoliberals enjoy mocking defenders of state-led development as anachronistic remnants of “old-thinking.” However it is the neoliberals themselves who are stuck in a time warp. The comments by Ehsani seem like World Bank literature in the late 1980s or early 1990s. His (and others) discourse ignores all the changes in both the global economy as well as development theory since the late 1990s. It is true that starting in the 1980s (after the debt crises) and early 1990s (after the collapse of the Soviet Union), there was a full-scale attack on the role of the state in development by multinational institutions (World Bank, IMF, and after 1994 the WTO) as well as U.S. and Western governments. However while these had been deaf to any objections at the time, the glaring failures of their advocated policies, as well as the success of countries with heterodox economic policies have become too difficult to ignore. The neo-liberal “model” has failed. Serious work in development today is to figure out how to bring the state back into development and not the reverse. I am not referring only to infrastructure, such as building roads and bridges, targeting health care, or education. The goal must be for a meaningful industrial policy, as hard as it is for some to see how this particular state can do so.
There are three main reasons why: 1) aside from a few exceptions, no currently wealthy country (including Western Europe; North America; Japan) has done so without substantial and long-lasting state intervention in economic development and direct protection and promotion of national industry; 2) the newly industrializing countries, including the so-called Asian tigers and certainly China and the emerging South American power Brazil have used even more direct and varied methods of state intervention; 3) countries which have closely followed the neoliberal path have witnessed disappointing results in economic growth, but more importantly have also been subject to increasing inequalities, social fragmentation, and periodic financial crises.
The first argument is simply historical: no country in the world has successfully managed sustained levels of growth and human development through free trade and free markets. All countries that are now rich, including the industrial powers of Western Europe, North America, and Japan as well as the newly emerging countries such as the so-called Asian tigers (South Korea and Taiwan, Singapore) have become rich through extensive and persistent state intervention to promote industrialization (the oil-rich low population countries are a different story of course) . In fact the extent of state intervention in the late industrializing states mentioned above has been much deeper and varied, using a wide variety of carrots and sticks measures. The main defense for the claim I just made can be found in various sources, but I will just name two: Alice Amsden’s The Rise of the Rest, and Ha Joon Chang’s Kicking Away the Ladder. Chang concentrates on protectionism and state intervention while Amsden demonstrates the mechanisms used by the late-industrializers to develop. Among other factors, the most successful countries were a) those with more equitable land and income distribution, achieved through state intervention, b) those who decided to “make” technology domestically and rather than “buy” or simply import it and used domestic savings or bilateral loans to finance development rather than foreign direct investment, c) those who successfully enforced a reciprocal control mechanism of government protection in return for monitorable performance. On the other hand, countries that underwent rapid (trade and financial market) liberalization, deregulation, and privatization have witnessed disappointing results. There is a depressingly large literature on this, documenting, among other aspects such as lower growth and increased inequalities, the periodic crises following capital account liberalization (Mexico 1994-95, Turkey 1994, 2000-2001; Argentina 1995, 2001; Russia 1998; South East Asia 1997-98; Brazil 1999).
However the process of liberalization in Syria has facets other than the increased inequality and levels of unbalanced regional development. There is also a process of social marginalization of the interests and concerns of less-desirable constituencies who do not fit the image of a “modernizing” Syria. Even on the level of discourse, the focus is shifting away from solidarity with the working and peasant class and the focus on the prospects for personal enrichment. Rather than programs like“مع العمال” or “مع الفلاح” we have “كيف جمعت المليون الاول”. Rather than focusing on, say the problems facing peasant women in the fields performing back breaking labor 10 hours a day, we have the stories of well-heeled westernized urban youth who apparently love the night life as much as any of their counterparts in the West. The normalization and legitimization of massive monetary gains in various media and the exclusion of the peasants and the poor from the national social space not only allows an uninterrupted success story to emerge, unhindered by actual social reality, but also has the effect of changing the aspirations of an entire sector of middle class and working poor who have no realistic chance of achieving the same social status, and try to bridge this lack of ability through conspicuous and unproductive consumption. This will likely exacerbate rather than mitigate social cleavages.
The discourse of ‘entrepreneurship’ is also key here, often repeated by Ehsani. Here again, Syrian neo-liberals did not invent this, but draws on thirty years of a bourgeois utopia promoted by the World Bank and other institutions (though it has its origins earlier). In this utopia everyone is an entrepreneur, everyone wants to start a business and work for themselves. This not only provides an excuse for state withdrawal from development, but also hides a key historical fact since the emergence of capitalist development: most people do not want to be self-employed and for a very good reason. The average rate of return from self-employment is low and risky. What most people really want is to be employed as wage laborers with job security. If entrepreneurship has a role (which it does), it must be subsumed within a larger developmental model whereby entrepreneurs are responding to the ‘right’ incentives. After all, both the venture capitalist and the street peddler are entrepreneurs.
