Governance of globalisation—the greatest challenge

That's nothing to wring our hands about, because market economy, also by its intrinsic nature, has corrective mechanisms, too, though they are pretty imperfect. When the deviation from the balance is too high; forces are activated that correct the disproportions. The problem is that very often they do so too late or not strongly enough, or they miss the point of balance, by going from lack of something to excess or the other way round. Obviously, it raises overhead costs of resource allocation and reduces its efficiency. Therefore, market corrections must be sometimes triggered, some other times speeded up, and yet some other times reinforced, curbed or even blocked; they need regulating. Who else than the state should do that?

It is necessary to use state interventionism to assist market corrections of the intensity of flows (income and expenditure, supply and demand, supplies and market) and of changes in resources (property, savings, stocks). It would be good to end ideological disputes on that matter and focus on which intervention techniques to use. If they are inadequate, you can do more harm than good because interventionism is a risky business. To avoid the resulting errors, neo-liberalism suggests throwing out the baby with the bathwater: not interfere with market processes as they have a capacity to self-adjust or to automatically balance themselves. State capitalism proposes not to throw out the baby but to keep the dirty water, too, excessively interfering with resource allocation, on many occasions, which reduces the achievable efficiency.

New Pragmatism calls for a well-balanced role of the state and a supra-state economic policy coordination, which is meant to correct, or, when necessary, to strengthen market processes. It says: wash the baby, pour out the dirty water, and if it starts to wash itself one day, perfect, but we can never do without washing. Therefore, we need to optimise the scope and instruments of state interventionism, while bearing in mind not to confuse the means of economic policy with its ends. The constant care to ensure balance in all of its sectors is an issue of great importance, but it's still a means the policy uses to achieve the end, which is development. The balancing of the economy is meant to foster rather than curb it.

Well, but each action causes reaction. Teams of experts, mostly lawyers in large corporations that can afford it, rack their brains over how to be compliant with the law, that is with the constantly changing regulations and still come out ahead. Business must be profitable, legal and ethical - these are the three sacred principles of New Pragmatism. Business should be ethical; it doesn't have to be profitable; it will be compliant with the law because we are the ones to establish it - these are the features of state capitalism. Business must be profitable and legal, and it may be unethical - these are the three canons of neo-liberalism. How eagerly and, to a great extent, effectively, it can, in nearly any situation, promote the interests of specific groups, especially those of the financial circles, is illustrated by the attempted legislative amendments and by results of those adopted in response to the crisis in the US after 2008. As a result, in many cases, attempts to improve regulations cause their quality to deteriorate, from the point of view of the general public interest.

DESCRIPTIVE AND NORMATIVE ECONOMICS: It's a cliché that we need to take care not to let the state that intends to improve the market, spoil it even further. There are cases where the state ruins the chances of obtaining the desired results. After all, not only the market errs; governments and central banks can be wrong, too. And they are, often. Governmental regulations, and in the era of irreversible globalisation, to a growing extent, also inter-governmental and worldwide ones, are often established to address challenges of the past. Meanwhile, it's about the future. Regulations are meant to help avoid blunders, errors, oversights, scams, frauds which can happen in the future rather than those that already occurred in the past. For these we should apologise, reprimand, dismiss, punish or put in prison. It's like the case of accidents and disasters after which technical inspection is tightened while it should have been done beforehand, limiting the causes of potential tragedies. An airplane crashed, so they check technical condition of all those that haven't, while it would have been enough to check some before the crash. A great flood broke the dike that had not been monitored for years and afterwards all the dikes are inspected while it would have been enough to check, in advance, the crucial points to avert the disaster.

Systemic state interventionism is supposed to examine fundamental shortcomings of the market and remedy excesses in the field of overly unequal income distribution, rather than try and take over the allocative functions of the market. Interventionism must refrain from socialising private losses. In the future, the growing complexity of market processes may make it easier to misuse interventionism for one's own ulterior motives. Ironically, these days there are more and more, rather than fewer and fewer ways to pass the costs of private capital failures on taxpayers. This is one side of the coin.

