Scottish-born economist - Angus Deaton - recently published his new book - An Immigrant Economist…
Today I have been working on a project for the Asian Development Bank concerning regional development and macroeconomic risk management in the Central Asian countries (all the “stans” plus a few others). I have also been reading a lot of the development economics literature lately, which is generally a place that the neo-liberal troglodytes really run amok. It certainly focuses one’s attention. In the advanced countries the media focuses on our own losses. In Australia, a lot is written about superannuation losses. And journalists, who largely ignored the fact that during the boom we still had around 10 per cent of our willing workers without enough work – wasted and excluded, are once again talking about unemployment. But overall, the public debate is not at all focused on how the current economic crisis is damaging the weakest of the weak in far off lands and killing people.
While the current economic crisis started as a financial problem it has now become a “real” crisis in that it is affecting production and employment. It is a misnomer to keep calling it the GFC given its huge spillovers into the labour market now. But the acronym has caught on and its saves typing!
In the advanced world, we tend to get obsessed with our own problems which are real enough. Clearly, the recession will worsen the lot of our own disadvantaged citizens significantly and reinforce the disadvantage that the neo-liberal policy regimes have inflicted on them. But when you consider the data more generally and understand what is happening in Africa and Asia you get a broader insight into how unhinged the global economy has become during the neo-liberal years. In fact, you quickly start to understand that the global economic meltdown it hitting the poorer regions of the world more quickly and more strongly than the advanced world might ever care to contemplate.
Tim Colebatch, the Melbourne Age opinion writer in his recent article – The hidden pandemic, argued that “the real victims of the global financial crisis are the poorest of the poor”. He asks:
How did a crisis that began in plush, carpeted offices on Wall Street spread to the remotest villages of Africa, the mountains of Latin America and the farms of Asia? … Those most brutally affected by the global financial crisis … will be people who had nothing to do with it. They will be poor people all over the world who are forced back into hunger and extreme poverty because the flow of money into their countries has been cut off.
These economies did not have direct exposure to the financial problems that have battered the banking sector in the first-world economies. The crisis has been transmitted to these economies by the way that they have become dependent on the advanced nations via trade and migrant workers. This dependence is one the worst aspects of this neo-liberal era.
The IMFs Regional Economic Outlook: Asia and Pacific Report, shows that Asia excluding China and India has seen the size of their economies (measured by GDP) shrink by 15 per cent in the December 2008 quarter (annualised). The IMF is forecasting a further deterioration this year.
This graph is taken from the IMF Asia Outlook Report and shows the December quarter GDP growth figures for various Asian countries against the Euro Zone and the US.
Remember Australia recorded a -0.1 per cent growth in GDP for December, so we would barely be on the bar chart!
The loss of income in the poorer nations is staggering.
The IMF also conclude that the reason that the Asian economies are now being hit so hard lies in their “exceptional integration with the global economy.
Much of Asia relies heavily on technologically sophisticated manufacturing exports, products for which demand has collapsed”. I will come back to this later.
In terms of the scale of suffering, the World Bank noted that:
The recent food crisis threw millions into extreme poverty, and the prospect of much slower growth in developing countries is now likely, in turn, to slow the pace of poverty reduction. Estimates of the additional number of people trapped in extreme poverty in 2009 as a result of the financial crisis range from 50 to 90 million … The number of chronically hungry people in the world, which rose in 2008 because of the food crisis, is set to exceed 1 billion in 2009, reversing gains in fighting malnutrition and making investment in agriculture all the more important.
So the GFC is now interacting in a deadly way with the aftermath of the recent escalation in food prices sent more people into starvation. We should also recall that the food crisis has been driven by the advanced nations insatiable desire for energy to drive their cars and other contraptions and the so-called “greening of energy sources” via bio fuels which just turned food into fuel so that the advanced world could get fatter while the poorer nations buried their starving citizens.
It is also interesting to note that the IMF Regional Economic Outlook Report claim that “this severe impact was unexpected … [because] … before the crisis the region was in sound macroeconomic shape, and thus in a strong position to resist the pressures emanating from advanced economies”. Which tells you something about their assessment of what constitutes a “sound macroeconomic shape”. They define it along neo-liberal lines where the governments have privatised public wealth; deregulated markets; toughened welfare provision and pursued budget surpluses. You will probably have worked out by now that I have no sympathy at all with this position.
The next graph is taken from the IMF Report noted above. I thought it presented an interesting picture by splitting the contribution to growth of public demand (net government spending), private demand and net exports. China stands out. Most people think of China’s growth coming from its burgeoing export sector. But it has a very strong domestic economy and a large public spending program – its called “nation building”.
Nations need to be continually built and the comparison between China’s performance with Japan (with virtually no public sector) and the performance of Australia and New Zealand, which have only miniscule growth originated from public spending, is compelling.
The IMF Report notes in that:
In China, GDP growth will also slow down notably from the average pace of the recent past. Still, the aggressive policy response is expected to support domestic demand and maintain growth at rates close to the level authorities consider necessary to generate jobs consistent with social stability. In particular, the massive program of public investment initiated late last year is expected to compensate for the decline in private investment and absorb productive resources no longer utilized in the tradable sector.
