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Steering Out of the Crisis

The global financial and economic crisis is of such magnitude that 2008 will probably be looked back upon as a turning point equivalent to 1945, 1971 and 1989. The silver lining is that the crisis has discredited many established ideas about how societies should run their economies, and the impact of this discrediting will last well beyond the recovery. The crisis provides opportunities for advancing a social democratic vision of a moral society, with more of a balance between economic democracy and political democracy, especially in finance; one in which states regain confidence to surveil markets, as in the Keynesian era. A three-stage programme to steer out of the crisis towards something better and very different from what has been followed under neoliberalism is set out. The first deals with the immediate crisis. The second with the restructuring of finance. The third - to which virtually no attention has yet been given - deals with respecialising western economies. Getting far with most of the items would require a step-up in multilateral cooperation.


Steering Out of the Crisis

Robert Wade

The global financial and economic crisis is of such magnitude that 2008 will probably be looked back upon as a turning point equivalent to 1945, 1971 and 1989. The silver lining is that the crisis has discredited many established ideas about how societies should run their economies, and the impact of this discrediting will last well beyond the recovery. The crisis provides opportunities for advancing a social democratic vision of a moral society, with more of a balance between economic democracy and political democracy, especially in finance; one in which states regain confidence to surveil markets, as in the Keynesian era. A three-stage programme to steer out of the crisis towards something better and very different from what has been followed under neoliberalism is set out. The first deals with the immediate crisis. The second with the restructuring of finance. The third – to which virtually no attention has yet been given – deals with respecialising western economies. Getting far with most of the items would require a step-up in multilateral cooperation.

The present paper elaborates on arguments made in “Financial Regime Change?”, New Left Review, September-October 2008, “A New Financial Regime?”, New Left Review, July-August 2007, “The First-World Debt Crisis of 2007-2010 in Global Perspective”, Challenge, July-August 2008, 23-54, “Iceland as Icarus”, Challenge, May-June 2009. Let me take this opportunity to offer a toast to EPW, which remains unique in the English-speaking world for its combination of current affairs and social science analysis directed at a large, intelligent readership. I owe it a particular debt, because it is where my first publications appeared in the mid-1970s.

Robert Wade ( is at the London School of Economics, and winner of the Leontief Prize for Advancing the Frontiers of Economics, 2008.

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here are still optimists who reject doom-laden comparisons with the Great Depression, on grounds that modern capitalism has built-in stabilisers which barely existed in the 1930s. The public sector is much bigger relative to the gross domestic product (GDP), and the idea that the state should expand its spending when the balance sheets of firms and households are bust is not a contested novelty. The fiscal stimulus packages mounted by governments across the world of the O rganisation for Economic Cooperation and Development (OECD) are of unprecedented size.

But when forecasts made one week are routinely torn up the next, it looks as though optimism can only rest on complacency or ignorance. Paul Krugman (2009a), who won the Nobel Prize in economics in 2008, said in early January 2009, “This looks an awful lot like the beginning of a second Great Depression”. He went on to say that

recent economic numbers have been terrifying, not just in the United States but around the world. Manufacturing, in particular, is plunging everywhere. Banks aren’t lending; businesses and consumers aren’t spending.

Whether recession or depression, the present crisis is a crisis of the capitalist system, not just a crisis in the system like the east Asian crisis a decade ago or the Japanese crisis before that, and it is the first crisis of the system since the 1930s. It is global in scope, so there are no fast growing regions of the world which can p rovide support for the resumption of growth in the crisisaffected regions.

At the same time, it is not a single phenomenon with a single cause. In the Anglo-American heartland it began and remained until September 2008 primarily a financial crisis, though with “real economy” causes (notably a structural deficit in the production of tradable goods and services) and real economy effects. In Japan, Germany, and much of the periphery it began later, primarily as an export crisis in response to slowdown in the Anglo-American heartland, reflecting a structural surplus capacity to produce tradable goods and services; but the export crisis then fed through to financial and wider growth problems.

In the heartland, the giant stimulus packages are not working because the financial system is broken; and the financial system remains broken because the stimulus packages are not working, making a vicious circle. Built-in stabilisers like bankruptcy protection and instruments of monetary policy are also hardly working, leaving governments powerless to steer their economies and vulnerable to shocks coming out of nowhere. As the Financial Times columnist Wolfgang Munchau says, “Virtually every policy response to the crisis, on both sides of the Atlantic, seems to be falling short” (Munchau 2009).

The United States (US) government has been applying the Colin Powell doctrine of “shock and awe” to the economy, throwing every conventional and unconventional policy it can think of at the problem; yet the numbers from the US economy keep getting worse. GDP contracted in the final quarter of 2008 at an annualised rate of over 6%. Industrial production in January 2009 was 10% lower than in January 2008. Consumer confidence as measured by the Conference Board is at its lowest since the series started in 1967. More than 3 million houses were foreclosed in 2008, meaning that about 10 million people shifted into rented accommodation, vans or shelters.

The numbers from Japan, the world’s second biggest economy, are even worse. Toyota has cut car production by half, Sony has put most of its labour force on part-time work and is probably to close at least four factories overseas. Exports, which account for almost half of Japan’s manufacturing output, were more than a third lower in value in December 2008 than in the previous D ecember. Export orders for core machinery fell by 46% between September and November 2008, and domestic orders by 20%. GDP fell in the last quarter of 2008 at an annualised rate of 13%.

