BERKELEY
As the signs of a deep global recession proliferate, the tone of publiccommentators and editorial writers on the state of global capitalism is turningapocalyptic. As some question, are we witnessing the end of capitalism as weknew it?
The speed and depth of the damage done in terms of loss of capital value, homes,and jobs as well as the magnitude of capital infusions and government stimuliboggles the mind. Some bemoan the possible demise of a system that in the lastfew decades produced unprecedented amounts of wealth and lifted many out ofpoverty in the far corners of the world. Others feel vindicated that after manyyears, their dire warnings of the risks associated with global capitalconcentrated in a few hands rang true. These dissenting voices hope that analternative system, more just and less unstable and community-disrupting, willrise from the ashes.
While the search for such an alternative system that can combine justice andstability with sustained incentives for innovation and respect for individualhuman rights has eluded mankind for the better part of the last two centuries,one may be on firmer ground in predicting the emergence of only a somewhatmodified form of global capitalism in the years to come. My crystal ball is justas cloudy as anybody else’s: No one knows if it will be a "lost decade" ora lost couple of years, but looking beyond the current storm in at least themedium run, certain features of change and in some cases lack of much change arelikely to draw attention.
Many people believe that the explosive growth of financial capitalism, way aheadof the real economy – global financial assets were more than three times thevalue of world output in recent years – will be somewhat tamed now. In theconstant search of leverage and undervaluation, the introduction of a wholerange of complex financial products and investment vehicles that enhanced theopacity of risk packages in the name of financial innovation will be slowed.There is a general outcry that for too many years the system has been hijackedby an overweening financial oligarchy that got away with compliant monetarypolicy, lax credit standards and crony credit-rating agencies. It is likely thatthere will now be a discernible movement back to producers from traders andarbitrageurs.
Despite widespread calls for greater international financial regulation, I donot, however, expect more than marginal tinkering, except some enhancement ofresources at the disposal of the International Monetary Fund, some minorcoordination in the case of banks owning foreign assets and some mildharmonization of taxes. Most regulatory tightening is likely to be at thenational level. At that level, the national diversity in the balance of powerbetween industrial and financial capital, between management and largeshareholders, and that between capital and labour will shape the variations inregulation.
The ramifications of the spectacular technological advance in communications and24-hour trading in the financial world will linger; but most policymakers, notjust the "born-again Keyenesians," will be wary in assuming that the marketis sufficiently self-correcting in coping with those ramifications.
After the current panicky withdrawals of international capital subside, thebasic asymmetry in international flows of capital and labour will persist –with substantially more constraints, cultural as well as legal, on labour.Hence, capital’s threat of exit will remain more credible. This asymmetry willcontinue to weaken the bargaining power of labour, notwithstanding themuscle-flexing by American trade unions under a more friendly administration inWashington or the street demonstrations in Paris. The conflicting interests ofskilled and unskilled workers will continue to weaken the union movement,whereas the recession may actually bring about more consolidation of capital,strengthening it further. The labour share in national income in most countriesmay not thus show much improvement, and this will particularly be the case ifthe nature of technological progress continues to be skill-biased.
As in all deep recessions the pressure for economic nationalism and tradeprotection will mount, but compared to the past it cannot go very far now: Inthe global production process with a long and complex international supplychain, there is no truly indigenous product left to protect, and with componentscoming from all over the world labels like "made in USA" have lost much oftheir meaning. Even unskilled workers may soon see that protectionism is likeshooting oneself in the foot – if you restrict free trade, you may no longerhave the components and materials on which to ply your own trade.
However, the demands for social protection of workers will strengthen, backed inmany cases by domestic business interests competing with businesses in othercountries that have more state-funded worker protection. We already see thishappening in the changing support base for universal health care. The mainstructural constraint on the increased provision of social protection will bethe battle of demography against technology – the ever-growing needs of anaging population against the surplus generated from the innovation capabilitiesof the young.
Capitalism (not necessarily in its Anglo-American form) will keep on thriving inChina and India, though at a less frenzied pace in the immediate future. In anycase, contrary to repeated assertions in the financial press, much of their highgrowth in the last quarter century has been driven by mainly domestic factors.Even at the height of global expansion of trade in the period 2002-07, theincrease in net exports contributed only about 15 percent of total real GDPgrowth in China in that period. Over the last year Chinese exports have fallenfrom their dizzying heights, and this has caused sizeable job losses in somecoastal provinces. But much of the exports from China, as well as India, involveprocessing of imported materials, and so the net loss in value added is not aslarge as the gross export figures suggest; in value added terms the high Chineseexport to GDP ratio in recent years was about half of the usually reported grossratio.
Also, the jobs in the export sector have been relatively small in terms of thetotal size of the labour force in both countries, more so in China than inIndia. China also has lot more financial resources to boost consumer demand inthe short run and strengthen the social safety net for workers and peasants inthe long run. The near-universal healthcare announced as part of the stimulusprogram, if implemented, will serve both of these goals. High savings in bothChina and India, not just their stringent regulations and government ownershipof banks, have given them relative insulation from external financial contagion.
Smaller developing countries, more dependent on exports, foreign capital andremittances, will suffer much more. There may be increased political instabilityin some of these countries, as has been the case in earlier large macroeconomicshocks, but this will not make much of a dent in the global capitalist system.
Over more than a century, capitalism, with all its inequity, instability andimmorality, has shown a remarkable resilience. Such resilience is likely tocontinue, but only if politics at the national level can tame capitalism’sexcesses and mobilize its surplus to strengthen social protection.
Pranab Bardhan is professor of economics at the University of California,Berkeley, and co-chair of the Network on the Effects of Inequality on EconomicPerformance, funded by the MacArthur Foundation. He was the editor of the Journalof Development Economics for many years. Rights: © 2009 Yale Center for theStudy of Globalization. YaleGlobalOnline