So the graph highlights, in my view, the importance of very large fiscal interventions. My Chinese friends tell me there is no discussion over there about the country drowning in debt and all of that nonsense. They know full well that they are sovereign in their own currency and can deficit spend to further their sense of public purpose. I am not advocating that all the policies of the Chinese government are sound. Clearly not! But they do have a much more sophisticated understanding of the opportunities that they have as a monopoly supplier of their currency than our Government has. And they are taking those opportunities more than other nations around them that are caught in and are being choked by the neo-liberal web imposed on them by the advanced nations.
One problem facing the poorer nations is that commodity export prices have fallen significantly. This will bite us quite badly next year as the new prices start to reflect in the new export contracts. But for the dirt-poor nations, they have become reliant on primary commodity exports to earn foreign exchange to service the massive debts that they have to organisations such as the IMF. They don’t have much else to sell.
The so-called development push engineered by the big world organisations such as the IMF, the OECD and the World Bank has taken a very nasty tack over the last 20 years or so. The recently fashionable “new monetary consensus” (that underlies monetary policy formulation in most of the major countries) has claimed that high inflation undermines economic growth and this has been thrust down the throats of all nations by these internation organisations. The upshot has been that monetary policy has become the dominant macroeconomic policy tool focused almost exclusively on maintaining a low inflation environment.
Relatedly, fiscal policy has been eschewed by the funding contracts that the IMF, for example, has forced onto the poorest nations. The conditions attached to any developmental funding have concentrated on privatisation, deregulation, and fiscal consolidation, which has severely limited the capacity of these nations to conduct nation building of the type that Australia enjoyed in the early Post-World War II period.
While the members of neo-liberal governments in Australia in recent times have sought to undermine the Welfare State that they themselves enjoyed as kids growing up in the 1950s and 1960s (full employment, adequate income support etc), the advanced countries have funded these international institutions (like the IMF and the World Bank) to impose regimes on the poorest countries which would have prevented us from developing if they had have been imposed on us way back then. It is a cruel spite that accompanies the neo-liberal rhetoric.
The research evidence (references available on request) shows that inflation and growth are unrelated when inflation is below 40 per cent. Even the World Bank has acknowledged that truly damaging inflation does not start until about 40 per cent. Other research findings show that: (a) low inflation is not associated in general with high growth; (b) hyperinflation is, in general, associated with low growth; and (c) moderate rates of inflation, 20-30 per cent per year, have been associated with rapid growth quite often.
I am not saying that high inflation is desirable. But there is little evidence that inflation at the moderate rates that have prevailed in recent times in most countries around the world has any significant harmful effects on output, employment, growth, or the distribution of income. The evidence certainly does not justify the types of policy frameworks that have been imposed on the poorest nations by the bullying international institutions.
The other aspect of this new approach to development has been the export-led growth movement. The aim is to stabilise the exchange rate (or better still take the currency sovereignty off the nation by forcing dollarisation onto them – that is, forcing them to use the USD as their currency). The typical method used in many nations is to target inflation, reduce budget deficits, and encourage exports. This is exactly what the IMF has thrust on the poorest nations around the world and why they are now suffering so badly as export volumes and prices collapse.
This has all been dressed up within a changing development economics debate. Early approaches were based on the view that a nation had to accumulate productive capital to underpin economic growth by some osmotic process of technology transfer and “trickle down effects”. These approaches failed to solve world poverty and gave way to perspectives linking structural trade impediments (the structuralists) and the more powerful dependency theories (called international dependence theories). The latter emerged as a powerful force in development thinking in the 1960s and 1970s and emphasised the fact that poor countries were roped into dependent relationships with the developed world who used their raw materials and labour for their own profit. I am simplifying a complex literature here. The idea was that poor countries were never going to develop as long as they were in these dependence relationships with the advanced world.
However, it is hard to keep the conservative free market lobby down and by the 1980s the neo-liberal experiment started to dominate policy making throughout the advanced world. The so-called third world debt crises in the early 1980s which really showed how dependent the poorer nations had become on the aspirations of capital in the advanced nations provided the entree for the neo-liberals to take over development policy as well.
The claims were that the poor countries were being hamstrung by government intervention which prevented private markets from functioning efficiently. The emphasis shifted to privatising government enterprises and eliminating trade barriers (which were put up to protect the infant local industries). The neo-liberals also forced a freeing up of global investment which allowed the capital from advanced countries to flow around the world with minimal regulations and a diminished sense of social responsibility.
Growth strategies then focused on moving significant parts of the subsistence economies into the “market sector”. Subsistance agriculture gave way to cash crops which then flooded the world and drove down prices. We enjoyed the cheap food but the reduced income forced these nations to then go the IMF for further loans to help service the development assistance loans. The conditions on the so-called Structural Adjustment Packages were onerous. Countries like Mali lost all their forests (as cash crop exports) and now suffer terrible land degeneration and have nothing left to sell.
The traditional sectors in these economies were devastated as the advanced world forced “modernisation” onto them. Indigenous populations have seen their livelihoods expropriated by these processes. For example, their lands taken over by firms from the advanced countries who are pursuing carbon credits under emission trading schemes so they can continue to pollute in their own countries.
And when the advanced countries fail the shocks to the poorest nations are huge and they have very little structure in place to deal with them. Tragically their citizens starve and die.
Not a happy story at all.
The next edition will be available sometime tomorrow afternoon. Put your thinking caps on!