Toshiaki Hirai
(Sophia University)
This chapter aims at addressing the following
themes fairly broadly and theoretically, showing a general perspective of the
whole book: What is the present globalization? How should we evaluate it in
relation to capitalism?
If we would search for a single word which
can characterize the development of the world economy from the latter half of
the 1980s to the present day, there would be no suitable word other than “globalization”.
it should be defined as the “phenomenon moving toward market economy (or
capitalism) on a global scale”.
We would mention the following three points
which can characterize the present globalization: (i) As a principle of
operating economy, socialism has been abandoned, capitalism being
adopted globally; (ii) financial globalization has come to proceed to an extreme
degree; (iii) Several countries, which had been regarded as developing
countries, have attained remarkable economic growth to such a degree that they
have come to occupy an important role in the world economy.
(i) is an
epoch-making phenomenon in the postwar world economy, not ever seen in the
world history. Albeit seen in the Pax Britannica, (ii) is outstanding in terms
of scale and the multiplicity of financial products. (iii) is a new phenomenon
such as would demolish the term of North-South Issue.
This chapter runs as follows. Firstly, we would
show what capitalism is, for the present globalization is the development of
capitalism. Here the essential characteristics of a capitalistic system are
pointed out, followed by its problematic points.
Secondly, globalization is examined. It might be grasped from two aspects – five factors which caused
it, and four types
of globalization which occurred as a result.
Five factors run as follows: (i)
Neo-Liberalism; (ii) financial liberalization; (iii) liberalization of capital
transaction; (iv) New Industrial Revolution; the collapse of a socialistic
system. Four types of globalization run as follows: (i) financial globalization;
(ii) capitalism in the ex-communist bloc; (iii) emerging countries); (iv) the EU.
An important point should be that globalization can be classified under the
broad headings of (i) financial globalization and market system globalization
which includes (ii), (iii) and (iv). The salient tendency has been for the
former to promote the latter, while bringing about a huge glut of financial
capital the former has left the world economy more fragile.
******
1 Essentials
We can mention six points worth noting as
essentials of capitalism: (i) dynamics, (ii) markets, (iii) capital, (iv)
firms, (v) uncertainty, (vi) ambiguities. The first three are connected with
strong points in a capitalistic system, while the last two with fragile points.
(i) Dynamics - The essential nature of a
capitalistic system is embodiment of an impulse to growth. A capitalistic
system generates increase in production and growth through the development of
division of labor, competition and technology while it destructs existing
systems. Thus the capitalistic system is dynamic system which embodies instability
as well. Its “dynamics” operates through “markets” and “capital”.
(ii) Markets - They have two salient
characteristics: (a) that of “turning everything into commodities” and (b) “the
monetary economy”.
(a) A capitalistic society might even be summed
up as a society in which the most important elements of the economy come to be
transacted, being turned into commodities. These include not only labor but
also, in recent years, securitized products, an emission trading system.
(b) In the markets, almost all the
transactions are made by means of money. That is, in capitalistic society
barter is not an essential form of transaction.
(iii) Capital - Capital, which is divided
broadly into “real capital” and “finance capital”, is an important wheel which
sets markets in motion.
Finance capital, among others, keeping a
lookout over all the markets on the globe, enters those deemed most profitable,
making some markets active while others inactive. Firms and industries which
cannot procure finance capital should perish. As a result, the industrial
structure undergoes sweeping transformation and the capitalistic system can
attain growth.
(iv) Firms - Firms play an absolutely vital
role in “dynamics” of capitalism. They must develop, looking to the uncertain
future, new goods and new markets, injecting huge amounts of capital and human
resources.
The above-mentioned four features are
strong points. Through a gigantic network of markets economic activities are
developed, and economic agents are allowed to behave on a self-driven basis.
Through the mechanism of numerous markets a great many economic agents produce
and exchange vast quantities of goods and services. Moreover, through the activities
of firms the economy as a whole can attain dynamic development.
The capitalistic system operates through
the activities of economic agents who are free to choose rational behaviors, bringing
about desirable results from a point of view of economic efficiency. It is
superior to socialistic systems in terms of freedom, for it is through the markets
– to a great extent “autonomous”, not depending on decrees by some particular
persons – that the production and exchange of goods and services are carried out.
Different from the above (i) - (iv), the
following show the capitalistic system as subject to various uncertainties and
ambiguities.
(v) Uncertainties –the capitalistic system faces
various kinds of uncertainties. Firms need to go on producing goods forecasting
sales in the markets. They need to make great efforts to develop new goods.
Once they succeed in doing so, they need to build capital equipment, making
efforts to increase profits. And yet forecasting is very difficult to achieve
because the sales of the goods depend on the demanders.
Moreover, the present-day capitalism has tended to be occupied by “self-augmentation
of finance capital”, so that firms in the real economy are forced to produce
and sell goods, given the behavior of finance capital, which makes forecasting
more difficult.
(vi) Ambiguities – Economics has assumed “rationality”
in regard to markets and economic agents and maintained that the unfettered
market system can bring about the Pareto optimum. To some extent, this system has
superior points in that independent individuals can make their own decisions in
the market, and many goods and services are determined without any intentional
interference from outside.
This assumption, however, entails big
problems. It excessively relies on “rationality”. If the capitalistic system was
conceived exclusively in terms of rationality, the inevitable result should
lead to error in cognition. One example is “ambiguities” with which capitalism
is endowed, distinct from uncertainties. We will illustrate this point by three
examples.1
Market Price – Economics teaches us that
the relative price is determined at the intersection between demand and supply
in each market, regarding money as a veil. However, it should be an absolute
price which is actually determined at the intersection, with money always working
as a counter party. This has important consequences, quite different from
barter transaction.
Suppose that a certain good has enjoyed
extremely high sales due to, say, word of mouth or advertising. The absolute
price goes up and the firms concerned can make a huge profit. In this situation
financial institutions can enter this market, creating money. As this
phenomenon encroaches on the goods concerned, the possibility looms that the
price as determined by demand and supply is not the result of optimal behaviors
of economic agents. Could the market mechanism greatly influenced by credit
creation really determine a “fair” price? We need to keep an eye on the market,
with some sort of fairness in mind.
