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The Global Economic Downturn
Praful Bidwai
Frontline, 9 January 1998
Ideological supporters of liberalisation and globalisation believe that the world economy is booming, going places. But it is in deep crisis due to "free market" policies.
Such is the gullibility of our elite when it comes to globalisation and the vistas of apparently limitless prosperity which it is meant to open up, that it is willing to suspend disbelief entirely while swallowing all kinds of myths about the world economy. The latest instance of this is the "India Economic Summit" organised by the World Economic Forum (WEF) and the Confederation of Indian Industry in the Capital. The media dutifully rushed to cover the "summit" with glowing reports bordering on the euphoric.
What "summit"? The Concise Oxford Dictionary defines the word as "highest point, top, apex" or "discussion taking place between heads of governments". All that happened in New Delhi was a two-day meeting, without a particularly well-defined agenda, largely among some 400-odd businessmen, and between them, a few European entrepreneurs, and some Indian ministers and government officials. However, we were told that the "summit" included "some of the world's leading economists" - an invention of a fevered imagination.
The media, it can be safely predicted, will equally dutifully send representatives at the end of January to the non-descript, boring, freezing-cold small town in Switzerland called Davos to report on the WEF's "world" summit, which will be graced by corporate chief executive officers (CEOs) and some political leaders from different countries of the world. It is perfectly natural that many Indian CEOs should want to go to Switzerland. (After all, the bulk of the $60 to 80 billion hoard of capital spirited out of this country probably lies in Swiss banks). But it is relevant to ask why important ministers (even the Prime Minister) should bestow respectability on a purely commercial organisation like the WEF.
What is the WEF? Contrary to what is widely believed, the WEF is not a think-tank, policy institute or body of experts. It is essentially an event management firm, much like those that organise exhibitions or tours. But it is sponsored by the 1,000 biggest transnational corporations of the world. It is, in its own words, an "international membership organisation integrating leaders from business, government, academia and the media into a
partnership". Its mission is "to act as a bridge-builder at the highest level between the business community and governments", creating "a
club-like atmosphere to address... key economic, social and political issues...".
The WEF has an interesting history of promoting various right- wing initiatives, such as the Uruguay Round of negotiations on trade under GATT, helping end economic pressure on China after the Tiananmen massacre, and persuading Nelson Mandela to give up the African National Congress's policy on nationalisation of business. It also has a history of making erroneous economic forecasts - not surprising since it lacks the necessary expertise, and perhaps the data base too. For instance, its managing director Claude Smadja - who never tires of admonishing Indians for not learning the right lessons about globalisation and liberalisation - confidently forecast last year that India's GDP growth would be under six per cent and the fiscal deficit would exceed 5.5 per cent. In reality, in 1996-97, the two figures were seven and five per cent.
Forecasts apart, this year the WEF again tried to peddle the "self-evident" truth that the answer to all economic ills, and the sole key to growth and prosperity, lies in opening up the economy to global capital, so that large volumes of foreign direct investment (FDI) pour in. An arrogant European businessman even chided India for having only increased FDI inflows to just $2.5 billion in six years, whereas China managed to increase its FDI 21-fold to $42 billion in a decade; and even Poland is targeting for $18 billion. (It would be interesting to find out how much FDI Sweden, where the CEO's main manufacturing operations are based, draws in.)
The media breathlessly reported all this, noted its own "embarrassment" at uncomprehending Indians, reminded us that $2.5 billion is "chickenfeed" - Harvard university's target for fund- raising this year - and gave free publicity to Smadja's condescending and out-of-turn remarks on the nature of Indian democracy: "Once again Indian politicians have reverted to their preferred national hobby which is political diversion.... [A few precious months will be wasted".
The comments were so offensive and embarrassing that a large number of Indian CEOs sharply criticised Smadja, and declared that "he does not understand Indian politics" and that his remarks were "unwarranted", "superficial", bordering on "brinkmanship", even "stupid". Nevertheless, a pro-WEF journalist pontificated: "Countries, economies, particularly companies, now do not have years to change. If they don't change fast enough, they will perish... let's not complain if the world laughs at us. At least those at the World Economic Forum did".
The premise behind such heavy, earnest, if unsolicited, policy advice is that the world economy is in great shape and booming as never before, thanks to unprecedented competition. The countries which are growing fast are on another track, another train, so to speak. The laggards and slow-movers are being left behind on another train. You either compete for FDI, or you perish. There is no third way, no alternative to complete liberalisation, deregulation, privatisation and globalisation - other than meltdown, collapse and economic ruin.
The premise is comprehensively wrong. The reality is different. Today, like it or not, rich and poor nations are all riding on the same train. And the journey is producing more problems than solutions. The poor and the underprivileged in both rich and poor states are worse off than a decade ago. "The world economy is not booming". It is experiencing severe strain. It lacks institutions and agencies that can manage, leave alone reduce, the strain. Capital markets everywhere have just experienced the worst downturn in 60 years. Property values and gold prices have fallen to historic lows-not just in India, but all over the globe, from Argentina to Zimbabwe. There is an industrial slowdown in most major economies.
