UN calls for overthrow of free market ideology

The United Nations has called for a return to state-led "industrial policy" for poorer countries in what amounts to a rejection of the free-market thinking that has dominated global institutions for the last 30 years.

Supachai Panitchpakdi, head of the UN Conference on Trade and Development (UNCTAD), said the financial crisis had exposed the deep failings of growth models adopted in Africa, the Pacific, and parts of Asia, usually under pressure from the West.

"Some advanced countries may be seeing an end to the crisis but it's still darkness at the end of tunnel for the least developed, and many of them are going backwards. We're talking about a billion malnourished people," he said in London.

Capital flows to poorer states and export earnings have together collapsed by $2 trillion (£1.22 trillion) since the credit crunch began. "This is an alarming trend, and it's not a result of their own doing," he said.

Mr Supachai said the world had spent some $5 trillion on financial support since the crisis began but almost nothing has reached the most vulnerable countries. "There is very little trickle down," he said.

While Eastern Europe has been rescued by the International Monetary Fund, the world's 49 "least developed countries' (LDCs) are too poor to meet the loan conditions.

UNCTAD said market ideology has distorted the structure of farming in many of these countries over the years and prevented them creating light industries and processing needed to move up the manufacturing ladder. "The market-led reforms since the early 1980s have, to a large extent, failed to correct this deep-seated weakness," said the agency's annual report.

Decrying a "false dichotomy" between the virtues of the free market and the alleged vice of state dirigisme, it said there is much to learn from the calibrated "industrial policies" of Malaysia, Sweden, Taiwan, and Finland.

"Not all decisions made by governments are always rational. Governments are subject to capture by special interests. The same criticisms, however, apply equally to the market," it said.

UNCTAD said the commodity boom of recent few years masked the underlying problems, as well as leaving countries exposed to sudden shocks and debt crises. The claim may raise eyebrows among those in the City who think that a "commodity supercycle" driven by China has transformed the prospects of mineral-rich states, despite the price correction over the last year.

The UN's tilt towards "smart dirigisme" would have caused apoplexy in Washington under the Bush Administration, and will remind some critics of development orthodoxies in the 1960s.

It may receive a less chilly reception from President Barack Obama and his Democratic Congress. As global leadership shifts ineluctably from West to East it is no longer possible in any case to ignore the success of Asia's state-led systems. The ideological baton is passing.