STWR - Share The World's Resources

Restructuring the world order will have to be based on conscious attempts to reduce income and wealth inequalities - requiring the north to reduce its consumption of scarce resources and carbon emissions. It's not going to be easy, says Jayati Ghosh.

18th September 08 - Jayati Ghosh, The Guardian (UK)

Now Wall Street has made it official: the boom is finally over and the world economy is not going to be quite the same for a while. But before we think of how to deal with the current mess, we need to figure out what that boom actually meant for most people in the world.

Everyone now knows it was unsustainable, a flimsy house of cards that greedy and irresponsible financial institutions could build because deregulation allowed dodgy practices. The economic boom drew rapaciously and fecklessly on natural resources. It was also deeply unequal. Contrary to general perception, most people in the developing world did not gain from that boom.

The bubble in the US attracted savings from across the world, including from the poorest developing countries, so that for at least five years the south transferred financial resources to the north. Governments of developing countries opened up their markets to trade and finance, gave up on monetary policy and pursued fiscally "correct" policies that reduced public spending. So development projects remained incomplete and citizens were deprived of the most essential socio-economic rights.

Nor was there a net transfer of jobs from north to south. In fact, industrial employment in the south barely increased in the past decade – even in China, the "factory of the world". Instead, technological change in manufacturing and the new services meant that fewer workers could generate more output. So old jobs in the south were lost or became precarious and the majority of new jobs were fragile, insecure and low-paying, even in China and India. The agrarian crisis in the developing world hurt peasant livelihood and generated global food problems. Rising inequality meant that the much-hyped growth in emerging markets did not benefit most people.

Of course, crises tend to make things worse, not better. As economies slow down, more jobs will be lost and people, especially those in the developing world who did not really gain from the boom, will face deteriorating conditions of living.

But the gloom and doom is not inevitable. Now that there is overwhelming evidence of the failure of the economic model on which the boom was based, we can think afresh about how to organise economic life, both nationally and globally.

Such new thinking has got to take into account the changed international context, in which the overwhelming dominance of the US is likely to be replaced by inter-imperialist rivalry and scramble for resources and markets, in which it will be harder for any individual country (or even the G8) to impose conditions on others. Three points must be noted if we want real democratic change and not just more of the same.

First, finance must be controlled and the "innovations" in financial markets that are actually no more than sleight-of-hand scams must be disallowed. Otherwise we will remain vulnerable to more financial crises and continue to face speculative swings in prices of important commodities like food and oil. And poor countries will continue to send to rich ones the capital they desperately need for their own development.

Second, fiscal policy and public expenditure must be brought back to centre stage. Across the world, we need significantly increased public expenditure to revive demand in flagging economies, to manage the effects of climate change and bring in widespread use of green technologies, to fulfil the promise of achieving minimally acceptable standards of living for everyone in the developing world.

Third, restructuring the world order will have to be based on conscious attempts to reduce income and wealth inequalities, both between countries and within countries. We have clearly crossed the limits of what is "acceptable" inequality. The effects are upon us every day: in growing socio-political conflicts; in the spread of enthusiasm for terrorism and violence among the dispossessed and the frustrated; in the growing insecurity of daily life anywhere.

Reducing inequalities is not going to be easy. It will require the north to reduce its consumption of scarce resources and carbon emissions, which means some reduction of average consumption generally. It will require the global elite, spread across both developed and developing worlds, to curb extravagant lifestyles. It will require wage shares of national income to rise from their current very low proportions, with corresponding declines in the shares of profits and interest. And it will require governments in the powerful developed countries to recognise that they can no longer call the shots in all important international decisions.

This may seem like an impossible wish list, but it may be essential. When an economic order has so clearly outlived its usefulness and is collapsing, it makes sense to build a new one on different principles.

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The political class can't face up to the scale of this crisis

18th September 08 - Seamus Milne, The Guardian (UK)

The scale of the crisis engulfing the global financial system can no longer be in doubt. The events of the past few days have confirmed that we are living through the greatest meltdown since the Wall Street crash of 1929. For the second time in barely a week, an avowedly free market government in the citadel of laissez-faire capitalism has been forced to nationalise a linchpin of American finance - this time the world's biggest insurance company, AIG - in an effort to prevent the toxin of collapse spreading further through the US economy.