Germany’s GDP fell by an annualised rate of 8% in the last quarter of 2008, and the unemployment rate for February 2009 is 7.9% and climbing. Yet the German government is dragging its heels on a serious stimulus package and even on cooperating with other European states, its beggar-my-neighbour attitude summed up by economics minister Michael Glos, who said at the end of November, “We can only hope that the measures taken by other countries…will help our export economy”. Across the e urozone, the purchasing managers’ index is at record lows.

Outside the high-income core of the world economy the numbers also keep getting worse. Most Asian economies, which had become dependent on exports of manufactured goods to the west, are experiencing big falls in output and increases in unemployment. South Korea’s GDP collapsed in the last quarter of 2008 at the annualised rate of 21%, and its industrial production is falling at the fastest rate since electronic record keeping began in 1975. Taiwan’s exports in December 2008 were 40% down on the same month last year. Indonesia, the fourth most populous country in the world, is experiencing surging unemployment at the same time as tens of thousands of migrant Indonesian workers are coming home after being laid off in neighbouring countries like Malaysia and Singapore (Bradsher 2009).

China is the only major economy likely to show significant growth in 2009, for reasons related to the fact that it breaks every second rule in western economic textbooks about how to do development – including the government using its majority control of the banks to keep them lending. But electricity production fell by more than 6% in 2008, having grown at 15% on average for the past five years; which suggests that China may have been growing much more slowly than the published figure of around 9%. Even 5% growth is not enough to stop unemployment from rising rapidly, and the middle class social compact of “political exclusion in return for rising prosperity” will be breached. In the rest of the world, crisis-ridden companies hoping that Chinese cash-rich buyers will come to their rescue are likely to be d isappointed, because most of China’s overseas acquisitions made earlier in the 2000s have turned sour, having been made at the peak of the market.

Two indicators sum up the global magnitude of the shock. First, stock markets in the last nine months of 2008 lost a “value” equivalent to 3,000 euros for every man, woman and child on the planet. Western European stock markets lost about 5,000 euros for every European. Second, world trade in the four months from November 2008 to February 2009 fell at a faster rate than at any time during the Great Depression.

Another Tipping Point?

The world economy will probably hit another tipping point – similar to the one in September 2008, with the collapse of Lehman Brothers – in the summer-autumn of 2009. The tipping point will be caused by rising general awareness throughout Europe, America, Asia and South America that hundreds of millions of people are experiencing rapidly falling consumption; that the crisis is getting worse, not better; and that it has escaped the control of public authorities. More big banks and non-financial companies are likely to fail, raising the level of fear in the economy and prompting banks to contract credit still more. More Icelands may be coming in east and central Europe, from the Baltics down to the Balkans and Turkey. Small countries with their own currency and loads of foreign debt are especially vulnerable, as investors/ speculators flee into the relative safety of the well-resourced c entral currencies.

One of the most dramatic portents of more trouble ahead is the bankrupt California state government’s resort to paying employees with its own IOUs, because it has no more dollars. This is part of the inner erosion of the US dollar, now heavily dependent on the goodwill of the Chinese government. Last year the Chinese government lent the US more than $400 bn, equal to more than 10% of China’s GDP. Opposition is growing within China to its continued bankrolling of the fabulously rich US (Dyer 2009). Since a dollar crash would be the metaphorical equivalent of a hydrogen bomb exploding in the existing world economic order, it is “lucky” for the rest of the world that China is an authoritarian state which can overrule popular opposition.

Global recovery will take several years. In the five worst postwar financial crises in the OECD world house prices fell on average by 35% over six years, equity prices by 55% over three and a half years, and output by 9% over four years (Reinhart and Rogoff 2008). Moreover, recovery from the east Asian crisis has been L shaped rather than V shaped: none of the crisis-affected countries had by 2006 regained the per capita income level they would have had if growth had continued at the pre-crisis rate, and only South Korea had come close to doing so (Beja 2007). The five worst previous crises and the east Asian crisis were confined to one country or region, while the current one has penetrated to every nook and cranny in the world at once.

It is sobering to see the numbers for US unemployment, p rivate investment and public spending between 1929 and 1950 (Table 1, p 41). They show how during the 1930s private investment collapsed, unemployment rose sharply, and public spending rose by about 5% of GDP (the size of the Obama stimulus). But the New Deal stimulus brought only a modest reduction of

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Table 1: US Unemployment, Private Investment and Public Spending (1929-50)
1929 1933 1940 1943 1950
Unemployment (%) 4 25 15 2 5
Private investment (% GDP) 16 2 13 3 18
Public expenditure (% GDP) 10 15 15 48 17

Source: Alan Freeman, “Investing in Civilisation: An Enquiry into the Role of the State in Crisis” in W Antony and J Guard (ed.), Bankruptcies and Bailouts (Winnipeg: Fernwood Press), 2009.

u nemployment. The big fall in unemployment happened only a fter 1940, due to the steep increase in public spending in 1940-43 as a result of the second world war.

