This is related to Ch.1 by T. Hirai (Hirai, T. ed . [2015], Capitalism and the World Economy, Routledge).
Lectures
2 and 3
Capitalism
and Globalization
Lecture
2 How Should We Grasp Capitalism?
1.
Introduction
These two lectures
aim to address the following themes fairly broadly and theoretically, showing a
general perspective on the whole book: What is the present state of globalization? How should we
evaluate it in relation to capitalism?
If
we try to characterize the development of the world economy from the latter
half of the 1980s to the present day with a single word, there could be none
more appropriate than “globalization”,
which may be defined as the “phenomenon moving toward market economy (or
capitalism) on a global scale”.
We
may then go on to single out three
points to characterize the present state of
(i) As a principle of operating economy, capitalism
has been globally adopted, while socialism having been abandoned;
(ii) Financial globalization developed to an
extreme degree;
(iii) Several countries that 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, never before seen on the worldwide scale, though it
found a place in the Pax Britannica. (ii) is remarkable in terms of scale and
the multiplicity of financial products. (iii) is a new phenomenon that is
throwing the North-South dichotomy awry.
These two lectures run as follows.
Firstly, we look into the nature of capitalism,
for the present globalization constitutes a development of it. Here the
essential characteristics of the capitalistic system are pointed out, followed
by its problematic points. (Lec.2)
Secondly, globalization is examined. It can be approached from two sides – five factors which caused it, and
four types of globalization which occurred as a result. (Lec.3)
The five factors are:
(i) Neo-Liberalism;
(ii) financial liberalization;
(iii) liberalization of capital transactions;
(iv) the New Industrial Revolution;
(v) the collapse of socialistic systems.
The four types of globalization lie in:
(i) financial globalization;
(ii) capitalism in the ex-communist bloc;
(iii) the emerging countries;
(iv) the EU.
An important point is 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.
2.
The Capitalistic System
2.1 Essentials
We may 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 the strong
points in a capitalistic system, the last two with the weak points.
(i) Dynamics - The essential nature of a capitalistic system is embodiment
of an impulse towards growth. A capitalistic system generates increase in
production and growth through the development of division of labor, competition
and technology while it plows down the existing systems. Thus the capitalistic
system is a dynamic system which also embodies instability. Its “dynamics” operates
through “markets” and “capital”.
(Schumpeter : there
does not exist capitalism without dynamics. )
(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, the emission
trading system, etc.
(b) In the markets,
almost all the transactions are carried out by means of money. That is, in
capitalistic society barter is not an essential form of transaction.
(What about Walrasian system?)
(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 other things, keeping a lookout over all the markets on the globe, enters
those deemed most profitable, making some markets active, others inactive.
Firms and industries which cannot procure finance capital face grim prospects.
As a result, the industrial structure undergoes sweeping transformation and the
capitalistic system sees 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.
(Note on Schumpeter’s definition of entrepreneurs.)
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 enjoy dynamic development.
The capitalistic system operates through the activities of economic
agents who are free to choose their rational behaviors, bringing about
desirable results from the 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.
(Again, how about
the Walrasian system?)
In contrast with 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, seeking to boost profits.
And yet forecasting is a very difficult art because the sales of the goods
depend on the demanders.
Moreover, present-day capitalism has tended to
get involved in “self-augmentation of finance capital”, so that firms in the
real economy are forced to produce and sell goods while coping with 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 relies excessively on “rationality”. If the
capitalistic system was conceived exclusively in terms of rationality, cognitive
errors would be inevitable. One example lies in the “ambiguities”
characterizing capitalism, as distinct from uncertainties. We will illustrate
this point with 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 counterparty . 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 up 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 as it is by
credit creation, really determine a “fair” price? We need to keep an eye on the
market, with some idea of fairness in mind.
Accounting – The amount of profit a firm can 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 other things, 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 went to extremes, accounting
Debt Contract – In a capitalistic system various kinds of debt contracts are made,
using money as unit of account. In this case, debts cannot avoid the influence
of inflation/deflation, and yet people cannot help but enter 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.
2.2 Issues involved
We saw in section 2.1 that a capitalistic
system, in principle, has strong points in terms of “dynamism”, “market and
capital”, and “firms” while it has weak points in terms of “uncertainties” and “ambiguities”.
