Antecedents to the Crisis of 2008
Uneven development & the State’s role
In the interwar era Sigmund Freud’s Civilization
and its Discontents raised concerns about early 20th century
Western civilization’s constrictive pressures on individual instinctual
predilections and freedom. In the late 20th century, globalization poses
a threat to freedom and identity as well as a danger to effacing national and
cultural autonomy. Because as an integrative system free enterprise is
predicated on perpetual expansion, inevitable contracting cycles built into the
system necessarily entail continuous strengthening of globalization and
compromising of both human freedom and cultural autonomy. This interpretive
essay argues that ‘dismantling the modern welfare state’ has been at the core
of the discontents of globalization. The process of chipping away at the
welfare state started in the US
and UK
during the 1980s during the ‘Reagan-Thatcher decade’. Despite contractions that
signal a danger to eliminating the social welfare safety net, which is at the
core of social justice in modern bourgeois democracies, dismantling of the
welfare state has spread globally and it continues to unfold.
From the Commercial Revolution to the present,
global economic integration under the evolving capitalist system has
exacerbated geographic and social polarization. Owing to capital accumulation
concentrated within the core (most advanced countries) of the modern
world-system, social inequality and uneven geographic development is inevitable
and it entails the periphery remains perpetually less developed and experiences
lower living standards. This is evident merely by considering that the US as the
center of the core countries (G-7 by today’s standards) enjoys 26% of the
world’s GDP, but it constitutes a mere 4% of the world’s population. Another
indicator of uneven geographic development is evident when considering the per
capita income ratio between periphery and core is 14:1 ($14 income average for
the G-7, $1 average for underdeveloped countries).
Backed by the state, private capital
incessantly appropriates labor’s value in both core and periphery. While a
strong state structure is a characteristic of the core, a weak state structure
plagues the periphery where foreign capital and organizations like the World
Trade Organization (WTO), International Monetary Fund (IMF), World Bank,
European Central Bank, European Investment Bank, among others of course, wield
far-reaching influence in global trade, fiscal, monetary, and development
policies. The process of capital accumulation floating toward the core during
cyclical economic crises, like the one the world has been experiencing since
2008, further exacerbates income disparities and asymmetrical trade relations
between advanced and less developed countries and results in downward economic
pressures on labor and the middle class amid financial retrenchment.
To rejuvenate and continue on a course of
expansion, the market economy must reduce production costs, which means
reducing wages and benefits – further appropriation of labor’s value - while
expanding markets, many of which are highly protected. More so today than
during the era of classical economists from Adam Smith to Karl Marx analyzing
the dynamics of political economy from disparate viewpoints, the role of the
state is catalytic. Most economists and social scientists, especially
neo-liberals do not acknowledge the role of the state as a pillar of the market
economy, viewing it instead an impediment to free enterprise because fiscal and
social policy have an impact on business growth. In the past century, finance
capitalism has been unable to operate without government indirect intervention
through fiscal policy during expansion cycles and direct intervention with
massive injections of public funds during contracting cycles of the 1840s,
1870s and 1890s. In the aftermath of every contracting cycle during the 19th
century, there was an effort by core countries to guide capitalism back to health,
namely, through policies that resulted in imperialist ventures in Africa, Asia, and Latin America.
In the 1930s, British scholar John M. Keynes
observed that capitalism left to its own devices cannot recuperate when in
severe dislocation; at least it cannot recuperate without social upheaval that
threatens the social order. Hence, state intervention to strengthen private
capital and preserve the social order is necessary. Since the 1930s, governments
adopted variations of Keynesian policies that remained at the core of bourgeois
regimes for the past fifty years. The credit economy, which replaced the gold
standard at the start of the Great Depression, is showing signs of
over-extension, thus contributing to economic contractions. The question of how
financial, political, military, and academic elites, especially in the core
countries, address an over-extended credit economy is the key to social
engineering and to the morphology of pluralistic society in the 21st
century.
Neo-liberal Challenge to Keynesianism – Reagan-Thatcher Origins
Milton Friedman and ‘Chicago School’
economists, who advised Ronald Reagan, who came to office in January 1981,
dismissed Keynesianism as outmoded and impediment to progress. Given that the
post-war global economy had not experienced another depression, and given the
need to stimulate the US
economy after its massive losses during the Vietnam War and loss of US global
competitiveness, there was a need for a new method for capital accumulation.
One option to stimulate growth was to water down ‘Keynesian militarism’ (also
known as containment militarism owing to America’s ‘containment doctrine’) by slashing
the bloated defense budget and invest public funds in research and development
for new sources of energy that the US needed to lower its external payments
deficit. Early Cold War advocates of ‘Keynesian Militarism’ like Paul Nitze
believed that America’s
surplus capital could be absorbed by the defense sector thereby serving both
geopolitical and economic goals by presumably keeping the economy balanced. An option
that an influential group called ‘managerialists’ (represented by businesspeople
like the Rockefellers, labor unions like AFL-CIO, government, and academia) proposed
using the surplus capital to expand the civilian economy at home and globally,
thus achieving a victory of capitalism over Communism without a ‘high-geared’
arms race. Managerialists conflicted with right-wing ‘Containment Militarism’ ideology
and entrenched interests profiting from the military-industrial complex.
The managerialists became prominent during the
Carter administration when the Vietnam War was over and the US and world
economy was faced with structural problems. The question for the US elites was
how to handle the credit economy for the future, while maintaining global
military and economic preeminence. The solution coming from neo-liberals was to
‘water-down’ the social welfare system. Proposing a return to classical liberal
economics based on Adam Smith’s theory, the ‘Chicago School’,
which also advised other governments, including former Chilean dictator A. Pinochet,
contended that greater wealth at a faster pace for more people could be
generated if government limited regulation and privatized public enterprises. From
the conservative era of Reagan-Thatcher to the present, globalization
accompanied by deregulation of business and privatization of public enterprises
promised to deliver an economic and social miracle; at least that is what
neo-liberal apologists contended, and they enjoyed the political support of
right-wing ideologues and advocates of bigger defense spending. Recent
developments prove that the neo-liberal theory a fallacy, especially when
accompanied by ‘Keynesian militarism’. Capitalist prosperity would not rise
indefinitely if government allow greater market freedom and everyone would not
benefit as neo-liberals maintained, while allowing for inordinate defense
spending.
Rising Rich-Poor Gap & Globalization
Transforming the social welfare state into
corporate welfare not just in the US but globally became policy.
There was and there remains a major public relations effort by business,
government and media on a global scale to indoctrinate the public that the
social welfare state is the enemy of progress. At the same time, neo-liberals
and advocates of corporate welfare argued that the free market system generates
prosperity and reduces poverty. This argument of course became even more
powerful with the downfall of Communism. Empirical studies, however, by the
World Bank and UN confirm that in the past forty years, poverty has been rising
and capital remains highly concentrated on a world scale. If it were not for
the social welfare state, the lower classes would suffer a great deal more
during the cyclical contracting cycles of the market economy.
The crisis of 2008-2010 has added millions more
to the poverty pit with one out of six Europeans living below poverty levels.
Similarly, there has been a widening gap between rich and poor nations, about
to widen further during the 2010s decade owing to the current crisis. Many
social scientists, business people, and politicians contend that the return to
economic growth and development rests with neo-liberalism accompanied by the dissemination
of the ‘consumerism doctrine’ floating outward from developed to underdeveloped
regions and from upper to lower classes; a trickle-down theory. Maxime
Laguerre’s Innovation & Growth, points out: “Only through the acceptance of the dogma that growth in consumption
equals a growth in happiness does every capitalist system legitimize itself.”
Therefore, the multifarious and ubiquitous marketing of the illusion imbedded
in “consumption equals growth” dogma
is far more significant than the reality of material progress and human
happiness.
Globalization-privatization-driven growth since
the 1980s resulted in massive capital accumulation concentrated in a small
percentage of private ownership, especially energy multinationals, mostly in
the advanced capitalist countries. If the state had vigorously regulated and progressively
taxed businesses to absorb surplus private capital, the inevitable contracting
cycle of 2008-09 would have been far less severe. Long-term causes of the
recent crisis include:
a) US fiscal policies favoring a small
percentage of the richest Americans;
b) a trade policy undercut by a weak dollar and
prejudicial quotas;
c) massive capital concentration winding up in
speculative enterprises instead of productive ones;
d) exorbitant defense spending that has added
enormous debt and left the bill to the next generations.
In varying degrees, EU and other countries
including former Communist bloc nations tried emulating US-style capitalism,
thereby creating similar conditions.