The Opportunity and Its Enemies

The crisis is of such magnitude that 2008 will probably be looked back on as a turning point equivalent to 1945, 1971 and 1989. The silver lining is that the crisis has discredited many established ideas about how societies should run their economies, and the impact of this discrediting will last well beyond the recovery. These established ideas – known as the neoliberal or free market ideology, which has dominated western economic thinking for the past 30 years to the point where it could be described as “the deep slumber of a decided opinion”, in John Stuart Mills’ phrase

– centre on the idea that the state in capitalist society should provide a range of public goods (national defence, infrastructure, basic education, and other goods and services not providable by private profit-seeking); but wherever “the market” works the state should stay out and let “economic democracy” prevail – let resources be allocated in accordance with the “votes” of consumers (however unequally distributed), with the state’s role limited to ensuring competition or pretending to ensure competition (as in oligopolistic Wall Street and the City). Or more exactly, the core idea is that markets should surveil the state, and the state should be made to work through markets or surrogate markets as much as possible (hence “new public management”).

The crisis provides opportunities for advancing a social democratic vision of a moral society, with more of a balance between economic democracy and political democracy, especially in finance; one in which states regain confidence to surveil markets, as in the Keynesian era (Lakoff 2002, Vestergaard 2009, Shonfield 1969, Dore 2000).

Equally, the crisis has undercut the US justification for world leadership, after six decades: leadership in banking, business, academic economics, in global economic governance, and in geopolitics. This too provides opportunities for the emergence of a more multipolar world where American views are not automatically privileged. But will other states – such as India, China and Brazil – challenge such crystallisations of US primacy as its veto in the I nternational Monetary Fund (IMF) and the World Bank, and its choosing the states to join it at the high table of global governance? (The states invited to make up the G-20 were chosen in 1999 a transatlantic telephone call between Timothy Geithner at the US Treasury and Ciao Koch-Weser at the German Finance Ministry.)

The crisis provides opportunities. But we can expect intense resistance to anything more than emergency deviations from the established neoliberal order. From the perspective of elites in top countries it is difficult to exaggerate the achievements of this order. First, the global rules of free trade, free capital mobility,

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“most favoured nation” and “national treatment” have boosted the economic power of the top countries’ big industrial and financial groups by giving them easier access to new resources, markets, and sources of profit. By the same token, the rules have cut developing countries’ negotiating power with big international firms, weakening spin-off effects on local production and making the economy more dependent on external resources – all to the good in terms of protecting the position of the top countries and their big firms (Wade 2003). Meanwhile the top countries excuse their agricultural, steel, armaments and other hi-tech sectors from the rules of free trade. Moreover, the same rules have allowed the US, riding on the world’s main international currency, to draw capital “uphill”, including from developing countries, to the extent that in 2006 it imported more than it exported by an amount equal to India’s GDP, a country with four times its population. The rule of free capital mobility makes for the most “efficient” use of the world’s savings, says the neoliberal credo, and the most efficient use is apparently to support US consumption.

Second, the neoliberal order has delivered a rapidly rising share of national income into the hands of the top few percentiles of the population of the US and other leading capitalist states while the rest of the population experienced stagnant incomes, all within a democratic rather than authoritarian political regime. The share of the top 1% of households in US disposable income (based on tax return data) went from a high of about 23% in 1929, steadily down to about 9% in the early 1970s, and then after the late 1970s it rose like a rocket to reach 23% by 2006.1 On the other hand, average income of the bottom 90% was almost stagnant after 1980 – though consumption kept rising thanks to the build-up of private debt. In Britain the ratio of Chief Executive Officer (CEO) salary to average salary in the Footsie 100 shot up from 17:1 to 75:1 between 1989 and 2007, without any apparent i ncrease in the value added by CEOs.

Neoliberalism provided the policy models and the ideological justification for this massive upward redistribution and rendered it acceptable to the electorate – or not so much as acceptable as invisible, off the radar screen of electoral politics. This is political artifice of the highest order, and it is not surprising that the pioneers – the UK, the US, Chile and New Zealand – have been widely copied by elites elsewhere.

During the 1960s the continuing – even accelerating – squeeze in the share of top incomes fuelled rising anger on the Right (a squeeze made all the worse by the rise of 1960s counterculture and other threats to the moral society); and anger on the Right and desire for revenge against the New Deal drove the neoliberal revolution of the 1970s and 1980s. Today the Right, led by households in the top few percentiles of income distribution, will fight tooth and claw to restore neoliberal policies and ideology and the vastly disproportionate share of national income accruing to the top. It will make largely token concessions (tighter regulation of banks, more “standards of best practice”) and will declare a compassionate concern to “reduce poverty” and “mitigate global warming” (but not reduce inequality and not eliminate the many devices by which states redistribute opportunity and income u pwards) (Baker 2006). Finance will lead the attempted restoration, for the financial sector has been the chief sectoral beneficiary.

Deutsche Bank was only being more explicit than most when it advertised that it “needed” a 25% rate of return annually – from economies growing in single digits (Prospect 2007, Pettis 2001).

