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.