Hedge Funds, Neo-Liberalism & Globalization
Operating under the dogma of neo-liberalism,
globalization-privatization is only partly to blame for the financial and economic
crisis the world is currently facing. Another factor that resulted in the current
crisis and accounted for the absence of rising productivity or horizontal
economic development was market speculation in the form of Hedge Funds
(unregulated mutual funds in all areas from energy and currencies, to stock, precious
metals and mortgages). Very loosely regulatory environment and the assumption the
government would come to their aid, emboldened corporations to engage in
duplicitous accounting and take immense risks with Hedge Funds that were beyond
regulatory mechanisms. In the past few months, the press has uncovered that
Goldman Sachs among other financial institutions were responsible for selling
high-risk products to clients. They were then shorting the same products they
sold to clients knowing those products would decline in value, thus making
money. Moreover, Goldman Sachs was responsible for striking deals with a number
of countries, including Greece, to ‘cook the books’, that is, to falsify public
accounts in the same manner that accounting firms in the 1990s and early 2000
were helping corporations do the same thing. The US and the EU were aware of the
operations of such investment banks. Governments looked the other way and
Goldman Sachs continues to operate with impunity.
Because the influence of Hedge Funds was far
reaching, the assumption was that the federal government would rescue them. Although
the FED was aware of the dangers, it permitted their operations to spread and
play a major role, thus contributing to volatile stock markets that drove many
otherwise solid companies like AIG to engage in Hedge Fund speculation that the
world had not seen since the collapse of energy-trader ENRON. Via computer
stock market trading, hundreds of billions exchanged hands. None of it
reflected rising or falling productivity in the real economy. Only timing of
the market mattered, a process more fitting for Las Vegas gambling. For a tiny investment,
speculators were buying insurance betting on shorting certain firms and
government bonds that were bound to decline.
For a dollar worth of insurance,
Hedge Funds were buying insurance betting that AIG would decline, or that
countries with weak fiscal structures like Greece and others would not be able
to meet its bonded debt. Because multi-millionaires and finance capital fund political
campaigns, the US
and other governments would not regulate Hedge Funds. In January 2010, Barak Obama
proposed tougher measures for financial institutions investing in Hedge Funds. French
President N. Sarkozy concurred. Some EU leaders going along and others
hesitated. Stock market reaction was negative reflecting the inordinate
influence of Hedge Funds. In April 2010 the Securities and Exchange Commission
and the US Congress is investigating Goldman-Sachs for ‘improperly’ if not
illegally manipulating the housing market. EU governments are following in the
footsteps of the US
government with regard to Goldman-Sachs.
Obviously, the issue is larger than
Goldman-Sachs and larger than Hedge Funds; it is one of how parasitic
capitalism helped to undermine the entire world economy and drove it to the
worse contracting cycle since the 1930s. Here is a case where governments
failed in their responsibility to protect the public from predatory
capitalists. The reasons of course include everything from heavy lobbying to
campaign contributions that account for the inexorable relationship between
finance capital and the state. Even after receiving about one-third of US GDP
in subsidies and loans, finance capital wants an ideal marketplace of no
investment restrictions and no corporate accountability; it wants a return to
the same environment that caused the recent crisis. The artificially glittering
quarterly reports accompanied by the promise of future earnings was enough to
keep more investors coming much like a pyramid scheme. Because there was very
little behind speculative capital in terms of productive capacity to support
the investment build on a paper pyramid, it was only a matter of time before the
reality of actual values of companies caught up with the hyper-inflated stock
market paper values. High oil and gas prices combined with the real estate
bubble, and saturated markets chasing limited consumer demand accounted for
finance capitalism’s cyclical crisis.
Consultancy & Outsourcing
Along with Hedge Fund and real estate mortgage speculation,
both aspects of parasitic capitalism, consultancy and outsourcing, in some
cases one-and-the same entity was an additional contributing element to
recycling of money toward parasitic instead of productive sectors. From the
early 1980s to the present, the utmost parasitic element of ‘consultancy’ emerged
to infect everything from banking and high finance to universities and
government. This phenomenon reflected first the neo-liberal demand that
government must create a larger and stronger private sector and second the
trend for greater bureaucratization of the private sector. While not every ‘outsourcing’
endeavor and every consultant can be classified as parasitic, in fact some are
productive, for the most part outsourcing was carried out as part of the
‘privatization’ trend. Consultants and consultant committees offered advice for
the most part that was common sense, already known, some combination thereof,
or something called ‘coffee table reports’ to the ‘contractor-client’.
Nevertheless, the ‘contractor-client’, whether the State Department or Exxon-Mobil,
justified having ‘consultant committees’ on the payroll because it was part of
the corporate culture.
In some cases, consultants and consultant
committees were simply on the payroll serving a political agenda, or because of
some interest group’s pressure, or because of a quota needed to secure a public
or private sector contract. In those cases where consultants for private or
public sector actually worked for their money, the advice had to be cloaked in
what served the client management’s interests, and not necessarily the company
or government’s broader interests. Often justified as ‘outsourcing’,
consultancy became a fad and it resulted in enormous amount of capital siphoned
off without any productive result. The madness of consultancy spread globally.
It became a way of doing business to the degree that even small and
debt-burdened countries like Greece
were notorious for ‘consultant committees’ composed of politically-connected
people that siphoned off public funds.
Fall of Communism-Failed Capitalism
Despite the tremendous rise of parasitic
finance capitalism that included consultancy as an obstacle to growth and
development, the world economy in the 1980s and 1990s was sufficiently dynamic
and had enough impetus to expand without suffering a crisis of the 2008-09
magnitude. The integration of former Communist countries into the world-capitalist
system in the 1990s, the low energy/raw materials prices for most of the
decade, and the new high tech revolution should have been sufficient to sustain
the expanding economic cycle without the experience of a mini-depression
crisis. The Euro as a reserve currency and relatively cheap labor in the Third World as well as advanced countries where trade
unionism has been eroding along with real wages were additional stimuli for
global economic growth. Such synergy of global developments could have
strengthened capitalism only if the state and IFIs (International Financial
Institutions) had vigorously regulated the corporate world, and better managed
and coordinated the world capitalist economy through monetary, fiscal, and
trade policies. Only by absorbing surplus capital instead of allowing its
greater concentration could the state mitigate the crisis. Therefore, the
catalysts to the mini-depression crisis of 2008-09 rests partly with the role
of the state and IFIs that pressured all governments around the world to
privatize, liberalize, and strengthen the strongest within the private sector.
The net result is the continued weakening of the social welfare state and the
corresponding strengthening of corporate welfare.
Blame Game & Damage Control -- US Banking Crisis & EU Reaction
The inevitable contracting economic cycle
notwithstanding, what specific forces were responsible for the biggest economic
crisis since the Great Depression? Who must be accountable to the public? US
banks like Citi-Group and Bank of America, insurance giants like AIG,
investment firms like Lehman Brothers, a corporate culture based on deception
and speculation together with government regulators who failed to regulate
financial institutions, greedy and corrupt bankers around the world that
invoked a neo-liberal ideology to secure greater profits, or all who took part
in the globalization-privatization euphoria. When the financial crisis erupted
in the US,
European businesspeople, expert analysts, and EU officials confidently
predicted that the banking problem was limited to the other side of the Atlantic. Hence, there was no threat from the ‘American-made
banking-real estate crisis’ to the EU or to other parts of the world.
Within weeks after it became clear how
inter-dependent and how high-tech-rapid the world financial system has become,
EU governments scrambled for political and financial ‘damage control’ followed
by the ‘blame game’. Yet, they seemed at odds and in panic mode about a concerted
solution given the uneven economic strengths of each EU member, and associate
Balkan and East European members waiting to join. Initially it was every
country’s central bank buttressing its own banking system in coordination with
the European Central Bank. The delayed coordinated EU-wide approach sent the
markets into a tailspin, bank loans to a halt, and the ‘real economy’ beginning
to feel the pain in terms of drop in producer and consumer demand, and job
losses. When EU finance ministers finally agreed on a more coordinated
approach, the bailout plan appeared similar to what US was doing. For the World Bank to
publicly accuse the G-7 of not doing enough to control the crisis means that
the time for wider coordination had come after many months of each country fending
for itself, each bank for itself, each multinational corporation for itself.
As a world system, capitalism operates under
the same rules of capital accumulation, thus requiring similar solutions
despite variations in modalities. For example, Ireland adopted an IMF-style
austerity program that the EU applauded as a model for other countries like Greece, but at
a great social cost. By contrast, social-democratic Sweden, whose manufacturing sector
suffered immensely, has social safety mechanisms to lessen the impact on labor
and middle class. The ‘bail-out’ solution to the crisis of 2008-09 benefited
the strongest financial institutions that were actually partly responsible for
prolonging and deepening the crisis by using public loans to buy out weaker
institutions. One course of action available to governments to ensure market
stability and return to growth would have been to nationalize all banks and
provide liquidity to stimulate growth, instead of purchasing stock and imposing
stricter regulations mainly regarding management bonuses while the bailout loan
remained outstanding.