In this section we will see three issues – (i) the bubble phenomenon;
(ii) corruption and injustice; (iii) the disparity problem – as constituting
headaches for the system, which are, more or less, related to the weak points.
(i) The Bubble Phenomenon
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 last two decades has been to revert to the tenets prior
to Keynes. The New Classical macroeconomics has defended the “classical
dichotomy” and Say’s law, and yet it allowed for economic fluctuations. Worse
still, this has become the mainstream.
Strangely enough, these two decades have seen increase in 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 have been unable to 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. Employees are put in the similar position. This sort of climate
comes from human nature itself, 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 hitherto 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 system of 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 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. Today’s world has been witnessing the
money game conducted 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 speculation 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 thus be 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 virtue is not always there.
In recent years “securitized
products” have multiplied at an amazing rate, but, many have been transacted in
a disturbingly 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 an extent 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
their trust in the general equilibrium theory. However, there is one point
which is left out ― distribution of income and/or wealth.
Moreover, in economics there is a proposition to the effect that “perfect
competition brings about Pareto optimality”. We are not told 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 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 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);
In 2007 the top 1% showed three times as much as 1979. Contrastingly,
the other classes have remained stagnant.
The upper 81-99% class showed a 50 % increase, and the upper 21-80%
class a 25 % increase.
Lecture
3 How Should We Grasp Globalization?
3.
Globalization
3.1 Five Factors Which Have Caused Globalization
We have already seen
five points constituting 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 part of governments and
financial institutions aiming at promoting financial liberalization. The “New
Industrial Revolution” occurred due to the IT revolution, initiated by many
young US entrepreneurs. The “Collapse of a socialistic system” is the fall of a
rival to the capitalistic system.
(i) Neo-Liberalism
Like many
terminologies in political philosophy, historically the term neo-liberalism has
been used with different meanings4. Here we take
it as used from the 1980s on with Hayek and Friedman as representatives, and
indeed has also understood among the general public as well as the politicians5.
The main claims of neo-liberalism run as follows: Leave everything to
the market economy; Respect the free activities of individual to the maximum
degree; Governments should not interfere with the market; Governments should
not adopt discrete economic policies; Structures should be reformed in such a
way that as many regulations as possible be discarded. Neo-liberalism thus
identified has been dominant over these three decades.
There is no hiding the fact that there are great
differences among the scholars
Firstly, Neo-Liberalism enjoyed overwhelming support from Thatcher and
Reagan – among others – Hayek in the case of
Thatcher, Friedman in the case of
Reagan. As both governments aimed at
strengthening military power, they never
neo-liberalism as social philosophy
against the strong trade unions, governmental
Secondly, Neo-Liberalism enjoyed the convinced support of economists.
In the
US, through Monetarism, the New Classical School
as represented by Lucas, Kydland and Prescot became mainstream macroeconomics,
with scathing criticism of Keynesian economics. Their economic models assumed
rational expectations on the part of economic agents, 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.
Mainstream economics had previously been
represented by the “the Neo-Classical Synthesis”, which consisted of Keynesian
economics and Walrasian general equilibrium theory. In this framework,
discretionary economic policy was essential in situations of underemployment,
while general equilibrium theory was also regarded as essential for describing
the full employment. 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 alternative to Keynesian economics. Thus over these three decades
economic theory and social philosophy could be said to have gone hand in hand7
8 – an entirely new phenomenon in the history of economic thought.
Thus Neo-Liberalism has made a great
contribution to globalization over these
(ii) Financial Liberalization
Financial liberalization was initiated
by the financial institutions, aiming at abolishing regulations in order to
widen the scope for procurement of capital and investment. Above all,
extraordinary persistence was to be seen in the activities aiming at attenuation of the
Glass-Stegall Act
.
These activities led to a rapid increase in hedge funds, structured investment vehicles (SIV),
private equity funds (PEF) together with a rapid increase in securitized
commodities such as MBS (Mortgage Backed Security), CDO (Collateralized
Debt Obligation), CDS (Credit Default Security)10.
(iii) Liberalization of Capital
Transaction
An
international movement aiming at liberalization of capital transactions was
advocated by the IMF in the 1990s
– “Liberalization of Capital Account”. The central figure here was S. Fisher11.
