Eight years ago, in September 2008, at the time of the Lehman crisis, this column had said that the old global economic system, based on the triple pillars of globalization, financialization and debt, was dying and a new system is likely to emerge from its ashes. The poet W.B. Yeats had put it much more dramatically when he wrote after the First World War: “What rough beast, its hour come round at last/Slouches towards Bethlehem to be born?" The answer, we now know, is Donald Trump.
Yeats wrote at a time when the era of laissez-faire capitalism and globalization prevalent before the First World War had collapsed and a new order was nowhere in sight. It would take a global economic depression, the rise of communism and fascism and another World War before we saw a new regime installed at Bretton Woods.
Thirty years later, in the nineteen seventies, the Bretton Woods system of fixed exchange rates, capital controls and the welfare state in the developed nations too broke down under the weight of its own contradictions and a new paradigm of globalization, free capital flows and financialization took its place. It received a massive boost from the collapse of communism, with the entry of a huge number of workers and consumers from the erstwhile socialist bloc and previously closed economies, such as India, to the global capitalist system.
Trade boomed, capital flowed like water across world markets, and those who could take advantage of the new rules made pots of money. Governments fell over backward to court global capital, lowering taxes, dismantling regulation and making labour more “flexible". Greed was back in fashion, seen in the bloated pay packets of CEOs. The share of labour in national income fell sharply. Bankers became the new heroes. Emerging markets, with their low-cost labour, prospered greatly under the new dispensation.
But there were also the losers. The disappearance of the trade unions and the casualization of labour meant that workers in the organized sector no longer enjoyed the same privileges they had under the earlier system. In Ross Perot’s memorable words, there was “a giant sucking sound" as factories and jobs disappeared over the border in many developed nations. Among the richer countries, immigration was seen as another threat by the working classes, inciting xenophobia and racism. All this led to the inevitable backlash.
It started in the ex-communist countries where the lives of ordinary people were ravaged during the transition to kleptocracies. The rise of Vladimir Putin is the obvious example. But it was the financial crisis of 2008 that sounded the death-knell for liberal capitalism. As Warren Buffet said, it is when the tide goes out that you discover who’s been swimming naked. The debt-fuelled boom of 2003-07 had papered over the cracks in the economy and polity. As growth stalled and central banks tried to print their way out of the recession, much of the working class discovered they were swimming buck naked, while booming asset markets bolstered the wealth of the elites.
In country after country, electorates mounted attacks on the establishment, on those seen to be responsible for the mess. Almost everywhere, the beneficiary was the far right. Why would working people support the far right, which is usually hand-in-glove with the business elite? Well, the same thing happened in Europe during the Great Depression and this time the political Left is a shadow of its former self. In the developing world too, growth rates slipped, disappointing many who expected the good times to last for ever and frustrating the millions of entrants into the job market. The result was the rise to power of outsiders to the system who, the people hoped, had something new to offer. Many of them were of the “strongman" variety.
More recently, we have had two instances where the vox populi has made insular, xeonophobic choices. The first was Brexit and the second is Donald Trump. As Karl Marx wrote, history repeats itself, “first as tragedy, then as farce".
The broad contours of the system that is likely to replace neo-liberalism are now evident. Under it, we will no longer have unrestricted globalization and immigration will be more controlled. The breaking down of barriers between countries, seen most clearly in the pan-European project, will stop and countries are likely to become much more inward-looking. Neither the flow of capital nor of goods or people across borders will be as free as they used to be. Cosmopolitanism will be replaced by a narrow nationalism and parochialism. Beggar-thy-neighbour policies will be rampant.
But it’s unlikely that these policies will resolve the contradictions in society and give the people what they want. Business elites have been big beneficiaries of globalization and they will resist any reversal of the process. Developed countries with low birth rates will continue to need immigrants, especially the ones with education and skills. And as far as politics is concerned, it can hardly be argued that the neo-liberal period was a peaceful one. Ask the people of Iraq, Syria, Afghanistan or the Ukraine. All that the neo-liberal ideology did was provide a fig leaf to naked aggression.
Nevertheless, in the words of Antonio Gramsci: “The old world is dying, and the new world struggles to be born: now is the time of monsters." The parallels to the time between the world wars should not be ignored.
Manas Chakravarty looks at trends and issues in the financial markets. Comments are welcome at email@example.com