Those who think there is something wrong, economically and morally, with a society in which the top 1% accrue more than 20% of income (and much more of wealth) have an obligation to lay out a strategy for handling the crisis and steering towards a less divisive new economic order. Of course, from the perspective of some Marxian analysis it is quaint to talk about policy choices, as though the outcomes could be shaped by ideas and coalitional politics. Capitalism has an underlying tendency to overaccumulation, manifested in switches of capital from one circuit to another

– from urban infrastructure to credit markets, for example, and from one territory to another; which merely postpone and g eneralise the contradictions; which erupt from time to time in what are called financial crises (Harvey 2006). There is nothing much to be done but let the dynamics unfold. To my mind this argument reifies the analytical model just as much as neoliberals reify the model of virtuous markets and stupid governments. In the real world, the variations in types of capitalism do matter; for example, with different political economy arrangements in the US and UK the imbalances and bubbles behind the current crisis could have been restrained. The question is how to steer out of this c risis towards something better than what we in the west have had.

A Three Stage Programme

Political leaders have certainly shown daring in policy responses so far. Alan Greenspan, the Ayn Rand-following former governor of the US central bank, has even called for the banks to be taken into public ownership. But the responses are of a finger-in-thedam kind, without much strategic thinking. Multilateral cooperation has also been feeble, and the US government, in particular, shows every sign of sticking to its long-established tendency to act unilaterally on matters it defines as either “national security” or “economic security” (now one and the same in the current c risis), and cooperate only insofar as others agree with it; the a ttitude known as “my way or the highway”.

What follows is an outline strategy mainly for western governments. The first step deals with the immediate crisis. The second deals with the restructuring of finance. The third – to which virtually no attention has yet been given – deals with respecialising western economies. Getting far with most of the items would require a step-up in multilateral cooperation – but that is not the focus of the current discussion.

1 Sort Out the Financial Mess

The immediate task is to stem the downturn and rein in powerful forces of social fragmentation within and between states. Governments must use the next several months to equip themselves to cope with a surge of unemployment, a collapse of capitalfunded pension funds, more bank failures, low or negative economic growth, and fierce anger directed at them by their citizens, which may take the form of civil violence.

(i) Spending: The crisis in the US and the UK has moved from a liquidity crisis (“credit crunch”) to a solvency crisis where the

42 a ssets of many banks, firms and households are worth less than their debts. The present thrust to make the banks lend more is dangerous in a solvency crisis, because it amounts to trying to solve the problem of debt with more debt. The primary response has to be more spending. In the immediate term, even the b igspending, already highly-indebted countries like the US and the UK have to artificially boost aggregate demand; and since the balance sheets of firms and households are broken, this means more public spending, resulting in even more public borrowing and even more financial fragility. One immediate step would be to issue vouchers to people to spend on certain kinds of goods where whole supply chains are in danger of collapsing from lack of demand. But most of the action should be on the side of i nvestment. Shovel-ready public works are as effective in s timulating demand as raising unemployment benefits, and the distributional effects are not too dissimilar. Governments should use the opportunity of the crisis to begin a generation-long t echnological overhaul in energy, transport, education, and health (see Section 3 below).

To stimulate private investment, one promising instrument is tax breaks for capitalists willing to risk their equity. The state should allow 100% depreciation allowances on investments – perhaps in selected sectors – at least for the next few years; and at the same time raise taxes on short-term capital gains. Better i ncrease spending by this route than by tax cuts on income or consumption.

Beyond the immediate future, the world cannot be rescued by the big spending countries spending even more. Rescue will come by the big saving countries like China, Japan and Germany spending more on the domestic market and accommodating higher exports from the big deficit countries, notably the US. But no amount of dollar devaluation is going to increase US exports by the needed 40%, so the US has to cut imports in order to reduce its external deficit. At the moment, however, further cuts in US imports will only exacerbate other people’s problems, and the sustained reduction of global trade balances will have to wait until world demand recovers.

  • (ii) Employment: As pressure on employers to cut costs rises, governments should aim to minimise the number of people obtaining unemployment benefit, for that way risks creating a lost generation of mainly young people with little work experience for when recovery begins. Promising measures include:
  • (a) Subsidise employers to offer apprenticeships to school leavers (rather than giving the subsidy to private training providers);
  • (b) Subsidise employers to place employees on short time working instead of firing them, by paying employees their missing days;
  • (c) Provide public work programmes, doing real work for the m inimum wage, from social work to construction (Toynbee 2008a).
  • (iii) Pensions: Capital-funded pensions schemes – which became particularly important in the US, Canada, UK, Japan, Netherlands, Denmark and Ireland – are collapsing everywhere as stock markets fall. Governments should intervene to slow down their collapse, such as by guaranteeing a minimum rate of return and imposing a cap on maximum rate of return. But there is an

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    i nevitable three-way trade-off: pensioners’ protection has to be paid for by current taxpayers (if the protection comes from c urrent revenues) or from future taxpayers (if the government borrows to protect them). Clearly, pensioners have to bear a share of the pain.

    In the medium to longer term, it is necessary to reverse the direction of pension “reform”. There has been a long-standing attempt to kill state and company pay-as-you-go pensions financed by current taxpayer contributions and replace them with funded pensions largely invested in equity (Orenstein 2005). This trend towards funded pensions constituted a major source of the flood of capital which has been leveraged into the giant bubble.

    If funded pensions remain, they should be required to take the form of “life cycle profile” funds, where a young member pays into equities and an older member within 10 years of retirement pays into bonds and locks in the earlier equity gains. They should also be required to take out insurance to the point where the insurance is sufficient to pay out, say, 80% of expected value if they go bust. Of course, compulsory retirement at age 65 should also be removed, on grounds of justice as well as pension fund sustainability.