Accounting – What amount of profit a
firm could make depends entirely on the accounting system, for complicated
everyday business activities cannot provide it with concrete information. Thus
every transaction is kept on a balance sheet. And once or twice a year a firm
makes performance public in the form of the balance sheet and the earnings
statement.
However, this system has a shortcoming. Among others, depreciation
allowance and inflation/ deflation are serious matters. Depreciation allowance
is not exempt from some degree of arbitrariness. Inflation/deflation is more
serious, for if it would goes extremely, accounting would lose its
significance. The figures thus kept for, say, half a year, show a bias and does
not carry correct information, and yet firms have no other choice. In this
case, nominal GDP does not constitute correct information. In order to avoid the
problem, social accounting calculates real GDP by dividing it by the GDP
deflator, and yet this method cannot elude the essential ambiguity.2
Debt Contract – In a capitalistic system
various kinds of debt contracts are made. They use money as a unit of account.
In this case, debts cannot avoid the influence of inflation/deflation, and yet
people cannot help entering upon debt contracts based on money as unit of
account. In spite of the fact that in a capitalistic system contracts in terms
of money are absolutely fundamental, “ambiguities” always crop up there.
2 Issues involved
In this section we will see three issues as
constituting headaches for the system.
(i) The Bubble Phenomenon
It means the situation in which the economy
overheats due to some factor to such a degree that the government tries in vain
to control it, finally leading up to an eruption. These phenomena have occurred
since olden days (e.g. the Tulip Bubble and the Stock Bubble associated with
John Law).
In economics, however, the bubble
phenomenon has been dealt with as an exceptional case. The principal task of
economics has resided, rather, in analyzing normal processes. Most economists
had placed profound trust in the “classical dichotomy” and “Say’s law”, thereby
failing to address an issue like unemployment in a capitalistic society until
Keynes appeared on the scene.
The trend in these
two decades has been to revert to the situation prior to Keynes. The New
Classical macroeconomics defended the “classical dichotomy” and Say’s law. Nevertheless
they argued economic fluctuations. Worse still, it has become the mainstream.
Strangely enough, these two decades have increased the degree of
instability of the capitalistic system with repeated bubble phenomena – e.g.
the Japanese bubble and its burst from the end of the 1980s to the early 1990s,
the US Dot.com bubble and its burst from the mid-1990s to 2000, and the housing
and subprime bubble and its burst in the early 2000s, all of which occurred due
to speculative activities with an abnormal bloat of money. Moreover, our modern-day
governments could not prevent these bubbles from coming to bursting point. The
reason why the bubble is a serious issue for the economic system is that it
could drive people excessively into money-making activities. When rival firms
are making huge profits on a bubble, a CEO of a certain company will not be
allowed to sit and wait, stating that the bubble will burst soon. The same
is true of employees. This sort of climate comes from the human nature
underlying society – people cannot sit and wait while rivals are making
profits.
Human beings are consciously or potentially driven by the desire to
obtain wealth and fortune. Once the bubble occurs, increasing numbers of people
grow eager to pursue profit - even those who had till then been composed – sooner
or later join in, driven by such an instinct. As a result, the economy eventually
plunges into the engulfing foam of the bubble, the real economy being
neglected.
Thus the responsibility to prevent bubbles
should be taken on by the governments, and yet repeatedly we see governments
incapable of holding back the runaway bubble. This is indicative of a
malfunction of the capitalistic system and the respective government, thus
constituting a problem we need to diagnose, and so reform the structure.
(ii) Corruption and Injustice
When the excellence of the capitalistic
system is evoked, free exchanges among agencies in the market are argued to be efficient
and reasonable with freedom and fairness being guaranteed.
Compared with a socialistic system, this is
true, and yet this system has a weak point - corruption and injustice.3
Mainstream
Classical and Neo-classical economics take the classical dichotomy for granted.
They analyze the real economy in terms of relative prices, and then take up
money as determining absolute prices. However, this method is a static and
non-monetary approach to the actual economy. Let us focus on the “monetary” aspect
here.
Capitalism is a system which is
inconceivable without money. As the real economy grows, the degree to which it
depends on outside capital for production and service activities grows larger.
Finance has its own existence value, for it enables smooth growth of the real
economy. At the same time, however, finance is a sphere in which there is ample
room for fraudulence. When finance enjoys unlimited freedom, the room for fraud
grows disproportionately large. The present world sees the money game by means
of “securitized products” together with the technique of “leverage” on a global
level. These activities, unless some regulations are imposed, tend toward excessive
speculations wrapped with a veil, and the scope for fraudulence is vast.
There are several types of corruption as well as dishonesty on the
part of the financial institutions.
Forced Saving
― This
is a behavior of financial institutions which buy goods ahead of the public
with money they create. As a result, the amount of goods left for the public
decreases proportionately. Thus the public is forced to save. This shows that
they can procure money and get whatever goods they want at will. The market
system could be thus misappropriated.
Stock Market
Malpractice ―
The stock market is a market representing the capitalistic
system. It is an important means by which firms can procure the money they require.
And yet it is a place which enables many wrongdoings. From illegal operations
to suspicious borderline dealing, including insider trading, stock price
manipulations by means of disinformation and so forth by means of which
unjustifiable profits are obtained.
Way of Usurping Profits through Nonexistence, or Opacity of Markets ― As a strong point of capitalism, we can in many cases point out its transparency.
In the financial markets, however, this point is sometimes lacking.
In recent years “securitized products” have multiplied at an amazing
rate. However, many of these have been transacted in a very opaque way without
markets. Moreover, hedge funds, which have played a major role here, have not
been subject to oversight by any governmental organization. The financial
institutions have had a tendency to emphasize the importance of independence.
However, the funds have carried out operations with huge amounts of money, to
such a degree as to endanger the world economy, as exemplified by the LTCM in
1998. The runaway effect in the form of “market non-existence” and “opacity” of
the financial system threatens to disintegrate capitalism.
