New Internationalist

Downside up

Issue 430

Jayati Ghosh explains how the market had failed long before the bust – and outlines some positive proposals for the future.

It does not really need a crisis to show us that our current development strategy is flawed. Even during the previous boom, the pattern of growth in both developed and developing countries had too many limitations, paradoxes and fragilities. Everyone now knows that it was unsustainable, based on speculative practices that were enabled and encouraged by financial deregulation. But it also drew rapaciously on natural resources. And it was deeply unequal. Contrary to general perception, most people in the developing world, even within the most dynamic segment of Asia, did not gain from that boom.

The financial bubble in the US attracted savings from across the world, including from the poorest developing countries, so that for at least five years the South transferred financial resources to the North. Developing country governments opened up their markets to trade and finance, gave up on monetary policy and pursued ‘correct’ policies that reduced public spending. So development projects remained incomplete and citizens were deprived of even the most essential rights.

Despite popular perceptions, a net transfer of jobs from North to South did not take place. In fact, industrial employment in the South barely increased in the past decade, even in China. Instead, technological change meant that fewer workers could generate more output. Old jobs in the South were lost or became precarious and the majority of new jobs were insecure and low-paying. The persistent agrarian crisis in the developing world hurt peasant livelihoods and generated global food problems. Rising inequality meant that the much-hyped growth in emerging markets did not benefit most people, as profits soared but wage-shares of national income declined sharply.

Export-led model 

Almost all developing countries adopted an export-led growth model, which in turn was associated with suppressing wage costs and domestic consumption. This led to the peculiar situation of rising savings rates and falling investment rates in many developing countries; and to the holding of international reserves that were then placed in ‘safe’ assets abroad. This is why the previous boom was associated with the South subsidizing the North: through cheaper exports of goods and services, net capital flows from developing countries to the US in particular, and flows of cheap labour in the form of short-term migration.

The collapse in export markets brought that process to a sharp stop. But in any case such a strategy is unsustainable beyond a certain point. Not only did it breed global inequality; it sowed the seeds of its own destruction.

In this boom, domestic demand tended to be profit-led, based on high and growing profit shares in the economy and significant increases in the income and consumption of newly globalized middle classes, which led to bullish investment in sectors like financial assets and real estate, as well as in luxury goods and services. This enabled economies to keep growing, even though agriculture was in crisis and employment did not expand enough.

Rape of nature

The patterns of production and consumption that emerged meant that growth also involved rapacious and ultimately destructive exploitation of nature and the environment. The costs – in terms of excessive congestion, environmental pollution and ecological degradation – are already being felt within our societies, quite apart from the effect such expansion has on the forces generating climate change. And the ecological constraints to such growth are already being felt, most unfairly, among regions and people of the world who have gained the least from the overall expansion of incomes.

At the same time, crucial activities that are necessary for the economy were inadequately rewarded. Farming in particular became increasingly fraught with risk. The attack on peasant livelihoods put the crucial task of food production on a more insecure footing in many countries. Meanwhile, non-farm work did not increase rapidly enough to absorb the labour force, even in the fastest-growing economies of the region.

So the recent boom was not stable or inclusive, either across or within countries. The chances are that the slump will be only too inclusive, forcing those who did not gain earlier to pay for the sins of irresponsible finance.

The upside

As the global financial crisis unfolds and creates downturns in real economies everywhere, it is easy to see only the downside. But in fact this global crisis offers a greater opportunity than we have had for some time now to restructure economic relations in a more democratic and sustainable way:

•  There is no alternative to systematic state control of finance. Since private players will inevitably attempt to circumvent regulation, the core of the financial system – banking – must be protected, and this is only possible through social ownership. Therefore, some degree of socialization of banking (and not just of the risks inherent in finance) is inevitable.

•  The obsessively export-oriented model needs to be reconsidered. This is not a just a desirable shift – it has become a necessity, given the obvious fact that the US can no longer continue to be the engine of world growth through increasing import demand. Countries that have relied on the US and the EU must seek to redirect their exports to other countries and, most of all, their economies towards more domestic demand.

•  This means that fiscal policy and public expenditure must be brought back to centre stage. Clearly, fiscal stimulation is now essential in both developed and developing countries, to cope with the adverse effects of the current crisis and prevent economic activity and employment from falling. Fiscal expenditure is also required to manage the effects of climate change and promote greener technologies. Public spending is crucial to advance the development project in the South and fulfil the promise of achieving minimally acceptable standards of living for everyone in the developing world.

•  There have to be conscious attempts to reduce economic inequalities, both between countries and within countries. We have clearly crossed the limits of what is ‘acceptable’ inequality in most societies, and future policies will have to reverse this trend. This is even more complicated than might be imagined, because unsustainable patterns of production and consumption are now deeply entrenched in the richer countries and are aspired to in developing ones. But many millions of citizens of the developing world still have poor or inadequate access to the most basic conditions of decent life. Ensuring universal provision will inevitably require greater use of natural resources and more carbon-emitting production. So both sustainability and equity require a reduction of the excessive resource use of the rich, especially in developed countries but also among the élites in the developing world.

•  This requires new patterns of both demand and production. This is why the present focus on developing new means of measuring well-being and quality of life are so important. Quantitative GDP growth targets can even be counterproductive. For example, a chaotic, polluting and unpleasant system of privatized urban transport actually generates more GDP than a safe, efficient and affordable public one. So it is not enough to talk about ‘cleaner, greener technologies’. Instead, we must think creatively about such consumption itself, and work out which goods and services are more necessary and desirable for our societies.

•  Public interventions in the market cannot be knee-jerk responses to short-term conditions. Instead, planning – not in the sense of the detailed planning that destroyed the reputation of command regimes, but strategic thinking about the social requirements and goals for the future – is absolutely essential. Fiscal and monetary policies, as well as other forms of intervention, will have to be used to redirect consumption and production towards these social goals, to bring about shifts in socially created aspirations and material wants, and to reorganize economic life to be less rapacious and more sustainable.

•  Since state involvement in economic activity is now an imperative, we should be thinking of ways to make it more democratic and accountable. Large amounts of public money are being used – and will continue to be used – for financial bailouts and fiscal stimuli. How this is done will have huge implications for distribution, access to resources and the living conditions of ordinary people whose taxes will be paying for it. So it is essential that states across the world, when formulating and implementing economic policies, are more open and responsive to the needs of the majority of their citizens.

•  We need an international economic framework that supports all this. Global institutions need to become not just more democratic in structure but more genuinely people-oriented in spirit, intent and functioning. Financing for development and conservation of global resources must become their top priorities, which means that they cannot continue to base their approach on a completely discredited and unbalanced economic model.

Jayati Ghosh is Professor of Economics at Jawaharlal Nehru University, New Delhi, India. This is an edited version of her 2009 Bristol Schumacher Lecture.

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