    (iv) House Foreclosures: As the number of foreclosures soars it is critical that ways be found to break the link between falling house prices and foreclosures, and cut the number of people forced to leave their homes. Allowing courts to modify mortgage contracts is one direction to move in.

    However, there is a real danger in the prevailing consensus in favour of government action to stop house prices from falling further – and hopefully to reignite house price rises. Governments in Anglo-American economies, in particular, like the idea of getting house prices rising again because it promises to restore the wonderful strategy of rule developed over the past several decades: encourage the growth in the share of profits in national income (and the share of finance in national product); tap into these profits for party and personal advantage; keep median wages s tagnant and labour costs down; encourage house price inflation; and encourage households to extract equity from their rising a ssets. Extracting equity from rising house prices – treating the house as an ATM machine – is the way to finance higher consumption even out of stagnant income; and it allows middle class households to exit from the public welfare state into their own private welfare state of private healthcare, private schools, and private other things, releasing public financing for imperial projects like Iraq, Afghanistan, Trident and the like. This, t ogether with the switch in pension regime from pay-as-you-go to capital-funded, builds a large constituency of electoral support for state policies which protect equity prices and house prices, even at the expense of labour income.

    The danger now is that governments will respond to popular pressure to “give us back our bubble economy”. House prices in the UK have fallen only to 2006 levels so far, and have a long way to go before they restore the historical relationship with incomes. So house prices in the UK and other countries with housing b ubbles should continue to fall; yet this will make recovery more

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    difficult, because the financial sector will remain fragile until house prices stop falling.

    2 Restructure the Financial Regime

    The financial regime has to be restructured to (a) protect it from its own excesses, and (b) redirect it to seek profits in the real economy rather than in speculation.

    On the first point – restructure the financial regime to protect it from its own excesses – the widely but grudgingly accepted policy response is part-nationalisation of private banks, by buying equity and shouldering the risks and liabilities of the partnationalised banks; but as soon as possible, reprivatise them and rely on stronger regulation to keep them in check.2 The rationale is that, except in emergencies, governments should not be in the business of running banks.

    The flaw is obvious: the private sector has brought the world economy to its knees with its stewardship of the financial sector, and this is only the most recent in a long line of financial crises under its stewardship. The historical record shows that private capital markets are quite capable of operating like drunken air traffic controllers.

    At the least remuneration principles in the financial sector should be brought back into line with remuneration in the rest of the economy: bonuses should be paid at a frequency longer than the average time before the risks hidden in financial products blow up; or better, replaced altogether by the normal incentives of salary, promotion, and the honour of a job well done.

    But now is a good time to go further and create a socially owned finance sector, on grounds that a modern economy cannot afford to have banks which are responsive to corporate and personal profit-seeking but which are so big as to endanger system stability (Milne 2009). The result – private profits and national losses – is what Icelanders call “the devil’s socialism” and others call “lemon socialism”. Of course, good regulation can help to rein in private banks and shadow banks, but it also creates powerful incentives for private profit seekers to find a way around the regulations and to persuade politicians to relax them.

    In a new “mixed” banking system there should be a separation between “savings” organisations and “investing” organisations, going beyond what would be achieved by restoring a Glass-Steagall separation. The savings ones would look like cooperatives or mutuals. They would provide loans mainly out of deposits, and might in addition hold government bonds plus some blue-chip stocks; they would have low gearing and low profits; they would employ a risk manager or two but they would not employ physicists or financial engineers. The investing ones could be both public and private, with the public ones exercising discipline over the private ones (“the state surveils the market”). The public ones would have some democratic accountability. The key organisational challenge is to make sure that public ownership does not imply political influence over individual loans, as distinct from steering finance into more productive and socially valuable parts of the economy.3 Both types would operate with leverage ceilings much lower than the 30+ :1 debt-to-equity ratios which the big US investment banks were operating with. And both would be subject to the requirement that new financial products be approved by a regulator, to make sure that their risk characteristics could be readily determined by a third party, in the same spirit as new drugs have to be certified. In the financial sector as a whole, the trade-off between stability and innovation would shift t owards stability of financial intermediation, which is a vital public good of a capitalist economy.

    Whatever the mix of private and public ownership, banking has to be “repatriated”, with smaller cross-border operations beyond the reach of the national regulator and lender of last resort. The European Union faces a daunting challenge in pulling back its highly internationalised banks, which grew far too big in r elation to their national support base.

    Internationally, there are major issues around the resources and governance of the IMF, World Bank and regional equivalents; and around international rules like the Basel-II rules of bank capital adequacy, the international accounting standard known as “mark to market”, counter-cyclical prudential standards, and the like (Wade 2008a). Central banks clearly have to drop the foolish notion that asset bubbles cannot be identified while under way and that policy cannot keep them in check; they must include house prices and other asset prices in their financial stability

    o bjectives. Likewise, there must be a shift in norms of economic management to sanction the use of capital controls, so that governments can defend their economies from “bubble-my-neighbour” strategies and panicky outflows. The standard response is “stronger financial regulation, yes, restrictions on capital flows, no”. But we now know from repeated crises that nothing is more certain than death, taxes and the failure of financial regulation in the face of capital surges.

