What World Leaders Need to Do Urgently (but are not) Jayati Ghosh

During 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 of capitalism.

”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.”

This 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 be altered.

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 institutions.

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 )