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Saturday January 14, 2012
WHAT ARE WE TO DOBy TAN SRI LIN SEE-YAN
TODAY we still face not just about the worst recession since the 1930s, but a challenge to the rich West's economic order. The poverty of orthodox economics is now exposed. It showed up capitalism as fundamentally flawed. Karl Marx had contentiously labelled capitalism as inherently unstable. Sure, some of Marx's predictions had failed: no dictatorship of the proletariat; nor has the state withered away. Even among Americans, just 50% surveyed was positive on capitalism; 40% not. Young people are markedly more disillusioned.
So, recent vogue for Marx should not surprise now that the euro stands on the precipice of collapse; and Jeffrey Sach's The Price of Civilisation pointed to US poverty levels not seen since 1929. Indeed, the Vatican's L'Osservatore Romano recently praised Marx's diagnosis of income inequality. Brazil elected a former Marxist guerrilla, Dihma Rousseff, as President in 2010. Marx may still be misguided, but his written pieces can be shockingly perceptive.
Marx and global disorder
Examine the daily European headlines: there is the spectre of a possible Greek default, an impending explosive bank-made disaster, the imminent collapse of the euro all reflecting a bewildering mixture of denial, misdiagnosis and bickering undermining European policy response.
As Mohamed El-Erian (CEO of Pimco, the world's largest bond dealer) observed: “Rather than proceeding in an orderly manner, today's global changes are being driven by disorderly forces ...” We see a crisis that has shaken the foundations of the prevailing international economic order.
It is remarkable that in Das Kapital Marx diagnosed capitalism's instability at a time when his contemporaries and predecessors (Adam Smith and John Stuart Mill) were mostly enthralled by its ability to serve human wants. George Magnus (UBS Investment Bank) wrote: “today's global economy bears some uncanny resemblances” to what Marx foresaw.
Marx had predicted that enterprises would need fewer workers as productivity rose, creating an “industrial reserve army” of unemployed whose very presence exerts downward pressure on wages.
Reality comes home readily with US unemployment still at 8.5% (13.3 million jobless). Nearly 5.6 million Americans have been out of work for at least six months; 3.9 million of them for a year or more. Last September, US Census Bureau data showed that median income (adjusted for inflation) in the US fell from 1973 to 2010 for full-time male workers aged 15 and above. True, the condition of blue-collar US workers is still a far cry from the subsistence wage and “accumulation of misery” that Marx figured. Again, French economist Jean-Baptiste Say had postulated that markets will always match supply and demand hence, gluts don't arise.
Against this conventional wisdom, Marx argued that over-production is endemic to capitalism simply because the proletariat isn't paid enough to buy up the supply capitalists produce. Recent experience showed that the only way middle-America managed to maintain consumption in the last 10 years was to over-borrow. When the housing market collapsed, consumers were left with crippling debt they can't service. The resulting default is still being played out.
Marx also predicted capitalism sows the seeds of its own destruction. Unbridled capitalism tends towards wild excesses. The 2007/08 Wall Street crisis had demonstrated how reckless deregulation (for example, in allowing banking leverage to rise unabatedly) proved disastrous for the financial system, attracting extensive moral hazard in massive bailouts.
“The Republican Party is en route to destroy capitalism,” radical geographer Prof David Harvey says, “and they may do a better job of it than the working class could.”
Now once again, we see unbridled capitalism threatening to undermine itself. European banks financially weak but politically powerful, are putting on the pressure to rescue their balance sheets. We see the same in the United States as home-owners struggle to stay afloat while renegotiating their mortgages. Similarly, creditor nations (e.g. Germany and China) are trying to shift the pain of rebalancing onto debtor nations, even though squeezing them threatens to be counter-productive and eventually, cause economic disaster.
Even so, prolonged economic weakness is contributing to rethinking on the value of capitalism. Countries scraping for scarce demand are now resorting to currency wars. America's senate has turned protectionist. Within Europe, the crisis turmoil is encouraging ugly nationalists, some racist. Their extremism is mild against the wrecking horrors of Nazism. Even so, it's unacceptable.
Unbalanced times ahead
The outlook for 2012 is dismal (my column 2011: Annus Horribilis dated Dec 31, 2011): recession in Europe, anaemic growth at best in the United States and a significant slowdown in emerging nations. We also know the world is far from decoupled. Export economies in Asia (South Korea, Taiwan and China) and commodity exporters (Indonesia, Malaysia and Brazil) are already feeling the pain.
What's going to happen in Europe is critical. The eurozone is already in recession. Germany's economy contracted in 4Q 2011 at a time the region is looking to its biggest economy to give the zone a lift. Add to this, continuing credit crunch, sovereign debt problems, lack of competitiveness and intensifying fiscal austerity we have a serious downturn ahead.
Downside risks in the United States can be as serious fiscal drag, ongoing financial unwinding among households in the face of stagnant incomes, weak job creation, losses on wealth, rising inequality and political gridlock. In Japan, weak governance will show-up soon enough. Rising inequality is impacting domestic demand big time! This is also fuelling popular protests around the world, bringing with it social and political instability adding further risks to economic performance. Turmoil in the Middle-east gathers geopolitical risks of its own making persistent high oil prices will constrain growth. On present course, conditions will get worse before they get any better.