    The present talk of boosting IMF reserves to $500 billion is feeble when world foreign exchange reserves are of the order of $7,000 billion; a big expansion of “special drawing rights” may be the most feasible way ahead (Wade 2002). We can be confident that the G-7 states will seek to minimise the shift in voting rights in favour of developing countries and maximise their responsibilities (as the G-6 did to Japan as it tried to increase its voting rights during the 1980s) (see Wade 1996).But it is also true that most of the big developing countries, notably China, have been ambivalent about taking on more of a leadership role, much of the time seeming to want to let the US take the lead while they get on with their own national agendas or snipe from the side lines. The current crisis could help to forge a grand bargain across this divide linking a big shift in voting rights and a big jump in the participation of developing countries in framing g lobal solutions.

    3 Tilt the Playing Field to Stimulate New Investment and Innovation in Each Country and across the Globe

    The third step elaborates on 2 (b) above, about redirecting the financial sector to seek profits in the real economy rather than in speculation. The task, on a global scale, is to shift the institutions of capitalism away from those favoured by finance capital and towards those favoured by production capital, for this way lies the prospect of “positive sum games” between (less flexible, more stability-oriented) production capital and labour, rather than the “negative sum games” which dominate relations

    44 between (more flexible, more exit-oriented) finance capital and labour. The state has a vital role in effecting this change of market institutions in favour of production capital. What should now happen is a much deeper deployment of the transformative information, com puters and telecommunications (ICTs) technologies around the world, across all activities and all territories. In particular, ICTs provide the potential for a big expansion of environmental activities and lifetime education activities, two of the big growth sectors.4

    This is the domain of “planning” and “industrial policy”, but these words have become so toxic that their mere utterance sets heads shaking and knees jerking, a tribute to the dominance of finance capital. Hence, the more innocuous “tilt the playing field” and “market-friendly planning”.

    Developed Countries

    Developed countries already have the market institutions, the corporate organisations, the capacity to innovate; but they now have to respecialise, and in particular, downsize the financial sector and grow non-financial sectors. The question is what directions to steer their capacities in. The state should support innovation in such fields as biotech, nanotech, new materials, new transport systems, and healthcare, which will feed into growth in environment and lifetime education.

    As the Anglo-American model of liberal capitalism has lost credibility, the French model of national objectives and state- favoured industries has gained credibility (Schmieding 2009). The French have long argued that the free movement of capital may not always yield politically desired outcomes. Their habit of steering market processes is becoming a more widely accepted norm.

    Politicians on the left should be pushing the issue of income and wealth inequality up the agenda from its present obscurity. At the very least they should be energetically explaining essential facts about what people earn and the taxes they pay. In Britain, for example, people tend to be clueless about income distribution and social mobility. When asked if they agreed that “In this country the best people get to the top whatever start they’ve had in life”, 49% of respondents agreed and only 43% disagreed in a poll in 2008. In fact, a middle class child is 15 times more likely to stay middle class than a working class child is likely to move upwards (Toynbee 2008b and Irvin 2008). In a sample of north American and European countries, “free market” Britain had the lowest rate of intergenerational mobility of all, with “free market” US second to bottom. The two advanced free market societies seem to be moving from class towards caste.

    Developing Countries

    In the case of developing countries, tilting the playing field or market-friendly planning has to aim at a more even spread of i ndustrial activity across the world, less biased towards Asia. I ndustrial activity, and manufacturing in particular, is critical for employment growth and wage growth; and therefore for reducing migration, famine, civil wars, and the lure of messianic leaders. Yet China’s role as the workshop of the world is knocking out i ndustrial capacity throughout the developing world (for example in Latin America), or preventing it from getting started (in

    march 28, 2009 vol xliv no 13


    sub-Saharan Africa and central Asia). Chinese makers of doors can even land their products in the capital city of land-locked Mali and outcompete Malian carpenters.

    This scenario implies a rethink of the microeconomic role of government in stimulating economic activity with the national territory, and a rethink of economic globalisation – of the idea that rising ratios of trade/GDP and foreign investment/GDP are always signs of success. Ideally, the Malian government would assist Mali carpenters to be as efficient as the Chinese, including by providing them with the capital to buy the superior woodworking machines the Chinese savings rate has enabled the C hinese door makers to have; or assist them in diversifying into higher value added products. But some forms of trade protection

    – another toxic word – may also have to be deployed, not least because trade protection is easier to administer than other forms of support, and also an easier way to raise public revenue. Yet the World Bank continues to grade the trade regime of countries e ligible for its soft International Development Agency loans on the assumption that an almost completely free trade regime is best for development.

    The present argument is that the government has to be able to exercise enough control over cross-border flows so as to influence what role its economy plays in the global economy, and what is produced within its territory. It has to give high priority to providing employment for rapidly growing populations, even if this means something less than free trade and free capital mobility; a priority which may also match with global environmental objectives, to the extent that the huge energy resources which go into transport, packaging and the like are reduced. The old OECD states, seeking outlets for their goods, services and capital, resist these ideas and demand that developing countries stick to free trade and free capital mobility, while following covert neo-mercantilist strategies themselves. Developing countries should call their bluff.

