Date: Sat, 4 Feb 1995 17:51:08 -0500 (EST)
From: ODIN (email@example.com) To: firstname.lastname@example.org
Subject: New Global Order in Crisis
/* Written by twn in igc:twn.features */
/* ---------- "New Global Order in Crisis" ---------- */
Geneva: It was to have been the start of a new era in the Global Economic System, with the new 'powerful', rule-based World Trade Organisation (WTO) in Geneva acting in tandem with the Washington-based International Monetary Fund (IMF)and the World Bank, as its high priests.
By the reckoning of some Biblical scholars, the New Year's day of 1995 which ushered in the WTO (without any New Year's eve party or New Year concert ala Vienna) is also the beginning of the third millennium Anno Domini -- despite the Papal sanction for the Gregorian calendar, according to which the new millennium is six years away.
For the prophets (and advocates) of Alliance Capitalism in the North -- for the South it increasingly looks more like the old colonial-style capitalism -- in a global economy being fast knit together by the transnational Market System, it would have been both a throwback to the laissez faire order of the 18th and 19th centuries and a new assurance of perpetual prosperity.
But, instead of the usual cheer, bon homie and goodwill to all of the holiday season, there were bad news and rude shocks.
The political system whose stability is vital to underpin any economic and social order felt new tremors across the globe. Neither Washington's sole-Superpowerdom nor Boutros Boutros-Ghali's valiant efforts at a New Agenda for Peace seemed to be of avail.
On the economic/trade front, it was business as before with the United States already threatening new unilateral actions over the European Union's banana regime -- without even the slightest attempt to go through the motions of invoking the WTO rules and dispute settlement. This further dented the credibility of the rule-based world trade system.
Cracks developed and deepened as well in some of the basics of the economic philosophies and theories of the new system.
If the "investments" in financial derivatives by the little- known (outside of the United States) Orange county administration that went awry and made that county seek protection under the US bankruptcy laws, had their ripple effects in financial and bond markets across the globe, Mexico in Latin America (as in 1982) set off a global "financial earthquake".
There had been enough warnings, but not the identification of any epicentre, for quite a while.
As early as 1991, while the Bretton Woods Institutions (BWI) and the 'mainstream' economists were encouraging and praising the new liberalisation policies in Mexico and Latin America (and now China and India) pointing to the Mexican miracle, others were raising cautionary warnings. But the BWIs ignored and ridiculed these warnings, and continued to propagate financial market liberalisation in the South as the new panacea.
But other economists -- in the UN Conference on Trade and Development (UNCTAD) in Geneva, CEPAL (ECLA-Economic Commission for Latin America) in Santiago, Chile and a host of Latin American and other think tanks and academia -- were warning of the inevitable slowing down of short-term capital flows to Mexico and other Latin American centres and the other 'emerging markets'. They predicted the likely outflow from the new massive inflows (from pension funds, market players chasing arbitrages across countries, and other fickle investors of the last few years) as the US and European short-term interest rates tightened and edged up.
These warnings of the unsustainability of the Latin American/Mexican model of capital inflows financing consumption rather than productive investments, had largely been ignored by decision-makers in these capitals.
There is a strong deja vu flavour, reminiscent of the 1980s, about the reassuring statements now spewing forth from leading financial and economic journals, and leading officials in the IMF, World Bank and US Treasury and elsewhere about the temporary nature of the Mexican peso problem (triggered by the failure of the previous Mexican administration to take hard decisions in time) and the governments having to persevere in further adjustments to attract and retain foreign funds.
In 1982 too, the debt crisis was first described as a cash flow and liquidity problem, and then a case of mismanagement of the economy by governments and only ultimately acknowledged as a "bankruptcy" problem caused largely by external factors and needing debt write-off.
That Mexican debt crisis (itself triggered by the US Federal Reserve's high interest rate policy a year or more earlier) in 1982 had set off a chain of events rolling across the developing world: the saga of Structural Adjustment Programmes tutored and monitored by the Fund and the Bank, with government after government in the South embracing and ardently preaching the virtues of liberalism and the market.
