| Discussions
of the current world economic crisis tend to focus exclusively
on the bursting of the housing bubble in the United
States. This no doubt is the immediate cause of the
crisis, but underlying its operation is the fact that
the stimulus for booms in contemporary capitalism has
increasingly come from such bubbles. The U.S. whose
size and strength make it, in the current regime of
trade liberalization, the main determinant of the pace
of expansion of the world economy as a whole, has increasingly
come to rely on such bubbles to initiate and sustain
booms. The dot-com bubble whose bursting had caused
the previous crisis was followed by the housing bubble
which started a new boom. This has now come to an end,
precipitating a major financial crisis and initiating
what looks like a major depression reminiscent of the
1930s.
John Maynard Keynes, writing in the midst of that Depression,
had located the fundamental defect of the free market
system in its incapacity to distinguish between “enterprise”
and “speculation” and hence in its tendency to get dominated
by speculators, interested not in the long-term yield
on assets but only in the short-term appreciation in
asset values. Their whims and caprices, causing sharp
swings in asset prices, determined the magnitude of
productive investment and hence the level of aggregate
demand, employment and output in the economy. The real
lives of millions of people were determined by the whims
of a bunch of speculators under the free market system.
Keynes wanted this link to be severed through what he
called a comprehensive “socialization” of investment,
whereby the State acting on behalf of society always
ensured a level of investment in the economy, and hence
a level of aggregate demand, that was adequate for full
employment. This prescription entailed not only a jettisoning
of the free market system in favour of State intervention,
but restraints on the free global mobility of finance,
since meaningful State intervention could not be possible
if the nation-State faced internationally-mobile capital.
“Finance above all must be national”, he had said, if
the State had to have the autonomy to intervene meaningfully
in the economy.
The process of globalization, involving above all the
globalization of finance, which began during the period
of Keynesian demand management itself, has undermined
Keynesian demand management in the capitalist countries,
and removed a whole host of regulatory measures that
characterized the Keynesian regime. Boosts to aggregate
demand have of late come increasingly from the stimulation
of private expenditure, associated with the creation
of bubbles in asset prices, rather than from an adjustment
of public expenditure within the context of reasonably
stable asset prices. The reliance on bubbles in short
has acted as a substitute for the earlier regime of
Keynesian demand management; it is management through
the creation and sustenance of bubbles rather than through
the pace of public spending. Not surprisingly, the frequency
of financial crises, associated with the bursting of
these bubbles, has increased greatly after 1973, and
we are now even headed for a major crash.
Governments in advanced countries have still not recognized
this onset of a crash. They have proceeded on the assumption
that the injection of liquidity into the system is all
that is needed. It was thought initially that this injection
could be achieved through the government purchase of
“toxic” securities, but widespread opposition to that
scheme has now made most governments accept the idea
of injection of liquidity in lieu of equity, i.e. through
the part-nationalization of financial institutions.
But injection of liquidity, even in this manner, is
not enough. Credit will not start flowing simply because
banks can access more liquidity. There has to be adequate
demand for credit for viable projects by solvent and
worthwhile borrowers. And this is not happening. First,
the injection of liquidity does not improve the solvency
of firms saddled with “toxic” securities, so that the
risk associated with lending to them remains prohibitively
high. And secondly, quite apart from this, the anticipation
of a Depression makes borrowers chary of borrowing and
lenders chary of lending.
This anticipation in turn derives from several factors:
first, the bursting of one bubble is not necessarily
succeeded by the immediate formation of another, so
that some recession of a more or less prolonged duration
is in any case inevitable. Secondly, the very scale
of the current financial crisis is such as to entail
an anticipation of a prolonged recession. And thirdly,
since the recession has already started, the prospects
of crisis-prevention now through the usual monetary
instruments (including liquidity injection) appear distinctly
dim. The scenario, in which tendencies towards increased
liquidity preference on the part of private individuals
and institutions and a downward slide in the real economy
mutually reinforce one another, has already started
unfolding itself and will continue for a prolonged period,
unless governments now act to inject demand into the
economy directly, apart from injecting liquidity. Until
this happens on a large enough scale the Depression
will persist.
The third world countries will not escape the effects
of this Depression. True, many of them whose financial
systems are still not sufficiently “opened up” and hence
have not been “contaminated” by any links to “toxic”
securities, will escape the direct impact of the world
financial crisis (though even they cannot escape some
“sympathetic” movements in their financial markets as
well). But they certainly will have to face the impact
of the Depression of the real economy. Their export
earnings, both merchandise and invisibles, will be hit,
causing unemployment and output contraction on the one
hand, and foreign exchange crisis, exchange rate depreciation
and accentuated inflation on the other. (The latter
will be aggravated by the outflow of speculative capital
that had come in earlier to the “newly emerging markets”
under the auspices of Foreign Institutional Investors).