One reason for the slowdown is the collapse of the "East Asian Miracle", the phenomenon of seven per cent-plus annual growth since the 1970s, described only a year ago by the UN Development Programme as "the most sustained and widespread development miracle of the 20th century, perhaps all history". East Asia's importance must not be underrated. For a decade, it provided over 40 per cent of all new demand for industrial goods in the world. This dynamo no longer works. The unravelling of the "miracle" has humbled even South Korea - which has had to accept a humiliating $57 billion "recovery" package - and will make Japan's emergence from its own prolonged recession extremely difficult.
Most OECD economies are in the grip of a downturn. The Asian meltdown will knock one percentage point off their already low GDP growth. More than 100 million people in these countries live below the official poverty line, and the numbers are growing. About 36 million people are unemployed and more than five million homeless. In the European Union, structural unemployment runs at 12 per cent. There is little hope of quick recovery amidst diversion of capital flows away from major economies like Germany's. None of the major EU countries securely meets the Maastrict targets either for the fiscal deficit, or especially for public debt: in most of them, this is way over the 60 per cent (of GDP) limit. The Euro (single currency) will only become possible in 1999 with the most "flexible" interpretations of the Maastrict conditions.
On a superficial view, the US economy seems to be doing better. Unemployment (5 per cent) is at its lowest in 24 years, inflation is under three per cent and corporate profits lines are the highest in 40 years. But appearances are deceptive. More and more Americans are being forced to take up degraded forms of employment. As the UNDP says: "Jobs are being created, but many are dead-end, temporary jobs - without security and without a future". "Despite moderate growth, US median incomes today are still below their 1989 levels!" There has clearly been a perverse redistribution of incomes and assets from the poor and the not-so-poor to the rich and the super-rich. The private saving rate in the US is a pathetic 5 per cent.
As Asian economies try to export their way out of the slump by devaluing currencies, the US trade deficit is set to nearly double to about $300 billion a year (or about the same as India's entire GDP). If this happens, America will no longer be the "buyer of the last resort" of surpluses of goods produced by other countries, which it has been for decades. For instance, in 1994, it bought $140 billion more worth of manufactures than it exported ($400 billion). Already, the US net-assets position in international terms has fallen from plus 30 per cent of GDP to minus nine per cent. With a runaway trade deficit, this spells serious trouble: America cannot indefinitely absorb both high indebtedness and huge trade deficits.
Worse is yet to come. The industrial economies have built huge overcapacities, and now face a demand crunch. For instance, the global automobile industry will soon be able to make 80 million cars a year, but the market has only 56 million buyers. This is no small matter: 13 of the globe's 50 biggest companies are auto- makers. The larger point is that the "supply side" era, launched by Ronald Reagan in 1980 - a naive but dangerous doctrine which says: cut taxes, make the wealthy wealthier, so they invest more and hence increase supply and output - is coming to an end as it is realised that such voodoo formulae are bad not just for people, but for whole economies too. Overcapacity drives down prices, wages, and eventually profits. The prospect of depression stares the world's richest nations in the face.
Policy-makers in these countries are coming under increasing pressure to adopt corrective and protective policies, including old-fashioned Keynesian pump-priming of demand, capital controls and even trade restrictions (e.g. a temporary general tariff on all imports, permissible under GATT). There is talk of a "protectionist backlash". But in India, we are being bludgeoned into believing that we should do the opposite-deregulate and liberalise, and leave anything to the "free market" and "free trade".
Such a policy can only be suicidal. Let us not forget, despite the labours of corporate PR men and not-so-hidden-persuaders like Smadja, that globalisation is a deeply unequal, disequalising and disruptive process. World trade is unequal - the terms of trade have steadily moved against the poorer countries for a hundred years, except for a brief interval in the late 1960s to the early 1970s - and investment flows are skewed: two-thirds of them are internal to the powerful triad of the US, Europe and Japan. Of the rest of the global FDI, China alone accounts for over one-half. (This is now threatened with Hong Kong's unification - it provided half of China's FDI - and the East Asian meltdown.)
The present state of world capitalism is gloomy, crisis-ridden, highly dualistic and lacking in legitimacy; and the prospect is bleak. Capitalism's "Golden Age" was in 1948-73 when it could sustain high growth and substantially generalise a degree of prosperity in the US and Western Europe. Such an age is not about to dawn again. Today's capitalism is, if anything, much meaner and more dualistic than at any time in this century. We would be more than a little foolish to plunge headlong into deregulation and globalisation, or expect that integration into the global corporate economy will help us solve our problems. We have to address them ourselves, and focus on an agenda based on our people's needs and priorities.
Copyright 1998 Frontline
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