Although the global economic crisis was triggered by the foregoing financial crisis, the more deeply rooted cause appears to have been the global imbalances, created by uneven developments in qualitative, knowledge-based competitiveness and the weakening thereof (primarily due to the marketifying of education in some developed countries). And, secondly, by the uneven development of cost competitiveness, mainly as a result of foisting a cheap-labour policy on developing countries by forcing them to reduce their customs protection in exchange for an acceptance of the low values of their currencies. Both these factors are the result of neoliberal recipes.
For example, in the US, two-thirds of tertiary education funding comes from private sources; the tuition fee leads to the unequal access of brains to knowledge; and the major differences in the quality of individual schools, as dictated by the market, have evidently led to lower efficiency than in Scandinavia, where tertiary education is financed almost exclusively from public sources. Prior to joining the WTO, China had to gradually reduce its tariff protection from 43 to 11 per cent. In the US, the epicentre of the contemporary world crisis, the consequences of weaker global competitiveness were cushioned in the long term by subdued wage growth, which spilled over into household debt, and by increasingly unrepayable, toxic mortgages, which ultimately contributed to the open financial crisis.
In this respect, the contemporary crisis, unlike the Great Depression of the 1930s, is not only a crisis of overproduction – a blanket freeze in demand – it is also a crisis of global imbalances. Furthermore, it is a crisis of extensive, tangible growth – the market is failing not only to purge the economy of wasteful consumption, but also to make the switch from tangible to knowledge-based, qualitative, sustainable growth.
Therefore, in combating the consequences of this crisis, Keynesian incentives are insufficient to boost demand; rather, it is also necessary to divert demand away from the current export surpluses to other, mainly domestic, markets.
The effects of the global crisis on the developed and developing economies were different in the first round. Successful developing countries, particularly the group of large BRIC countries, managed to redirect some demand to their huge domestic markets (Russia is rerouting part of its oil and gas exports to Asia), and thus largely freed themselves of the crisis in developed countries. After last year’s partial slowdown, this year they have regained their high growth rates, which in China may again reach 10%.
The initial recovery in developed countries, however, especially in the US and the EU, has been of a contradictory, fragile character. The recovery in the US was affected in particular by a one-off fiscal injection to boost demand on a scale equivalent to approximately 5% of GDP. In view of the US’s continuing lack of competitiveness, however, it did not just temporarily restore 1-3% growth in GDP (according to currently very uncertain and varying estimates), it also absorbed imports and revived unsustainable deficits in the trade balance and in the balance of payments current account. If anything, this is helping the recovery in the rest of the world, including the EU.
On the other hand, in the EU (starting with Germany), the demand injection did not exceed 1.5% of GDP. The initial 1-3% recovery in GDP growth is even more fragile in Europe and has been gradually fading – it is a ‘one-trick’ recovery based solely on exports, without nurturing domestic investment and consumer demand. Perhaps it can be attributed more to the recovery in the US and the BRIC countries than to any homegrown economic policy.
However, in the phase now awaiting us, the conflicting actions initiated by the US and the EU could be a risk.
The US has dramatically weakened the dollar’s exchange rate in anticipation of further plans for quantitative easing (QE), provided it is not marred by the Republicans. In any event, even if QE helps to maintain growth in the US, it will weaken the recovery in the rest of the world, starting with the EU and Germany in particular. In contrast, the EU, starting with Germany, has rejected new demand stimuli, opting instead (prematurely, according to the IMF and the US) for budgetary consolidation by making unilateral public spending cuts.
Whether or not these opposing actions will help the US, each is sure to undermine growth in the EU, starting with Germany, and will weaken the sole (export) pillar of the current renewed growth. Paradoxically, the budget expenditure cuts here are not only heralding the destruction of the welfare state, they might also lead to the destruction of the economy and the public budgets in general.
From a broader perspective, both steps are risky and do not look promising.
Unilateral currency weakening could spark a ‘currency war’, as the IMF has warned. This could be avoided by abandoning floating, market-driven exchange rates and making the transition to the international coordination of controlled exchange rates, as has long been recommended by the UNIDO. This has also been indicated in the past by Samuelson: ‘The exchange rate of a currency is a price, the price of money. But such an important price that it cannot be entrusted to the market.’ Yet this cannot be arranged overnight and pushed through by force; rather, this is a longer-term process within the scope of broader global economic reforms.
Likewise, public spending cuts are the least effective means of consolidation. The debt was caused mainly on the revenue side. Developed countries’ rates of taxation in proportion to GDP rose from around 10% to 15% in the late 19th century to about 50% in Scandinavia, 40% in the EU15 and 30% in the US and other predominantly neo-liberal countries at the end of the 20th century. In the mid-1990s, developed countries, according to neo-liberal recipes, halted the century-old increases in the rates of taxation in proportion to GDP and even reduced them to some extent. Nevertheless, expenditure on health, pensions, education and environmental protection is objectively increasing – life expectancy and the duration of education are becoming longer, environmental degradation is on the rise – and wastefulness accounts for only a fraction. Applying the brakes on taxation places pressure on the deficit financing of these public services and on their privatisation, even though this increases their cost and impairs their quality. A point of departure could be a reasonable increase in the level of taxation, internationally harmonised within currency areas. In the future, some taxes may be common, such as the Tobin tax on financial transactions or certain environmental taxes.
A broader view
The current crisis is a social crisis on a par with the crisis of the 1930s. Monopolistic, financial, globalised capitalism, based on the nearly exclusive role of the market with almost no state regulation, is failing. The long-term solution is to overcome its essence – to make the transition to a society of freedom, based on the interplay of the invisible hand of the market with a visible, and more effective than at present, hand of the social knowledge-based society (Pohledy 1/2010, Social Europe, July 2010, Journal, Volume 5, Issue 1). This can be developed on a global scale in particular:
- By overcoming the asymmetric liberalisation of world trade based on the forcing of a cheap labour policy on developing countries. A prerequisite is the development of the emerging multilateral world.
- By turning away from tangible, quantitative economic growth based on increased quantities of products and services and instead seeking knowledge-based, qualitative development based on increasing the amount of knowledge embodied in a unit of goods and services. This requires, on the one hand, the development of humankind and its knowledge, mostly by means of public health and welfare services provided in accordance with the solidarity principle, and in particular by means of the equal access of brains to knowledge, facilitated by a policy of solidarity. Another requirement is a reasonable rate of taxation, including taxation reflecting the scarcity of natural resources and the cost of environmental sanitation.
- By overturning the imbalance of power between capital and labour, the consumer and nature, especially by overcoming the dominance of the largest multinational corporations in the economy and politics, which hinders the competitive market and democracy. Here, it is necessary to overcome the extreme deregulation of markets, starting with the financial markets, the public – possibly even proprietary – control of monopolies and the few hundred largest multinationals. Another requirement is social bargaining between labour and capital and the participation of the workforce in the ownership and decision-making of enterprises.
Such a society should be a society of the freedom not just of the individual, but also the freedom of a society based on solidarity, not only political freedom, but also liberation from poverty, ethnic and racial oppression, war and environmental destruction.
These themes are not an attempt at an instructive cookbook, but are presented merely as food for thought.