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Emphasise quality of life, not growth

The present financial crisis may signal a shift from globalisation to a deglobalised economy. This would mean production for local markets, equity in income and asset distribution, more democratic arrangements, progressive taxation, and a move from fossil fuels to renewables, says Darryl D’Monte

Greenaccord, the biggest and most diverse meeting of international environmental journalists, takes place every year in or around Rome. This November, it was in the walled mediaeval town of Viterbo, about 100 km from Vatican City, and its theme was ‘Environment and Development for Developing Countries’.

The shadow of the global financial crisis hovered permanently over the deliberations, often dominating it. Speaker after speaker emphasised that due to the meltdown in financial and industrial sectors throughout the world, the environment would get short shrift.

The first to make this point was Sergio Marelli, director of FOCSIV (Federazione Organismi Cristiani di Servizio Internazionale Volontario), a kind of Christian Peace Corps. He said deregulated markets were the villain of the piece: “Free markets are not the solution; we are saying this now and have said it earlier. Are the needs of gourmands who consume oysters and those of the disabled the same? We can’t agree that the economic crisis will be solved through an increase in consumption.”

He cited how, some two decades ago, James Tobin, the US economist who subsequently received the Nobel Prize, advocated a tax on all speculative financial transactions, particularly the transfer of currencies across international borders. Till the current crisis, these have reached a mind-boggling $1.8 trillion per day. He suggested 1% but, faced with a barrage of criticism, lowered it to between 0.01% and 0.05%. It was the duty of governments to control this runaway speculation. Had the Tobin tax been in place, it would have curbed these transactions and raised sufficient revenue to look after both development and the environment.

When asked which would yield more revenue, a carbon tax of say $50 per tonne emitted globally, or the Tobin tax, Marelli stated that Italy had in fact introduced a carbon tax in 1999, which only lasted a year. It yielded €1.2 billion, demonstrating its viability. The Tobin tax would have mitigated the impact of the Asian financial crisis a decade ago, which cost 10 million jobs in the region, a foretaste of things to come.

At the Earth Summit in Rio in 1992 industrial countries were castigated for not meeting their aid commitments of 0.7% of their GDP. This would currently yield $150 billion per year, sufficient to meet minimum human needs. Italy was only providing one-seventh of this requirement and there was every possibility of countries reneging on any commitment, in the current crisis. Marelli believed it was “impossible” to meet the UN’s Millennium Development Goals, the deadline for which is just seven years away.

It took a masterly presentation on ‘The Global Financial System as a Threat to Sustainable Development’, by Professor Walden Bello, who heads the Bangkok-based NGO, Focus on the Global South, and won the Alternative Nobel Prize in 2003, to succinctly understand the nexus. He raised a number of questions, beginning with: Will global capitalism survive its worst crisis? He likened New York today, one of the world’s finance centres along with London, to a “war zone”. The sociologist believed that “New York is still here, but Wall Street has disappeared”. October 6-10 was the worst week for Wall Street, when $2.3 trillion of wealth was lost by investors.

There was the “effective nationalisation of Wall Street,” with the US government now running the world’s biggest insurance company. Two years ago, Citicorp was worth $244 billion; on November 21 this year it had fallen to $20 billion. There was no strategy to deal with the conflagration; it was “like the fire department being on fire”. There was an attempt to re-capitalise the financial system. Was it the worst ever crisis? Fear was overwhelming trust, with banks not lending to each other because they didn’t know which was exposed to “toxic securities”. As he put it: “In a run, no bank is solvent.”

What caused the collapse? Leading investor Charles Schwab told the Davos summit this year that the world was “paying for sins of the past”. Wall Street was outsmarting itself by attempting to securitise derivatives, the prime example being sub-prime housing loans. According to Bello, this was what the French philosopher Jacques Derrida referred to as spectral or ghostly assets -- with no relation to reality. Banks were swapping credit defaults: it was pretty certain that the banks’ own borrowers couldn’t pay back their loans.

As recently as December 2005, Lehman Brothers maintained a global presence, describing itself as the “most innovative” investment bank, “just doing things you won’t see elsewhere”.  Three years later, it self-destructed. Warren Buffet, another giant investor, had eliminated derivatives in his portfolio as being “financial weapons of mass destruction”. He mentioned how Wall Street and its progeny throughout the world was manned (and womanned) by products of business schools, “mainly of Indian and Chinese origin, who are good at math but bad at business”. He might have added that their rigorous business school training ignores the earlier emphasis on more rounded education in the humanities.

Was there a lack of regulation? There was no question that speculators ran far ahead of the government. Allan Greenspan, former US Federal Reserve Bank chairman, who could be held responsible as the single biggest culprit for the present meltdown, always believed that the derivates market would regulate itself. Wall Streeter Robert Rubin, who was President Clinton’s treasury secretary, was another early convert: he has now been resurrected as President Obama’s financial advisor, which makes one wonder whether America will change, after all.

George Soros, another veteran investor, sees the giant circulatory global capitalist system coming apart at the seams. It is nothing less than the crisis of over-production, over-accumulation and over-capitalisation. If one traces a potted history of the present debacle, the Golden Age of contemporary capitalism was the 30-year period between 1945 and 1975. There were strong state controls over the monetary economy, high wages and the aggressive use of fiscal policy. In the mid-1970s, there was stagflation, symptomatic of a deeper malaise. This witnessed the reconstruction of Japan and East Germany, accompanied by the rise of Brazil, Taiwan and South Korea, and the hike in oil prices.