(iii) The Disparity
Problem
Capitalism bases the foundations of
economic activities on the markets. Economists seeking to work out its
mechanism have placed trust in the general equilibrium theory. However, there
is one point to which it does not pay attention ― a distribution of income and/or wealth.
Moreover, economics has a proposition to the effect that “perfect
competition brings about the Pareto optimality”. It does not tell at which
point on the so-called contract curve the exchange will be determined.
Mainstream economics interprets “justice” in terms of “commutative
justice”. This is an idea that the market mechanism attains “justice” through exchange
behavior. It precludes a value judgment of the state of distribution of stock -
“distributive justice” is excluded.
When economists applaud market efficiency, they tend to emphasize an
equality in the premise. This is also problematic, for in a capitalistic system
there is no “equality in the premise”.
There exists the conviction that, left to the free market, the economic
system will be efficient. However, in a society in which there exists a great
disparity in the ways of obtaining wealth or incomes, there is a possibility
that if left to the free market a great disparity could result.
The world which has been driven by market fundamentalism has seen,
as a result, a very great disparity in income and wealth in many countries,
notably in the US, and even more notably in the emerging nations.
Let us take the US as an example (the distribution trend in family
incomes from 1979 to 2007 reported by the CBO in October 2011); the top 1% showed
three times in 2007 as much as 1979. Contrastingly, the other classes have
remained stagnant. The upper 81-99% class showed a 50 % increase, while the
upper 21-80% class a 25 % increase. The lowest class has shown little increase.
Thus this period is called “the Period of Great Disparity”.
******
1 Five Factors Which
Have Caused Globalization
We have already five points as the cause which has brought about
globalization. “Neo-Liberalism” is a development in thought in the
wider sense. “Financial liberalization” and “liberalization of capital
transaction” are a conscious movement on the side of governments and financial
institutions aiming at promoting the financial liberalization. “New Industrial
Revolution” is a rise in the IT revolution, initiated by many US young
entrepreneurs. “Collapse of a socialistic system” is a fall of a rival to the
capitalistic system.
(i) Neo-Liberalism
Like many terminologies in political philosophy, neo-liberalism has been
historically used as having a different meaning4. Here we would adopt it as having been used
from the 1980s on with Hayek and Friedman as representatives, and yet as having
been understood among the general public as well as politicians5.
The main claims of neo-liberalism run as follows: Leave everything
to the market economy; Respect free activities of individual to a maximum
degree; Government should not interfere with the market; Government should not
adopt discrete economic policies; Structures should be reformed so that as many
as regulations should be discarded. Neo-liberalism thus set out has been dominant
over these three decades.
It can be easily found out that among
the representative scholars of neo-liberalism
there is a great difference – for example, a perception of liberty, and
market. We can recognize great difference between, say, Hayek and Friedman, or
Hayek and Robbins/Knight. However, this is not the place to make comparison at
this dimension.
Firstly,
Neo-Liberalism got an overwhelming support from Thatcher and Reagan –
among others, in the
case of Thatcher, Hayek while in the case of Reagan, Friedman.
As both governments
aimed at strengthening military powers, they never achieved
become small
government. However, it matters here that both advocated neo-liberalism as
political thought6. Thatcher invoked neo-liberalism as social
philosophy against the strong trade union, the existence of governmental enterprises,
and the old-fashioned City, while Reagan invoked it for favoring entrepreneurs,
implementing sharp reduction of income tax for the upper class and sharp
reduction of corporate tax, while increase of income tax for the middle and low
class.
Secondly,
Neo-Liberalism got a strong support from economics profession. In the
US, through
Monetarism, the New Classical School as represented by Lucas, Kydland
and Prescot has
become the mainstream macroeconomics, showing harsh criticism of
Keynesian economics.
Their economic models assumed economic
agents as being able to form rational
expectation, the
instantaneous equilibrium in the market and Say’s Law. The so-called “policy ineffectiveness
proposition” and financial engineering based on the efficient market hypothesis
can be said to be along the same line.
The previous mainstream economics was the “the
Neo-Classical Synthesis”, which was composed of Keynesian economics and
Walrasian general equilibrium theory. In this framework, discretionary economic
policy was essential in the situation of underemployment, while general
equilibrium theory was also regarded as essential. The social philosophy was
built on this Synthesis.
Neo-Liberalism, in a nutshell, might be said to have
been built on the framework in which neoclassical microeconomics is preserved,
and new macroeconomic theories such as Monetarism and the New Classical theory
are advocated as an alternative to Keynesian economics. Thus over these three
decades, economic theory and social philosophy could be said to be on the same
boat7 8. This phenomenon appeared for the first time in the history
of economic thought.
Thus Neo-Liberalism has made a great contribution to
the globalization over these
three decades9.
(ii) Financial Liberalization
The financial liberalization was initiated by the
financial institutions aiming at abolishing the regulations in order to widen
methods of procurement of capital and the place for investment. What was the
most important was persistent activities aiming at attenuation of the
Glass-Stegall Act.
These
activities led to a rapid increase in hedge funds, structured investment
vehicles, private equities together with a rapid increase in the securitized
commodities such as MBS, CDO, MBS, CDO, CDS10.
(iii)
Liberalization of Capital Transaction
International movement aiming at the liberalization
of capital transaction was advocated by the IMF in the 1990s – “Liberalization
of Capital Account”. The central figure there was S. Fisher11.
After the Breton Woods System collapsed in the early
1970s, the IMF’s function had
remained unclear. Then it came to feed its
way into financing the developing countries.
The 1980s saw the debt crisis of the Latin American
countries, greatly afflicted by the two-time Oil shocks. Faced with these
phenomena, the IMF has come to tackle the liberalization of capital account as
the major task
However, the
article of agreement of the IMF did not deal with the liberalization of capital
account from a start, so the IMF needed to work it out. The movement of
reforming the article of agreement reached the apex in 1997, when the South
East Asian financial crisis took place and the movement ended up in failure.
That said, this movement went together with the movement of attenuation of
the Glass-Steagall Act.
The latter half of the 1980s saw a great increase in foreign direct
investment (FDI) by Japanese firms into China, and the South Eastern countries due
to appreciation of Yen, which contributed to a high economic growth there
through exports. This is not the whole story. In the early 1990s, India and
Brazil came to adopt a policy of capital liberalization, which brought about economic
development through FDI.