As much as the US banking crisis, chronic
external equilibrium problems, and skyrocketing defense spending have contributed
to the global crisis originating in the US with the real estate sector and
speculative below-prime lending at its core. Vladimir Putin was correct to
claim that under US unilateral financial leadership the world economy had
faltered, thus the world needs multilateral economic leadership. However, the
European Central Bank’s (ECB) decision to keep interest rates high at the
outbreak of the crisis was even more irresponsible than anything Washington was doing
under the inept and perilous Bush administration. The idea of fighting
inflation and keeping a strong currency amid rising unemployment and economic
stagnation was one only the IMF would recommend on behalf of finance
capitalists that benefit under such conditions at the expense of the middle and
lower classes.
At the Rome Conference on global poverty in November 2008, ECB’s
announcement to hold steady interest rates and thus maintain a strong euro
against a weak US and Chinese currencies indicated incredible confidence in
IMF-style monetarist policies that invariably redistribute income from the
bottom income earner toward the wealthy. Instead of providing more liquidity
for the civilian economy at the dawn of the crisis, ECB was keeping it tight; instead
of raising taxes on high-income groups, EU governments were providing subsidies
and making it easier for further corporate consolidation, asking the average
taxpayer to pay the bill.
Global Campaign to Save Finance Capitalism
With central banks and IFIs (IMF, World Bank,
OECD, European Investment Bank, etc.)
helping to analyze and coordinate a concerted policy to stimulate growth by injecting
inordinate public funds into the financial system, it was possible to moderate
the impact of the stock markets’ crash on the ‘real economy’. The ultimate goal,
however, was to save finance capitalism as the economy’s backbone, instead of focusing
on a jobs-based economic growth that would generate consumer spending and
faster revival. As expected, there were rifts within G-8 and even more within
G-20 where President Ignacio Lula of Brazil argued that the Third World was suffering from a First
World crisis. Although all evidence pointed to Wall Street and US
financial institutions, common fear to get a handle on the crisis before it was
out of control drove the summit leaders to strengthen world finance capitalism.
World leaders and public opinion realized that
the worst economic crisis since 1929 took place against the background of the
war and occupation in Iraq
and Afghanistan
and perpetual instability in the Middle East
owing to the Israeli-Palestinian conflict. The long-standing policy of ‘Keynesian
militarism’ designed to stimulate growth at a time the US was suffering balance-of-payments
and budgetary deficits weakened the American economy that was spending about
five percent more than it was producing; deficit that needed external financing.
Concurrently, out-of-control energy prices fueled by speculative investment
climate in a number of sectors that accounted for inter-sector imbalances –
real estate values rising to unrealistic levels because banks were expecting to
make money with below-prime loans. At the same time, balance of payments and
budgetary deficit contributed to the dollar’s decline, thus resulting in a
further loss of investor and marketplace confidence.
When the crisis erupted, there was a scramble
by governments to save their own economies, even if they had to resort to mild
economic nationalist measures. As the largest dollar holder, the Chinese
government proposed a world reserve (supra-national) currency above the dollar,
euro, yen, sterling pound, etc. Russia
agreed with the Chinese proposal, but Obama promptly rejected it and naturally
supported the dollar as the preeminent reserve currency. Could the
Russian-backed Chinese proposal inspire monetary stability and thus prevent
future mini-depressions as the one we are currently experiencing, or are the
Chinese regretting investing two trillion dollars in US bonds out of necessity?
A number of economists and politicians maintain that the world economy may not
be in ‘real growth mode’ until 2012 – much longer for non-energy producing
countries in the periphery - and there may not be dynamic growth until the end
of the decade.
Structural weaknesses, which includes immense
public debt combined with low consumer demand and unemployment, will continue
to rise in the next 12 to 24 months. Outside of China, India, select Asian countries, energy-rich
Russia,
and perhaps Brazil,
this decade may be one of slow growth. Even as countries aim to lower public
debt and even if the Chinese ‘reserve currency solution’ were adopted, will
such measures avert another cyclical crisis? If the single super-reserve
currency is not the solution, is there a need as the Europeans, Russians, and
others claim, for a new Bretton Woods system? Some economists and social
scientists have suggested that the world needs a Green Bretton Woods, one rooted in new eco-friendly science and
technology of self-sufficiency, especially in the energy sector, if the world
is to avoid economic dislocations like the one we are currently experiencing.
The gradual power shift in the world economy
from the Atlantic to the Pacific, with calls for a new Bretton Woods or a ‘New
Deal’ that British PM Gordon Brown proposed, and the Chinese proposal for a new
reserve world currency placed immense pressures on the US at the G-20 meeting
in London in April 2009. Given that the EU and Japan together account for 38.1% of
IMF contributions, and given that Gordon Brown has repeatedly asked the Arab countries
to make a multi-billion contribution to strengthen the IMF, the question arises
about the US
role in that organization headquartered in Washington and essentially run as a US bureaucracy
since Bretton Woods.
Global Crisis and Realignment of Elites
The fall of the Communist bloc reinforced and
emboldened the ‘Markets-over-State’ (financial over political elites) theme.
After the fall of Communism, there was an enormous rise of stock markets (‘irrational
exuberance’, as FED chair A. Greenspan once called it) around the world in the
1990s. The ‘end of history’ was here, so proclaimed true believers in the
market economy, neo-liberals, and right-wing ideologues celebrating the death
of their nemesis Communism. Presumably, serious academics lined up behind the
‘Cold War winner’ and ready to sound the trumpet on behalf of a social order
that seemed to transcend history. Prevalent since the Reagan-Thatcher era, the
‘markets-over-state’ theme filtered down to the middle classes throughout the
world, operating under the Hegelian (G. W. F. Hegel) assumption of steady
upward progress for the market economic system.
From fixed-income retirees to millionaires,
euphoric individuals invested their savings in an institutionalized fallacy that
drove stock markets higher along with the boundless speculation bubble. The new
reality today is that the financial elites have recognized the global economic
crisis diluted if not obviated the ‘markets-over-state’ ideology and culture. Obviously
more serious and far reaching in its economic and social impact than most people
believed before autumn 2008, the current crisis temporarily forced governments toward a
quasi-statist course – greater role of the state in guiding, managing,
regulating the market economy which would collapse in the absence of public
funding. However, this was only an ephemeral phase that quickly gave way to the same old neo-liberal policies.
As a last resort and presumed arbiter in
society, the state in the hands of political elites is far more significant in
times of crisis to guide the course of the economy than the financial elites. Besides
the monumental weight of fiscal policy, government subsidies, public contracts,
and legislation, the reality is that the public sector is becoming increasingly
larger in the developed nations and smaller in semi-developed and developing ones.. The neo-liberal crusade since the Reagan-Thatcher era was precisely to
create a larger private sector and stronger financial elites, while retaining
‘Keynesian militarism’ responsible for ‘winning’ the Cold War.
Political party
machinery is the foundation of the political elites, although in some cases,
those who are part of the political elites may also be a part of the financial
hierarchy, as in the case of Silvio Berlusconi. Under mechanisms (at least some
depending on the individual country) of public scrutiny and accountability,
political elites have a responsibility for all institutions to preserve social
harmony and avert instability that may lead to systemic change. Assuming they
are operating under legal and regulatory guidelines, financial elites’ accountability
does not extend beyond corporate management, followed by investors and consumers.
As the largest entity in the economy and main
engine of economic stimulus, the state determines the economy’s fate,
institutions and social order. Given that markets require such intervention in
times of crises to survive, political elites are currently more hegemonic than
they have been in the last 30 years. Such realignment of financial and
political elites of course takes place depending on whether society is
undergoing economic crisis, war, revolution, or other destabilizing episodes. The
current contracting economic cycle will result in a long-term rather than
temporary realignment of elites because it will be a long time before the
political climate is such that it permits the revival of the unfettered
‘market-over-state’ culture of the last three decades. Another reason for
realignment of elites is the relative success of countries where statism in
some form takes precedence in comparison with countries that followed the
neo-liberal route.
Quasi-Statist Alternative to Neo-Liberalism
Can the welfare state, which neo-liberals fear
as a form of statism, co-exist under globalization predicated on corporate
welfare? China,
India,
and Brazil,
three countries where statism in varying degrees prevails did not suffer nearly
as much as a result of the current global crisis and have the best prospects
for rapid growth in the rest of the decade when most other countries will
struggle. Brazil,
for example, did not have to bail out its banks largely because the Lula da
Silva regime had imposed transparency and accountability in banking. Foreign
investment in BRIC (Brazil,
Russia,
India,
China)
nations is driving growth - $45 billion for Brazil in 2008 vs. $2 billion in
1994. Such reliance on foreign capital entails ‘dependent development’. While
the combined BRIC nations have the largest population of poor on the planet,
their development prospects are better than those of advanced nations.
