After Neoliberalism, What Next?

Yves here. This is a thoughtful, far-reaching piece. To quote Antonio Gramsci:

The crisis consists precisely in the fact that the old is dying and the new cannot be born; in this interregnum a great variety of morbid symptoms appear.

By Jayati Ghosh, Professor of Economics and Chairperson at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. Cross posted from Triple Crisis

We may be living through one of those moments in history that future historians will look back on as a watershed, a period of flux that marked a transition to quite different economic and social arrangements. Unfortunately, in human history a ‘moment’ can be a very long time, so long that it could be decades before the final shape of the new arrangements are even evident; and in the interim, there could be many ‘dead cat bounces’ of the current system.

What is clear is that the established order – broadly defined as neoliberal globalised finance capitalism – is no longer capable of delivering on its promises of either growth or stability, even as it generates more inequality and insecurity across the world. In Marxist terms (as befitting the 150th anniversary of Das Kapital), the property relations under which production is organised have become fetters on the development of productive forces themselves, and generate more and more alienation. This may explain why, perhaps even more significantly, the system is also losing legitimacy in most countries, under attack from both right and left.

Whether we look at straws in the wind or green shoots in the ground, there is no doubt that there are incipient signs of change. But at this point there are many directions in which such change could go, and not all of them are progressive or even desirable. That is why it is important to get social and political traction for alternative trajectories that focus on more equitable, just, democratic and ecologically viable outcomes for most of humanity.

A Familiar Question

The question ‘what is your alternative?’ is a familiar one for most progressives, and too often we are overly defensive or self-critical about our supposed lack of alternatives. In truth, there are many economically-viable, socially-desirable alternative proposals in different contexts. The problem is not their lack of existence but their lack of political feasibility, and perhaps their lack of wider dissemination. But it is certainly true that the alternative does not consist of one over-arching theory (or even framework) that can subsume all others, since there are many good reasons for being sceptical of the days of the ‘grand theory’ that supposedly could take care of everything.

While rejecting the totalising theory, it is possible to think of a broad framework around which there could be much agreement, even among people who do not necessarily identify themselves as of the ‘left’, but are nevertheless dissatisfied with current economic arrangements at both national and international levels.

Much current discussion on economic strategies for global capitalism is framed around the financial crisis of 2007/8 and its continuing repercussions. But it does not really need a crisis to show us that the past strategy for growth and development has been flawed in most countries. Even during the previous boom, the pattern of growth had too many limitations, paradoxes and inherent fragilities. Everyone now knows that the economic boom was unsustainable, based on speculative practices that were enabled and encouraged by financial deregulation. It also drew rapaciously and fecklessly on natural resources, and it was deeply unequal. Contrary to general perception, most people in the developing world, even within the most successful region of Asia, did not gain.

Global Transfers

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 global South transferred financial resources to the North. Developing country governments opened their markets to trade and finance, gave up on monetary policy and pursued fiscally ‘correct’ deflationary policies that reduced public spending. Development projects remained incomplete and citizens were deprived of the most essential socio-economic rights.

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 the ‘factory of the world’, China. Instead, technological change in manufacturing and new services 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 fragile, insecure and low-paying, even in fast-growing China and India. 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.

Almost all developing countries adopted an export-led growth model, which in turn suppressed wage costs and domestic consumption in order to remain internationally competitive and achieve growing shares of world markets. This led to the peculiar situation of rising savings rates and falling investment rates (especially in several Asian countries) and to the holding of international reserves that were then placed in ‘safe’ assets abroad. This is why the boom that ended in 2007/8 was associated with the South (especially in developing Asia) subsidising the North: through cheaper exports of goods and services, through net capital flows from developing countries to the US in particular, through flows of cheap labour in the form of short-term migration.

Profit-Led Costs

The collapse in Northern export markets that followed the recession brought that process to a halt, and recent moves towards more protectionist strategies in the US and elsewhere, as well as the persistent mercantilist approach of surplus-producing countries like Germany, have made it more difficult since then. In any case, such a strategy is unsustainable beyond a point, especially when a number of relatively large economies use it at the same time.

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-globalised middle classes, which led to bullish investment in non-tradeable sectors such as financial assets and real estate as well as in luxury goods and services. 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, quite apart from the implications such expansion has on climate change.

There have been other negative impacts. Within developing Asia, for example, it led to an internal ‘brain drain’ with adverse implications for the future. The skewed structure of incentives generated by the explosive growth of finance directed the best young minds towards careers that promised quick rewards and large material gains rather than painstaking but socially necessary research and basic science. The impact of relocation of certain industries and the associated requirement for skilled and semi-skilled labour led to increased opportunities for educated employment, but it also led bright young people to enter work that is typically mechanical and does not require much originality or creativity, with little opportunity to develop their intellectual capacities.

At the same time, crucial activities were inadequately rewarded. Farming in particular became increasingly fraught with risk and subject to growing volatility and declining financial viability, while non-farm work did not increase rapidly enough to absorb the labour force even in the fastest growing economies of the region.

Restructuring Economic Relations

The boom was not stable or inclusive, either across or within countries. The subsequent slump (or ‘secular stagnation’) has been only too inclusive, forcing those who did not gain earlier to pay for the sins of irresponsible and unregulated finance. As economies slow down, more jobs are lost or become more fragile, insecure and vulnerable; and people, especially those in the developing world who did not gain from the boom, face loss of livelihood and deteriorating conditions of living. This is why it is so important that we restructure economic relations in a more democratic and sustainable way.

