Try not to be too sceptical. The global economy does appear to be on the mend. Growth is picking up in Japan and the United States, and sentiment is probably on the turn in Europe as well. Expect forecasts for 2004 to be revised upward over the next few months.
Stock markets have bounced back from the lows seen before the Iraq invasion, and this has been the cue for a revival of the boosterism last seen in the heady days of early 2000, before the dotcom bubble went pop. Rising share prices mean the miracle economy is just around the corner.
There are reasons for optimism. The aggressive loosening of macroeconomic policy has helped underpin demand. Consumer spending in the US has been boosted by tax cuts, while a combination of cost-cutting and orders from the Pentagon has given a boost to US corporate profitability.
The conventional wisdom is that the recovery is at last under way, and that we all now start to reap the dividends from the industrial breakthroughs of the past couple of decades. In other words, the right macroeconomic policy plus globalisation plus new technology equal a golden tomorrow.
This is the moment the New Economics Foundation has come up with a critique of the new world order. Intended as a counterblast to the International Monetary Fund’s World Economic Outlook, the Real World Economic Outlook takes a jaundiced view of globalisation and its works.
The critique expresses concern that global economics is dominated by a like-minded cabal. The odd heretic, like Joseph Stiglitz, may be admitted to the temple, but they don’t last long. ”Sadly economics, as taught today, is not just a dismal science; it is a dreary discipline. Little more than a subdivision of applied mathematics, it is based on assumptions that do not hold in reality and have scant relevance to our complex, diverse, real world. The obsession with the promotion of economic efficiency through government by markets; the self-interested optimising behaviour of individuals; and the wisdom of usurious financial markets, means that, today, the economics taught in universities ignores reality and is narrow and exclusive.”
To which the riposte is: there is good reason why modern left and right-wing parties believe in markets, self-interest and financial liberalisation — they work. They are, to paraphrase Churchill, the least bad option on offer.
So, even if globalisation has widened the gap between rich and poor, it does not matter because a rising tide is lifting all boats. The poor are better off in absolute terms because growth is higher than it would have been in the bad old days of capital controls, strong states and full employment policies.
Fine. But where’s the empirical evidence that policies of finance-led globalisation have delivered better outcomes than the era of capital controls and government intervention? Investment, productivity and incomes per head are growing more slowly than in the decade immediately after World War II. And unemployment is higher than in the 1950s and 1960s. The dragon of inflation has been slain — but at a considerable price.
The report makes clear that capital liberalisation has allowed an extraordinary surge in speculation, but that the relentless rise in the value of ”paper” assets has not been matched by an increase in the stock of real wealth — physical and human capital, research and development — that over the long term leads to rising productivity, growth and living standards.
At the end of the 1970s the stock of financial assets in the world’s leading economies was worth about the same as the ”real” assets underpinning them; today, financial assets are valued at three times real assets.
Two conclusions stem from this. The first is that the orgy of speculation has led to grotesque misallocation of resources, depressing investment rates. The second is that the rich and powerful have benefited from the rising value of financial assets, while the poor and weak have suffered from the weaker underlying economic growth.
This is perhaps why globalisation has had such a good press. The report says the median wage in the US is the same as 27 years ago, explaining why consumer spending is only being kept going by personal debt and tax cuts.
Worryingly, even those who accept this analysis despair of doing anything about it. Globalisation, it is said, is driven by technology and big business, and governments can no more tame it than tame the weather.
This is a counsel of despair. ”Globalisation has not been corporate-driven nor is technology responsible,” says the report. ”The origins lie with the US need to finance the post-Vietnam war deficit without making structural adjustments to its economy. This led US politicians, backed by the British government, to lift controls over capital markets — so as to tap their resources to fund the US deficit. Globalisation was created by politicians and can be reversed by politicians.”
Funnily enough, the sky has not fallen on countries that have defied the conventional. Remember Malaysia, which brought in capital controls during the Asian crisis, on grounds that it preferred to look after its own citizens than international speculators? The investors soon came back, because they saw money could be made. Also, China’s tough capital controls have not prevented it from being easily the biggest recipient of foreign direct investment in the developing world.
As the Harvard economist Dani Rodrick puts it: ”Countries that articulate credible growth strategies are likely to find themselves the recipients of capital inflows even if they buck the trend of financial openness. Capital markets, unlike academics or policy advisers, do not mind eating their words as long as there is money to be made.
”The good news is that putting the real economy ahead of the financial sector may be good, not just for the former, but for the latter too.”
For countries such as China and India that have yet to let the genie out of the financial liberalisation bottle, Rodrick’s message is: just say no.
This report is as unfashionable as loon pants. Arguing that there is a world of difference between a credit-driven cyclical upswing and sustainable recovery, it urges the taming of financial markets, upsizing of the state and downsizing the single global market.
This challenge to what George Orwell called the ”smelly little orthodoxies” is long overdue. Far from leading us to the promised land, the policies followed by finance ministries have created a legacy of debt and deflation that has taken the global economy to the brink of the abyss. — Â