According to some estimates by 2014, Brazil’s economy will be fifth in
the world, surpassing France
and England.
BRIC nations have demonstrated first that political elites enjoy paramount influence
in guiding the economy, and second that statism is here to stay because it
works to save national and international capitalism. Scandinavian style social democracies
operating under statist policies are another model with historical roots of the
relationship between political and financial elites. Regardless of models,
political elites will remain strong first because capitalism thrives under a
strong state structure and secondly because their role in protecting and preserving
the political economy and existing social order will remain more significant
than that of financial elites.
Public Debt & Living Standards
In the last three decades, there is a
correlation between runaway public debt and astronomical corporate and consumer
debt in most countries. There is nothing wrong with public borrowing when it
contributes to horizontal economic development that meets society’s broader
needs. Nor is there anything wrong with corporate debt, if the goal is asset
building and adds value to the company, and not intended to reward a handful of
‘insider’ investors, executives, and consultants engaged in fraudulent
accounting and investment schemes. The convergence of rising public debt,
partly for the parasitic defense sector, the rise of private debt – corporate
and consumer – reflects the reality of a consumer-oriented capitalist economy
that spends more than it produces. Servicing loans is not a problem when the
economy is expanding, even on credit. The problem arises when the state,
businesses, and individuals cannot service loans on a chronic basis because
they have overextended. Inordinate public borrowing coinciding with similar
trends in private borrowing in the last 30 years weakened the economy and
resulted in mini-recessions culminating in the current crisis.
Of the $3.6 trillion US budget that Obama
presented in February 2010, $1.6 trillion is in deficit, money that must be
borrowed and paid by future generations through lower living standards. Given
the US is currently suffering a budgetary deficit that accounts for 9% of GDP,
at a time that official unemployment is at 10% (at least 15% unofficially,
growth rates must be above 5% for the next ten years to bring down both
percentages. Otherwise, the result will be sustained official unemployment of
above 6%, poverty above 15%, and weaker middle class.
Cyclical crises of capitalism are inevitable
because the dynamics of the system predicated on continued expansion with
periodic contraction upon market saturation. Established to maintain market growth
in the world economy and help alleviate the symptoms of crises by providing
currency stabilization (IMF) loans and World Bank development loans, IFIs have proved
beneficial, especially for corporate America and the other advanced capitalist
countries whose corporations profit from stable currencies and open markets.
Conditionality of IFI loans, which entail the recipient must deregulate the
market place and reduce labor costs while reducing corporate taxes, further benefit
multinational corporations. Because loan ‘conditionality’ drains capital from
loan recipients and does not lead toward self-sufficient development, the IFIs role
has entailed cyclical debt-crises and perpetual dependence of the Third World on the core countries. Playing a key role in
austerity programs that perpetuate asymmetrical trade and uneven geographic and
social development, IFIs have been major obstacles to sustainable development and
strong state structure in the Third World.
At the urging of the US and EU, during the
1980s the IMF, World Bank, European Investment Bank, OECD, and regional IFIs
like the Inter-American Development Bank, Asian Development Bank fostered deregulation,
privatization, cuts in social programs, reduction in the public sector,
reduction in wages, raising indirect taxes, and cutting taxes on corporations
and upper income groups. Backed by the G-7, the IFIs recommended to borrowing
member countries that they offer all types of incentives from less regulation
to lower taxes to attract domestic and foreign capital investment. Borrowing
governments went along with IFI policy recommendations, and only then did the
IMF-World Bank-Paris Club declare the loan recipient ‘credit worthy’ so that
consortium loans led by the World Bank would approve funding for development
projects.
Public and private banks would then provide guaranteed and commercial
loans to the borrower. Such policies resulted in de-capitalization from the
periphery to the core and from labor to capital and strengthened the process of
globalization. Moreover, borrowing countries remained structurally weak to face
the next cycle of global economic recession like the recent one when currency
devaluation, lower wages, and higher indirect taxes are among the austerity measures
become necessary to strengthen finance capital. The result was lower living
standards for borrowing nations, especially labor, and the lack of sustainable
development that would allow upward social mobility instead of widening
rich-poor gap.
The Global Crisis & the Shrinking Middle
Class
In all economic contracting cycles throughout
finance capitalism’s history, blue collar skilled to unskilled labor,
agricultural day laborers to small farmers, and white-collar employees to
mid-management ultimately pay the price for economic dislocation. The middle
class, as the media and governments define it today to include a very broad
range from upper working class to highly paid professionals and managers,
experiences downward pressure toward ‘proletarization’ status instead of upward
mobility as it envisions its destiny in a pluralistic society. Very clear in
the 1930s, this phenomenon is taking place amid the current crisis not only
because people are losing jobs, homes, and retirement savings, but because the
future looks bleak for their children’s opportunities for upward mobility.
Besides part-time and contract work, the middle
class and workers are asked to accept pay cuts, reduced benefits, reduced work
schedules, flexible working conditions, all of which will be accompanied by the
expectation of retiring at a later age. That limited market opportunities means
limited possibilities for upward mobility for the next generation translates
into loss of confidence in bourgeois democracy. Where is the recent ‘proletariatized’
middle class headed; will it emerge stronger than it did after the Great
Depression, helped immensely by the war-stimulated economy, or will the middle
class society lapse into chronic decline? There is a fundamental question of
whether the ‘middle class’ was on sound footing in the last four decades, or
artificially created by a deficit-spending system now in crisis throughout the
world.
On paper, the combination of low labor values in the Third
World that allowed for higher incomes in the advanced countries
and the postwar credit economy accounted for the quantitative and qualitative
growth of the middle class in core countries. A large percentage of the
population in western countries of the northern Hemisphere, as well as Japan, Taiwan, and South Korea
experienced upward mobility in the past 40 years, and China more
recently. Middle class mobility was based on the credit economy and the ‘wealth
effect’ was a mirage because the middle class lived on credit and hoped values
in everything from their incomes to homes and securities would continue to rise
indefinitely. The current crisis has exposed the bourgeois facade of endless
progress, and revealed that a large percentage of the middle class was really
working to pay off debt until death. All along, the proletariatization of the
middle class was taking place serving both the economic goal of capital
accumulation and the political purpose of liberal democracy as a material
utopia.
The US Congressional Budget Office estimates
that in the next three years there will be a $2.9 trillion gap between
productive capacity and actual output. In short, more than 300% the amount congress
initially approved as part of Obama’s stimulus package. Such a gap will mean
that the state must decide if the top 10% of income earners will bare the brunt
of the bailout cost, or if the middle class and workers will have to endure
lower living standards and downward instead of upward social mobility. Because
capital accumulation on a world scale takes place by the more thorough
exploitation of labor, the state will support financial elites’ efforts to
squeeze out the maximum from middle class and workers short of precipitating
social upheaval and political instability. Arbiter of social relations through
control of the fiscal system, the political elites in each country will
determine how weak the middle class will be for society to function without
paying the price of radicalization and violence.
Because effective demand is limited
by the earning power of workers and middle class in the post-credit crisis of
the early 21st century, and the sharply reduced personal wealth
(drop in real estate values, private pensions, and stock portfolios) the illusory
middle-class ‘wealth effect’ will remain low and the accumulated surplus
capital high. Of course, China
with a strong state structure and dynamic economy growing faster than any other
in the world is the exception, followed by India, despite very low average
living standards.
Naturally, science and technology innovation will result in
new growth, as will the degree to which the state in the core countries will
intervene to limit capital accumulation by financial elites to keep a relatively
stable middle class. Because there are multiple institutional means that
condition people toward conformity, most exercise self-restraint toward the
status quo as they are convinced that there are rewards in such behavior and
punishment for social dissidence. In the end, the middle class perception of
upward social mobility for their children may be a catalyst to a political
solution or social action.
Global Crisis & the Working Class
Few would disagree that the most dramatic and
lasting impact of the recent recession will be on workers especially in less
developed countries. Even with G-8 coordination, as the IFIs urged throughout
2009, the recession of 2008-2010 will not turn into an expansion cycle before workers
have paid a very high price to revive the ailing monster whose tentacles reach
around the planet. Unemployment will rise – officially, averaging 10% in US and
EU, closer to Great Depression levels if one counts those who have stopped
registering for work and those working seasonally and part time. Wages will
fall along with benefits and workers will be doing the tasks of two or more
people because businesses reduce staff. Socioeconomic polarization will
continue as price inflation reduces working class living standards.
