Economic crisis and global disorders
By Michel Husson | Amandla Issue 61/62 | 07 January 2018
The picture of the world economy after ten years of crisis is bleak:
• the European Union is torn between Britain leaving the European Union (“Brexit”) and the rise of the extreme right;
• the common currency euro zone is splitting up;
• many so-called emerging countries are subject to erratic capital movements;
• debts, and especially private debts, are increasing;
• the share of created wealth accruing to those who create it is decreasing almost everywhere, and inequalities are widening;
• the welfare state is undermined by tax competition, etc.
Rather than moderating, the effects of this crisis have worsened. The basic reason is that there is no alternative model to the one that went into crisis ten years ago, which would be acceptable to the world oligarchy.
In these conditions, many commentators today are predicting a new crisis (perhaps also to make sure they don’t get caught again by the same blindness they showed ten years ago).
The instruments of coordination have lost their substance or have been abandoned by the still dominant power. Globalisation no longer has a pilot. The climate challenge, however, should involve, by nature, international cooperation, not to mention a divergence towards another model of development. However, disorder in the global economy, hostile policies to public investment, and probably the inherent logic of capitalism, make this perspective seem tragically out of reach today.
Capitalism is out of breath
The dynamism of capitalism ultimately rests on its ability to generate productivity gains. In other words it needs to increase the volume of goods produced in one hour of work. Since the generalised recessions of 1974-75 and 1980-82, productivity gains have been slowing down. We have gone from what some have described as the “Golden Age” (to underline the exceptional nature of this period) to neoliberal capitalism. Today we have slid into “secular stagnation”. During this period, capitalism achieved what it had hoped for – the restoration of profitability despite a slowdown in productivity gains.
This achievement has been possible only by an almost universal slowdown in wages. The share of wages in total production has been steadily declining. In addition, this was achieved thanks to globalisation, financialisation, technological innovations, indebtedness. Inequality is an integral part of this coherent model. It is coherent, but its coherence is not sustainable. The contradictions of this model led to the 2007-2008 crisis. Globalisation is indeed one of the essential elements of this model, but the crisis has had the effect of changing it a bit.
The big change
The decade before the crisis was marked by the rise of the so-called emerging countries, especially China. This “emergence” was driven by a new pattern of production: different segments are spread over several countries, from the design stage to production and delivery to the final consumer. These “global value chains” are established by multinational companies establishing a web around the world economy. A smartphone is now designed, produced and marketed by workers spread out in many countries.
This new form of globalisation was useful to offset the crisis of the early 1980s. It opened up a reservoir of low-wage labour, which further increased after the collapse of “real socialism”. Nevertheless, it has led to a real shift in the global economy. This can be seen in the distribution of global manufacturing output (excluding energy). Output increased by 62% between 2000 and 2018, but almost all of this growth came from the so-called emerging countries, where it has more than doubled (+152%). It has only slightly increased in the advanced economies (+ 16%). Emerging countries now account for 42% of global manufacturing output, up from 27% in 2000. In some countries, such as China and South Korea, industrialisation is less and less confined to the assembly industries (textile or electronics). It is turning towards high-tech products, even towards industrial machinery used as means of production.
States and capitals
The privileged links between a multinational company and “its State” have obviously not disappeared, and the State will seek to defend the interests of its national industries. However, large companies have the world market as a horizon. One of the sources of their profitability lies in organising production on a global scale in order to minimise their costs and locate their profits in tax havens. They have no constraints forcing them to resort to domestic employment, and their outlets are largely disconnected from the domestic situation of their home country. This means that the weak growth of a country’s domestic market is bearable for companies, as long as they have alternative markets in the global market. The task of the states is not so much to defend their “national champions” but to do everything to attract foreign investment on their territory. This is particularly true in Europe.
So the relations of economic power are structured according to two axes: a traditional “vertical” axis in which national states compete with one another, and a “horizontal” axis in which the competition is between global corporations. International institutions function as a sort of “trustee of capitalist states”, but today there is no “ultra-imperialism” or “world government”. On the contrary, contemporary capitalism escapes any real regulation and operates in a chaotic manner, tossed between heightened competition on the one hand and the need to reproduce a common operating framework on the other. But the rights and privileges of the nation-state have not been abolished. For the world economy, one priority remains the control of raw materials.
Control of raw materials
The permanent struggle for access to raw materials has never stopped. It generates imbalances and conflicts. We obviously think of energy: oil, uranium, etc. To this must be added looted land for the benefit of agriculture that maximises production at all costs, hydroelectricity and mining. Access to water also generates a number of regional conflicts.
Globalisation destabilises peasant agriculture, either by flooding a country with food imports or by land grabbing. At the same time, international investments often aim at relocating the most polluting products to countries with less stringent legislation. These mechanisms are further aggravated by climate change, as the effects of waste, pollution, warming, droughts, torrential rains, subsidised agricultural products, patented seeds, fertilisers and pesticides are transferred from advanced countries to “emerging” ones.
The last decade, inaugurated by the crisis of 2008, has gradually revealed the limits of this global organisation. Even if this is not the end of globalisation, the previous cycle has shown signs of exhaustion.