It
should be worth noting that the Japanese government had been critical of the
IMF
and the World Bank, both of which promoted capital
liberalization, among others speculative international monetary system, as is
shown by the idea of the Asian Monetary Fund, and the Miyazawa Proposal.
Japanese proposals were not able to bear
fruit due to harsh opposition of Rubin and Summers.
(iv) New
Industrial Revolution
The IT industry was initiated in the US in the
1980s. Initially, Japanese firms could continue to lead the world by setting up
sections which adopted the technology developed there within the firms.
However, the situation dramatically changed. The IT revolution in the US was to
attain startling growth due to the originality of young entrepreneurs such as
Microsoft, Apple, Yahoo, Google while the Japanese established firms were to
suffer from competition with the US newly born firms.
While until the 1980s the Japanese firms had lead the world economy in
terms of
industrial technology, the US came to lead them
Japan in the 1990s. Moreover the IT revolution was to give a great economic opportunity
to the country such as India in the form of outsourcing.
(v) Collapse of Socialistic System － Why Did the Soviet Union Collapse?
Here let us see how the Soviet Union came to
collapse, concentrating focus since the 1970s, putting aside discussion of a nature
of the system.
Sharp Drop in Petoleum Price and the Defeat of the Afgan War – The 1970s saw a sharp increase in petroleum
price due to the two-time Oil Shocks. The developed countries, which plunged
into the serious depression due to them, succeeded not only in exploring new
oil fields, as a result of which oil production saw a great increase but also
in using an alternative energy. On the other hand, the industry consuming
petroleum made efficient use of petroleum. In consequence the situation
dramatically changed in the mid-1980s which saw a sharp drop in oil price.
Thus, the Soviet which
largely depended on the revenue of oil, was to suffer from
extreme decrease in fiscal revenue. To make
the matter worse, it had spent huge military expenditure for the Afghan War
(1979-1989), was forced to finally pull out.
The Rise of Gorbachev – It was Gorbachev
who came to the front (Secretary in 1985). It was in the sphere of politics rather than in that of economy
which he promoted a great reform. He went on approving political freedom never
seen before with the idea of “Europe as a Common House” - Among others, an
approval of democratic movement in the East Europe, which finally led to the
unified Germany.
In 1990 Gorbachev introduced the
presidential system as well as a plural political party system, becoming himself
the first president.
These political trends, however, led to weaken his
power of leadership. A coup took
place in August in 1991. Yeltsin, who was given
credit for the suppression, gripped the political power. He came to conclude
the Belavezah Accord with the leaders of Belarus and Ukraine, proclaiming the
collapse of the Soviet Union. It was a natural course that capitalism was to
enter into the empty area thus created.
2 Four Types of Globalization
Globalization can be broadly classified into “financial
globalization” and “market system globalization”.
Financial globalization is caused by the financial liberalization
and liberalization of capital transaction in which financial business can make
operations without any oversight from any government in the world. Financial
business has procured huge capital through various methods and entered various financial
markets, thus attaining the global unification of the financial markets.
Let us turn to “market system globalization”. The market system is
one in which goods and services are freely transacted among firms and consumers
in the market. This type of market system are adopted throughout the world is a
market system globalization.
Speaking of the relation between the two globalizations,
the salient tendency has been that the progress of the financial globalization has
promoted the market system globalization. Financial business has actively
invested funds in the areas on the globe which are judged to yield profit. This
tendency has given a great momentum to many developing countries.
On the other hand, as the development of financial globalization
brought about an extraordinary glut of financial capital, it became increasingly
difficult for governments to oversee the behavior of financial institutions
(the bloated SBS), which has made the world economy ever more unstable.
Four types of globalization can be identified as constituting the
great transformation of the world political economy system: (i) financial globalization;
(ii) market system I – relating to the collapse of the Soviet Union; (iii) market
system II –the rise of the emerging nations; and (iv) globalization of market integration
– the Euro System (or EU).
(i) Financial Globalization － Usurpation
of Leadership by US-UK Financial Capital
In the 1970s and 1980s the world capitalist
system, in which the US economy had so far ruled the roost, saw a great
transformation. The Breton Woods regime suffered from recurrent dollar crises
and finally ended up with the “Nixon Doctrine” in 1971. Then, following the Smithsonian
agreement, the major countries agreed to shift to the floating system.
For
this state of affairs we can indicate the economic development of the Japanese
and West German economies. This tendency has led to, among others, a continuum trade
friction between the US and Japan.
Two
oil shocks in the 1970s caused an exorbitant rise in the oil price, plunging
the world economy into serious depression. Then Thatcher (1979-1990) and Reagan
(1981-1989) appeared on the scene. In order to revive the stagnant economy, they
advocated the market system, unrestrained economic activities on the part of
the entrepreneurs, deregulation, and so forth. These meant to a shift from
Keynes-Beveridge thought to Hayek-Friedman one.
With these developments, “financial globalization” strategy was to
be adopted by the two politicians as the way of regaining their position.
The US and the UK governments made efforts
to widen room for operations by financial institutions. In the first half of
the 1980s, however, it had still failed to have conspicuous effect in terms of
the US and the UK regaining their position. It was, rather, the Plaza Accord in
1985 that was to bring about a truly notable effect, which was to bring about
an abrupt appreciation of the yen.
In the 1990s, under the leadership of the US and the UK, “financial globalization”
developed at an ever faster pace. This has contributed to recovery of control
of the world financial market by the US and the UK. In addition, the US
business activities have also achieved successful recovery through the IT revolution.
Contrastingly, Japan - the only victor in the world economy up until
the early 1990s - failed to accommodate to the Plaza Accord well – failed to deal
with the bubble economy and was plunged into the “Lost Two Decades” as the self-trapped
failure.
In the latter half of the 1990s, the Japanese financial institutions
were forced to withdraw from the world market due to the domestic financial
crisis. Even in respect of entrepreneurial spirits, moreover the Japanese firms
were left far behind, and the Japanese economy could not attain GDP growth.