That followed hard on the heels of the nationalisation of the mortgage giants Freddie Mac and Fannie Mae; the bankruptcy of the country's fourth largest investment bank, Lehman Brothers - corroded by bad debt and bonus-fuelled speculation - and the forced takeover of Merrill Lynch. And a year after the credit crunch triggered the fatal run on Northern Rock, British high street retail banks are being sucked into the crisis: at one point yesterday the country's largest mortgage lender, HBOS, had lost almost 70% of its share value since the start of the week.

Meanwhile, the impact on the real economy is becoming stronger: output in Britain is falling and official unemployment is likely to rise above 2 million next year - the real figure will be significantly higher. More than 100,000 jobs are expected to go in finance alone. The only question is how deep and prolonged the recession will now be.

What is certain is that the dominance of the free-market model of capitalism, which has held sway across the world for more than two decades, is rapidly coming to an end. When its high priests in Washington are forced to carry out the largest nationalisations ever undertaken outside the communist world, while intervening on an unprecedented scale across markets that were supposed to be self-regulating in order to keep the system afloat, the neoliberal order is transparently falling apart.

Naturally, market fundamentalists and ideologues will continue to preach the old religion. The Times argued yesterday that the unfolding of the banking crisis showed that capitalism and markets were working, however "brutal and unforgiving" that might sound. Such otherworldly dogma is not a luxury candidates standing for election can afford - and even John McCain felt obliged this week to attack Wall Street's "casino [of] greed, corruption of excess", while Barack Obama blamed McCain's economic philosophy of deregulation and called for wide-ranging reform.

That is exactly what should be happening in Britain. But instead, across the main political parties, there is a striking and continuing failure to face up to the extent of the economic crisis or the sea change in policy it must herald. Britain's political class appears to be wedded to the politics of the 1990s and the glory days of neoliberalism, clinging to the economic legacy of Thatcherism and unable to make the shift from deregulation to intervention that the times demand.

The government has the most to gain and least to lose by doing so. But it's hamstrung by Gordon Brown's paralysing caution and New Labour's original Blairite embrace of market ideology, private provision and corporate privilege. When Alistair Darling declared on Tuesday that he was "extremely anxious" about speculative manipulation of the markets, he invited the obvious question of what on earth he plans to do about it - and why he and Brown insisted on the "light-touch regulation" that created the destructive derivative whirligig in the first place.

The Liberal Democrats could be capitalising on the early warnings from Vince Cable, their new superhero, about the debt crisis and his calls for the public ownership of Northern Rock. But instead of building on the tradition of Keynes and Lloyd George, their leader Nick Clegg has chosen this of all moments to orchestrate a symbolic return to economic liberalism, forcing through a commitment to cut both taxation and spending.

The issue is not, of course, the Lib Dems' welcome proposals to redistribute the tax burden from the low to the high paid - it's the new plan to pay for extra tax cuts by reducing the overall level of public expenditure. Not only are spending cuts the last thing the economy needs as it sinks into recession. But underpinning the new policy is Clegg's personal ideological conviction that state intervention is dead - exactly the opposite of what is required in the face of the storms now sweeping away the neoliberal nostrums of the past.

It also gives political cover to David Cameron's parallel enthusiasm for a smaller state, backed up by more charity provision for the poor. Much has been made of the Tories' latter-day conversion to social liberalism, their new enthusiasm for fairness and their self-proclaimed "progressive" agenda. Certainly, their rhetoric is a long way from the confrontational style of the Thatcher era - even if the word "progressive" has, as the social democratic sage David Marquand argues, been largely gutted of any meaning.

But when it comes to the core social and economic choices, all the signs are that Cameron's Tories plan to follow precisely the same agenda of corporate privilege, deregulation, privatisation of public services and low taxes for the rich inherited from his Conservative predecessors via Tony Blair. Already George Osborne is moving away from his commitment to stick to Labour's spending plans, while Cameron has declared that redistribution of wealth and income is an "approach that has run out of road".

But that agenda is precisely the model that has delivered today's financial breakdown. And as a result, the leaders of the party expected to win the next general election - tied as they are to City and corporate interests - have even less to say about the crisis carving a swathe through finance and the wider economy, and what to do about it, than Brown and his unfortunate chancellor. Beyond calling for better bank deposit protection, Osborne seems to be utterly at sea.

This all represents a woeful failure of institutional politics. But it is also a gift to anyone prepared to push a new agenda that breaks with the failed market orthodoxy and faces up to the reality of our times: that only decisive public intervention and regulation can begin to deal with the economic - or, for that matter, environmental - crises we face. For any Labour politician thinking of standing against the prime minister, that has to be the starting point.

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