Leaders Need to Do Urgently (but are not)*
4th 2011, Jayati Ghosh
the height of the Global Financial Crisis in 2008, President
Nicolas Sarkozy of France was seen carrying around a
copy of ''Capital'' by Karl Marx. Maybe he should now
pick up a copy of another book (''Anti-Duhring'') by
Marx's collaborator Friedrich Engels. In this book Engels
made a persuasive argument about the anarchic nature
''Anarchy reigns in socialised production. But the production
of commodities, like every other form of production,
has its peculiar, inherent laws inseparable from it;
and these laws work, despite anarchy, in and through
anarchy. They reveal themselves in the only persistent
form of social interrelations, i.e., in exchange, and
here they affect the individual producers as compulsory
laws of competition. They are, at first, unknown to
these producers themselves, and have to be discovered
by them gradually and as the result of experience. They
work themselves out, therefore, independently of the
producers, and in antagonism to them, as inexorable
natural laws of their particular form of production.
The product governs the producers.''
anarchy was said to exist within capitalist enterprises,
between different types of capitalist enterprises, and
within the system as a whole, creating tendencies of
disproportionality between sectors, periodic overproduction
and crises. More than 150 years later, obviously the
nature of such capitalist anarchy has undergone much
transformation. But it certainly still exists, and is
revealed today in the anarchy that prevails between
different types of capital - mainly between finance
capital and productive capital - as well as in the contradictions
between different capitalist countries (which is popularly
referred to as global macroeconomic imbalances). It
operates to create markets that seem to be beyond anyone's
control, which deliver undesirable and volatile outcomes
that seem to be in no one's interests and yet cannot
So we have a peculiar global situation in which global
leaders seem to be at their wits' end in controlling
a market system run amok, in which all their efforts
at damage control and enabling recovery end up having
the opposite effect of creating more havoc and instability.
Increasingly in the core centres of the global economy,
whether in the US or the eurozone, the argument seems
to be ''we adopted Keynesian policies, but they have
not stabilised the economy or delivered employment growth''.
This is misleading. In fact the stimulus measures adopted
in most countries were not weighted in favour of employment
generation: a disproportionate amount went as bailouts
and support to large financial institutions that simply
used the resources to clean up their balance sheets.
In the US, very little of the money went into direct
state spending on activities that directly increase
employment or have high multiplier effects. Social spending
and government employment have fallen as local governments
have been strapped for cash; small businesses have been
starved of bank credit; there has been no systematic
attempt to address the continuing problem of foreclosures
in residential housing markets. And now, even these
half-hearted and slipshod stimulus measures are to be
clawed back with the new focus on fiscal austerity.
In Europe, too, the direction of macroeconomic policies
is all wrong. The imbalances in the eurozone are being
dealt with in a counterproductive manner - forcing regressive
austerity measures on to deficit countries and sending
them into a downward spiral of falling output and employment
in which their fiscal and public debt measures will
only get worse. Meanwhile the surplus countries (especially
Germany) are unwilling to extend enough finance to protect
deficit countries form further battering by bond markets,
and are even unwilling to reduce their own dependence
on export-driven growth, which is necessary if rebalancing
is to occur. It is ridiculous to expect private investment
and activity to increase to fill the slack created by
public expenditure cuts, in this context of continuing
crisis. So it is not a surprise that employment is not
recovering and growth prospects are dismal.
Meanwhile the elephant continues to rampage around the
room. Mobile finance capital, which received major bailouts
and therefore now operates with the associated moral
hazard of humongous proportions, is faced with very
low interest rates and is still largely unregulated.
The climate of fear and loathing in the bond markets
that is driving governments to despair and preventing
them from engaging in required macroeconomic policies
is at least partly because of their own inability to
call the bluff of financial market agents, whether they
be rating agencies or derivatives traders or investment
banks or any other institutions.
So what needs to be done? Here are five basic steps.
First regulate finance, and do it properly. Bring in
genuine controls on the ''too-big-to-fail'' institutions.
Cover ''shadow banking'' in the regulation, to avoid
regulatory arbitrage. Incorporate a macro-prudential
dimension, with anti-cyclical capital requirements and
capital controls. Make commodity markets more transparent,
with more controls on financial activity in commodity
futures and direct intervention to curb excessive volatility.
Further, restructure the financial system: downsize
giant institutions; separate the activities of commercial
and investment banking; and create more diverse financial
systems, with a bigger role for public and cooperative
Second, provide countercyclical lending to countries
that require it to prevent downswing or further retrogression.
This applies not only to the deficit countries of Europe,
whose plight is much publicised (though still dire),
but also to a much larger number of developing countries.
They have been battered by global winds and cannot access
finance on easy terms to cope with adverse external
circumstances; yet, the multilateral institutions continue
to force harsh austerity measures on them even in a
period of high and volatile food and fuel prices.
Third, focus on productive and good quality employment
generation as the chief macroeconomic goal. This means
re-orienting stimulus measures in all countries to focus
on those instruments with the largest multiplier effects,
and increasing (rather than decreasing) public expenditure
on the provision of essential goods and services such
as food, sanitation, health and so on.
Fourth, in dealing with public sector imbalances and
public debt issues, emphasise taxation of the rich and
particularly of finance, rather than cutting spending
and putting additional burden of indirect taxation on
the bulk of the people. If this results in a shrinking
of the financial sector globally, so be it. This sector
is now far too large (and powerful) in relation to its
actual productive contributions to economies and societies,
and should indeed shrink in size. Taxation should also
be focussed on reducing income and asset inequalities
that are now so large as to threaten social stability
in many countries.
Finally, re-orient incentives within economies and public
spending in directions that encourage more sustainable
forms of economic activity, and patterns of production
and consumption that are less destructive of nature
and do not destroy already fragile ecological balances.
Are these steps likely in the near future? Unfortunately,
it does not seem like it. But that is not because the
alternative strategy does not exist or is unknown -
only that the political vision and leadership for such
an alternative is currently missing.
This article was originally published on Sify.com and
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