`Voodoo Economics' Doesn't Trickle Down Overseas, Either

It is dangerous to view economic tools as ends in themselves

VENEZUELA, Russia, then Mexico.

First in Venezuela, an elderly man returned to power; a solid majority of the voters rejected the free-market policies of the previous administration. Not many eyebrows raised; not much press coverage. Venezuela doesn't attract much attention, it doesn't rank high on our list of concerns.

A week later, in Russia, neo-liberal economic reformers are shaken in the first free parliamentary election the country has ever held. Vladimir Zhirinovsky, ultranationalist and nuclear saber-rattler looms large on the country's political horizon. His Liberal Democratic Party wins 23 percent of the vote in parliament, and the old communists win 12 percent.

Then Mexico, our newly acquired partner in the North American Free Trade Agreement, shows what lies beneath the public relations picture of the country sold to the American public. Indian peasants take up arms, as in the days of the Mexican Revolution, in a desperate attempt to call attention to their plight.

Different countries, different histories, very different positions in the scales of world power; but a common thread.

The purpose of economic reform is to improve the conditions under which people live. Economic measures are the tools; improvement of conditions is the goal. Whoever confuses the relationship between the two invites political disaster.

Russia, Mexico, and Venezuela are examples of such confusion and the price to be paid. The differences between the countries accentuate the common cause of their troubles. They fell victim to shortsightedness, to a dramatic replacement of reality with abstract ideas as to what constitutes economic improvement or progress.

In Venezuela a middle class was erased from the economic map. In Russia a middle class has been prevented from arising by policies favoring a few at the expense of many. In Mexico the government has, through a questionable privatization program, made a few billionaires without meaningfully improving the conditions of its middle or lower classes.

In the three countries the economic reforms have favored the polarization of wealth - the creation of a society in which a few have a great deal and the immense majority lags far behind. This lopsided approach to national well-being has been advocated on the assumption that once the wealthy minority was saturated with money, they would invest it, and their prosperity would begin to spill over to the rest of society - to trickle down.

Two fundamental things are wrong with this idea of economic development: First, it doesn't work that way; second, it is political dynamite.

We owe to George Bush the most accurate and picturesque characterization of the trickle-down theory: voodoo economics. Apart from the incantations of those who advocate this approach, there is no evidence, historical or empirical, that the indiscriminate liberalization of an economy leads to national prosperity. The history of Western society, of capitalist growth in the United States, Western Europe, and Japan, is the most forceful negation of such a theory. These economies grew and prospered under active, if enlightened, protectionism, with much help from their respective governments.

Today, the wealth accumulated in one country quickly disappears into the complicated network of international financing and may never return to its country of origin. As far as that country is concerned, it doesn't trickle down, it evaporates. Stability requires the existence of a middle class, a large number of articulate beneficiaries with a vested interest in the system's economic arrangements. Without them no economic system has a chance of lasting very long in a democratic political context.

There is also a seamy side to pushing the free-market miracle cure. Some Western businesses seek markets in which they can avoid the health, environmental, and financial restrictions that developed countries place on their activities. For these businesses, new markets with cheap labor and few restrictions are appealing. Trying to maximize profits is in the nature of private enterprise, and we can understand the business executive's idealization of unregulated markets. But it is the role of government to guarantee that the entrepreneurial spirit makes its invaluable contribution without jeopardizing the very circumstances that make a capitalist economy possible.

Viktor Chernomyrdin, prime minister of Russia, put his finger on the problem when he referred to the program of economic reforms implemented by his predecessor, Yegor Gaidar, as a ``poorly thought-out experiment,'' a failure ``to think about the people, for the sake of whom reforms were started.''

The Russians, the Venezuelans, and the Mexicans, poles apart in so many ways, are trying to tell us something: Reality is complex and messy; social dreams are oversimplifications that should not be taken for reality. If we do, the price to pay will be high.

One wonders if we will ever be able to get rid of dogmas. The dismal performance, indeed the horror, of communism should have immunized us against magic solutions and ready-made answers to questions of human organizations - at least for a while. But here we are, communism is barely buried and a new dogma sweeps the land: free the market, open the economy, and the millennium will be here. The Opinion/Essay Page welcomes manuscripts. Authors of articles will be notified by telephone. Authors of articles not accepted will be notified by postcard. Send manuscripts by mail to Opinions/Essays, One Norway Street, Boston, MA 02115, by fax to 617 -450-2317, or by Internet E-mail to OPED@RACHEL.CSPS.COM.