/* Written 7:13 AM Jan 25, 1995 by margross in igc:econ.saps */
/* ---------- "Happy New Year, IMF & World Bank..." ---------- */
From: Ross Hammond <margross>
/* Written 6:59 PM Jan 24, 1995 by twn in igc:twn.features */
/* ---------- "New Global Order in Crisis" ---------- */
NEW GLOBAL ORDER IN CRISIS
The advert of the New Year was supposed to usher in a new
global economic system with the IMF/World Bank and the WTO
at its helm. But recent events, particularly the Mexican
crisis, have shown that cracks are already developing in
this system and that the foundations of this global order
are far from secure. The recent crisis in Mexico has also
called into question the development model held out by the
North as a panacea for the South's economic woes.
By Chakravarthi Raghavan
Third World Network Features
Geneva: It was to have been the start of a new era in the
Global Economic System, with the new `powerful', rule-based
World Trade Organisation (WTO) in Geneva acting in tandem
with the Washington-based International Monetary Fund
(IMF)and the World Bank, as its high priests.
By the reckoning of some Biblical scholars, the New Year's
day of 1995 which ushered in the WTO (without any New Year's
eve party or New Year concert ala Vienna) is also the
beginning of the third millennium Anno Domini -- despite the
Papal sanction for the Gregorian calendar, according to
which the new millennium is six years away.
For the prophets (and advocates) of Alliance Capitalism in
the North -- for the South it increasingly looks more like
the old colonial-style capitalism -- in a global economy
being fast knit together by the transnational Market System,
it would have been both a throwback to the laissez faire
order of the 18th and 19th centuries and a new assurance of
perpetual prosperity.
But, instead of the usual cheer, bon homie and goodwill to
all of the holiday season, there were bad news and rude
shocks.
The political system whose stability is vital to underpin
any economic and social order felt new tremors across the
globe. Neither Washington's sole-Superpowerdom nor Boutros
Boutros-Ghali's valiant efforts at a New Agenda for Peace
seemed to be of avail.
On the economic/trade front, it was business as before with
the United States already threatening new unilateral actions
over the European Union's banana regime -- without even the
slightest attempt to go through the motions of invoking the
WTO rules and dispute settlement. This further dented the
credibility of the rule-based world trade system.
Cracks developed and deepened as well in some of the basics
of the economic philosophies and theories of the new system.
If the "investments" in financial derivatives by the little-
known (outside of the United States) Orange county
administration that went awry and made that county seek
protection under the US bankruptcy laws, had their ripple
effects in financial and bond markets across the globe,
Mexico in Latin America (as in 1982) set off a global
"financial earthquake".
There had been enough warnings, but not the identification
of any epicentre, for quite a while.
As early as 1991, while the Bretton Woods Institutions (BWI)
and the `mainstream' economists were encouraging and
praising the new liberalisation policies in Mexico and Latin
America (and now China and India) pointing to the Mexican
miracle, others were raising cautionary warnings. But the
BWIs ignored and ridiculed these warnings, and continued to
propagate financial market liberalisation in the South as
the new panacea.
But other economists -- in the UN Conference on Trade and
Development (UNCTAD) in Geneva, CEPAL (ECLA-Economic
Commission for Latin America) in Santiago, Chile and a host
of Latin American and other think tanks and academia -- were
warning of the inevitable slowing down of short-term capital
flows to Mexico and other Latin American centres and the
other `emerging markets'. They predicted the likely outflow
from the new massive inflows (from pension funds, market
players chasing arbitrages across countries, and other
fickle investors of the last few years) as the US and
European short-term interest rates tightened and edged up.
These warnings of the unsustainability of the Latin
American/Mexican model of capital inflows financing
consumption rather than productive investments, had largely
been ignored by decision-makers in these capitals.
There is a strong deja vu flavour, reminiscent of the 1980s,
about the reassuring statements now spewing forth from
leading financial and economic journals, and leading
officials in the IMF, World Bank and US Treasury and
elsewhere about the temporary nature of the Mexican peso
problem (triggered by the failure of the previous Mexican
administration to take hard decisions in time) and the
governments having to persevere in further adjustments to
attract and retain foreign funds.
In 1982 too, the debt crisis was first described as a cash
flow and liquidity problem, and then a case of mismanagement
of the economy by governments and only ultimately
acknowledged as a "bankruptcy" problem caused largely by
external factors and needing debt write-off.
That Mexican debt crisis (itself triggered by the US Federal
Reserve's high interest rate policy a year or more earlier)
in 1982 had set off a chain of events rolling across the
developing world: the saga of Structural Adjustment
Programmes tutored and monitored by the Fund and the Bank,
with government after government in the South embracing and
ardently preaching the virtues of liberalism and the market.