After the Breton Woods System
collapsed in the early 1970s, the IMF’s function
The
1980s saw the debt crisis of the Latin American countries, greatly afflicted by
the Oil Shocks. Faced with these phenomena, the IMF took on the liberalization of capital account as its
major task.
However, the articles of agreement of the IMF did not include the
liberalization of capital account from the outset, so the IMF needed to work on
it. The pressure to reform
the articles of agreement peaked in 1997, when the South East Asian
financial crisis broke out and the movement ended up in failure. That said,
this movement ran together with the movement for attenuation of the
Glass-Steagall Act.
The
latter half of the 1980s saw a great increase in foreign direct investment
(FDI) by Japanese firms in China and the
South Eastern countries due to appreciation of Yen , which contributed to a high
economic growth there through
It is worth noting that the Japanese government had been
critical of the IMF
(iv) The 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, it was not long before the situation changed dramatically.
The IT revolution in the US was to attain startling growth due to the
originality of young entrepreneurs creating enterprises such as Microsoft,
Apple, Yahoo, Google while the established Japanese firms were to suffer from
competition with the newborn US firms.
While until the 1980s the Japanese firms had lead
the world economy in terms of
(v) Collapse
of Socialistic System － Why Did the Soviet Union Collapse?
Sharp Drop in Petroleum Price
and the Defeat of the Afghan War – The 1970s
Thus, the Soviet which
largely depended on oil revenue, suffered a severe drop in fiscal revenue. To make matters
worse, it had undertaken huge military expenditure for the Afghan War (1979-1989), and
was finally forced to pull out.
The Rise of
Gorbachev –
It was then Gorbachev's turn to come to the
front (Secretary in 1985). It was in the sphere of politics rather than the
economy that he promoted a great reform. He went on approving political freedom
never seen before with the
idea of “Europe as a Common House” -including approval of the democratic
movement in Eastern Europe, which finally led to the unification of Germany.
In 1990 Gorbachev
introduced the presidential system as well as a pluralistic political party
system, becoming the first president himself.
These political trends, however,
eventually weakened his power of leadership. A coup took place in August in
1991. Yeltsin, who was given credit for the suppression, grabbed political
power. He came to conclude
the Belavezah Accords with the leaders of Belarus and Ukraine, proclaiming the
collapse of the Soviet Union. It was quite natural for capitalism to enter the vacuum thus created.
3.2 Four Types of Globalization
Globalization can be broadly classified
in terms of “financial globalization” and “market system globalization”.
Financial globalization is caused by financial liberalization and liberalization of capital
transactions in which financial business can conduct operations without any
oversight from any government in the world. Financial business has procured
huge amounts of capital through various methods and entered various financial
markets, thus achieving 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 adopted throughout the world constitutes market system
globalization.
Speaking of the relation between the two globalizations, the salient tendency has been
for the progress of the financial globalization to promote 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 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 [Shadow
Banking System), 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.
This transformation was greatly related
to the economic development of the Japanese and West German economies.
This tendency has led, among other things, to continual trade friction between the US and Japan.
Two
oil shocks in the 1970s caused an exorbitant rise in the price of oil, 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 switching from the
Keynes-Beveridge approach to that of Hayek-Friedman.
With these developments, “financial globalization” strategy was adopted by the two
politicians as the way of claiming back their position in the world economy.
The US and the UK governments made efforts to create greater scope for
operations through financial institutions. In the first half of the 1980s,
however, no particularly conspicuous effect had been achieved 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, in
turn provoking 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, US business
activities have also picked up thanks to the IT revolution.
By contrast, Japan - the only winner in the world economy up until the early 1990s -
failed to adapt to the Plaza Accord well, failed to deal with the bubble
economy, and was plunged into the “Lost Two Decades” of 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 fell short of GDP growth.
Although it remains unclear how far the US and the UK governments and
their financial industries had foreseen this development, financial globalization was to
define the line along which the world economy would be running.
(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 came 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, with the two antagonistic economic systems struggling for mastery. In
the socialistic system, markets, firms and the price mechanism were almost
non-existent. Goods and services were bought and sold, but the prices were not
determined in the markets. Production activities were programmed by the central planning bureau,
while the lower organizations carried out production following the planning.
