Big Bang, or Steady Eddie?

The jury is in regarding which approach to global economic reform works.

October 10, 2005 05:33
china bridge 88 ap

china bridge 88 ap. (photo credit: AP)

In a recent piece (The Jerusalem Post, Sept. 20), former IMF chief economist Kenneth Rogoff argued that the pace of economic reform worldwide has slowed down. "People are not thrilled to live in a world of blindingly fast change," Rogoff explained, arguing that only an economic crisis might trigger politicians (and the public) to seriously pursue reform agendas. The problems with Rogoff's argument begin on the factual level. He claims, for example, that Indonesia, Mexico and Brazil are governed by leftist governments that have not found a viable alternative to the "Washington Consensus" economic liberalization agenda. This is an odd statement. While the Brazilian government is leftist, Mexico and Indonesia have pro-American governments that firmly support market capitalism. Rogoff's claim that Europe has lost its appetite for economic reform is similarly problematic. Germany recently privatized Deutsche Post while altering tax rules so that its giant conglomerates could efficiently unwind their cross-holdings. France recently completed the privatization of its toll road system, and is preparing the privatizations of the Paris airport and the gas and electric utility monopolies (GdF and EdF). Then, of course, there is the UK. There the Tories are pushing for a comprehensive tax reform built around a "flat tax," while Labour was talking about introducing a nationwide congestion pricing scheme that would allow market forces to ameliorate traffic jams. Why would Rogoff, known as a brilliant theorist, make such a factually incoherent argument? The answer likely lies in a economic policy debate that has been raging for the past 20 years. Should economic reforms be done "big-bang" style, or should they be implemented in small, measured steps? Today, it is clear that the gradualists won decisively. To be sure, some of the countries that were subjected to crash programs ended up successful in the long run, but only after suffering immense suffering in the short run. In these cases, the short-run pain inflicted by reform often outweighed the long-run gain. Even today, Poland, regarded as the most successful example of big-bang economic reform, suffers from an unemployment rate that exceeds 18%. Some of the other rapid-reform countries, like East Germany, seem set to continue suffering indefinitely into the future. Hence, the popularity of ex-communists in the recent German elections. Most tragically, some of the "big bang" countries particularly Russia had economies and even political systems that literally collapsed outright. In the meantime, the "steady Eddie" countries that embarked on gradual reform programs seem to have suffered little or no short-run pain, enjoyed major long-run benefits, and developed broad political consensuses in favor of continued reform. India, the UK, and the US come to mind. In all three cases, modest but well-thought-out programs implemented by Rajiv Ghandi, Ronald Reagan and Margaret Thatcher not only worked, but were so popular that rival parties, far from reversing the reforms, adopted their predecessor's reform agenda as their own. In effect, Clinton and Blair are Reagan and Thatcher's ideological heirs. This brings us to Rogoff's biggest mischaracterization. After correctly noting the "dizzying pace" of China's development, he implies that this is due to aggressive economic reforms and argues that "with a long history of cataclysmic, often violent change," Chinese society is perhaps more adaptable than most. What? First of all the Chinese hardly have a monopoly on violent or rapid change the history of Europe and the rest of Asia is not dramatically less tumultuous. More significantly, Rogoff claims that China is an aggressive reformer. In fact, China is solidly in the "gradualist" camp. Indeed, 25 years after it launched its reform drive, China has yet to privatize its massively subsidized state-owned industry, has not sorted out property rights, has an archaic tax system based primarily on a myriad of license fees, has capital controls and a rigged banking system, and has not begun to establish the political institutions required for the functioning of a developed country. In spite of all this, China has engineered a miracle in terms of rising living standards and poverty abatement. In short, China is the best evidence in favor of the gradualist approach to reform. Rogoff seems to be trying to jam square facts into round holes because he, like most of the world's leading economists (Joseph Stiglitz and Jagdish Bhagwati are important exceptions), strongly advocated the big bang approach to economic reform. In Rogoff's defense, it must be said that he was not among those who spread the "big bang" fad around the third world. While Rogoff spent most of the 1990s writing arcane works of economic theory, the economist who really popularized the big-bang approach was Jeffrey Sachs, who left a remarkable trail of destruction behind him as a consultant to Poland and Russia. Sachs has never taken responsibility for his poor performance and the high human cost that resulted from the policies he advocated. Instead, he has reinvented himself as the economics profession's moral conscience and the world's "advocate for Africa." Frankly, Africa has enough problems already. The writer is the chief economist of Forum FIE, the Israeli marketer of Vanguard Mutual Funds.

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