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 are 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.

September 27, 2008.

This article appeared in the Guardian, 18 September, 2008
http://www.guardian.co.uk/commentisfree/2008/sep/18/economy.useconomicgrowth