There is another one, too. In all types of market economy, but certainly to a greater degree and more often so in state capitalism than in the neo-liberal one, clientelism is rife, where state regulations and government policy serve the purposes of political, bureaucratic and business cliques rather than to correct market deficiencies. This has as much in common with a decent interventionism as neo-liberal scams do with honest business.

This can be defied only by a society that is well organised in a state with strong institutions, one founded on progressive law and order. That's why neo-liberalism wants a 'small' government or a 'cheap' government because what's small and cheap is poor and, consequently, weak. If a government can be relatively smaller without weakening its intervention functionality, we should by all means follow that direction. If it's not possible, it has to be 'bigger' or 'more expensive', because precious public services, also those that safeguard law and order, have a higher price than goods of poor quality.

Therefore, if somebody wishes ill to market economy, he should wish it an unbridled freedom as then it will be only a matter of time before its future becomes uncertain. Yet who wishes it a good future, must advocate proper regulation and a harmony between the market and state interventionism. In the long term, and on a macroeconomic scale, what can help in this respect is developing strategic indicative plans using the rolling wave method. These are plans in which, as time goes by, the time horizon progressively moves by the corresponding period so that the perspective ahead of us doesn't get shorter. In the world of the future, countries and regional integration blocs that are able to make a better use of this instrument will get the upper hand. Unlike in private capital corporations, which often prefer to keep their strategic plans secret (and every self-respecting corporation has plans), in states and regional integration agreements they are part of the knowledge of long-winded intentions doesn't harm competitiveness in any way. Actually, by causing an overall mobilisation, also among competitors, it can favour development even more.

It is worth noting at this point that without a proper strategic plan, the United States will be unable to cope with improving their public finances which are in a pitiful state, and the European Union will be unable to sort out its backyard when it comes to finance, either. This is understood by the Chinese, who approach the problem from the other end, in a way. They still rely on macroeconomic five-year planning but it's no longer command-based but rather strategic and indicative. From one period to another (currently the 12th five-year plan is already being implemented, 2011-15), this is a less and less planned and more and more market-oriented economy. Indicative planning is also used in India, which has not abandoned this instrument of controlling the development of economy, while continuing to deregulate the same, for over a decade now, calmly and rationally, without neo-liberal excesses.

Against this backdrop, it's easy to note that New Pragmatism is in keeping with the compensation hypothesis, which says that the more advanced globalisation, the 'bigger' government, or that the public expenditure to national product ratio is rising. Naturally, the goal is to relativise the sum total of expenditure to the gross world product, or to the sum total of gross domestic products of all countries. After all, there will be among them also those where the good cause of sustainable development is better served by reducing such expenditure (adjustment according to the efficiency hypothesis), but there will also be those where it requires a greater scale of fiscal redistribution.

New Pragmatism expresses a strategic approach to the future. It is no stranger to global visions or to warning forecasts, but, in principle, it has a pro-active approach to future. Good economics is not only about describing the world; it's also an instrument to change it for the better. Considering the long-term development trends, it's worth developing strategies to help orienting them the way we wish them to be, which will make it easier to solve more than one problem and avert more than one economic disaster.

In conclusion, as for the future, even more interesting than alternative scenarios or extrapolations of various trends, is the political economy of the future which addresses the critical question: how the contradictions, surfacing from various economic activities, will arise and by what institutions and policies' coordination mechanisms, on the world-wide scale, they may be mitigated. The greatest challenge for the future is to find a way of the governance of globalisation, since despite the recent crisis it remains an irreversible process.

What I call 'New Pragmatism' is a policy-oriented theoretical approach looking for the set of values, institutions, and policies which ought to sustain a balanced growth of the world economy in the long run. 'New Pragmatism' is eclectic, multidisciplinary, and dynamic. It also pays a great attention to the multi-culture aspects of social and economic development, since the future requires continuing opening of the societies and economies, and their peaceful co-operation won't be possible without a tolerance based on multi-culture.

The writer is a former Deputy Premier and Finance Minister of Poland and currently the Director of TIGER (Transformation, Integration and Globalisation Economic Research) and Professor at the Kozminski University in Warsaw (ALK). The article is adapted from his public lecture, organised by the Bangladesh Economic Association (BEA), in Dhaka on Tuesday (February 02, 2016).