Wisdom at the barricades

This time the populist protesters no longer seem to be the sideshow,primarily because they reflect (and are expressing vociferously) the deep anger of a much broader section of global society than hitherto. The anger,at its base,is about the consequences of the economic crisis. But it is,in particular,directed at those in the world of finance and banking who people at large view as responsible for bringing on this crisis. What makes the anger worse is the perception that the culprits in finance are getting a landing soft when compared with many others who are suffering much more. It’s no surprise then that the protesters have amusingly anointed April 1,2009 as financial fools’ day.

The mainstreaming of the populist protesters is also reflected in the fact that,for once,politicians are attempting to reach out to them. Until the unravelling of this crisis,these were groups which could be physically barricaded away from major summits and intellectually dwarfed by the very obvious success of the system they were protesting against. After all,free markets and globalisation lifted hundreds of millions of people out of poverty (largely because of the phenomenal growth not only of China and India but also in places like Africa and Latin America) and made others wealthier than they were under the more closed world between 1945 and 1980.

The change can be gauged from the fact that leaders as powerful as Joe Biden and Peter Mandelson tried to make appeals for patience directly to the people on the streets. Interestingly their appeal was directed to a rainbow group of protesters (including NGOs and trade unions) under the banner of “Put People First” who are drawing attention to poverty,jobs and climate change — all fairly mainstream concerns (unlike,say,anarchy).

Whether the G-20 summit achieves anything concrete or not,events around it clearly show the way the balance of global political economy is swinging leftwards. Given the scale of the crisis and its root causes in financial capitalism this shift is inevitable. Free markets,after all,do not exist in a vacuum — they need popular legitimacy,something which voters in at least the US and the UK had been granting them since the Reagan-Thatcher revolution. Now,politicians need to manoeuvre around to a new political consensus and social contract.

In doing so,they still must be wary about the agenda of the varied populists they want to bring on board. The edifice of free market capitalism and globalisation is after all about much more than just global high finance — think free trade,foreign direct investment,movement of people across borders,to name a few. And the problem is that the populists would instinctively turn the entire system on its head,which would send the global economy into an even sharper tailspin.

So,what’s the compromise politicians must strike? First,there will have to be some redistribution given the severity of the downturn and the toll it’s taking on the poorest. This should,however,be done in the least distortionary way. Textbooks would suggest lump-sum cash transfers (as opposed to protectionism or nationalisation) which is precisely the policy road the US and UK governments are already taking. It is politically difficult to argue about the costs of redistributing to the poor when billions and trillion are being pumped into banks and financial institutions.

In this there is a lesson for India. For too long we have resorted to distortionary and ineffective ways to allegedly protect jobs and create livelihoods — protectionism,licence raj,big public sector,etc,which achieved little. Now’s the time for policymakers to push more effective direct transfer programmes to the poorest while stepping up reform in other areas (including disinvestment) to help finance this transfer spending without busting the deficit — a combination of good reformist economics on the crutches of some minor but effective populism.

At the global level,politicians have begun responding to some populist/public concerns. Already,tax havens are being forced to become more transparent. That’s a good thing. A debate on the future regulation of finance has also begun. It need not,of course,shut off finance as we have known it,but it can help make the system a lot more transparent and a lot less prone to opacity,collapse and crisis. This crisis has been in large part caused by the opacity of securitised assets — if perhaps the pricing of these assets was transparent we might have got out of the mess sooner.

But that’s where the adjustment with populism must end. There ought not to be any compromise on free trade or on the free movement of capital across borders once confidence returns. In India,policymakers may feel emboldened to undertake more pro-poor public spending — after all that’s mainstream and hardly populist now. But they should also press ahead with other reforms,like disinvestment which can help finance their spending plans. And let’s not even contemplate raising barriers to foreign trade and foreign capital — anyone who lived through India’s decades of socialism would know the dangers of populism in that form.

dhiraj.nayyar@expressindia.com