Finally, there is the fetishization of the word “reform,” giving it an independent existence outside of space and time. The problem is that Ehsani and others (including some Western scholars writing on Syria) suffer from what Dani Rodrik calls as “the reformer’s conceit” which is : we know what the right reform policy is, but special interests and politics are preventing. Only in this mindset do we see crusading free traders fighting the archaic and parochial state apparatus who can’t see beyond their noses. So let me be clear: there is no such thing as reform.
Reform in all countries is a socially constructed process, shaped by the strength of social forces to suit their interest. The “promised land” the neoliberals point towards, if only we’d listen, is a fiction. What they’re advocating is an illusion, a myth which, in the name of its pursuit provides an avenue for the powerful and well-connected to bend the political economy to their own interests, as it has happened elsewhere near and far (from the homeland, that is) and is happening now. To make it clearer, there is no evidence that the ‘reform’ Ehsani advocates will lead to the elimination of corruption, patron-client networks, etc. etc. The more likely outcome is that the state simply safeguards the interests of a different set of clientele, with “corruption” and “hand-outs” going in different directions than earlier.
So what is the appropriate model for development? The lessons mentioned above are quite clear. That said, I do not view it as my role necessarily to “spell out” what path Syria should take. But I know my role should not be as a cheerleader for a policy that is likely to lead to cataclysmic results, and that has been tried and failed everywhere. Our role should be to continue to insist on the inclusion and empowerment of weak and under-represented social groups (such as peasants and workers in the informal economy) who are most vulnerable during a process of rapid change. Second it should be, when possible, to draw upon the positive lessons being formulated in other countries. Here I mention in passing Venezuela and Bolivia who have made rapid progress and social indicators through empowerment of previously marginalized groups, and direct targeting of illiteracy, poverty, and gender inequalities.
Of course there’s much more to the neo-liberal project than just removing the role of the state from playing a leading role in development. Once the population is re-configured as a “burden on the state,” [as it has in the official economic team’s discourse] every form of social spending is up for elimination and it won’t be too long when health care and education which until now have been thought of as rights also turn into privileges to be subjected to the logic of markets. Or maybe then Syria will have finally arrived: a nation overflowing with entrepreneurs.
Omar S. Dahi, Assistant Professor of Economics
Hampshire College firstname.lastname@example.org
His Ph.D. is from the University of Notre Dame, Indiana. His research and teaching interests are in the areas of economic development and international trade, with a special focus South-South economic cooperation, and the political economy of the Middle East and North Africa. See this article: The Middle East and North Africa by Dahi and Demir.
 I will summarize a broad literature, but you can go to the following sources for more information. On capital account liberalization: L. Taylor 2000. “The Consequences of Capital Liberalization,” Challenge; 1997. “The Revival of the Liberal Creed,” World Development. G. Epstein, ed. 2006. Financialization and the World Economy, Edward Elgar. On theoretical and empirical evidence on trade liberalization, globalization, and growth see: Darity and Davis 2005. “Growth, Trade, and Uneven Development: a critical survey”, Cambridge Journal of Economics. D. Rodrik and F. Rodriguez. 2001. “Trade Policy and Economic Growth: A Skeptic’s Guide to the Transnational Evidence,” Macroeconomics Annual 2000. Milanovic 2003. “The Two Faces of Globalization: Against Globalization As We Know It, World Development. On new thinking in development see: Dani Rodrik. 2006 Goodbye Washington Consensus, Hello Washington Confusion? A Review of the World Bank’s Economic Growth in the 1990s: Learning from a Decade of Reform, Journal of Economic Literature. H.J. Chang and I. Grabel 2004. Reclaiming Development: an alternative economic policy manual. Zed Books. On historical experiences of now rich countries see: H. J. Chang, 2002. Kicking Away the Ladder: Development Strategy in Historical Perspective, Anthem Press, and 2008. Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism, Bloomsbury Press.; and A. Amsden 2001. The Rise of the “Rest”: Challenges to the West from Late-Industrializing Economies. Oxford University Press.
Last week, Dr. Landis shared with me a brief note from Mr. Dahi. In it, the assistant professor in economics wrote that he felt compelled to respond to the recent statements that I made in support of Mr. Dardari’s economic reform agenda as he took heavy criticism from the new head of the state planning commission.
My response was to ask Dr. Landis if he could convince Mr. Dahi not only to expand on his note but to also make sure that he offers his solutions to the challenges facing the Syrian economy.
The good news is that Mr. Dahi did expand on his critique of my writings as the fine note above illustrates. The sad news is that he offered no real solutions when he wrote:
“I do not view it as my role necessarily to spell out what path Syria should take”.
To be sure, Mr. Dahi’s note is organized, professorial and well meaning. Most readers are likely to be attracted to its concerns for the “working and peasant class” and its criticisms of multinational institutions, U.S. and Western governments as well as “conspicuous and unproductive consumption”.
The note pits “neoliberals” where I seem to belong against “defenders of state-led development” where Mr. Dahi’s heart lies.