Although it remains unclear how far the US and the UK governments
and their financial industries had foreseen this development, this financial globalization
was to define the line along which the world economy was to proceed.
(ii) Market System I ― The End of the Cold War and Convergence to the Capitalistic
System
In this section we will consider the former
Soviet bloc (together with China), which has come to adopt the market system
subsequent to the collapse of the Cold War regime.
Emergence and Decline of the Socialist
System
The post-world war period saw the US-Soviet
Cold War regime, in which the two antagonistic economic systems came to
struggle for mastery. In the socialistic system, markets, firms and the price
mechanism were almost non-existent. Goods and services are bought and sold, but
the prices were not determined in the markets. The production activities were
planned by the central planning bureau, while the lower organizations carried
out production following the planning. Thus in this system there was no room
for voluntary activities for entrepreneurs.
The Cold War regime came to an end due to the abrupt collapse of the
Soviet bloc in 1991. Would a socialist
system doom to collapse by its very nature? It is easy to judge so with
hindsight. However, until just before the collapse, no one was not able to
predict that it would collapse so completely. For better or worse, man is
liable to forget the past. While the world capitalist system had almost
collapsed in the 1930s, it was the Soviet Union that had succeeded in attaining
economic growth. Moreover, its economic performance did not lag behind the US
in the 1960s.
Transitional Process toward Capitalistic
System
Here we would see how the former Soviet
Union, once it collapsed, transformed itself into the capitalistic system
(China, which is an exception, gradually adopted capitalistic elements under
the sway of the Communist Party). Let us see how Russia and China tried to
shift toward the capitalistic system.
Russia － After the coup by Yanayev and its
suppression, the Belavezha Accord was concluded in December 1991, with
declaration of the CIS and the abolition of the Soviet Union. Russia was the
largest nation there.
Yeltsin aimed at making Russia a capitalistic society, adopting the
so-called “Shock Therapy” following the advice of the IMF. His presidency (1991-1999)
had two distinct periods.
The
first half saw rapid transformation into a capitalistic society through the shock
therapy, led by Gaidal and Chubais with Sachs and Schleifer (L. Summers was his
protégé) as advisor. Their methods were price liberalization, privatization of state-owned
companies through the “voucher method”, and establishment of the stock market.
The performances were miserable. In 1992 the Russian economy suffered from hyper-inflation
of 2510% and -14.5 % in terms of GDP per annum. The hyper-inflation together
with the collapse of the social security system drove a considerable part of
the population into destitution while the voucher method would beget the
Oligarch.
The
second half saw political and economic turmoil. It started with the Moscow
Turmoil in 1993, which resulted in Yeltsin’s victory. His popularity, however,
sharply dropped due to the miserable economic performances. He was forced to
ask the Oligarch for help in the election campaign. He was re-elected but the
influence of the Oligarch was conspicuous. They had possessed many state-owned
companies through loans with the equity as collateral.
In
1998 Russia plunged into default of the national debt. This was a result of
sharp drop in revenues, capital flight and so forth. Officials and the military
had left unpaid, while ruble lost trust and barter system had been prevalent.
The default caused a collapse of hedge funds such as the LTCM, which almost
plunged the world economy into serious financial crisis.
In
1999 Yeltsin resigned from presidency, appointing Putin as acting president,
who was elected President in 2000. Around this period the Russian economy, due
to the hike in oil prices, began to show miraculous recovery. In the first
period Putin was earnest in reforming Russia politically as well as
economically. In the second period he came to change the course in such a way
of strengthening the state control, and expelled the Oligarch who were
disobedient to him. While the Lehman shock also hit Russia, the influence of
the sovereign state over firms became all the stronger.
Thus the way adopted for transforming
Russia into a capitalistic society resulted in the gratuitous concentration of
wealth in the hands of the Oligarch, and in destitution of the mass. And yet since 2000 Russia has succeeded in begetting
the middle class due to the high economic growth while
wealth has shifted to the State from the Oligarch.
China － “The Great Leap Forward” policy
(1958-1960) advocated by Mao Zedong resulted in a calamitous economic situation
(sharp decline in agricultural production and some billions of people’s death
due to starvation).
In
1965-1977, then, China saw the “Great Cultural Revolution”. Learning being
negated, intellectuals and students were expelled into remote areas. This was
initiated by Mao to regain power. The revolution was soon to kindle internal
strife among the leaders as the economy plunged into a miserable state. The
revolution, after complicated and perverse struggles, finally ended with the
arrest and conviction of the “Gang of Four”.
In 1978 the “Economic Reform” policy was launched by Deng Xiaoping,
who came back from the dead like a phoenix. This was a starting point toward
the miraculous economic development of the Chinese economy. This policy aimed,
in substance, at transforming the Chinese economy into a capitalistic system,
although it was dubbed the “Socialist Market Economy”. It was a gradual reform,
in sharp contrast to Russia’s shock therapy.
Initially the Chinese economy recovered from a miserable situation
due to an increase in agricultural product through an introduction of land
privatization in the rural area as well as the growth of the so-called “township
and village enterprises”. Then followed a policy of attracting foreign firms to
the “special economic zones”, which was the beginning of miraculous economic
growth in China.
In 1985 Deng advocated the so-called “Xian Fu [Wealth as Prioritized]”
doctrine. And the rapid growth of the Chinese economy was to be accomplished
mainly by private firms. In 1992 he delivered a “South Tour Speeches”,
insisting on speeding up reform policy against the conservative group. This
contributed to bringing the Chinese economy back into a capitalistic system in
the midst of the political and economic confusion due to the Tiananmen Square Incident
(1989). The guiding principle in the mid-90s was to privatize small state-owned
enterprises while maintaining big ones under the control of the government. It
was reconfirmed in the 15th National Congress of the CCP in 1997 with
the decision that economic growth should be left to private firms while
confining state-owned enterprises to the four fields. In consequence the share of
the state-owned enterprises in the economy steadily continued to decline. Thereafter
the government allowed the local governments in the inland area to attract
foreign firms to newly developed zone, which was to ignite economic development
there.