Thus in this system there was no room for entrepreneurs to pursue whatever
activities they liked.
The Cold War regime came to an end due to the abrupt collapse of the
Soviet bloc in 1991. Was the socialist system doomed to collapse by its very nature?
It is easy to judge so with hindsight. However, until just before the collapse,
no one could have foreseen
such an abrupt and total end. For better or worse, most of us have short
memories. While the world capitalist system had almost collapsed in the 1930s,
it was the Soviet Union that was enjoying economic growth. Moreover, in economic
performance it did not lag behind the US in the 1960s.
Transitional Process toward Capitalistic
System
Here we will see how the former Soviet Union
system turned into a capitalistic system (China, which is an exception,
gradually adopted capitalistic elements under the sway of the Communist Party).
Let us see the steps Russia and China took towards 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 (Commonwealth of Independent States) and abolition of
the Soviet Union. Russia was the largest nation in the CIS.
Yeltsin aimed at making Russia a capitalistic
society, adopting the so-called “Shock Therapy” recommended by the IMF. His presidency
(1991-1999) had two distinct periods.
The first half saw rapid transformation into
a capitalistic society through shock therapy, led by Gaidal and Chubais with Sachs and Schleifer (L.
Summers was his protégé) as advisors. Their methods were price
liberalization, privatization of state-owned companies through the “voucher method”, and
establishment of the stock market. Their performance proved miserable. In 1992
the Russian economy suffered hyper-inflation
at 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 was to 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, dropped
sharply due to the miserable economic performance. 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
national debt default. This was a result of sharp drop in revenues, capital
flight and so forth. Officials and the military had been left unpaid, while confidence
in the ruble plummeted and the
barter system became prevalent. The default caused a collapse of hedge
funds such as the LTCM
(Long Term Capital Management), which came close to plunging the world economy
into serious financial crisis.
In 1999 Yeltsin resigned from the
presidency, appointing Putin
as acting president; he was elected President in 2000. Around this period the
Russian economy began to show miraculous recovery due to the hike in oil
prices.
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 as to strengthen
state control, and expelled the Oligarchs who did not bow to his power.
While the Lehman shock also hit Russia, the influence of the sovereign state
over firms became all the stronger.
Thus the way adopted
to transform 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 forming a middle class due to the high
economic growth, while wealth 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 the death of some billions of
people 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 soon kindled
internal strife among the leaders as the economy plunged into a miserable state.
After complicated and perverse struggles, the revolution 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 its miserable situation due to an increase in
agricultural output through
the introduction of land privatization in rural areas, 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 saw 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
accomplished mainly by private firms.
In 1992 he delivered
his “South Tour Speeches”, insisting on speeding up reform policy against the
conservative group. This contributed to bringing the Chinese economy back along capitalistic tracks amidst
political and economic confusion subsequent 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 (Chinese
Communist Party) 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 areas to attract foreign firms to newly developed zones, which was
to spark off economic development there.
In December 2001
China entered the WTO, which has treatment of foreign capital equal to domestic
capital, liberalization of tariffs, and a considerable degree of liberalization
of labor mobility as necessary requirements.
(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 area 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 rapidly looming larger 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 economy and geopolitics
has dramatically changed.
We will outline the cases of Brazil and India before going on to
consider the role 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 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: all
this would greatly change the course for Brazil. In 1994 President Franco
(1992-1994) created the “Real” under the dollar-pegged system, which helped
bring down hyper-inflation dramatically. Then President Cardoso (1995-2002) achieved
sound fiscal status through the Fiscal Responsibility Law and the Fiscal Crimes
Law. 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 other things, the growth of the IT industry, which began
with outsourcing business thanks to increased orders from US firms. In India the
literacy rate remains low, and yet the country 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. At the
dawn of the 2000s, 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.
The economic
destiny of the BRICs has been greatly influenced by the events which occurred
since the latter half of the 1980s.
Firstly, the collapse of the
Soviet bloc: a movement for political and economic liberalization was
initiated by Poland, followed by other East European countries, finally leading
to the demise of the Soviet Union.
