Mustafa Kutlay USAK Center for EU Studies printable version send your friend

Wednesday, 8 April 2009

“Despite unprecedented stimulus, the biggest risk is still that governments overall do too little”

 The Economist[1]

The G20 Summit is finally left behind. The leaders of the most developed 19 countries and representatives of the European Commission and the European Central Bank met at the ‘minimum common denominator’ and arguably went beyond the expectations. Given the differences of the preferences ordering between the US and the EU and between China and the rest, many commentators were expecting theG20 to turn out to be a ‘talking shop.’ Yet, the leaders have succeeded to agree on tightening the financial regulation on financial derivatives and shadow banking to create a stimulus package amounting to 1,1 trillion dollars and to keep the credit channels open to emerging markets via propping up the arsenal of the IMF reserves.

Yet, is it enough to ensure the survival of the capitalist world economy? Will these measures and perhaps others in the upcoming days, be a panacea in mitigating the global financial turmoil? As many reasonable and realistic pundits acknowledge, the answer is “no, not enough!”

 In order to see why G20 Summit did not offer a satisfied response, it is of vital importance to look at the three major fault lines within the global world economy. Without setting off these fault lines, it seems it would not be possible to balance the global imbalances.

Fault Line 1: The Undemocratic Nature of Globalization

What we have today is almost completely integrated global financial markets and the so-called “global economy,” but we do not have the global institutions to manage the failure of this economy. Under normal conditions when a crisis occurs in one country, the central bank of this economy acts as the formal “lender of last resort” to alleviate the situation. Since the world economy has become more complex and integrated within the last three decades, a crisis in one country quickly spills over to another one, and becomes a worldwide issue instantaneously. In such a situation, who is the ultimate lender of last resort? If the central banks of the states are not capable enough to cope with speculative attacks on their own, who will be the responsible authority to deal with the destructive consequences of the economic crisis?

One may put forward the IMF. Yet, the IMF and World Bank, or other similar institutions, are the result of the Bretton Woods compromise, and they are not equipped enough to secure the health and stability of the world economy. Worse than that, these institutions have been deeply criticized, and their respectability has been questioned by different strata of societies all around the world.[2] Moreover, these institutions are not democratic enough to represent the non-Western countries, one of which is China. Not surprisingly, the absence of the non-Western world in the decision making mechanisms opens a black hole in the democratic structure of IFIs and creates “a question of representation.”  Thereby, it is crucial to establish “new global institutions” in order to manage the fault lines embedded within the markets and societies in the age of globalization.

Fault Line 2: The Asymmetry between Labor and Capital[3]

The widening asymmetry between capital and labor creates the second fault line in the current debacle. One of the striking results of the current globalization wave is the abolishment of barriers in front of the capital. Today, capital (both in foreign direct investment and in portfolio forms) is unleashed and can easily go almost everywhere in the world if the conditions are feasible. But the same thing is not valid for the labor force. The free movement of labor vis-à-vis the capital is too restricted, and this gap (asymmetry) widens day by day thanks to the strict migration laws put into force by developed countries. If the labor cost starts to increase in one country, the capital transfers its equipments to a more suitable one, which is literally known as “runaway factory.” In technical terms, the demand elasticity of labor increases with globalization, especially for un-skilled labor and for low-middle level managers. This asymmetry creates tensions between the capital and the labor that lead to protectionist tendencies against free trade.[4]

Fault Line 3: The Over Financialization of World Economy

After the 1980s, the political economy of the world is characterized by the trio of terms: neoliberalism, globalization, and financialization. During the 1990s, the world witnessed the increasing influence of financialization. Referring to the “increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of domestic and international economies” in Epstein’s definition[5], financialization creates the third fault line in the global economy.  After the 1980s, finance transformed itself from being a mere epiphenomenon to a genuinely new phenomenon. In Isenberg’s words, “de-regulation has fostered finance’s transformation from being an input into the production process to being an independent industry that innovates and sells its own products.”[6] This rupture between the finance-capital and industrial economy, and the excessive risk taking in the financial managers to cultivate extraordinary bonuses and fringe benefits underpinned the financialization phenomenon.

In summary, the above fault lines fashion the unbalanced nature of the global economy. It is doubtlessly possible to add new ones to them. Nevertheless, a solution proposal without taking the three fault lines into consideration would be nothing more than after me, the deluge approach and would not help mitigating the global instability permanently. 

   Mustafa Kutlay,
USAK Center for EU Studies,
mkutlay@usak.org.tr