The most telling and remarkable quote from Mr. Dahi’s note is the following:
“Most people do not want to be self-employed and for a very good reason. The average rate of return from self-employment is low and risky. What most people really want is to be employed as wage laborers with job security”
Coming from an Assistant Professor in Economics, this is a shocking statement.
Of course, I would myself love to have a job that pays me with no risk. I would love it further if it came with a generous medical and pension plan. Free coffee and breakfast in the morning to go with this secure job would be fantastic.
But who is going to pay for it?
If Mr. Dahi is right that “most” of us would want just such a job (I know that I do), we must find a sucker that is willing to pay for our risk-free salaries and benefits and also our retirement.
Well, that is easy. Let us ask the state to be our friendly employer.
This is precisely what the Syrian government has done for the past 40 years as they got into the business of running 250 constantly losing businesses. Mr. Dahi and his supporters keep pleading with us for time and patience before the state-led sector miraculously turns around and suddenly prospers. If we just agree to reform the system one more time. If we just reorganize the way in which the sector is managed one last time, profits will flow and we will all be one big happy family. The working and peasant class will no longer be marginalized looking from the outside. Those conspicuous and unproductive consumers will no longer “exacerbate social cleavages”.
Mr. Dahi claims that countries which have closely followed the neoliberal path have witnessed disappointing results in economic growth. He offers the examples of Mexico 1994-95, Turkey 1994, 2000-01; Argentina 1995, 2001: Russia 1998; South East Asia 1997-98; Brazil 1999. He of course conveniently forgets to talk about where these countries are today precisely because they followed and stuck to those “neoliberal” policies. Brazil has seen so much in capital inflows recently that it imposed a tax on new capital coming in to prevent its currency from appreciating further. Its equity market is up 73% in Dollar terms and 132% in local currency this year alone.
Defenders of state-led developments are more concerned about “income inequalities, social fragmentation and periodic financial crises” than economic growth. The size of the cake is not important enough to their thinking so long as we cut it as equally as we can. Hugo Chavez has squandered his country’s vast natural resource revenues to promote what Mr. Dahi supports as the “empowerment of previously marginalized groups”. My thoughts on this experiment were detailed in a dedicated post here on this forum.
Sadly, Syria is not blessed with substantial oil revenues. Any spending that the state embarks on in the shape of subsidies and/or expansion of the public sector must be financed through tax revenues, borrowing or printing of its currency. As none other than the country’s own Prime Minister recently remarked, how many electricity generating grids, irrigation projects and roads and highways could the country have built if it were not for the subsidies that were spent on those that did not deserve it or which have gone to the benefit of the smugglers.
Unless economic policy delivers real economic growth that matches the country’s potential growth, unemployment will rise, standards of living will drop and sooner or later, the state will run out of money to finance socialist projects.
Potential growth is defined as labor force growth plus productivity growth. In the case of the U.S., potential growth is 3%. Unemployment will rise if the economy grows at 3% or less. In the case of Syria, most estimates put the country’s potential growth in the range of 6% to 8%. As Syria’s young population grows, those entering the labor force will accelerate. Syria’s number one economic challenge is create close to 300,000 jobs annually to help absorb those entering the labor force seeking employment.
GDP is defined as C (consumption) + I (investment) + G (government) + X (exports) – M (imports).
Syria’s consumers suffer from low purchasing power and lack of personal credit to keep powering consumption much further. Imports are already high and are unlikely to subside hence continuously subtracting from GDP. The Government is already burdened with an expensive subsidy program, low tax revenues, lack of other sources of funding and constantly having to plug the hole in its money losing enterprises. This leaves private Investments and exports to carry the load.
For private investments to increase, interest rates, taxes and red tape need to be reduced. The government monopolies over certain businesses have to be dismantled so that the private sector fills the void. In the past, I offered the tire, beer and bottled water industries as examples. There are many more. For exports to increase, the value of the Syrian Pound has to become more competitive. Electricity has to be more widely available. Tax and rebate incentives to exporters must be offered.
No one should be duped into thinking that this process will be easy and painless. You cannot undo 40 years of misplaced economic policies and expect no pain. Regional and global competitors have had a huge leg up on us already. The leadership must explain to the public that this transformation is likely to be hard on a large segment of the society. The quicker the private sector finds it profitable to invest and grow, the faster they will increase employment and income. Government policy must make it easier for private entrepreneurs to make money by assuming risk. After all:
“It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.”
Adam smith realized this back in 1776. The difference between Mr. Dahi and me is that I agree with the above 233 year-old quote. He does not. His prescription is the same outdated policy of state-led development but that can now expand into a “meaningful industrial policy”. Regrettably, his note does little to explain how the outcome will be different this time around.
Financial superstar analyst and former chief global strategist for Morgan Stanley, Barton Biggs, argues in Newsweek that Syria may represent “the next hot market“.
Also read Qifa Nabki