Some of the sociological consequences of this
crisis include a rise in suicides, rise in physical and mental illnesses, rise
in divorce rates and single-parenting, and a rise in crime to mention only a
few. However, it will all be worth it knowing that capital concentration will
thrive once again, that stock market speculators, bankers and investment gurus,
and tough-talking industrialists make a few extra million in annual bonuses and
other compensation! The media and ‘expert analysts’ will blame everything from
workers lacking training for the ‘right jobs’ to bad character traits of the
individual unable to cope in the otherwise ideal democratic society operating
under the ideal market economy! The poorer the country the worst off labor
conditions will be. However, regardless of whether the worker is unemployed and
homeless in Manila
or in Detroit,
the painful consequences are the same. Although this scenario did not have to
unfold as pessimistically as I am describing it, I fear that it has evolved
somewhat so because the greater the wretchedness of the multitudes, the greater
capital accumulation on a world scale. Therein rests the essence of the market
economy as operates even with existing social safety nets – the somewhat more
humane Scandinavian model notwithstanding.
Within the capitalist camp, there are of course,
other ‘gentler kinder’ paths to follow that will be less painful for labor and
the Third World that had nothing to do with
precipitating the crisis but will have to pay for it. Instead of a policy mix
intended to strengthen the financial sector, governments could absorb surplus
capital from the top 10% of income earners and stimulate the economy. Transfer
of income from the parasitic capital-intensive private sector to productive
labor-intensive public areas as a way to stimulate job growth that results in
consumer spending, greater stability in the investment climate and greater
confidence in the economy can be carried out by more aggressive Keynesian
measures. Although the current crisis presents the state with the opportunity
to redistribute wealth from top down for a change instead from bottom up, so
far there is no sign that is likely to occur.
More socially progressive policies always meet
with vehement objections because they entail asking capitalists to share in the
recovery of the economy they have debilitated. And behind finance capital are
the political elites. Because capital accumulation on a world scale will be
financed by the more thorough exploitation of labor, the state must continue to
back capitalists to drain every ounce from workers short of precipitating
social upheaval and political instability. Of course, apologists of capitalism
ranging from social democrats to neo-liberals will try to mold public opinion
that this is how life is in a pluralistic society; that indeed it is the fault
of the individual worker who lost his/her job with all the consequences to
follow, or that everyone must share in the ‘sacrifice’.
Given the weak trade
unions in most countries, the fact that leftist groups have been co opted by
the center in the last four decades or they are marginalized by their own archaic
ideology, tactics, and corruption, workers in most countries lack effective
leadership. Desperate, fearful, anxiety-ridden workers will run for help to
bourgeois political parties that represent capital. They will demand crumbs;
they will beg not to have so much blood drained from their veins this time
around. It is indeed a testament of globalization that household pet in the
core countries enjoy better health care, housing, and food than more than 50%
of the world’s poor in the periphery!
Corporate Bailout or Corporate Welfare
In the US in 1970, the average
worker-to-CEO compensation ratio was 20-30 times or $1 for worker to $20-30 for
CEO. In 2007, the same ratio had risen to 350 times, or $1 for worker to $350
for CEO). Along with its products and services, the US exported its corporate and
consultant culture and we now see such outrageous worker-to-CEO compensations
in Europe. Government bailout funds for banks,
insurance companies, and other corporations has been used primarily for
consolidation, rather than easing the credit crunch.
With the approval and in
some cases urging of government, European and US banks have used public funds
to buy other banks, investment, and insurance firms on the cheap, and/or as
reserve capital to stabilize their stock price. When British PM, Gordon Brown,
approved Lloyds TSB purchase of HBOS in September 2008, did Mr. Brown
know that on 13 February 2009 Lloyds
would ask that the state to save the bank that had purchased $17 billion bad
debt from HBOS? Similar cases abound
in the US
where the Bush administration urged banking consolidation more for ideological
considerations than financial, namely, to save financial institutions from state
control and/or ownership.
Because economic crisis can cause social and/or
political instability as well as destabilize foreign relations, Obama’s
election was actually necessary to de-radicalize the disgruntled workers and
the middle class, while appeasing world public opinion that had turned
decidedly against the US
more than ever in its modern history. Many believed that Obama would follow in
the footsteps of F. D. Roosevelt, and thus revitalize society in every sector
from banks to social programs. As much as Obama represents hope for the masses
at home and abroad as the ‘reformer Messiah’, he is in fact the Messiah of
finance capitalism following watered-down Keynesian policies. Even billionaire Warren
Buffet admits that no one really knows if Obama’s measures will bring about the
publicly stated result.
Nor do we know that Obama’s policies and those
of the other advanced countries will result in inflationary pressures once the
world economy revives and their impact on labor. To control inflation it will
mean higher interest rates and further credit tightening that will result in lower
living standards for workers. Indicative of finance capital’s pervasive
influence, in January 2010 the US Supreme Court ruled that limiting corporate
campaign contributions constitutes an infringement of free speech. As the US economy
improves, there will be greater pressures on Obama and the congress to revert
to loosen government regulation of business and revert to the same policies
that led to the current crisis. And the rest of the world will follow because
capitalism is a world-system operating under the same rules.
The Poverty of Globalization
Despite GDP growth in the last two decades
before the economic crisis of 2008-2010, social inequality, uneven social and
geographic development and rising poverty are among the reasons that the
legitimacy of capitalism and the myth that materialism engenders happiness
comes to question. Besides the planet’s rapid environmental degradation, decline
in the bourgeois lifestyle characterized by boundless consumption and
self-indulgence, a weakened middle class today is possessed more by fear and
anxiety for its children’s future than comfort that capitalism promises in the
marketing of the “growth and happiness dogma”.
One of the major concerns is how
higher education around the world is increasingly tailored to serve capital and
that only the wealthy will be in a position to secure a classic
Renaissance-style ‘liberal arts’ education in the future. There are many
complex variables, among them objective conditions of how the evolving
capitalist system is restructuring society. Progressives throughout the world
have an undeniable responsibility for surrendering to the status quo or
surrendering to fatalism. This is partly because bourgeois democracy no longer
has a nemesis as it did during the Cold War to provide an alternative, but also
because of thorough indoctrination of the masses.
Hovering just under 20% in the US and about
the same in the EU, chronic poverty will remain a long-term legacy of the
current recession. ‘Third World-type’ conditions already exist within the
advanced capitalist countries – families in the American Deep South and
northern inner cities subsist on a few hundred dollars per month and rely on
food stamps to feed themselves. Conditions for the bottom 20% of the population
are not that much better in the EU where the prospects for recovery are not as
bright as in US, and even less so for Japan.
If finance capitalism is to
survive with the inevitable wealth concentration within the top 10%, there must
necessarily be downward income pressure on the middle class and workers.
Generating greater surplus amid global contraction than the market can absorb
will keep the capitalist economy in a limited-growth mode for at least a
decade, unless the state absorbs the surplus capital from the top ten percent
of income earners and spends it for labor-intensive socioeconomic development.
History’s most destructive holocaust may unfold
in the next decade as one billion poor fight just to be fed unless the richest
nations that control most of the wealth act fast to lessen the crisis. The pets
of the wealthy and middle classes live better than one-third of the world’s
population (two billion) that will experience further decline because of the
current contracting cycle. Although international organizations (NGOs and
official entities) and even some heads of state have been warning about this
issue almost on a monthly basis, there is yet no concerted action by the G-20,
which own most of the world’s wealth, to reduce poverty.
Meanwhile, there is no
shortage of empirical studies warning about the rise in global poverty owing to
everything from market speculation to the multi-trillion global financial
crisis and the lack of the state to address capital concentration. The poverty
holocaust will have social and political implications and cause instability and
further weaken the world economy as the UN has warned to the shrugs of the
richest nations responsible the crisis. To deflect attention from the poverty
holocaust, the EU is accusing China
of neo-colonialism in Africa, which suffers
the lowest living standards in the world. I have no doubt that informed Africans
are amused at blatant European hypocrisy at a time that food, water, and
medicine are the key issues for hundreds of millions, especially given that a
few multinationals control a large global share of water, medicine and
foodstuff resources.
Greece & the Global Financial Crisis
Greece financed its War of Independence with European
loans. Because throughout its modern history Greece has been financially dependent
on the Great Powers, it suffered chronic underdevelopment. External financial
dependence is continuing despite the fact that Greece is an EU member, which
presumably projects the image of a First World
country protected by the euro as a reserve currency. Financial dependence
entails economic dependence that includes trade and manufacturing dependence.
