Alan Freeman

Presented to the Amandla Colloquium on wage-led growth, Johannesburg, 15-17 November 2012

With acknowledgements to

AIDC and Amandla

Radhika Desai

‘Key Trends in Globalisation’ website

The economic crisis, its effects, and what that means for strategy

in the global South

A crisis of what?

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

0%

10%

20%

30%

40%

50%

60%

Share of World GDP

North America Other IndustrialisedAccession and Transition Rest

BRICS or CIRBS?

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

0%

2%

4%

6%

8%

10%

12%

Western Hemisphere Middle EastAsia AfricaChina

0

5

10

15

20

25

International Inequality

Reversing the lost decades

35%

1970

33%

1980

20%

1990

22%

2000

35%

81%

83%

84%

84%

86%

Made in the USAA crisis of the industrialised world

US

US Growth

-10%

-5%

0%

5%

10%

15%

1930

1934

1938

1942

1946

1950

1954

1958

1962

1966

1970

1974

1978

1982

1986

1990

1994

1998

2002

2006

Average Growth over cycle

Growth on previous year

Source: US Bureau of Economic Affairs NIPA table 1.1.6 (annual): US GDP in chained 2005 USD)'growth' refers to the growth of annual GDP on the previous year)

Institutionalised overcapacity

197219751978198119841987199019931996199920022005200860

65

70

75

80

85

90

US capacity utilisation in successive business cycles

Permanent underemployment

1948195319581964196919741980198519901996200120060

0.01

0.02

0.03

0.04

0.05

0.06

Length of time out of work, as pro-portion of workforce

Less than 5 weeks 5-14 weeks15-26 weeks Longer than 26 weeks

An investment-led crisis

US profit rate, corrected for credit-money-capital

0%

2%

4%

6%

8%

10%

12%

14%

0%

5%

10%

15%

20%

25%

30%

35%1

94

6

19

49

19

52

19

55

19

58

19

61

19

64

19

67

19

70

19

73

19

76

19

79

19

82

19

85

19

88

19

91

19

94

19

97

20

00

20

03

20

06

(Unadjusted) Operating Surplus of Private Enterprises/Fixed Assets of Private Enterprises [left scale](Corrected) Operating Surplus of Private Enterprises/(Fixed Assets of Private Enterprises plus Marketable Financial Securities owned by US agencies and persons) [right scale]

‘Financialisation’Symptom not cause

Underlying cause is failure of investment Irrational expansion of credit-money-capitalResource-extractive, speculative modes of “growth”

Drive to extract solution from other nationsUnder neoliberalism, centred on ‘global south’Rising poverty, productive paralysis, parasitic classesExtreme inequities

Extreme problems of governanceNational responses fuelled by popular revolt (Argentina,

Venezuela, combined with ‘rational economic nationalism’ (China, Russia)

Focused in the first instance on control of resourcesTo a greater or lesser degree addressing social problems

The new shape of the world economy

Prolonged and intractable crisis of growth provoked by long-term failure of investment

Increasingly irrational responses domestically (austerity, refusal to contemplate state-led

investment)Increasingly predatory relations with global

southIncreasingly undemocratic governance

Growth of militarismBUT

ULTIMATELY UNDERMINING THE ECONOMIC BASIS OF DOMINANCE

The industrialised world

Leads to unsustainable inequityCreates parasitic and predatory classesIncompatible with democratic institutions

(because great majority do not benefit)Extreme vulnerability to speculative shocksPolitically and economically unsustainable

Resource prostitution

Latin America clearest exampleRetake control of resourcesKick out the IMF; development-oriented

financeEconomic regionalismSouth-South strategy

The problem of ‘reprimarisation’Constant threat of military intervention and

external destabilisationThe most successful (Venezuela, Brazil) are

those that focus on raising living standards of the poor

Resource nationalism

State-ledExport of manufactures and servicesLeapfrog technology – climb up the value chainDomestic market substitution – insulate from

falling demand in export markets‘South-South’ economic relations

Many contradictions but primary outcome is human-led economic developmentManufacturing industries made competitiveService industries lead employment growthHigh wage growth despite great inequitiesRapid educational development

Combined Development (China, Vietnam)

Use the stateTreat labour as the primary asset of the

economyControl your resourcesControl financial flows

Create a capital goods industryMove into high-value service productionFocus on building domestic and regional

demand

DO

Sell off your resources‘Liberalise’ your financial institutions

Choke off domestic demandExpect capital to invest in your country

without being made toFollow a North-oriented economic strategy

Let a parasitic class take over your government

Listen to the IMF

DON’T

Various factors played a role in the IMF’s failure to identify risks and give clear warnings. Many of these factors represent long-standing problems that had been highlighted for over a decade.

These factors are grouped into the following broad categories: analytical weaknesses, organizational impediments, internal governance problems, and political constraints.

Independent Evaluation Report (IEO) on why the IMF ‘failed to give clear warning’ of the crisis

Analytical weaknesses were at the core of some of the IMF’s most evident shortcomings in surveillance, particularly for the largest advanced economies. These weaknesses were of two broad types:

groupthink and other cognitive biases, and analytical approaches/knowledge gaps

Analytical Weaknesses

The linking of macroeconomic and financial sector analysis remained inadequate, even though a series of evaluations since the Asian crisis had called for enhanced attention to macro-financial linkages in the IMF’s surveillance

This reflected the lack of a suitable conceptual framework for analyzing such linkages within the economics profession at large, as well as the view common among IMF economists that financial issues were not central.

IMF economists tended to hold in highest regard macro models that proved inadequate for analyzing macro-financial linkages.

incentives were not well aligned to foster the candid exchange of ideas that is needed for good surveillance—many staff reported concerns about the consequences of expressing views contrary to those of supervisors, Management, and country authorities.

Staff reported that incentives were geared toward conforming with prevailing IMF views. Several senior staff members felt that expressing strong contrarian views could “ruin one’s career.” Thus, views tended to “gravitate toward the middle” and “our advice becomes procyclical.”

Staff saw that conforming assessments were not penalized, even if proven faulty. A lack of accountability was frequently highlighted as a serious obstacle to getting the incentives right. Many area department economists felt that there were strong disincentives to “speak truth to power,

Governance

Consumption and growth