In December 2001 China entered the WTO, which has treatment of
foreign capital equal to domestic capital, liberalization of tariffs, and
considerable degree of liberalization of labor mobility as necessary
requirement.
(iii) Market System II ― The Rise of the Emerging Countries
The global operations of business
activities contributed to bringing about large-scale economic development in
some “developing” countries. This was ascribed not only to the business
activities of the developed countries but also to those of the developing
countries. The result was the rise of the emerging countries as represented by
the B[R]ICs – Brazil, [Russia], India and China.
What matters here, especially after the Lehman Shock, is that the
world economy has been greatly transformed from “the growing developed
countries vs. the stagnant developing countries” to “the stagnant developed
countries vs. the growing emerging countries”. Above all, the Asian area has
attained a high rate of economic growth. Moreover, economic growth in the South
American zone has also gained attention. This is, to a large extent, due to the
fact that economic growth in China and India caused a huge demand for minerals
and agricultural products, while the areas had a relatively stable financial
system. In consequence, the US ambition, entertained in the early 1990s, to
control the world economy alone has been shattered.
Over these two decades the economic growth of the developed
countries has been slow or stagnant, while the emerging countries have consistently
attained high rates of economic growth (in the case of Russia this is true of the
last decade only). Consequently the BRICs have not only been rapidly catching
up with the developed countries, but also been rapidly occupying larger positions
in the world economy. Indeed, China has often been ranked as one of the G2. The
future of the world economy is expected quite certainly to revolve around them.
The world map in terms of the economy and geopolitics has dramatically changed.
Briefly describing the cases of Brazil and India, we will refer to
the presence of the BRICs in the world economy in more concrete terms.
Brazil ― In the 1980s and the first half of the 1990s, Brazil had suffered
from the bloated debt and hyper-inflation. In 1990 President Collor (1990-1992)
adopted a policy of promoting the market economy, opening the door abroad and
privatizing the state-owned firms, which was greatly to change the course for
Brazil. In 1994 President Franco (1992-1994) created “Real” under the dollar-pegged
system, which contributed to suppress hyper-inflation dramatically. Then
President Cardoso (1995-2002) achieved a sound fiscal status through the Fiscal
Responsibility Law and the Penal Law for Fiscal Crimes. President Lula (2003-2011)
followed the same line. When the 21st century dawned, Brazil was able to
accomplish a high rate of economic growth due to the rapid growth of demand for
agricultural products from China, and has since asserted its status in the
world economy as a resource-rich country.
India ― India had long operated on a socialistic economic system and remained
stagnant. In 1991 PM Rao (1991-1996) adopted a new economic policy to meet economic
stagnation - a liberal policy which includes (i) liberalization of trade,
foreign exchange and capital, (ii) deregulation, (iii) privatization of state-owned
firms and (iv) financial system reform. This line was to be followed by the successive
PMs including PM Singh.
India has been able to attain a high rate of economic growth due to,
among others, the growth of the IT industry, which began with outsourcing business
thanks to increased orders from the US firms. In India the literacy rate
remains low, and yet has produced a vast number of young people endowed with IT
knowledge.
The Presence of the BRICs in the World
Economy －
Up until the end of the 1980s Brazil, India and Russia had
suffered serious economic stagnation or turmoil. In the early 1990s, however,
Brazil and India succeeded in attaining a high rate of economic growth through liberalization
of the market and sharp increase in demand for agricultural products in Brazil
and for IT services in India from abroad (in China, economic liberalization
started in 1978).
In
Russia, the shock therapy brought about only destruction and confusion. When
the 2000s began, however, it succeeded in attaining economic growth thanks to
the hike in the price of oil and natural gas. Putin succeeded in rectifying the
market economy system while stepping up the power of control by the sovereign
state.
Economic
destiny of the BRICs has greatly influenced by the events which occurred since
the latter half of the 1980s.
Firstly, the collapse of the Soviet bloc comes. A movement for political
and economic liberalization was initiated by Poland, followed by other East
European countries, and finally led to the demise of the Soviet Union.
Secondly the financial globalization comes. As it developed in the
1990s, the BRI[Cs came round to a policy of liberalization in general (China
already adopted it in 1978). The financial globalization was to contribute to a
high rate of economic growth of the BRICs thereafter through the influx of
capital. To sum up, they could attain high economic growth, reaping benefit
from both “Market System II” and “Financial Globalization”.
Table 1 lists an average annual GDP growth, while table 2 GDP top 10 in
terms of PPP in 2010. The BRICs are included here. Above all, China’s figures
are amazing. We could say that in terms
of national powers they have achieved an equal footing. What is certain is that China is soon going
to reach No.1.
Table 1 Annual Average Rate of Growth of GDP (%)
|
China
|
10.46
|
1991-2010
|
|
India
|
7.54
|
2001-2010
|
|
Russia
|
6.58
|
2001-2010
|
|
Brazil
|
3.61
|
2001-2010
|
|
|
******
|
|
|
US
|
2.55
|
1991-2010
|
|
Germany
|
1.47
|
1991-2010
|
|
Japan
|
0.97
|
1991-2010
|
(Original Source) http://ecodb.net/
Table 2 GDP Ranking
in Terms of PPP（2010）（unit: billion dollars)
|
1
|
US
|
110086
|
|
2
|
China
|
4658
|
|
3
|
Japan
|
4310
|
|
4
|
India
|
4060
|
|
5
|
Germany
|
2940
|
|
6
|
Russia
|
2223
|
|
7
|
UK
|
2173
|
|
8
|
Brazil
|
2172
|
|
9
|
France
|
2145
|
|
10
|
Italy
|
1774
|
(Original Source) http://ecodb.net/
(iv)
Market System Integration – Euro System (or EU)
The Euro system (or the EU) might be
described as a sort of globalization which has continued over a long period,
for it has aimed at a common market, mobility of labor and capital, and a common
currency. The movement started immediately after the Second World War, and has by
now accomplished these.
The EU and the Euro system were set up in the 1990s when present globalization
has been accelerated and the Socialistic system collapsed. The EU adopted a
policy of bringing the ex-Soviet members into the EU. In that sense, the EU or
the Euro system can be said to constitute Market System Integration, which
includes a partial Financial Globalization (in the form of the Euro) and Market
System I.