    More developing country governments are looking to China as a model. They see advantages in China’s combination of a relatively open economy together with public control of the banks and the most capital intensive sectors. This combination allows the Chinese government to say to banks, “Increase your corporate loan rates (without worrying about profits to your shareholders)”, and to companies in these sectors, “Continue to spend, do not defer your investment plans”. And other developing country governments see China as a model of how to shift towards freer markets gradually, “crossing the river by feeling for the stones”, as distinct from the big-bang model championed by western o rganisations. Other developing country governments also look to China as a model of how to construct a middle class in a f ormerly socialist economy, by allowing workers to buy up state-owned houses cheaply and by allowing farmers to rent their land to o utsiders (including corporations) – with the aim of creating a larger number of “owners” of assets who will have a base from which to increase their consumption, hence boosting domestic demand and reducing China’s dependence on export demand (Foroohar 2009).

    Finally, a caveat. All the prescriptions about what governments should and should not do must steer clear of the assumption common to the Leninist or Fabian forms of state socialism that “the

    Economic & Political Weekly

    march 28, 2009 vol xliv no 13

    centralised state” must be the prime actor and regulator, the answer to society’s problems. The political left has to integrate the central state role described above with expanding the scope for people to lead their lives by their own initiative and through cooperation unenforced by the state (Wade 1988). For concrete examples of this spirit as a way of life, look to Switzerland, its decentralised confederal structure, and its voluntary mutual aid societies, like fire brigades (Wheatcroft 2009). To praise Swiss localism risks being labelled right wing, but the non-authoritarian left should praise it too.

    All these “shoulds” come up against the question of whether the post-2008 global order will see the end of the long Anglo-American hegemony, which in the past three decades has been based on the dominance of international finance and which has shaped global opinion in favour of policy regimes which benefit finance. Much depends on how the ball bounces in the US, China and Japan.

    In the US it depends on whether the long-dominant “oligarchic” fraction of the capitalist class continues to prevail over the “establishment” fraction. The oligarchic fraction, based in fi nance, seeks to protect the structure which yields increasing wealth and power at the top. The establishment fraction, represented by Paul Volcker, James Baker, George Soros, Bill Gates, and others, recognises the need to reduce the power of finance and improve the equity of the national and international society, in order to protect the overall structure of the capitalist economy. The Obama government’s decision not to force the bankruptcy of big and weak banks, but keep them on life-support (“zombie banks”), reflects the “oligarchic” strategy of hoping that minimal changes will be sufficient to restore economic growth and American primacy in finance (and will not anger the foreign creditors in east Asia and the Arab states who would otherwise be badly hit). On the other hand, the 2009 Obama budget reflects – at least at the level of discourse – the “establishment” strategy of making real changes in a social democratic direction, and has provoked intense anger from the Right.

    As for China, the question is whether the current crisis of the export economy induces a big switch to a strategy of endogenous, domestic demand-based growth. Much the same question applies to Japan and its crisis of the export economy. Both economies could reorientate even more towards the other than they are already. If so, China-Japan will emerge in another decade as even more central to the world economy, and a real threat to Anglo-American hegemony because less vulnerable to arm-twisting. In this case, the alarm bells now ringing in western capitals about China’s aid to Congo and other parts of Africa are only a small precursor of what is to come.


    During the first fortnight of March the world economy continued to fall at accelerating speed, with the big exporters of manufactured goods in Europe, Japan and other Asian countries particularly hard hit. Yet the G-20 finance ministers, meeting in London on 14-15 March, were unable to agree on a route ahead, beyond a modest increase in support for the IMF. The prevailing mood was the same as articulated by a British cabinet minister in January, off the record: “The banks are f****ed, we’re f****ed, the country’s

    f***ed”. For all that, the British government did try to give the fought by a vigorous concerted move to free market policies, impression that it knew what everyone had to do: commit to free and for national economies to be made more “flexible”. Free trade and free capital movements. The British finance minister trade and free capital mobility were essential. Yet all around, declared in a letter to the other G-20 finance ministers in advance these neoliberal principles were being discredited by experiof the meeting, ence, as the most “flexible” economy watched its banking sector collapse and as balanced budgets accelerated deflation. The

    Open, innovative financial markets are critical in driving forward e conomic growth... Our second objective, therefore must be to retain conference ended in disarray. Things were to get a lot worse and build on the benefits that open financial markets bring to the before political elites began to listen to Keynes and other world economy.

    iconoclasts who argued that the problem lay in the neoliberal

    This has a scary parallel with what happened at the World principles themselves. Economic Conference held in London in 1933, when the tidal How much longer will the British and American governwave of depression was coursing through the world economy ments go on advancing the 1933 agenda for the international and economic agents were as lost in cognitive fog as they are economy (even while they follow more Keynesian principles

    today. The British government called for the depression to be domestically)?


    1 See Wade (2008b), I also draw on discussions with Gabriel Palma.

    2 Nationalisation of banks is happening on a sizeable scale in the US. The Federal Deposit Insurance Corporation (FDIC) has been taking over (small) banks which it deems insolvent at the rate of two a week. It pays off some of the bank’s debts, takes the bad assets onto its own book, and sells the cleaned up organisation to investors. See Krugman (2009b).