Structurally, Greece
remains an externally dependent society that has raised living standards in the
past four decades largely through public and private borrowing.
All Greek politicians were well aware during
the national elections of autumn 2009 that the country would have to ‘put its
house in order.’ Under pressure to satisfy ‘market conditions’, the EU compelled
Greece
to undertake a series of deficit-reduction measures that are as harsh as those
that the IMF imposes on underdeveloped and semi-developed countries. The
fundamental prescription for austerity measures has not changed in the past
fifty years and they are essentially the same for all IMF borrowers, including Greece today. That
bond rates rose sharply in order for Greece to borrow is an indication of its
lack of creditworthiness, speculation by Hedge Funds, and the extremely tight global
market for loans at a time that most of the world suffers staggering budgetary
and balance of payments deficits.
Austerity or IMF-style stabilization is not
about the funds applied to the country that needs it but about fiscal and
economic policies that the country adopts which make it attractive for domestic
and foreign capital. More political than they are economic, stabilization programs
serve as the pretext for unpopular privatization/liberalization policies. While
IMF austerity entails cutting public sector spending, wages and benefits, and
providing incentives for capital investment, the unique aspect about Greece
having to resort to the IMF as Germany demanded is that it is a full member of
the EU and a stab at the monetary union’s integrity.
Associate members in Eastern Europe are IMF borrowers, but they are outside
the common currency. Tested under the extreme economic contracting conditions
of 2009-2010, the EU integration model is not nearly as cohesive as it had
promised in the past decades. On the contrary, the EU integration model
ostensibly more egalitarian than the US or Japanese models proved rather
tenuous. Moreover, the entire eurozone area also proved a more vulnerable against
intense global competition and less communitarian.
The Greek and foreign press presented the course
toward financial regression, if not near-bankruptcy, in 2009 just before the
national elections, but the seeds for regression have their origin in the
transfer of dependency from Great Britain to the US during the 1940s and then
back to dependency on Europe upon its induction into the EU. How could
near-bankruptcy happen to a country that hosted the Olympic Games in 2004? How
could Greece,
once EU’s best examples of how integration works for smaller members. The answer
is that the Greek economic miracle in the past 25 years was largely financed by
a combined public and private sector debt that may amount at least 300 billion
euros and perhaps as high as one trillion.
The current recession accompanied by
a stabilization program will have an impact on the economy and living standards
for the rest of the decade. This is because of international economic slowdown,
limited domestic growth prospects, and Third World-type official and private
sector corruption combined with a marked absence of EU-style institutional
mechanisms to deal effectively with a fiscal system designed around a corrupt
private and public sector. Despite the Greek economy’s impressive growth rate
in the previous decade, the socioeconomic gap has widened sharply once
again after it had been closing in the past three decades, as it did in Spain, Portugal, and Ireland. As the
EU’s weak link, Southern Europe may in fact
reflect the greater flaws in the monetary union’s structural integrity, namely,
that the EU was never prepared to confront a crisis of the magnitude as it is
currently facing.
In 2008, one study indicated that by 2012 Greece and Spain could
approach Italy’s
living standards. That prediction based on the infamous “Greek statistics” and
boundless optimism now seems only a dream for Spain and Greece. IMF-EU
privatization recommendations that have been implemented under the ‘reform’
label and more are on the way, which are designed to strengthen big businesses
and attract direct private investment. Curbing social security benefits and
keeping wages low, which are among the lowest in the EU entails that Greece is
hardly Southern Europe’s economic miracle of
the early 21st century that some observers once praised.
Baksheesh Capitalism & Austerity’s
Political Price
Some of the chronic problems facing the country
and keeping it from enjoying higher living standards and upward social mobility
include unrelenting rampant corruption in all sectors of society from church and
state to health and education. The current regime has used corruption as a
pretext to undertake austerity measures and strengthen the private sector. Greece suffers
chronic and widespread tax evasion not much different from a Third World
country, but the majority of fiscal income not flowing to the state is from big
business. The thriving subterranean economy estimated at 70 billion euros, or
about one-third and it includes everything from street vending to narcotics and
sex traffic and money laundering activities, is of course a serious drain on
the fiscal system. The World Bank ranks Greece’s corruption at about the
same level as some Latin American and African countries.
The issue of speculators targeting Greece is both
accurate and a pretext for the austerity measures. The real issue is one of
horizontal development that Greece
lacks during its entire history, including the period from its induction in the
EU. Despite receiving EU development funds, for various projects from
infrastructural development to subsidies for building hotels and cheese
factories, there has never been central economic planning, especially absent of
bribery and corruption, aimed to generate sustained development. As one of the
smaller EU members without a manufacturing sector, Greece entered the current crisis
later than Western Europe. Although Greece
accounts for a tiny percentage of EU’s GDP, its monumental fiscal deficit,
combined with public and private external debt payments deficit (estimated at
more than one trillion euros), and chronic public and private sector corruption
has resulted in threats that threaten the currency’s integrity.
After PASOK’s
election in autumn 2009, the EU immediately demanded speedy austerity measures,
preferably similar to those of Ireland, so that the Europeans (mainly Germans)
do not pay for the costs for Greece’s chronic budgetary and balance-of-payments
deficit that have weakened the euro. Some Greek analysts have wondered why the US government
helps bail out states like California,
while the EU refuses to bail out Greece. Why is it that the EU
offers loans for associate members in Eastern Europe,
but no comparable aid to its own members? First, as a sovereign nation, member
of a common market and common currency, Greece is not a state like California.
Second, bailing out Greece
would set a precedent for all full members to spend above the 3% of GDP.
Finally, the EU as a common market competes globally, which means that its strongest
members are apprehensive about their global competitiveness diluted by weaker
members. Therefore, just as the US
would impose IMF austerity on its common market neighbor Mexico to
stabilize its currency and make it attractive to investors, so does the EU
demand austerity from Greece.
That Germany
encouraged the IMF to take part in a bailout program of a Eurozone member is
indicative that the reserve currency is much more vulnerable than politicians
or financiers believed until 2010.
EU political support for stabilization has come
at a high price. Stabilization programs weaken national capitalism, strengthen
foreign capital; they weaken labor and the middle class and strengthen finance
capital; they weaken the public sector and strengthen the private sector. For
example, there are several thousand foreign firms in Greece (perhaps as many as
16,000) which are exempt from many of the taxes imposed on national firms, at
least those national firms that actually pay taxes in the required amount. That
Germany
became the obstacle to the EU bailout for Greece is understandable, given Germany’s
preeminent role in the EU and in Greece. Eastern
Europe that borrows from EU and other sources including the IMF
has less freedom to decide its fiscal program than Greece. Papandreou acknowledged
that in fact Greece
has lost a part of its fiscal autonomy, in reality most of it. However, the \experience
of Greece
amid the current contraction threatened EU monetary stability, thus the idea of
an EU super-fund for future financial crises is a valid proposal and it may
come to pass, if the richest EU members agree.
Although unemployment is hovering around 25% in autumn 2012, or 15% above the EU
average, it is expected to rise an additional 5% during 2013, while the combined
budgetary and balance-of-payments deficits will amount to 17% of GDP, and the country will remain in negative GDP growth for the fifth straight year. Spending
4.3% of GDP for defense, Greece
has one of the largest military budgets owing to its NATO commitments and
unstable relationship with Turkey.
Even when Papandreou announced austerity measures, defense contracts were not
canceled, despite revelations about bribery scandals involved with each
contract.
Corruption on a global scale shaves off about 10% of the legitimate
economy and public finances. In the case of Greece, the percentage is much
higher and approaches the levels of sub-Saharan and South American countries.
Paradoxically, the government is using the stabilization program to integrate a
greater segment of the informal economy into the legitimate economy that the
ministry of the finance can document and tax accordingly. Under the guise of
EU-imposed austerity, the government is reforming the fiscal structure that was
one of the weakest in EU.
Equally alarming to the abyss of public
spending, it is estimated that an ever-larger percentage of households are
over-extended and as many as one-third may not be able to service them on time
this year. Loan-payment delinquency is a global problem the credit economy
created, and its impact entails widening rich-poor gap. All of this was before
the current stabilization program, which will result in lower living standards.
In short, Greece,
along with many other core and semi-periphery countries, built a credit middle
class that will be facing retrenchment during this decade. On the optimistic
side, GDP growth may reach just under one percent, but capital flight and high
interest rates for bonds will remain an obstacle to such growth.
In the last
analysis, the tourism-shipping industry are hardly sufficient to stimulate new
vertical growth, at a time the country needs ‘horizontal development’, that is
to say, development in new sectors that will serve domestic needs and reduce
import dependence so that there is a drop in the external payments deficit. Hardly
a microcosm of EU’s northwest members, Greece is a reflection of the
periphery and future members in Balkans and Eastern Europe.