Not long after, in the 1980s, there was an end of the Fordist regime -- referring to conveyor belt mass industrial production -- and the emergence of neo-liberal regimes, which provided an escape route to capitalism. Reaganism and Thatcherism dominated global economies, although -- as Bello joked -- the former was just a lousy cowboy actor and the latter a small-time chemist.

The 1990s was the age of structural adjustment promoted by the Bretton Woods Twins, the World Bank and the International Monetary Fund. This sought to remove state controls on growth. In 1990, however, global GDP rose by only 1.1%, as opposed to 1.4% per year in the 1980s, 2.4% in the 1970s and an average of 3.5% in the 1960s when state interventionist policies were dominant. The neo-liberal restructuring of economies couldn’t shake off stagnation.

The solution sought was globalisation. In The Accumulation of Capital, Rosa Luxemburg analysed how in order to shore up the profit rate in metropolitan economies it was necessary to have cheap labour (if necessary, across national frontiers), markets, sources of agricultural and raw materials, new areas of infrastructure. This had to be accompanied by trade liberalisation, capital mobility and the removal of barriers to foreign investment.

Such development seems to have seen its fruition in China, which now receives investment from many of the world’s largest corporations, with its seemingly inexhaustible supply of the requisites listed above. By 2010, 40-50% of US corporations will be operating from overseas, mainly China. However, China faces tremendous overcapacity and, since 1997, the profits of Fortune 500 companies have stagnated.

Hence the third escape route, which has led to the present impasse -- financialisation. Savers, with surplus funds, collaborate with entrepreneurs, with the financial services sector reinventing itself. There is a hyperactive financial economy and a stagnant real economy, which is why it imploded. The disconnect between the real economy and the financial economy was to make up for the stagnation in real production. It was more profitable to invest in finance than in manufacturing. This has its echo in Mumbai, where cotton mills have given way to speculative real estate.

The super-profitability of the financial sector has its acronym in the US: the FIRE economy, referring to finance, insurance and real estate (all sectors, incidentally, which have also been on the ascendant in India). Financialisation seeks to squeeze profit out of already created value.

It is not as if such volatility is anything new; only the scale is now global, not national or regional. Mexico witnessed its crisis in 1994-95; Asia in 1997-98; Wall Street in 2001; and Argentina in 2002. In Asia, capital account convertibility and financial liberalisation was promoted by the IMF and the US treasury department. Global and local investors entered into real estate and the stock exchange. There was over-investment, leading to a fall in share prices and real estate prices. In 1997, these southeast Asian countries lost $100 billion in just two weeks. The IMF, having caused the problem in the first place, started prescribing solutions and had to bail them out, but there was a severe recession between 1998 and 2000. Attempts at regulation, like negotiations in Basel, the Tobin tax and the Sovereign Debt Restructuring Mechanism, which would have reinstated state controls, were all shot down.

The current crisis originates in the technology bubble in the 1990s, where $7 trillion in assets were lost when dotcom start-ups bit the dust. In 2002, economists warned about the housing boom, though Bernard Bernanke, Greenspan’s successor, assured investors that this sector had strong fundamentals (sounds familiar?). As Soros explains, institutions dealing in mortgages encouraged mortgage holders to refinance mortgages. The sub-prime crisis didn’t occur when supply exceeded demand but it was fuelled by a speculation mania, with an inflow of Asian and Chinese funds. Interest rates were raised on sub-prime loans and of some 6 million such loans, 40% are likely to default. Like a plague, the entire financial system was “infected” due to lack of inoculation. As Bello put it: “Non-asset assets killed off assets of which they had been a shadow.”

The collapse saw the demise of Lehman Brothers, Fannie Mae, Freddie Mac and Bear Stearns. Soros cited how a market worth some $45 trillion had been left unregulated. Now “nationalisation” through the back door has begun, and almost happened to the three major US auto manufacturers. Since China’s main market is the US, decoupling or divorce is impossible. It is the defeat of the prevailing economic paradigm of export-led growth. The Wall Street collapse is the crisis of over-production since the 1970s. Resorting to neo-liberal restructuring and financialisation of securities was a dangerous road, one which is leading from recession to depression.

Ironically, the economic crisis could to some extent help mitigate the environmental crisis, if greenhouse gas emissions are cut with industrial decline and kept within the 2% rise which makes the situation irretrievable. However, that needs a reduction of 80-90% by 2050, which looks a distant dream given the insatiable demand for energy.

There are some signs of change. An Asia-Europe People’s Forum in Beijing recently called for a full-scale socialisation of banks, full transparency of institutions, insertion of environmental and social clauses while lending, reintroduction of stringent capital controls, and the cancellation of all developing country debts that are more than 20 years old. The demand was: “Bail out the people, not the banks.”

The present crisis may signal a shift from globalisation to a deglobalised economy. This would mean production for local markets, equity in income and asset distribution, more democratic arrangements, progressive taxation, and a move to ecological transformation from fossil fuels to renewables. In other words, instead of growth, the emphasis should shift to quality of life. Developing countries have an advantage in this respect. The emergence of US President-elect Obama has already raised hopes and economists are recalling FDR and John Maynard Keynes. This time, the New Deal could be a Green Deal.

Of course, the opposite could occur, with countries closing their doors and looking to their own interests, imperilling the globe in the process. Already, aid to Africa which is the worst off as a continent has been long delayed. The future doesn’t look very promising.  

InfoChange News & Features, December 2008