Get real and everybody benefits 

      Larry Elliott
      Monday September 1, 2003
      The Guardian 

      The lights have been going out in New York and London. Terrorists have blown up the UN building in Baghdad. Thousands of elderly people died in France  as a result of the heatwave. But don't worry, last month things were getting better out there. 

      Try not to be too sceptical. The global economy does appear to be on the mend. Growth is picking up in Japan and the United States, and sentiment is probably on the turn in Europe as well. Expect forecasts for 2004 to be revised upward over the next few months. Stock markets everywhere have bounced back from the lows seen before the invasion of Iraq and this has been the cue for a revival of the boosterism last seen in the heady days of early 2000, before the dotcom bubble went pop. Rising share prices since the spring mean the miracle economy is just around the corner. 

      There are, to be fair, reasons for optimism. The aggressive loosening of macro-economic policy has helped to underpin demand. Consumer spending in the US has been boosted by tax cuts, while a combination of cost-cutting and orders from the Pentagon has given a boost to American corporate profitability. The conventional wisdom is that the long-heralded recovery is at last under way, and that we all now start to reap the dividends from computers, robotics, genetics and all the other industrial breakthroughs of the past couple of decades. In other words, the right macro-economic policy plus globalisation plus new technology equal a golden tomorrow. 

      Like-minded people

      This, by happy coincidence, is the moment the New Economics Foundation has come up with a critique of the new world order. Intended as a counterblast to the half-yearly World Economic Outlook from the IMF, the Real World Economic Outlook (Macmillan Palgrave) takes a more jaundiced view of globalisation and all its works. The other two pieces on this page are extracts from it. 

      As a starting point, the RWEO expresses concern that global economics is dominated by a cabal of like-minded people. The odd heretic, Joseph Stiglitz for example, may be admitted to the temple, but they don't last long. "Sadly economics, as taught today, is not just a dismal science; it is a dreary discipline. Little more than a subdivision of applied mathematics, it is based on assumptions that do not hold in reality and which have scant relevance to our complex, diverse, real world. The obsession with a) the promotion of economic efficiency achieved through government by markets; b) the self-interested optimising behaviour of individuals; and c) the wisdom of usurious financial markets, means that, today, the economics taught in universities ignores reality and is narrow and exclusive." 

      To which the riposte is there is a good reason why parties of both left and right today believe in markets, self-interest and financial liberalisation: and that is that they work. They are, to paraphrase Churchill, the least bad option on offer, so that even if globalisation has widened the gap between rich and poor at both national and international levels it does not really matter because a rising tide is lifting all boats. The poor are better off in absolute terms because growth is higher than it would otherwise have been in the bad old antediluvian days of capital controls, strong states and full employment policies. 

      Fine. But, if so, where's the beef? Where's the empirical evidence to suggest that the policies of finance-led globalisation have delivered better outcomes than the era of capital controls and government intervention? You will have trouble finding it. Investment is growing more slowly, productivity is growing more slowly and incomes per head are growing more slowly than they were in the decade immediately after the second world war. What is more, unemployment is higher - in some parts of the world a lot higher - than it was in the 1950s and 1960s. Yes, the dragon of inflation has been slain, but at a considerable price. 

      What has happened, as the report makes clear, is that capital liberalisation has allowed an extraordinary surge in speculation, but the relentless rise in the value of "paper" assets has not been matched by a similar increase in the stock of real wealth - physical and human capital, research and development - that over the long term leads to rising productivity, rising growth and rising living standards. At the end of the 1970s, the stock of financial assets in the world's leading economies was worth about the same as the "real" assets that underpinned them; today, financial assets are valued at three times real assets. 

      Two conclusions stem from this. The first is that the orgy of speculation has led to grotesque misallocation of resources, depressing investment rates. The second is that the rich and powerful have benefited from the rising value of financial assets, while the poor and weak have suffered from the weaker underlying economic growth. This may help to explain why globalisation has - in the face of the evidence - had such a good press. The median wage in the US, according to the report, is the same as it was 27 years ago, which explains why consumer spending is only being kept going by personal debt and tax cuts (government debt). 

      Worryingly, even those who recognise the validity of this analysis despair of doing anything about it. Globalisation, it is said, is a force of nature. It is driven by technology and by the power of big business, and there is no more chance of governments taming it than there is of their taming the weather. 

      This is a counsel of despair. "Globalisation has not been corporate-driven nor is technology responsible," says the report. "Instead, we contend, the origins lie with the United States' need to finance the post-Vietnam war deficit, and to do so without making structural adjustments to the US economy. This led US politicians, backed by the UK government, to lift controls over capital markets - so as to tap their resources to fund the US deficit. Globalisation, therefore, was created by politicians and can be reversed by politicians." 

      Openness

      Funnily enough, those countries that have defied the conventional wisdom have not seen the sky fall in on their economies. Remember Malaysia, which to almost universal condemnation brought in capital controls during the Asian crisis on the grounds that it would rather look after the interests of its own citizens than those of international speculators? The investors soon came back, because they could see there was money to be made. 

      Similarly, the fact that China has tough capital controls has not prevented it from being easily the biggest recipient of foreign direct investment in the developing world. 

      As the Harvard economist Dani Rodrick puts it: "Countries that articulate credible growth strategies are likely to find themselves the recipients of capital inflows even if they buck the trend of financial openness. Capital markets, unlike academics or policy advisers, do not mind eating their words as long as there is money to be made in doing so. The good news is that putting the real economy ahead of the financial sector may be good not just for the former but for the latter as well." For those countries such as China and India which have yet to let the genie out of the financial liberalisation bottle, Rodrick's message is: just say no. 

      All in all, this report is as unfashionable as kipper ties and loon pants. On the grounds that there is a world of difference between a credit-driven cyclical upswing and a sustainable recovery, it calls for the taming of financial markets, the upsizing of the state and downsizing the single global market. This challenge to what Orwell called the "smelly little orthodoxies" is long overdue. Far from leading us to the promised land, the policies relentlessly followed by finance ministries and central banks over the past couple of decades have created a legacy of debt and deflation which has taken the global economy to the brink of the abyss. 

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