Should finance lead the real sector?

June 4, 2024

NEW DELHI – As emerging and developing economies (EMDEs) navigate a turbulent world of intense geopolitical rivalry and worsening climate warming, the question of a new development model is at the top of the growth agenda. The current narrative is one of how EMDEs choose sides between an insecure rich West and the rising BRICS (Brazil, Russia, India, China, South Africa) grouping of countries that seek an alternative order to the current G7 dominated neoliberal system.

The Biden Administration story of a choice between democracy versus autocracy and supporting a rules-based order is today not convincing to the Global South, which sees a global retreat in democratically-led countries, whilst the West can selectively “do as I say, not as I do”. Free market order is in serious retreat as tariffs and sanctions are raised unilaterally, with industrial policy and state intervention rising by the day. The issue is less capitalism versus socialism, because some capitalist countries are turning fascist, whereas climate change policies cut across ideologies. All countries face two serious imbalances – social injustices in terms of widening income and wealth, as well as planetary injustice as natural capital is being plundered with pollution, biodiversity loss and ruthless extraction of minerals and nonreplaceable natural resources.

Attending the Global Islamic Economy and Finance Forum in Kuala Lumpur this week, it struck me that the theme illustrated a dilemma of policy choice – promoting the real economy over finance or the other way round? Finance has led the real economy in global growth since the 1980s, when financial liberalization became synonymous with the neoliberal order. Allowing open capital accounts,