The Euro system, however, which had been
applauded with a touch of envy in the early 21st century, has been prone to great
drawbacks soon after the Lehman Shock.
The policy adopted to address the Euro crises which started in May
2010 has been bailout cum an ultra-austerity budget for the PI[I]G[S] –
Portugal, Ireland, [Italy], Greece and [Spain] - and a monetary policy by the
ECB (initially a low-rate interest policy, and then the Long Term Refinancing
Operations). The underlying
idea was that with an ultra-austerity budget and structural reform (such as
liberalization of the labor market, privatization of the public sector), the
afflicted country can enhance its international competitive power and attain
economic recovery.
The
consequence, however, was even greater crisis among the PIIGS. An ultra-austerity
budget implies an ultra-deflationary policy. Continued restructuring, increased
taxes and pension cuts brought about a sharp drop in effective demand, high
rates of unemployment, and further deterioration of the budget situation.
The afflicted members without monetary policy and exchange rate
policy at their disposal, were, furthermore, obliged to implement an ultra-austerity
budget. Consequently the economies became even worse, being trapped in a
deflationary spiral.
Moreover, the bailout is used only to stabilize the Euro system, which
could save the German and French megabanks as lenders to the PIIGS, while the populations
are required only to shoulder the heavy burden.
The Euro leadership has never addressed the fundamental causes which
should reside in “the widening intraregional disequilibrium” and “the situation
of the member states. Consequently the Euro system has been often driven close
to collapse.
The widening intra-regional disequilibrium can be typically
expressed as the economic imbalance between Germany and the PI (I) GS. The
initial ECB monetary policy allowed Germany to expand exports while the PI (I) GS
made huge investments in real estate by exploiting low rates of interest. Or,
to put it another way, surplus savings which had accrued in Germany had been
lent to the PI (I) GS – a regional version of the so-called global imbalance12.
This imbalance has continued since the birth of the Euro. However, with the
Lehman Shock as a triggering event, it brought about the Euro Crisis through the
burst of the PI (I) IGS bubbles.
What is more problematic is the survival of the EU per se, for it is
now losing its founding spirit – the Schuman spirit while nationalism is
becoming prevalent. The risk is growing of a divided Europe. The EU is ironically
losing the ability to eliminate it, notwithstanding it was set up for the very
purpose. The Euro system as well as the EU is facing a major turning point.
******
1 Collapse of
Neo-Liberalism and Resurgence of Keynes
The Lehman Shock, which broke out in
September 2008, caused the meltdown of the U.S. financial system and
abruptly drove
almost all the nations into critical conditions. Many financial institutions as
well as manufacturing firms went bankrupt, which brought
about a soaring number
of unemployed. Various governments made strenuous efforts to surmount the
crisis, injecting huge amount of money and implementing drastic fiscal
policies.
This was a state of affairs that marked a great turning point in the world economy. Neo-Liberalism and New Classical Economics collapsed
in the midst of this calamity with governments being
forced to surmount the crisis with
instinct. “The market economy should be a self-discipline
system. Success or failure should be attributable to one’s own responsibility. Government
should not interfere with the market economy” – such were the credo and motto
of the Neo-Liberals.
What happened in reality? Almost all the American mega-banks and
investment banks pleaded with the government for bailout. And yet the
management personnel got exorbitant salaries from the bailout, justifying it due
to “redemption of contract”. Here we see abandonment of the self-discipline principle
and the collapse of business ethics by the CEOs. By contrast, many people faced
foreclosure, being unable to repay their mortgage loans, with much debt being
left. The mass alone were forced to observe the self-discipline principle.
As the world economic crisis went from bad to worse, reference to Keynes
showed widespread increase. While
hardly any of the economists were able to do anything for the Great Depression
in the 1930s, Keynes deftly put forward his own economic theory and policy proposals.
Now the same phenomenon emerged in
front of the impotence of the established macroeconomics.
Noted economists declared abandonment of their belief in the
Neo-Liberalism. Many economists urged Keynesian fiscal policy. In October 2008,
the (UK) Chancellor of the Exchequer insisted on the necessity of fiscal
policy. The economic policy staff of the Obama Administration advocated fiscal
policy which became the backbone of his economic policy.
2 Thereafter - Austerity Measures
Until May 2010, the Keynesian policy line
had been predominant in the world, putting the Obama Administration at the top.
Around June 2010, however, the world was to see a great turn in the stance of
economic policy (except for China).
In the spring of
2010 the Greek crisis was abruptly extended to the Euro Crisis. Faced with this
situation, a huge bailout (110 billion euro) to Greece by the EU/IMF was
decided with conditions of austerity measures. Since then, this was to become a
persistent policy of the EU.
Reflecting this state of affairs, the G20 (Toronto, June 2010) showed
an outlook quite different from that (London, April 2009). Notwithstanding Obama
appealed to a fiscal policy against the depression, the Toronto G20 ended with
a big chorus of austerity measures.
In the US criticism of the budget line by Obama had become louder
and louder. The fiscal policies such as the Job Act (June 2009), the Hire Act
(February 2010), a big scale fiscal stimulus policy (May 2010) were foiled, due
to not only the rising movement of the “Tea Party” but also the increased
passive tendency among even the Democrats. The decision
of the Toronto G20 gave impetus to criticism, and contributed to the fatal
defeat of the President-Democratic Party in the midterm election (November 2011).
Thereafter Obama was to walk along a difficult path for implementing all sorts
of economic policies. Among others, Obama was forced to accept the Budget
Control Act (austerity measures) in the Debt Ceiling Crisis of July 2011.
Following this, the Super Committee in November came to determine annually to
cut 120 billion dollars from the defense and social securities from the end of
2012.
Thus since June 2010, the US and the EU (including the UK) have
turned into austerity measure policy, abandoning economic policy for the
depression. Because the government is implementing big spending cut, effective
demand is continuously in the decline, which are to make the fiscal situation
worse. The only economic policy adopted for meeting the depression might be the
QE policy. But the effectual effect is to bail out and then encourage the
megabanks to make room for financial investment, without substantial effect on
the real economy.