The development of global value chains was motivated not only by the search for low wage costs. It was also seeking to offset slow productivity gains in the centre by using the dynamism on the periphery. In emerging countries the average annual growth in total factor productivity has however been reduced from 3.5% (2000 to 2007) to only just over 1% (2011 to 2016). This undoubtedly helps to explain the dramatic slowdown in world trade. Until 2007, trade was growing twice as fast as world production; today it is increasing at the same rate.
If we leave China aside, we could even talk about the end of “emergence”. The other BRICS countries (Brazil, Russia, India and South Africa) have not managed to outperform sustainably, as China or South Korea did, based initially on the supply of raw materials. Pierre Salama speaks of “reprimarisation” in the case of Brazil while other economists identify an early deindustrialisation. They are describing the failure to successfully diversify from primary extractive industries. In addition, emerging countries are subject to erratic capital movements creating a chronic instability of their external balances and currencies.
The crisis has served to reveal another phenomenon, made worse by austerity policies – the social dislocation engineered by globalisation. Many studies, including from international institutions such as the IMF and OECD, have pointed to its corrosive effects.
In all advanced countries, the same phenomenon is observed: employment increases “at both ends”. Highly skilled jobs are increasing at one end of the scale, precarious jobs at the other end. Between the two, the “middle class” stagnates and its prospects for social advancement vanish. At the same time, income inequalities are widening. Globalisation is not the only factor responsible. Financialisation and new technologies also play their part, not to mention the changing balance of forces between capital and labour.
The Trump effect
The disruptive capacity of Donald Trump seems limitless, but his protectionist measures do not take into account the way the US economy works in the current interweaving of capital. One of the essential elements of Chinamerica was to enable the United States to reduce household savings rates (and hence grow consumption), with a large trade deficit financed by capital from the rest of the world, and in particular from China. In addition, Donald Trump’s tax cuts are leading an expansionist economic policy that can only widen the deficit. One caustic commentator has written: “if there was a secret plan to increase the trade deficit, it would be much like the current US policy”.
A lot of US imports come from US investments in countries like China or Mexico. According to the IMF, in 2015 US investments were 44% of the total of direct investments in Mexico. In 2014, 60% of Chinese exports to the United States were from foreign-invested enterprises. It is therefore not surprising that the US business community is divided and that many sectors are worried about higher prices for intermediate goods.
As the British Financial Times said: “The concern over the impact of Trump’s protectionism is steadily increasing throughout the US economy. Many companies rely on global value chains to keep prices low and profits high. They fear that this time may soon come to an end.”
Donald Trump’s trade policy is therefore incoherent. The US trade deficit is consistent with the fact that national savings are not enough to finance domestic investment. To this one must add the impact of the fiscal deficit, driven by tax cuts. Under these conditions, the deficit cannot decline, despite import taxes, unless consumption is reduced. This would necessarily reduce growth rates in the United States. In practical terms, capital inflows will have to continue to flow from the rest of the world to finance the trade deficit. This assumes that the dollar’s role as a reserve currency is not jeopardised. However, this status would be threatened if US financiers were dissuaded from holding the dollar, either because its exchange rate is declining or because of aggressive measures taken against them.
If Donald Trump has clearly decided to end the US / China axis, China is also exploring a new path based on three principles. The first is to refocus its economy towards the internal market, which it is doing very gradually. The second is to highlight the goal of upgrading its production, with the ambitious Made in China 2025 program.
Finally, China is developing the “The belt and road” project, a gigantic infrastructure programme of nearly 1,000 billion dollars, affecting more than 60 countries. The “belt” is a physical connection between China and Western Europe via Central Asia and Russia. The “road” is maritime and will reach Africa and Europe via the China Sea and the Indian Ocean.
“Populism”: the true legacy of the financial crisis
The pre-crisis world order is today challenged by the progress – and even the rise to power – of right-wing forces, critical of globalisation and strengthened by the crisis. A Financial Times editorial said, “Populism is the true legacy of the global financial crisis”.
However, we must beware of any simplistic view. For example, the European countries most affected by austerity (Greece, Spain, Portugal) are not much affected by the rise of the extreme right, while it has gained power in Italy, Austria, Hungary and Poland. The influx of refugees in recent years has obviously played a role, but this factor has also had a different impact in different countries. The general formula combines the effects of neoliberalism and xenophobia, but in varying proportions.
A recent study taps into economic and electoral data, mixing it with the results of the European Social Survey of the opinions of citizens. It states that “regions experiencing a greater increase in unemployment are more likely to reject immigrants on an economic basis”. The crisis “has changed the opinion of Europeans on the impact of immigrants on the economy, a particularly strong effect for those most affected by the negative consequences of globalisation and technological improvements”. The authors emphasise the difference between the “economic and cultural drivers of populism”. Their results show that the rejection of immigrants has an economic rather than a cultural basis. It seems that ultra-right parties have transformed the “economic base” of anti-immigrant feelings into a cultural rejection – in other words, into xenophobia.
This is an edited version of an article originally published on the website A l’Encontre. Michel Husson is a French economist and activist working at the Institute of Social and Economic Research.