There are several necessary elements of this. Globally, most now recognise the need to reform the international financial system, which has failed to meet two obvious requirements: preventing instability and crises, and transferring resources from richer to poorer economies. Not only have we experienced much greater volatility and propensity to financial meltdown across emerging markets and now even industrial countries, but even the periods of economic expansion were based on the global poor subsidising the rich.

Within national economies, this system has encouraged pro-cyclicality: it has encouraged bubbles and speculative fervour rather than real productive investment for future growth. It has rendered national financial systems opaque and impossible to regulate. It has allowed for the proliferation of parallel transactions through tax havens and loose domestic controls. It has reduced the crucial developmental role of directed credit.

Given these problems, there is no alternative but systematic state regulation and control of finance. Since private players will inevitably attempt to circumvent regulation, the core of the financial system – banking – must be protected, and that is only possible through social ownership. Therefore, some degree of socialisation of banking (and not just the risks inherent in finance) is inevitable. In developing countries this is also important because it enables public control over the direction of credit, without which no country has industrialised.

Desirable – and Necessary

The obsessively export-oriented model that has dominated the growth strategy for the past few decades must be reconsidered. This is not a just a desirable shift – it has become a necessity given the obvious fact that the US and the EU are no longer engines of world growth through increasing import demand in the near future. This means that both developed and developing countries must seek to redirect their exports to other countries and most of all to redirect their economies towards more domestic demand. This requires a shift towards wage-led and domestic demand-led growth, particularly in the countries with economies large enough to sustain this shift. This can happen not only through direct redistributive strategies but also through public expenditure to provide more basic goods and services.

This means that fiscal policy and public expenditure must be brought back centre stage. Calls to end austerity are becoming more widespread in the developed world and will soon find their counterpart in developing countries. Clearly, fiscal stimulus is now essential, to cope with the adverse real-economy effects of the current crisis/stagnation and to prevent economic activity and employment from falling, and then to put good, quality employment on a stable footing. Fiscal expenditure is also required to undertake and promote investment 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.

Social and Economic Rights

Social policy – the public responsibility for meeting social and economic rights of citizens – contributes positively to both growth and development. This means especially the provision of universal good quality care services, funded by the state, with care workers properly recognised, remunerated and provided with decent working conditions. This also helps to reduce gender and other social inequalities generated by the imposition of unpaid care work, and has strong multiplier effects that allow for more employment increases over time and generate a ‘bubbling up’ of economic activity.

There must be conscious attempts to reduce economic inequalities, both between and within countries. We have clearly crossed the limits of what is ‘acceptable’ inequality in most societies, and policies will have to reverse this trend. Globally and nationally, we must reduce inequalities in income and wealth, and most significantly in the consumption of natural resources.

This is even more complicated than might be imagined because unsustainable patterns of production and consumption are deeply entrenched in richer countries and are aspired to in developing countries. But many millions of citizens of the developing world still have poor or inadequate access to the most basic conditions of decent life, such as electricity, transport and communication links, sanitation, health, nutrition and education. Ensuring universal provision across the global South will inevitably require greater per capita use of natural resources and more carbon-emitting production.

Both sustainability and equity therefore require a reduction of the excessive resource use of the rich, especially in developed countries but also among the elites in the developing world. This means that redistributive fiscal and other economic policies must be especially oriented towards reducing inequalities of resource consumption, globally and nationally. Within countries, for example, essential social and developmental expenditure can be financed by taxes that penalise resource-wasteful expenditure.

New Demand and Production

This requires new patterns of demand and production. It is why the present focus on developing new means of measuring genuine progress, well-being and quality of life are so important. Quantitative GDP growth targets, which still dominate the thinking of policy-makers, are not simply distracting from these more important goals but can be counterproductive.

For example, a chaotic, polluting and unpleasant system of privatised urban transport involving many vehicles and over-congested roads generates more GDP than a safe, efficient and affordable system of public transport that reduces congestion and provides a pleasant living and working environment. It is not enough to talk about ‘cleaner, greener technologies’ to produce goods that are based on the old and now discredited pattern of consumption. Instead, we must think creatively about consumption itself, and work out which goods and services are more necessary and desirable for our societies.

This cannot be left to market forces, since the international demonstration effect and the power of advertising will continue to create undesirable wants and unsustainable consumption and production. But public intervention in the market cannot be knee-jerk responses to constantly changing 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 such shifts in socially-created aspirations and material wants, and to reorganise 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 involvement more democratic and accountable within our countries and internationally. Large amounts of public money will be used for financial bailouts and to provide fiscal stimuli. How this is done will have huge implications for distribution, access to resources and living conditions of the ordinary people whose taxes will be paying for this. So it is essential that we design the global economic architecture to function more democratically. And it is even more important 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.

International Framework

These are general points and obviously leave much to the specific contexts of individual countries and societies. But finally, we need an international economic framework that supports all this, which means more than just that capital flows must be controlled and regulated so that they do not destabilise these strategies.

The global institutions that form the organising framework for international trade, investment and production decisions need to change and become not only more democratic in structure but more genuinely democratic and people-oriented in spirit, intent and functioning. This is particularly the case with respect to the dissemination of knowledge, now privatised and concentrated thanks to the privileging of intellectual property rights. Financing for development and conservation of global resources must become the top priorities of the global economic institutions.

These proposals may seem like a tall order, but human history is replete with stories of major reversals of past trajectories and transformations that come when they are not expected and from directions that are unpredictable. What has been created and implemented by human agency can also be undone to bring in better alternatives. It may well be that the time is ripe in terms of greater social acceptance of such ideas and thoughts about how to refine and adapt them to particular contexts.

Originally published in the Red Pepper, August 6, 2017.

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