There’s a lot of talk about a reset of the global financial system these days. Jeffrey Immelt, chairman and chief executive officer of General Electric Co., said in a recent interview to BBC that he expects GE Capital to shrink to two-thirds the size it is today.
A recent World Bank policy brief by the World Bank’s Constantinos Stephanou has this to say about the shape of the financial world to come: “Global trends taken for granted in recent decades—the big expansion in global financial assets compared with underlying economic activity, growing global financial integration, shrinking role of the state in financial systems, and rising share of cross-border ownership of financial institutions—may reverse over the foreseeable future. In addition, the structure of financial systems, particularly in developed countries, will likely become oriented less toward capital markets and more toward traditional (and simpler) banking activities. The impact on economic growth and overall welfare is likely to be negative—perhaps the price we have to pay for living in a brave new (and presumably safer) financial world.”
Also read Manas Chakravarty’s earlier columns
International institutions have been arguing that, because of the changes in banks in the developed world, fund flows to emerging markets are likely to suffer. That is just one part of the damage. Exports have been the driving force behind the rapid growth of many developing nations, especially in East Asia. China, of course, is now the example par excellence. When domestic consumers are largely poor, an export-oriented strategy makes a lot of sense. But if the Western markets are in for a prolonged period of stagnation, there will have to be a rest in that strategy as well.
As Pimco’s Mohamed El-Erian has said: “Relative to where it is coming from, the financial system will be de-levered, de-globalized, and re-regulated. Global growth will be lower and unemployment higher, notwithstanding the continued rotation of dynamism away from industrial countries and toward emerging economies.”
The implications of the crisis could be even more serious; it could very well have an impact on globalization.
In the short term, there is the problem of the fiscal stimulus programmes being leaked abroad. From the point of view of a US politician, what is the point of bailing out General Motors Corp. if all it does is set up plants in China? But there’s an even bigger issue here. Before the 1970s, the world economy was much simpler. Global financial flows were tightly controlled in accordance with the Keynesian dictum, “Above all, let finance be primarily national.” The national surplus in the developed world was shared out between local labour and local capital.
That cosy arrangement was shattered in the 1970s, for a variety of reasons. Some said the share of profits in the advanced economies declined rapidly and that led to a political backlash against labour. Others pointed to the rapid catching up by the European and Japanese economies with the US, which spurred restructuring. Still others blamed the lack of success of Keynesian demand management in the 1970s after the rise in oil prices. Whatever be the reason, the system was radically changed in the 1980s, aided by the growth of communications technology.
In its place, a new system came in place where production became global, with countries in Asia and shareholders in the developed world benefiting hugely from the relocation of factories. Simultaneously, in order to keep the working class in the US happy and to create a market, there was a huge rise in household debt.
The net result has been aptly summed up in a book titled Low-Wage Capitalism by Fred Goldstein. He points out: “The transformation of the US economy to low-wage capitalism is symbolized by the fact that in the 1970s the largest employer was General Motors, where 600,000 mostly unionized workers earned relatively high pay with benefits. Today the largest employer in the US is Wal-Mart, where 1.2 million workers get near poverty-level wages, many existing on food stamps and government assistance, in an environment utterly hostile to even the mention of unions.”
And it’s not just a matter of becoming more protectionist by erecting tariff barriers. So far, despite real wages being held down in the US, there has been no real backlash, because workers kept afloat on cheap credit.
What will happen now, with credit being tightened? Will the American masses display the same tolerance towards outsourcing their manufacturing and service jobs? Remember Dick Cheney’s boast a few years ago that “The American way of life is non-negotiable” Well, that way of life for many Americans is now under serious threat. The point is that excessive indebtedness was part and parcel of the package of globalization and financialization. That increases the risk to globalization.
If the backlash against globalization grows, this won’t be the first time it has happened.
The world before 1914 was in some respects even more globalized than now, but that was rapidly reversed during the 1920s and 1930s. Of course, there are powerful forces that continue to support globalization, among them the business elites in the advanced countries. And in a world of global production, it’s impossible to go back to the system that prevailed in the 1960s.
No wonder governments and central banks are desperately trying to blow up a new bubble. But as Jeff Immelt had said long ago: “If you (were to) put globalization to a popular vote in the US, it would lose.” High unemployment and falling living standards will add fuel to that fire.
Manas Chakravarty looks at trends and issues in the financial markets. Your comments are welcome at firstname.lastname@example.org