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By Walden Bello*
The controversy that now surrounds the Group of Eight (G8) after the violent protests that marked its meeting in Genoa is so difficult to shake off because, for some time now, this club of leaders of some of the world's biggest economies has had little to show in terms of positive achievements.
THE END OF FINE-TUNING?
The G8 came into existence in 1975 with the grand objective of coordinating
the macroeconomic policies of the rich countries in order to navigate a direction
of stable growth that would avoid the Scylla of high inflation on the one side
and the Charybdis of deep recession on the other. The record was sketchy in
the early years. However, in the last few years, efforts to synchronize fiscal
and monetary initiatives have proved frustrating, with efforts at coordination
failing to contain the Asian financial crisis, stabilize the euro-dollar-yen
exchange rate, bring Japan out of a decade-long recession, or prevent the onset
of a global downturn.
The 0.7 per cent growth that the US economy registered in the second quarter of this year is the latest evidence of strong resistance to technocratic fine-tuning in the form of interest-rate cuts.
CRISIS OF OVERPRODUCTION
The reason that the economic slowdown seems to be immune to orthodox fiscal
and monetary mechanisms, even when coordinated across borders, is that beneath
the glitzy nine-year expansion of the world's lead economy, the US economy,
deep-seated global structural imbalances had been building up for some time.
The boom of the early and mid-nineties resulted in a burst of global investment
activity that led to tremendous over-capacity all around. The indicators are
stark. The US computer industry's capacity has been rising at 40 per cent annually,
far above projected increases in demand. The world auto industry is now selling
just 74 per cent of the 70.1 million cars it builds each year. So much investment
took place in global telecommunications infrastructure that traffic carried
over fiber-optic networks is reported to be only 2.5 per cent of capacity. There
is, says economist Gary Shilling, an "oversupply of nearly everything."
Profits apparently stopped growing in the US corporate sector after 1997, leading
firms to a wave of mergers, the main purpose of which was the elimination of
competition. The most prominent of these were the Daimler Benz-Chrysler-Mitsubishi
union, the Renault takeover of Nissan, the Mobil-Exxon merger, the BP-Amoco-Arco
deal, and the blockbuster "Star Alliance" in the airline industry.
CRISIS OF FINANCE CAPITAL
In addition to mergers, another avenue that was taken to avoid the crisis of
profitability in industry was to push investment to speculative activity, notably
to the stock market and the real estate sector, leading to the spectacular boom
and bust in East Asia in the 1990s. At the time of the Asian crisis-which, incidentally,
has not been surmounted--many observers pointed out that it was the same hothouse
speculation that underpinned the Wall Street-Silicon Valley complex that drove
the US economy. What optimists-the most prominent being US Federal Reserve Board
Chairman Alan Greenspan--called the "New Economy" seemed for a time
to defy the laws of economics, with Internet stars such as Amazon.com registering
an explosive and seemingly permanent rise in stock values even as they continued
to operate at a loss.
But all talk about the emergence of a New Economy vanished when the law of gravity caught up with the speculative sector in late 1990s, resulting in the wiping out of $4.6 trillion in investor wealth in Wall Street, a sum that, as Business Week pointed out, was half of the US Gross Domestic Product and four times the wealth wiped out in the 1987 crash.
THE KONDRATIEFF PHENOMENON
According to Gary Shilling and a number of other pessimists, probably the reason
the macroeconomic imbalances are working themselves out in what is likely to
be a deeper than expected recession is that we are now at the downward curve
of the so-called "Kondratieff Cycle." Discovered by the Russian economist
Nikolai Kondratieff, the progress of global capitalism is marked not only by
short-term business cycles but by long-term "supercycles." Kondratieff
cycles are roughly 50 to 60 year-long waves. The upward curve of the Kondratieff
cycle is marked by the intensive exploitation of new technologies, followed
by a crest as technological exploitation matures, then a downward curve as the
old technologies produce diminishing returns while new technologies are still
in an experimental stage in terms of profitable exploitation, and finally a
trough or prolonged deflationary period.
The trough of the last wave was in the 1930s and 1940s, a period marked by
the Great Depression and World War II. The ascent of the current wave began
in the 1950s and the crest was reached in the 1980s and 1990s. The profitable
exploitation of the postwar advances in the key energy, automobile, petrochemical,
and manufacturing industries ended while that of information technology was
still at a relatively early stage. From this perspective, the "New Economy"
of the late 1990s was not a transcendence of the business cycle, as many economists
believed it to be, but the last glorious phase of the current supercycle before
the descent into prolonged deflation. In other words, the uniqueness of the
current conjuncture lies in the fact that the downward curve of the current
short-term cycle coincides with the move into descent of the Kondratieff supercycle.
Marxists say that what underlies such conjunctures is that the old "relations
of production'" or the complex of existing capitalist property relations
and institutions, come into conflict with the further development of the "forces
of production" or technologies, which is only possible if this process
is no longer driven by the search for profit.
Are we in for a bout with more than a normal recession? To use Joseph Schumpeter's terms, are we moving into a long period of "creative destruction?"
POLICY IMPLICATIONS
What are the implications of global deflation for economic policymaking in the
South? Well, one is that while, theoretically, you might stand to benefit more
the more globalized your economy is in the period of ascent, you also stand
to suffer more in the period of descent because you have far fewer mechanisms
to buffer your economy from the forces of global deflation. The IMF-WTO neoliberal
approach of promoting ever freer flows of goods and capital that continues to
guide the technocratic and economic elites of many developing countries becomes,
in this new global context, not only dysfunctional, as it has been for some
time, but suicidal.
It is interesting to see that some establishment analysts, such as Hong Kong-based economist Andy Xie of Morgan Stanley, are beginning to raise doubts about the viability of outward-oriented, foreign capital-intensive growth in this period. "The region came out of the Asian Crisis by hitching onto the US IT [Information Technology] bubble," says Xie. "The day of reckoning has evidently arrived. There is no other easy ride in sight." This burst of the US IT bubble, he contends, "is not just a cyclical event" but signals "the beginning of a slower US economy perhaps for a decade." Governments will realize that there is no alternative but to rely on domestic demand to drive growth, and will consequently be "forced to remove anti-consumption policies."
In Southeast Asia, Malaysia has already traveled along this path and Thailand under Prime Minister Thaksin Shinawatra is seriously considering it. In any event, export-oriented growth is out; inward-oriented domestic-demand-led growth is in. Which means not only erecting tariff and other barriers to protect producers but undertaking decisive measures of asset and income redistribution to create the mass of consumers with effective demand that will serve as the engine of economic growth as global demand falls off.
Global deflation is, in short, as much a crisis as an opportunity. And the opportunities are greater for those in the periphery of the global economy than those in the center-if the South's policymakers are bold enough to shake off obsolescent strategies and pursue innovative ones. One can only hope that another Great Depression does not take place. But one cannot also but remember that it was the Great Depression, with the collapse of world trade that it triggered, that created the space for Latin American countries to build up their manufacturing and industrial sectors and emerge from the crisis far stronger than when they entered it.
* Executive director of Focus on the Global South and professor of sociology
and public administration at the University of the Philippines.