Secondly, financial
globalization. As it developed in the 1990s, the
BRI[ Cs came round to a policy of liberalization in general (China had already
adopted it in 1978). The financial globalization was to contribute to a high
rate of economic growth for the BRICs thereafter through the influx of capital.
To sum up, they were able
to attain high economic growth, reaping benefit from both “Market System II”
and “Financial Globalization”.12
Table
1 lists average annual GDP growth, table 2 GDP the top 10 in terms of PPP (purchasing
power parity) in 2010. The BRICs are included here. Above all, China’s figures
are amazing. We could say that in terms of national powers the BRICs have achieved
an equal footing. What is certain is that China is soon going to be 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
objectives.
The EU and the Euro system were set up in the 1990s when the current globalization
saw acceleration and the Socialistic system collapsed. The EU adopted a policy
of bringing the ex-Soviet members into the EU.
In this respect, 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, became 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
ECB monetary policy (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 achieve economic recovery.
The consequence, however, was even
greater crisis within the PI[ I] G[ S]. 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, with no monetary
policy or exchange rate policy to fall back on, were again obliged to implement
an ultra-austerity budget. Consequently the economies saw
further deterioration, trapped in a deflationary spiral.
Moreover, the bailout is used only to stabilize the Euro system, thereby saving
the German and French megabanks as lenders to the PIIGS, while the populations
are called upon 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 often been 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 imbalance13.
This imbalance has continued since the birth of the Euro. However, with the
Lehman Shock as triggering event, it brought about the Euro Crisis as the PI (I) IGS bubbles burst.
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 override nationalism, although it was set up for
the very purpose. The EU
as well as the Euro system is facing a major turning point.
4.
The Lehman Shock and the Present
4.1 Collapse of Neo-Liberalism and Resurgence of
Keynes
The Lehman Shock, which struck 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 set the number of unemployed
soaring. Various governments made strenuous efforts to surmount the crisis, injecting huge amounts 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. The 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 as 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 masses alone were forced to observe the self-discipline
principle.
As the world economic crisis went from bad to worse, reference to Keynes became ever more widespread.
While hardly any of the economists were able to do anything about the Great
Depression in the 1930s, Keynes deftly put forward his own economic theory and
policy proposals. Now the same phenomenon emerged in the face of the impotence
of the established macroeconomics.
Noted economists declared abandonment of their belief in the
Neo-Liberalism. Many economists urged Keynesian fiscal policies. In October
2008, the (UK) Chancellor of the Exchequer insisted on the need for fiscal
policy. The economic policy staff of the Obama Administration advocated fiscal policy which became the
backbone of his economic policy.
4.2 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 economic
policy stance (except for China).
In the spring of 2010 the Greek
crisis abruptly extended to Euro Crisis. Faced with this situation, a huge
bailout (110 billion euro) to Greece by the EU/IMF was decided on condition
that austerity measures were implemented. Thereafter the EU went on persisting
with this policy.
Reflecting this state of affairs, the Toronto G20 (June 2010) showed an outlook quite
different from the London G20 (April 2009). Although Obama advocated a fiscal
policy to tackle the depression, the Toronto G20 ended with a grand chorus
invoking austerity measures.
In
the US criticism of Obama's budget line 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 not only to the
rising “Tea Party” movement but also the increasingly passive tendency even
among 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 had a difficult path to follow to implement all
sorts of economic policies. Among other things, 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 determined to cut 120
billion dollars from defense and social security annually as from the end of
2012.
4.3 The SBS Remains Intact
The
Dodd-Frank Act was enacted in July 2010. However, the
implementation process took a very long time due mainly to the Republicans’
opposition and the banking lobby activities. It was not until early 2014 that most,
but not all, of the implementation process 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 government14,
have been obstructing
the establishment of organizations set up to oversee their speculative
activities. They have also tried to weaken the Act with their lobbying
activities. In consequence, the SBS has remained intact, which probably implies a huge
financial crisis in the near future.
So far only the US has put through a financial regulatory act. Unless
the other countries including the UK and the EU bring in similar acts, the
world will be left with a huge loophole.