Moreover, the recent problems with the public deficit may in fact be a
reflection of the fragile EU system and its lack of proper centralized
mechanisms to prevent any member from jeopardizing the Union’s
monetary integrity. That a small EU member caused the euro’s decline by several
percentage points was a hard lesson to Europeans who will have to
institutionalize more rigorous safety net mechanisms in the future to prevent a
similar eventuality.
GOLDMAN-SACHS
Partly of because Greek officials have been
falsifying statistics for many years, the fiscal deficit stands not at 6% they
presented as fact last summer but at 12.7%, or more than double that of
Germany, which explains the much higher interest rate. Since last summer/autumn bondholders had been
speculating on a debt crisis and purchasing insurance betting on the existing
shortfall nearly bankrupting the country. In February 2010 the New
York Times revealed that Goldman Sachs was helping the previous
administration conceal its real debt from the EU, and Goldman was interested in
buying Greek debt, a scheme that never materialized. Greek accounting methods
of the public sector in the last decade or more are actually a reflection of
how some corporations also operated, namely, falsifying numbers and hoping to
cover the gaps with future receipts. However, such accounting methods were not
very different from mega-corporations engaging in fraudulent accounting.
Fraudulent accounting is based on the assumption of continued economic growth
to cover gaps.
In November 2009, Goldman approached the newly
elected Socialist Government of George Papandreou in Greece and proposed purchasing the
Greek debt, at least a portion of it, presenting it to the EU lower than it
actually is, and in exchange take control of the airport tolls and other frozen
income sources. In October 2009, Greece’s official debt presented to
the EU was 6% of GDP as opposed to 12.83% that was the real debt. Having run a
campaign to clean up rampant corruption involving both domestic and foreign
firms, Papandreou rejected the Goldman-Sachs proposal. What followed was a
campaign by Goldman-Sachs to expose Greece along with all of Southern Europe as EU weak links whose bonds should
command much higher bond yields than what Germany pays.
Before the NYT
published the Goldman-Sachs story, Papandreou went public with implicit
accusations that the EU was complicit in covering up fraudulent statistics that
Greece
was submitting for a number of years in exchange for policy measures that it
(EU) wanted Greece
to adopt. The German government acknowledged that the EU had not done its job
properly. Ironically, in March 2010, the Greek government used Goldman-Sachs as
one of the investment banks for the issuance of bonds. Besides their working
relationship with investment banks like Goldman-Sachs and bond investors,
accrediting agencies like Moody’s and Fitch responsible for assessing Greek
bonds are essentially in the business of pursuing a neo-liberal agenda that
strengthens finance capital. Concerned that Greece would have difficulty refinancing
past debt was what bond traders focused on and one of the key reasons for the
high interest rates until of course the EU and IMF agreed on a bailout with
interest rates much higher than developed countries are paying.
Stabilization’s Economic Growth & Social
Impact
In the era of globalization and privatization,
the inherent characteristics of ‘Greek-style baksheesh capitalism’ are evident
in other countries and contribute to social instability and radicalization of
the masses. The rapid rise in public and private debt during the past 30 years
in Greece as much as in many western countries, combined with the expected
higher interest rates once western economies recover in 2010 posed another
impediment to economic growth for the next five years. That the public
sector and the various social security funds are in debt to the tune of billions
and the government must borrow to finance such staggering debt entails high
interest rates, which incidentally benefit German investors who hold an estimated
of 80% of Greek bonds. The price for EU backing Greece financially carries the same
quid-pro-quo as any Third World borrower,
which means Greece
will be making large trade deals that involve everything from defense contracts
to consumer items from Germany
and France,
which are the main financial supporters.
Hyper-debt and the current EU-imposed
stabilization program entails stagnation that may last for the entire decade
and result in lower living standards and contraction of the middle class, in
the absence of rationalizing the otherwise chaotic market economy that is
externally dependent and not inwardly oriented – designed to serve the domestic
consumer’s needs. While France
was relatively cordial toward Greece,
Germany
has been much tougher. Merkel’s conservative government favored monetarism at
the cost of cuts in social programs. Having to contribute the largest amount
for Greece’s
bailout, Germany
has immense debt of its own and it does not know how much it will have to
devote to help other EU members in the future. As the third-largest buyer of
French defense supplies Greece
has earned a receptive audience in Paris.
Austerity in the Greek economy is also a signal that Germany wants to send to the rest
of the members that fiscal discipline will be observed at the national level.
Radicalization of workers and middle class will
only intensify not just in the weaker EU members like Greece, Spain, and Portugal, but
in other countries where protests are expressed in different modes from student
riots and labor strikes to rising crime. The gap between these social groups
and political parties and trade unions, invariably extensions of political
parties, will widen. The result will be spontaneous uprisings indicative of far
reaching indignation with those who claim that democracy means lining up behind
established political and labor organization. In short, bourgeois democracy’s
challenge in the early 21st century, as much in Greece as in the EU
and elsewhere, will be the widening gap between the under-represented broader
social classes and institutional structures like political party and trade
union bosses. Entrenched political, business, trade union, and academic elites
divorced from the lives of the masses contributes to social alienation and
sociopolitical instability.
Greece’s Prospects
for the Future
The extremely difficult phase, which Greece is
undergoing owing to austerity measures, will come to an end in a three to five
year period. Assuming that the state modernizes and utilizes its enormous
talent in the form of an educated work force, there is reason for guarded optimism.
Greece under the EU ‘inter-dependent’ model of integration has performed much
better than it had under the US-imposed ‘dependency’ model. The natural gas deal
with Russia
and the Black Sea Trade and Development Bank consortium present opportunities
for capitalist growth. Greece
has untapped mineral resources that can be used to stimulate new capitalist
growth.
Assuming the current regime succeeds in curbing corruption and addressing
tax evasion by going after the top ten percent income earners, while at the
same time pursuing multilateral commercial relations, Greece as a national
economy may actually do better than its northern Balkan neighbors, despite
lower living standards for workers and the middle class. Consortium investment represent
considerable impetus; Greek-owned firms have been taking advantage of low-cost
labor and have been expanding in the Balkans and the Near East where Greece has
created its own mini-zone of limited influence. Moreover, Greece has
benefited from cheap immigrant labor that continues to fuel its economy, and it
looks for further stimulus by expanding its Russian natural gas pipeline
connection.
Some politicians claim that Greece is the 30th
richest country in the world and that may very well be correct, is we count the
assets of the top 10% of wealthy people whose assets are outside the country. There
are options before the Greek government, ranging from a mixed economic model
that South Korea
and Taiwan
are following to the Scandinavian that Papandreou likes but does not emulate.
Moreover, there are sources claiming that Greece has enormous unexplored
strategic mineral resources that can be the basis for new economic development.
Assuming that Greece will follow the example of other countries around the
world to curb parasitic consultants and outsourcing, there can be some savings
realized along with continued pursuit of legitimizing the subterranean economy
and addressing rampant corruption and tax evasion. However, the plan is to
privatize and pursue IMF-EU liberalization measures. While the austerity
program will work as it always has, namely, to weaken the public sector and strengthen
private capital at the cost of a weaker middle class and laborers, the state
can prevent ‘brain drain’ (the exodus of educated workforce) and develop a
modern economy under a socially just system with domestic and EU resources.
Global Macroeconomic Prospects
The core
issue for the early 21st century is the degree to which
globalization will continue to erode the social welfare state in order to
strengthen corporate welfare. Although some economists and investment gurus
remain guarded about economic growth owing to rising unemployment and very high
public and private debt, the IMF is optimistic that 2010 will yield global
economic growth slightly above 1%, whereas 2009 plunged the world economy into
negative territory. Given that the G-20 have invested about one-third of GDP to
bail out financial institutions from 2008 to the present, the IMF is correct
that a recovery is imminent, led by China, India, and developing countries in
the Pacific, with the G-8 following. China may enjoy double-digit GDP growth in 2010,
while Germany
has declared it would take at least three years to emerge from the current crisis
that has resulted in a budgetary deficit 6% of GDP.
Assuming
relative political stability with the major powers led by the US, 2010 may be
a much better year than the IMF is predicting, but growth will be limited to
corporate profits amid a jobless economy. To the degree of it may be political plausible option, economic
nationalism and statism are ways to lessen the burden on labor and the middle
class. For countries like China,
Russia,
India,
or energy-rich Iran,
such a course is much easier than for dependent countries in the periphery and
semi-periphery of the world-system. For example, historically dependent
economies whether it is Greece
and Turkey,
or countries undergoing dependent development do not exercise economic
nationalism under bourgeois regimes to the degree Germany can. Of course, a radical
government such as those in Bolivia
for example could adopt quasi-nationalist policies to mitigate economic
inequality and the power of foreign capital. Given that international
organizations like the IMF, World Bank, and the World Trade Organization best
serve the interests of the most advanced capitalist countries under the
globalization model, economic growth will continue under the existing framework.