    3 The Economist sounds the warning call. “[N] ationalisation carries huge risks of its own. With the world awash in unwanted bank assets, it could take years for the governments to privatise their banks. Meanwhile politicians would be tempted to turn banks into instruments of industrial p olicy, propping up powerful industries such as car makers and scrimping on more deserving r ecipients. Politically motivated lending could r esult in even larger loan losses in the future, and private banks would be put at a disadvantage”. (The Economist 2009).

    4 If Carlota Perez is right, deep forces of capital accumulation and technological change are pushing in this direction anyway, even without “voluntaristic” steering by states. See Perez (2006).


    Baker, Dean (2006): The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (Washington DC: Center for Economic and Policy Research).

    Beja, Edsel (2007): “Retrospective on East Asian E conomic Performance”, Challenge, September-October.

    Bradsher, Keith (2009):“Downturn in Factories Sows Fear across Asia”, International Herald Tribune, 22 January.

    Dore, Ronald (2000): Stock Market Capitalism: W elfare Capitalism: Japan and German versus the Anglo-Saxons (Oxford University Press).

    Dyer, Geoff (2009): “China’s Dollar Dilemma”, F inancial Times, 23 February.

    Foroohar, Rana (2009): “Why China Works”, N ewsweek, 19 January.

    Harvey, David (2006): The Limits to Capital (Verso).

    Irvin, George (2008): “Super Rich” (Polity).

    Krugman, Paul (2009a): “Fighting Off Depression”, I nternational Herald Tribune, 6 January.

    – (2009b): “Banking on the Brink”, I nternational H erald Tribune, 24 February.

    Lakoff, George (2002): Moral Politics: How Liberals and Conservatives Think (Chicago: University of Chicago Press).

    Milne, Seumas (2009): “Our Banks Are Too Important to be Left in Private Hands”, Guardian, 22 J anuary.

    Munchau, Wolfgang (2009): “Global Policy Shortcomings Will Cost Us Dear”, Financial Times, 2 March.

    Orenstein, Mitchell (2005): “The New Pension Reform as Global Policy”, Global Social Policy, 5 (2), 175-202.

    Perez, Carlota (2006): “Respecialisation and the Deployment of the ICT Paradigm: An Essay on the Present Challenges of Globalisation” in R Compañó et al (ed.), The Future of the Information Society in Europe, Technical Report EUR22353EN. Seville: European Commission/IPTS, 2006, 27-56. http://

    Pettis, Michael (2001): The Volatility Machine: Emerging Economies and the Threat of Financial Collapse, (Oxford University Press).

    Prospect (2007): “Is Global Finance Out of Control? Yes: Robert Wade, No: Anatole Kaletsky”, D ecember.

    Reinhart, Carmen and Kenneth Rogoff (2008): “Banking Crises: An Equal Opportunity Menace”, NBER Working Paper 14587, December, www.

    Schmieding, Holger (2009): “The Last Model Standing Is France”, Newsweek, 19 January.

    Shonfield, Andrew (1969): Modern Capitalism (Oxford University Press).

    The Economist (2009): “The Spectre of Nationalisation”, Economic Focus.

    Toynbee, Polly (2008a): “The Prospect of Another Lost Generation Is a Chilling One”, Guardian, 20 December.

    – (2008b): “Without the Facts on Pay, How Can We Judge What Is Fair?”, Guardian 9 December.

    Vestergaard, Jakob (2009): Discipline in the Global Economy? International Finance and the End of Liberalism, Routledge.

    Wade, Robert (1988): Village Republics (Cambridge University Press).

  • (1996): “Japan, the World Bank, and the Art of Paradigm Maintenance: The East Asian Miracle in Political Perspective”, New Left Review, 217, 3-36.
  • (2002): “On Soros: Are Special Drawing Rights the Deux Ex Machine of the World Economy?”, Challenge, September-October, 112-124.
  • (2003): “What Strategies Are Viable for Developing Countries Today? The World Trade Organisation and the Shrinking of ‘Development Space’”, Rev. Int. Pol. Econ., 10, 4, November, 621-44.
  • (2008a): “Financial Regime Change?” in Howard Davies and Howard Green (ed.), Global Financial Regulation: The Essential Guide (Polity).
  • (2008b): “Globalisation, Growth, Poverty, Inequality, Resentment and Imperialism” in John Ravenhill (ed.), Global Political Economy (Oxford University Press).
  • Wheatcroft, Geoffrey (2009): “Citizenship in Action”, Guardian, 22 January.

    Review of Labour
    Forthcoming (May 30, 2009)
    Power, Inequality and Corporate Social Regimes: The Politics of Ethical Compliance in the South Indian Garment Industry – Geert De Neeve
    De-Fragmenting Global Disintegration of Value Creation and Labour Relations: From Value Chains to Value Cycles – Ajay Gudavarthy
    The Effects of Employment Protection Legislation on Indian Manufacturing – Aditya Bhattachajea
    Revisiting Labour and Gender issues in Export Processing Zones: The Cases of South Korea, Bangladesh and India – Mayumi Murayama, Nobuko Yokota
    Work and the Idea of Enterprise – Nandini Gooptu
    Household as a Site of Production: Informalisation and Fragmentation of the Workforce – Kalyan Sanyal

    march 28, 2009 vol xliv no 13

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