In the UK,
in December 2013, the Financial Services (Banking Reform) Act was enacted,
adopting the ring fence method
advocated by the Vickers Report. In France the Banking Reform Act
was enacted in March 2013, again with a ring-fencing method. In Germany the Ring-Fencing
and Recovery and Resolution Planning of Credit Institutions Act was enacted in
May 2013, based on the Liikanen Report.
The implementation process
in these countries is yet to come underway.
5.
Conclusion
We began by discussing the essentials and
issues involved in the Capitalistic System. Secondly, we examined
Globalization, selecting five factors which caused it and illustrating four
types of Globalization. Thirdly, we explained what the Lehman Shock brought
about in relation to globalization and what occurred thereafter. The final
conclusion runs as follows.
Globalization has helped the US and the UK regain the
economic power from Japan, especially through financial globalization.
Globalization has offered great opportunities for the
emerging nations to attain high rates of economic growth, to the extent that
they have qualified as members of the G20 (though Russia suffered from the
Shock Therapy severely).
Globalization, however, has made the world economy
increasingly fragile due to its excesses.
We
cannot and need not prevent the advance of Globalization. But we need to know
what capitalism is and how it should be managed in order to prevent excesses, especially
in financial globalization.
Now there are several
important points to make about Globalization. The economic crisis
subsequent to the Lehman Shock was the consequence of excessive financial
liberalization, supported and promoted by Neo-Liberals and the New Classicals.
This produced the unregulated problem of multi-layered securitized papers and induced
moral hazard on the part of the CEOs. Ironically enough, in the midst of
feverish market fundamentalism, the world also witnessed the phenomena of
market non-existence and market opaqueness.
What direction will market society be moving in? What is clear at the
moment is the collapse of Neo-Liberalism, and movement of market society in a
very different direction. To
tackle the phenomena of market non-existence and market opaqueness and the SBS,
many governments are taking steps to improve the financial system so as to
render it controllable.
And yet, as we saw above, this movement is proceeding extremely slowly, and the
slowness has allowed the financial institutions to behave just as they did before
the Lehman shock. This could bring about another financial meltdown in the
not-too-distant future.
Another
important problem concerns business
ethics. In these crises we saw 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” (TBTF) principle in mind. Amazingly
enough, having got huge bailouts , they have displayed shameless behavior in
awarding themselves handsome bonuses. The fact that this kind of injustice, corruption and selfishness
has been prevalent in the US business community is eloquent evidence of the
need for a new business model for the market society. If it were not created,
the market society would face an even more serious problem in the
not-too-distant future.
The world is still navigating without a mariner’s compass.
1) On accounting and debt contract, see Akerlof
and Shiller [2009].
2) Lately “current value accounting” has received attention. 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 (CSR), for capitalism cannot eliminate all the
scope for fraudulence.
4) In the 1930s when the term “Neo-Liberalism”
was first coined, it was tinged with “Ordo-Liberalism”. It was against it that
Hayek and others were determined to set up the Mont Pelerin Society.
5) Although the term “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 as adopted here. The
term is not used in this paper for avoiding this confusion.
6) It would be misleading if Thatcherism
and Reaganomics were to be interpreted exclusively from the point of view of
Neo-Liberalism, for both were characterized by strong nationalism as well.
7) It
should be noted that the “New Keynesianism” – another dominant school of
macroeconomics – does not belong to Neo-Liberalism. It sees the fundamental
flaw in the market economy in some rigidities of prices, and advocates discretionary
economic policy in addressing unemployment. What makes the matter complicated,
however, is that while it shares a 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
9) It
should be noted that during this period government activities 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 Section 2 of Chapter 2.
11)
He got a job at the Citi Group during 2002-2005.
12) As
a result of this, a great geopolitical shift has taken place in recent years
which nobody had imagined in the early 1990s – from the US predominance system
to the tripolar system (the US, Russia and China). The Ukraine crisis is
emblematic of this shift. Incidentally, Rodrik [2007] sees globalization in
terms of political economy – trilemma .
13) 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 on both sides. Unlike this, the following three (“New
Economy” theory; “Dark Matter” theory and “Savvy Investor” theory) argue that
correction of the present global imbalance should not be required.
14) The FRB then helped the megabanks through a series of QE policies,
which means that they are in the same boat. Very strong connections in personal
terms between the FRB, the mega banks (and the Department of Treasury) are to
be seen.
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