Given the US is currently suffering a budgetary
deficit that accounts for 9% of GDP, Germany at 6%, and at a time official
unemployment is at 10% (at least 15% unofficially, growth rates for US and EU
must be above 5% for the next ten years to bring down both percentages.
Otherwise, the result will be sustained official unemployment of above 6%,
poverty above 15%, and weaker middle class. This is social engineering designed
to strengthen capitalism! Within the EU, growth prospects are even worse for
Europe’s “PIGS” – Portugal, Italy, Greece and Spain, (Ireland also belongs in
this group) all of which are targets by bond speculators and partly responsible
for the euro’s and stock market slumps since January 2010.
With 11.5% of the
EU’s GDP, Spain is the fourth largest Eurozone economy confronting a budgetary
deficit that is 9.3% of GDP (lower than the US percentage) and cumulative
public/private debt that amounts to 207% of GDP (equal to Japan’s), while
European average currently runs about 180%. As of December 2009, Eurozone’s
private debt as a percent of GDP was divided as follows: Businesses – 73.6%;
Households – 61%; Mortgages – 44.5%; and Credit card & consumer – 16.5%.
Credit will become much tighter as interest rates will be rising and banks will
be reluctant to float loans. Because banks receiving bailout public funds
reinvested to consolidate by strengthening their own and/or purchasing other
banks, credit tightening has already choked the real economy and in 2010
interest rates will be going higher according to several EU central bank
forecasts.
As banks
and other corporations continue to dish out huge bonuses, while governments do
not impose restrictions and refuse to regulate effectively, the question is
whether structurally anything has changed since 2007, and if the conditions
that structural causes of the current crisis may precipitate another crisis
during the next downward economic cycle five-to-seven years hence. A number of
social scientists have written that this entire decade will be one of modest recovery
and paying off debt, thus lower living standards and relatively low growth on a
global scale. Technological and scientific innovations in a number of areas
from nanotech to biotech, from bio-fuels to ‘green economic models’ that impact
agriculture, transportation, building and manufacturing sectors may hold a
window of opportunity for growth and development, assuming there is relative
geopolitical stability. On the other hand, the internet revolution of the 1990s
was a major stimulus to the world economy. However, because it operated under
the rules of speculative capitalism, by the end of the decade, the bubble
busted like all bubbles throughout history. I expect the future high tech and
science revolutions to follow the same pattern of over-speculation and eventual
retrenchment.
Global Social
Prospects
In the
next 18 months at the very least and perhaps for the next three years, rising
unemployment, lower wages, social security and social benefits cuts will mean
lower living standards for labor and the middle classes that must work longer
to secure the ‘retirement dream’ they seek. Urban and rural labor and student
unrest will accelerate in many countries in the next few years, as it becomes
clear that governments will demand that the lower classes will pay for the
banks’ bailout. Social unrest will result in political realignment within
existing systems whether more conservative or progressive. Since the Reagan administration in its first
term broke the air traffic controllers union in the name of national interests
and security, governments throughout the world manipulate inter-sector
interests and invoke transcending ‘national interests’ to quell labor unrest.
For example, if French farm workers engage in mass strikes and protests, the
government points to truck drivers and retailers as interests that will be hurt
along with consumers. Whereas the state immediately funds banks facing default,
it will not use public funds to support labor in its grievances. In short,
quasi-statism is limited to buttressing finance capital not labor. Therefore, under
such policies class solidarity becomes difficult partly because bourgeois
regimes use the ‘national interest’ as a shield against strikes, and because
the state in a populist, almost ‘Bonapartist’ manner uses one sector against
the other.
The most
intense social unrest will take place in underdeveloped countries that will
suffer the worst from the recent recession’s lingering effects. In underdeveloped
countries, radicalism and militancy finds expression in secular movements of
leftwing or rightwing orientation, or religious movements like Islam.
Therefore, we can expect rising tensions in areas already afflicted by
disparate political, social, and economic problems. Increase in crime,
suicides, divorce rates, single-mother births, and continued erosion of the otherwise
cohesive bourgeois social fabric will take place at the same time that there
will be political, ideological and religious polarization widening the gap
between the privileged few and the multitudes in despair. The current economic crisis may translate into
a crisis of confidence in bourgeois democracy. For example, in January 2010, the
more cynical voters in the Ukraine
were offering their national election votes and those of their families for
sale on the internet.
Global Geo-Political
Developments
World
economic recovery will be hastened with the end of US military engagement in Iraq and Afghanistan and
a settlement of the perennial Israeli-Palestinian conflict. Continued Middle
East instability is a certainty, although the Obama administration has
demonstrated the symbolic willingness to discipline Israel, a foreign policy we
have not seen since Secretary of State Cyrus Vance tried to bring some balance
in the region. Unless the US
utilizes Russia,
China,
and especially EU to secure stability in the Middle East,
Obama-Clinton policy will fail and Israel, not Iran or Afghanistan,
will remain the key source of regional instability. The latest developments in Israel
(especially in Gaza Strip) prove there is reason for pessimism in any type of
permanent peace settlement.
While
there is a great deal of optimism about U.S.-Russia and U.S.-China relations,
there may be a widening rift in EU-US relations over dollar-euro reserve
currency competition, trade, and market share in each other’s domain as well as
in the rest of the world. In short, the competition-cooperation dynamic between
EU and US will intensify as the struggle for global influence increases amid
tightened economic conditions. Finally, the futile attempt by the US to use Afghanistan and
Iran
as focal points to appease the right wing and Israel will prove a continued drain
on the US
budget, and it may contribute to unexpected instability with oil prices rising
and the world economy experiencing an unexpected return to global recession.
The global balance of power will continue to
shift increasingly toward the EU as the ‘new old center’ of world power, with China, Russia, India, and much
of the Third World looking to Europe for economic and political leadership.
Increasingly a Hemispheric power, the US will hold on the strongest nuclear
force and largest military budget on the planet, hoping that translates to
political, economic, and financial power as in the early Cold War. Such a
scenario of America’s decline in not inevitable, if the US faces a domestic
catastrophe more or less like the Great Depression, or a very serious foreign
policy crisis that requires collaboration with the EU on an equal partnership
basis. In the absence of such developments, the new administration will
re-package more or less the same policies, continue to create mini-crises as a
way to divert focus from significant domestic problems and from Iraq,
Afghanistan, and/or the Palestinian question, and it will pay lip service to
multilateralism. Is America’s
decline as inevitable as the Roman, as predictable as its determination to
retain a unilateralist course in a multi-polar world? Can America renew
itself like imperial China
under various dynasties?
Absence
of Alternatives to Global Capitalism
Since
the downfall of Communism and China’s
thorough integration into the world capitalist system, there are no apparent
alternatives to the status quo. Of course, there is the ‘green solution’ but
the capitalist establishment has absorbed it thoroughly. There is the
‘terrorist alternative’ (undeclared war or random violence against the
establishment and imperialist targets), but history shows the severe
limitations of such tactics. There are the varieties of ‘reformist options’
that include the ‘greens’, community-based organizations NGOs, etc., but the
establishment quickly co-opts anything with a ‘reform label’. The most efficacious method of co-optation is
some form of populism that appeals to a broad segment of the population on the
basis of nationalism, class, mutual group interests, and banding together for
the good of all. Such populist tactics work especially in times of crises and
especially in countries with strong nationalist or religious proclivities.
Among
the concrete reformist suggestions that governments have co-opted, mostly in
rhetoric only, include stronger regulation of banking and finance, and the
return to the public sector of major industries that were privatized. The
neo-liberal belief ever since the Reagan-Thatcher decade was that the private
sector can do it better, faster, cheaper, and more efficiently for the
consumer. While public sector employees invariably do not have the best
reputation for efficiency, the last three decades proved the private sector is
far more costly to the consumer and pays much lower wages to workers, while
amassing capital for a handful of managers and investors.
The question today is
whether the public sector is in the position to re-purchase public enterprises
– everything from transportation to communications and utilities. There is a sense of contentment for about
one-fifth, at best, of the world’s population mostly in the developed
countries, tolerance for about one-fifth, and despair for the rest mostly in
the Third World. That capitalism remains the
only ‘game in town’ actually entails inherent stability, despite the inevitable
acts of non-state violence (terrorism) that is more a symbolic threat than
real, and inadvertently helps to engender conformity to the capitalist regime.