The belt-tightening of that era for the common man (still continuing without respite) and affluence for a small percentage of the upper middle class in the South pursuing Northern lifestyles, the liberalisation of markets and increased profitability for finance capital, the "disciplining" of the workers and the unions --- all supposedly set Mexico off on a high upward trajectory of which the outward symbols were its becoming a part of the North American Free Trade Area and a member of the Organisation for Economic Cooperation and Development (and withdrawal from the Group of 77).
The Mexican success story was being held out as an example of the path for others to follow -- and many of the Latin American countries to its South did.
There were some uneasy "facts" in the global economic scene that contradicted this rosy scenario -- not the least the rising and stubborn figures of unemployment, and the decreasing share of the benefits (and increasing poverty, and even hunger) at the growing bottom and the high prosperity for the few at the top.
But the solution, according to the theoreticians of this neo-liberal economics -- securely ensconced in international secretariats in Paris, Washington and Geneva -- was the same: "adjustment" and "more adjustment" and liberalisation of labour markets and reduction (if not elimination) of labour-market rigidities and freeing employers from social security burdens.
It was in line with the so-called 'medium-term strategy' of bringing down inflation (purportedly caused by wage- inflation and union-driven labour market rigidities) and restoring private sector profitability to encourage private investments and private initiative for a private-sector investment-led non-inflationary growth.
This same theme was most recently repeated in the 1994 year- end Economic Outlook of the Paris-based OECD secretariat, though some of its annexed tables seem to bear out what economists elsewhere have been arguing, namely, that inflation is now profit-driven and not wage-driven.
The OECD data show that, except in Japan, real public consumption expenditure in the G-7 countries has been coming down from the averages of the 1970s and the highs of the mid-80s.
Inflation has come down very much from the high levels of the 1970s and 1980s, with the OECD average expected to come down from the 4.1% in 1994 to about 3% in 1996.
Unit labour costs in manufacturing industry have been dropping fast, with the drops in the US being high, and so has been the compensation per employee in the business sector.
The rates of return on capital have been going up with a G-7 average of 15.7% in 1993 and projected to rise to 18.1% in 1996.
In 1994, it is estimated at 18.4% in the US, 13.4% in Japan, 13.8% in Germany, 14.7% in France, 15.2% in Italy, 11.5% in the UK and 17.1% in Canada.
Three elements constituting the price are labour costs, material costs and the profit margin.
But with unit labour costs going down, material costs rising a bit but non-oil commodities in real terms accounting for only 0.6% of the gross domestic product (GDP) in OECD countries, the inflationary pressures are thus clearly coming out of or are driven by higher profit margins.
Yet, in a knee-jerk fashion, the economic apostles of the new order continue to call for further attacks on labour, to reduce 'labour- market rigidities' and reducing the pressures on wages.
The post-war prosperity, the so-called golden age over which the General Agreement on Tariffs and Trade (GATT) - IMF- World Bank presided, was postulated on not only economic elements, but a social and political order, with a built-in distribution system, for a fairer share of the benefits of the system.
Unlike in Adam Smith-Ricardo capitalism theories, this post- war order was postulated on capital accumulation, not by the private individuals, but by corporations.
The full employment and social security systems freed individual wage-earners and salary-earners from worries of the future -- for themselves and their families -- and they engaged in a binge (aided by various credit mechanisms) to pursue consumer-spending.
The corporations used the profits to further capitalise and invest and produce more, to promote more consumerism and so on and so on.
Whether or not the new awareness of ecology calls for a halt to this, the rising unemployment, and the theory of the upwardly moving NAWRU (non-accelerating wage inflation rate of unemployment) to ensure low-inflation, the whole concept of reducing state provided social security and telling wage- earners and salary-earners to look also for private social security is bound inevitably to put a spoke in the wheels of the earlier consumerist capital accumulation process.
Yet, the drive is all for cutting wages and staff costs, and thus the disposal incomes of these people, and still expecting them to fuel a consumerist economy in a deeply divided society -- with an increasingly marginalised growing poor and a very affluent upper-middle-class at the top.
And with the new ethos putting a higher premium on speculative activities (of finance capital) over industrial and production activities, sanctioned and being pushed now under the aegis of the WTO, the underpinnings of the new system based on the old are giving way.
And there is nothing in the horizon to take its place.
About the writer: Chakravarthi Raghavan is Chief Editor of SUNS (South-North Development Monitor), a daily bulletin, and the Geneva representative of the Third World network.
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