Two areas are of special concern here. One is the inevitable
decline in the terms of trade for primary commodities
that will occur in a Depression, which will push cash-crop
growing peasants into even greater distress and destitution
and into even larger mass suicides. (These have been
already occurring for some time on a disturbing scale
in countries like India). The second is the loss of
food security over much of the third world that will
inevitably occur. There are at least three mutually-reinforcing
reasons for this: first, the loss of foreign exchange
earnings owing to the decline in exports and in the
terms of trade will cause a decline in foodgrain availability
in food-importing countries owing to a decline in their
import capacity. Secondly, even if food availability
is somehow maintained, the decline in the incomes of
exporting peasants and small producers and of those
affected by the rise in unemployment will mean that
large masses of people will simply lack the purchasing
power to buy necessary food. And thirdly, if the terms
of trade of non-food primary commodities decline relative
to food, as has been happening for some time now, then
both the above problems will be greatly aggravated.
There is a tragic irony here. The booms fed by asset
price bubbles not only did not benefit the large mass
of peasants, petty producers, agricultural labourers,
craftsmen, and industrial workers in the third world,
but were actually accompanied by an absolute deterioration
in their living standards. This happened not despite
the boom but because of it, in a number of ways. First,
with the interlinking of global financial markets, asset
price booms in the US tended to produce stock market
booms, and more generally financial sector booms, even
in third world countries, where banks and other financial
institutions withdrew from productive sector lending
to speculative lending, from rural to urban lending
and from agriculture and small-scale sector lending
to consumer credit to the affluent and loans against
securities. This damaged the productive base of the
peasant and small-scale sector. Secondly, the changed
role of the State in the new dispensation where it was
more concerned with supporting the financial sector
boom and in maintaining “the confidence of the investors”
than with sustaining peasant and petty production, entailed
a withdrawal of State support from the latter sector:
input subsidies, the price support system, essential
public investment, and State spending on rural infrastructure
and on social sectors, were all drastically curtailed;
and without them the entire small producer economy became
submerged in crisis.
A simple statistic illustrates the point. In 1980, the
per capita cereal output in the world was 355 kilogrammes.
By 2000 it had fallen to 341 kilogrammes. This absolute
decline in per capita cereal output meant also an absolute
decline in per capita cereal consumption for the world
as a whole. But since per capita cereal consumption,
taking both direct and indirect consumption into account,
increased for the advanced countries, the overall decline
for the world as a whole was caused by a massive decline
in the third world countries, where even countries like
China and India which experienced remarkably high GDP
growth rates, did not escape this trend.
The fact that this decline in per capita cereal output
in the world economy was not accompanied by any rise
in relative cereal prices (in fact between these two
years the terms of trade of cereals visavis manufacturing
in the world economy declined by 40 percent), even when
the per capita income in the world economy was increasing
quite noticeably, suggests that the squeeze on the purchasing
power of the masses in the third world was even greater.
The other side of the speculative boom occurring in
a deregulated and financially-interlinked capitalist
world therefore was a drastic squeeze on the living
standards of the masses, especially n the third world
(which incidentally is one reason why the “locomotive”
analogy often given for the US economy’s role in the
world economy is so inapposite: this locomotive while
pulling some coaches, pushes back some others).
But even though the masses suffered from the effects
of the speculative boom, they would also suffer additionally
from the effects of its collapse. We do not have a symmetry
here between the effects of booms and of depressions,
and herein lies the tragic irony of the situation.
It is clear from the above that the need of the hour
is not just the injection of liquidity into the world
economy but also in addition the injection of demand.
This can occur only through direct fiscal action by
governments across the world. For activating governments
for this, control over cross-border capital flows is
essential, for otherwise governments will continue to
remain prisoners to the caprices of globally-mobile
speculative finance capital. The sectors where government
spending will go up will of course vary from country
to country, but the general objective of such spending
must be the reversal of the squeeze on the living standards
of the ordinary people everywhere in the world that
has been a feature of the world economy in the last
several years. In the United States government spending
may have to take the form of increasing the social wage
and enlarging welfare state activities generally, increasing
infrastructure expenditure and to making more funds
available to states through federal transfers. But in
India, China and other third world countries, in addition
to welfare state measures, larger government expenditure
has to be oriented towards a substantial increase in
agricultural, especially foodgrains, output.
Taking the world economy as a whole, the new growth
stimulus will have to come not from some new speculative
bubble but from enlarged government expenditure that
directly improves the livelihoods of the people, both
in the advanced and in the developing economies, and
that is geared towards improving the foodgrain output
of the world through a revamping of peasant agriculture
(and not through corporate farming, since that would
reduce purchasing power in the hands of the peasantry
and perpetuate its distress). In short, the new paradigm
must entail a foodgrain-led growth strategy (on the
basis of peasant agriculture), sustained through larger
government spending towards this end, which simultaneously
rids the world of both depression and financial and
food crises. The trade and financial arrangements of
the world economy have to be oriented towards achieving
this rather than being made to conform to some a priori
free market principles that have the effect of pushing
the world economy into financial crises and slumps,
and the peasantry and small producers of the world into
destitution both during the booms and also, additionally,
during the slumps.
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