"This crisis is a wake-up call," Robert Wade said of the global financial downturn last night as he accepted the 2008 Leontief Prize for Advancing the Frontiers of Economic Thought.
Both Wade, a London School of Economics professor, and José Antonio Ocampo, a professor at Columbia University's School of International and Public Affairs, received Leontief Prizes from Tufts' Global Development and Environment Institute (GDAE) for their work criticizing the so-called Washington Consensus on globalization and free markets.
Speaking in the Coolidge Room of Ballou Hall, Wade said that the upside of the crisis is that it undercuts the confidence with which proponents of the neo-liberal Washington Consensus can argue. "There is an opportunity going forward for debate," he said.
According to Wade, the Washington Consensus purports that liberal economic policies such as globalization and maintaining free markets are best for economic growth. Wade said that the consensus is important because it has helped inform policy and has continued to enjoy support from key policymakers such as President George W. Bush. But both Ocampo's and Wade's work deal specifically with the weaknesses of this consensus, which they say led to the current global crisis.
"The principles of deregulation and self-adjusting markets are the main reasons for this crisis," Wade said.
Neva Goodwin, co-director of the GDAE, said the two scholars' reevaluation of the Washington Consensus was a main reason they were chosen for the Leontief Prize. "It's healthy to have reassessments of creeds that have directed economic progress," she said.
Goodwin said that some previous Leontief recipients also focused on the Washington Consensus, such as Alice Amsden and Dani Rodrik in 2002 and Ha-Joon Chang in 2005. The theme for this year's Leontief Prize ceremony was "Beyond the Washington Consensus: New Visions for Trade and Development."
Ocampo, whose work focuses mainly on developing countries, made policy recommendations that contradicted the "view that low inflation and fiscal balance were signs of economic stability." He suggested that developing countries should focus on forming policies to counteract current market cycles; in a boom period, he encouraged countries to be more "austere."
Ocampo noted markets are inherently unstable and do not self-correct. "The current crisis is an illustration of that basic point," he said.
The Columbia professor, who served as the minister of finance and public credit in the nation of Colombia, also said that the "space" to enact policy in developing countries is limited, partially due to the limited amount of economic instruments. But he added that foreign-reserve management is a tool that developing countries are beginning to use more effectively.
"For the first time, developing countries have massive foreign reserves since they realize that this is the best way to implement countercyclical policies," Ocampo said.
"Foreign exchange is [the] essence of monetary management in developing nations. What you have to do during [a] boom is save all foreign currency inflow," he added.
Wade, who spoke after Ocampo, discussed the failure of what he called the new Wall Street system, which is based on the idea that financial firms trade for themselves as well as their clients. Wade said that firms originate investment opportunities and then distribute them to their clients so that they do not hold debt on their balance sheets.
According to Wade, the new Wall Street system is also responsible for "blowing up bubbles around the world" to achieve profits. Examples of this include the technology bubble in the 1990's, the current-day housing bubble and the most recent oil bubble. "If some basic changes aren't made to operating parameters, and we go back in five years to business as usual, then by 2015 we will have experienced a new set of bigger bubbles and a continued upward redistribution of income," he said.
Wade, who worked at the World Bank, also presented evidence that contradicted the idea that incomes in developing countries and European countries are converging.
"The data shows [increasing] polarity rather than convergence," he said. He recommended that policymakers pay more attention to income inequality and domestic — as opposed to foreign — demand, to combat the growing gap between rich and poor countries.
The Leontief Prize is named for economist Wassily Leontief, who won the Nobel Prize in 1973 for his work on input-output functions.
The GDAE was founded in 1993 to investigate how societies can pursue their goals in a sustainable manner, according to GDAE Co-Director Bill Moomaw. Moomaw said that the organization has published over 30 books, numerous articles and reports, in addition to awarding the Leontief Prize each year.