The belt-tightening of that era for the common man (still
continuing without respite) and affluence for a small
percentage of the upper middle class in the South pursuing
Northern lifestyles, the liberalisation of markets and
increased profitability for finance capital, the
"disciplining" of the workers and the unions --- all
supposedly set Mexico off on a high upward trajectory of
which the outward symbols were its becoming a part of the
North American Free Trade Area and a member of the
Organisation for Economic Cooperation and Development (and
withdrawal from the Group of 77).
The Mexican success story was being held out as an example
of the path for others to follow -- and many of the Latin
American countries to its South did.
There were some uneasy "facts" in the global economic scene
that contradicted this rosy scenario -- not the least the
rising and stubborn figures of unemployment, and the
decreasing share of the benefits (and increasing poverty,
and even hunger) at the growing bottom and the high
prosperity for the few at the top.
But the solution, according to the theoreticians of this
neo-liberal economics -- securely ensconced in international
secretariats in Paris, Washington and Geneva -- was the
same: "adjustment" and "more adjustment" and liberalisation
of labour markets and reduction (if not elimination) of
labour-market rigidities and freeing employers from social
security burdens.
It was in line with the so-called `medium-term strategy' of
bringing down inflation (purportedly caused by wage-
inflation and union-driven labour market rigidities) and
restoring private sector profitability to encourage private
investments and private initiative for a private-sector
investment-led non-inflationary growth.
This same theme was most recently repeated in the 1994 year-
end Economic Outlook of the Paris-based OECD secretariat,
though some of its annexed tables seem to bear out what
economists elsewhere have been arguing, namely, that
inflation is now profit-driven and not wage-driven.
The OECD data show that, except in Japan, real public
consumption expenditure in the G-7 countries has been coming
down from the averages of the 1970s and the highs of the
mid-80s.
Inflation has come down very much from the high levels of
the 1970s and 1980s, with the OECD average expected to come
down from the 4.1% in 1994 to about 3% in 1996.
Unit labour costs in manufacturing industry have been
dropping fast, with the drops in the US being high, and so
has been the compensation per employee in the business
sector.
The rates of return on capital have been going up with a G-7
average of 15.7% in 1993 and projected to rise to 18.1% in
1996.
In 1994, it is estimated at 18.4% in the US, 13.4% in Japan,
13.8% in Germany, 14.7% in France, 15.2% in Italy, 11.5% in
the UK and 17.1% in Canada.
Three elements constituting the price are labour costs,
material costs and the profit margin.
But with unit labour costs going down, material costs rising
a bit but non-oil commodities in real terms accounting for
only 0.6% of the gross domestic product (GDP) in OECD
countries, the inflationary pressures are thus clearly
coming out of or are driven by higher profit margins.
Yet, in a knee-jerk fashion, the economic apostles of the
new order continue to call for further attacks on labour, to
reduce `labour- market rigidities' and reducing the
pressures on wages.
The post-war prosperity, the so-called golden age over which
the General Agreement on Tariffs and Trade (GATT) - IMF-
World Bank presided, was postulated on not only economic
elements, but a social and political order, with a built-in
distribution system, for a fairer share of the benefits of
the system.
Unlike in Adam Smith-Ricardo capitalism theories, this post-
war order was postulated on capital accumulation, not by the
private individuals, but by corporations.
The full employment and social security systems freed
individual wage-earners and salary-earners from worries of
the future -- for themselves and their families -- and they
engaged in a binge (aided by various credit mechanisms) to
pursue consumer-spending.
The corporations used the profits to further capitalise and
invest and produce more, to promote more consumerism and so
on and so on.
Whether or not the new awareness of ecology calls for a halt
to this, the rising unemployment, and the theory of the
upwardly moving NAWRU (non-accelerating wage inflation rate
of unemployment) to ensure low-inflation, the whole concept
of reducing state provided social security and telling wage-
earners and salary-earners to look also for private social
security is bound inevitably to put a spoke in the wheels of
the earlier consumerist capital accumulation process.
Yet, the drive is all for cutting wages and staff costs, and
thus the disposal incomes of these people, and still
expecting them to fuel a consumerist economy in a deeply
divided society -- with an increasingly marginalised growing
poor and a very affluent upper-middle-class at the top.
And with the new ethos putting a higher premium on
speculative activities (of finance capital) over industrial
and production activities, sanctioned and being pushed now
under the aegis of the WTO, the underpinnings of the new
system based on the old are giving way.
And there is nothing in the horizon to take its place. --
Third World Network Features
- ends -
About the writer: Chakravarthi Raghavan is Chief Editor of
SUNS (South-North Development Monitor), a daily bulletin,
and the Geneva representative of the Third World network.
When reproducing this feature, please credit Third World
Network Features and (if applicable) the cooperating
magazine or agency involved in the article, and give the
byline. Please send us cuttings.
1289/95
Published by Third World Network 228, Macalister Road, 10400
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