Policymakers are running out of options. Monetary policy is already less effective and ineffective where problems stem from insolvency (as in Europe) rather than liquidity. Fiscal policy is now well constrained. Whatever central bankers do, they cannot resolve problems best fixed by politicians such as the United States' incoherent deficit politics or Europe's fractured institutions and crucially, its lack of political will to act firmly.
Eventually, papering over solvency problems and reform issues will give way to more painful and disorderly restructurings, including exit from the euro. History teaches that financial crises are followed by years of weakness and stress. But some of the pain is self-inflected. Clarity on eurozone's future needs strong political leadership. There is really no excuse for the United States' fiscal paralysis as politicians bicker and dawdle. Indeed, even deeper austerity is quite unnecessary; it brings a vicious circle of decline, squeezing demand and raising unemployment, thereby hurting revenues, sustaining large deficits and draining away confidence.
Lessons from Japan
Japan has been experiencing the West's current woes for 20 years. Will Europe and United States suffer a similar “Japanese” future? There are important lessons.
First, get out of denial: admit past mistakes and take-on new challenges for the future. Japan had refused to admit its economic model has since failed. Similarly, Europeans are not ready to give up their welfare safety net even though already buried in huge debt. The United States, in preserving “free markets”, wouldn't build badly needed infrastructure because of aversion to state intervention. Let's face it: new realities need new ideas.
Second, recognise problems are really structural. Japanese politicians continue to rely on orthodox pump priming in the face of excessive regulations (which stymied competition) and belief its high savings will finance it. All it did was to pile up more debt up to 200% of GDP. The United States and Europe are now in a similar boat. Continuing Fed stimuli missed tackling underlying problems need smarter approaches to resolve the mortgage quagmire, and to extensively re-train misfit unemployed. Euro-zone needs reforms for a more integrated Europe to spur growth. Instead, governments bury their heads in the sand of Tobin taxes (a small financial transactions tax to discourage speculation) and other such diversions.
Third, embrace globalisation which Japan has yet to seriously acknowledge, while the rest of Asia had become more integrated. The United States is still “fighting” globalisation harbours an anti-trade mentality in the face of deficit politics. Similarly, Europe indulges too intensely in intra-regional trade; needs to build a competitive multilateral non-European network.
Finally, firm political leadership is critical. Psychologist and Nobel laureate Danial Kahneman pointed to behavioural economics showing people are “influenced by all sorts of superficial things in decision making” and so they procrastinate. Japan personifies procrastination. Likewise, political gridlock gripping United States and Europe led to more “kicking the can down the road,” instead of seriously changing national policy. Japan's history teaches political will as vital in instigating change without it, the West will likely turn “Japanese.” Ignore it and history may well repeat itself.
Middle class on the rise
The growing irrelevance and mistrust of politicians and governments are the result of massive economic slowdown and wasteful public spending. Emerging markets in contrast, have kept growth consistently going while keeping fiscal affairs well under control.
The political woes in China and India and even Malaysia (and possibly in Brazil and Indonesia) reflect, in my view, the early stirrings of political demands by the growing emerging middle class.
The World Bank estimated the middle class (people earning between US$60 and US$400 a month) trebled to 1.5 billion between 1990 and 2005 in developing Asia, and by one-third to 362 million in Latin America. Estimates by Asian and African Development Banks showed similar trends in Africa, Latin America and China in 2008.
As Marx said: “Historically, the bourgeoisie played a most revolutionary part” in Europe. As I see it, in emerging markets, that same but softer revolution is now on hand. Middle-class values are distinctive.
Surveys showed the middle classes consistently are concerned with free speech and fair elections; with opportunities and corruption. Success of Hazare's campaign against graft in India, and of street protests in Dalian and Xiamen in China over environmental abuses and the crash by high speed trains are some cases in point. Unlike unrest in Middle-east, middle class activism in India, China, Brazil and Chile is not aimed at bringing governments down. Rather, an attempt to reform government, not to replace it so far, at least, aimed against unaccountable, untransparent and undemocratic politics.
What to do?
Recession made plain the need for smarter government and highlighted weaknesses in designing policy to address issues on fairness and burden sharing. There are lots to learn and much to put right. I see an extraordinarily uncomfortable year ahead, with a wide range of possible outcomes, many unpleasant.
The euro-zone casts the darkest shadow. The US outlook is darkened by political uncertainty. The West is now being challenged to deliver not just growth (while necessary, is insufficient given high unemployment, and income and wealth inequalities) but “inclusive growth” for greater social justice. There is a deep sense that capitalism has become unfair. Calls for a fairer system will not go away. As Marx would insist, they will spread and grow louder.
Ironically, unlike emerging economies, the West is not equipped to deal with structural and secular changes after all, their recent history has been predominantly cyclical. Grasping the ways in which Marx was right marks the first step towards making things acceptable. The longer they fail to adjust, the higher the risks. So expect more volatility, unusual strains and even odd outcomes. But looking at the cup as half-full, the global paradigm shifts when they do come, will also present opportunities, not just risks. That can help ease the agony. But it won't make up for politicians' mistakes. Welcome to 2012!
Former banker, Dr Lin is a Harvard educated economist and a British Chartered Scientist who now spends time writing, teaching & promoting the public interest. Feedback is most welcome; email: email@example.com
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