3 The SBS
Remains Intact
The Dodd-Frank Act was enacted in July
2010. However, the implementation process
was to cause a very long delay mainly due
to the Republicans’ opposition and the Banking lobby activities. It was not
until early 2014 that the principal implementation process, if not the whole, was
somehow finished.
What will this long delay
implicate? The financial institutions, having successfully bounced back from the
brink of failure due to huge bailout from the government13, have
been obstructing the setup of organizations aimed at overseeing their
speculative activities. They have also tried to weaken the Act, engaging in
lobbying activities. In consequence, the SBS has remained intact, which implicates
a probable huge financial crisis in the near future.
So far the US only has put through a financial regulatory act.
Unless the other countries including the UK and the EU could enact the same
sort of acts, the world would be left with a big loophole.
In the UK, in December 2013, the Financial Services (Banking Reform) Act was
enacted, which adopts the Ring Fence method advocated by the Vickers Report. In France the Banking Reform Act was enacted in March 2013, which adopts a
ring-fencing method. In Germany the Ring-Fencing
and Recovery and Resolution Planning of Credit Institutions Act was
enacted in May 2013, which was based on the Liikanen Report. The implementation
process in these countries is yet to come.
******
Firstly we discussed the essentials and the
issues involved of the Capitalistic System. Secondly we examined Globalization,
selecting five factors which caused it and showing four types of Globalization.
Thirdly wet explained what the Lehman Shock brought about in relation to the
Globalization and what occurred thereafter. The final conclusion runs as
follows.
Globalization has
contributed for the US and the UK to regain the economic power from Japan
especially through financial globalization.
On the one hand,
Globalization has made the world economy more and more fragile due to its
excessiveness.
On the other, Globalization
has given great opportunities for the emerging nations to attain high rate of
economic growth to such a degree that they could become members of the G20
(though Russia severely suffered from the Shock Therapy).
We cannot and need not prevent the advent of Globalization. But we
need to know what capitalism is and how it should be managed in order to
prevent excessiveness especially in the financial globalization.
Now we could say several things which are important in considering
Globalization. The economic crisis after the Lehman Shock was the consequence of
excessive financial liberalization, supported
and promoted by Neo-Liberalism and the New Classicals. It
produced the unregulated
issue of multi-layered securitized papers and induced moral hazard of the CEOs.
Ironically enough, in the midst of feverish market
fundamentalism, the world met the phenomena of market
non-existence and market opaqueness.
In what direction will the market society move? What is clear at the
moment is the collapse of Neo-Liberalism, and a movement of the market society
in a very different direction. In order to subdue the phenomena of market
non-existence and market opaqueness and the
SBS, many governments are moving to improve the financial
system in such a way that it can be controllable.
And yet, as we saw above, this movement is proceeding extremely slowly.
This slowness allowed financial institutions to behave in the same way as they
did in the pre-Lehman shock. It might bring about another financial meltdown in
the not-too-distant future.
Another
important problem concerns business ethics. In these crisis we
witnessed that
many business leaders who had been advocating the self-discipline principle
were the first to plead with the government for financial help, bearing the “too
big to fail” in mind. Amazingly enough, having got huge bailouts, they have displayed shameless
behavior in awarding themselves big bonuses. The fact that this kind of
injustice, corruption and selfishness has been prevalent in the US business community
is eloquent evidence for requiring a new business model for the market society.
If it were not created, the market society would face a more serious problem in
the not-too-distant future.
The
world is still navigating without mariner’s compass.
1) On accounting and debt contract, see Akerlof
and Shiller [2009].
2) Lately “current value accounting” has been paid
attention to. The problem raised here, however, cannot be solved with this
method.
3) The points raised below cannot be dealt with in the
framework of corporate social responsibility, for capitalism cannot eliminate
all scope for fraudulence.
4) In the 1930s when
the term “Neo-Liberalism” was first coined, it was tinged with “Ordo-Liberalism”.
It was a declaration against it that Hayek and others were determined to set up
the Mont Pelerin Society.
5) Although “The
Washington Consensus” was first coined by J. Williamson in 1989, it came to
be used with a different meaning, which is tinged with Neo-Liberalism adopted
here. This term is not used in this paper for avoiding this confusion.
6) It would be misleading
if Thatcherism and Reaganomics should be grasped exclusively from the point of
view of Neo-Liberalism, for both possessed strong nationalism as well.
7) It should be
noted that the “New Keynesianism” – another dominant school of macroeconomics –
does not belong to the Neo-Liberalism. It sees the fundamental flaw in the
market economy in some rigidities of prices, and advocates discretionary
economic policy for addressing unemployment. What makes the matter complicated,
however, is that while it shares social philosophy similar to that in the age
of the Neo-Classical Synthesis, it accepts important theoretical ideas from the
New Classicals.
8) Libertarianism
is quite often argued in relation to Neo-Liberalism. However, it might be
wise not to use it here because it has many different meanings. The most
popular is the one advocated by M. Rothbard, who allows for no place for nation
and government.
9) It should be
noted that during this period activities of government greatly increased,
betraying Neo-Liberalism (during the Reagan Administration, for example, the US
turned from the largest foreign creditor into the largest foreign debtor).
10) For further details, see Secion 2 of Chapter 2.
11) He got a job at the Citi Group during 2002-2005.
12) Eichengreen
introduces four theories for global imbalance. Firstly,
the standard analysis by Bernanke. Here great attention is paid to excessive
savings, above all, in China. Maintaining that the US current account deficits
at the present level cannot be sustained, this theory argues that substantial
adjustment of asset prices for spending and substantial change in relative
prices for balance of trade should be required in both sides. Different from
this, the following three (“New Economy” theory; “Dark Matter” theory and “Savvy
Investor” theory) argue that the correction of the present global imbalance
should not be required.
13) The FRB then helped the megabanks through
a series of QE policy, which means that they are on the
same boat. Very strong adhesion in personal terms among the FRB, the mega banks
(and the Treasury Department) are recognizable.
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