www.Josephcamilleri.org

Risks & Opportunit

iesA World in A World in FermentFermentThe World EconomyAn ‘ocean liner without

lifeboats’

Risks & Opportunitie

sA World in A World in FermentFerment

from

Keynesianism

to

Neo-Liberalism

Neo-Liberalism

Neo-liberalism (NL) = ideology & policy model centred on free market

At its core, NL = laissez-faire economics:

confidence in free markets as the most-efficient way of allocating resources

emphasis on minimal state intervention in economic and social affairs

 commitment to unfettered movement of goods, services and capital

NL = based on the belief that market driven economic growth holds the key to human progress – but accepts periodic crises as means of market correction.

KeynesianismKeynesianism = set of policy prescriptions we associate with the work of JOHN MAYNARD KEYNES (1883-1946) – perhaps the most influential economist of 20th century.

= how to deal with unemployment, inflation, recession and depression.

As early as 1919 – well before his General Theory of Employment, Interest and Money (1936) – Keynes made his position clear. He resigned as official representative of the British Treasury at the Paris Peace Conference – fiercely opposed to austerity imposed on Germany.

KEYNES: “An inefficient, unemployed, disorganised Europe faces us, torn by internal strife and international hate, fighting, starving, pillaging, and lying.”

KeynesianismKey propositions

No natural tendency for capitalist market economies to correct economic shocks and maintain an equilibrium at full employment.

No self-generating economic forces can correct a situation of unemployment, in which large numbers of involuntary unemployed seek work at the going wage rate but are unable to find it.

Unemployment = result of inadequate spending.

Failure to spend = due mainly to a shortfall of business investment – often the result of irrational business sentiment a fall in demand, output and employment.

Governments had a crucial role to offset the shortfall in economic activity. Tools: taxation, government spending, tax reductions, lower interest rates or greater money supply.

Politically: a large government sector holds the key to economic stability. ###

The ‘New Deal’

FDR Speech at Madison Square

https://www.youtube.com/watch?v=3nuElu-ipTQ

The Double Movement

A useful starting point is Karl Polanyi’s The Great Transformation

He explained the economic evolution of 19th and early 20th century Britain in terms of a double movement:

“the origins of the cataclysm [World Wars I and II] lay in the utopian endeavour of economic liberalism to set up a self-regulating market system.”

Yet , the self-regulating market was not pervasive:“. . . while on the one hand markets spread all over the face of the globe and the amount of goods grew to unbelievable proportions, on the other hand a network of measures and policies[were introduced] to check the action of the market. . . ”

We thus have a pendulum effect:FROM colonisation of society by the market economy TO resistance of society to that colonisation AND BACK AGAIN..

Financial

Crises

Financial Crises

A brief history provided by The Economisthttp://www.economist.com/news/essays/21600451-finance-not-merely-prone-crises-it-shaped-

them-five-historical-crises-show-how-aspects-today-s-fina

Other  Crises: Throughout 19th century Latin American states ran into repayment problems and many 

defaulted on European loans they had taken out to finance various projects.

In the 1970s, with the collapse of the Bretton Woods system Latin American  countries entered periods of recession and incurred debts they could not repay

 In  1982 Mexico’s central bank could no longer pay its $80 billion foreign debt

By 1986 more than 40 countries had encountered severe external debt problems

Late 1990s-Early 2000s: mounting debt  recession in both Brazil and Argentina

1998 Russian financial crisis  devaluation of the ruble and debt default.

Causes of Financial Crises

Each crisis has specific causes, its own financial dynamic and political environment .

But most crises share a number of common factors:

Asset Price Bubbles (e.g. house prices rose sharply prior to the 2008 global crisis (in US, UK, Iceland, Ireland, Spain) fuelled by fast rising credit 

Credit Booms Often fuelling real estate booms (increased mortgage financing in US  unsustainable debt service relative to disposable income) 

Causes of Financial Crises

Other Factors Deterioration in lending standards 

Lending viable only in favourable economic conditions  loans vulnerable to economic downturns and changes in credit and monetary conditions  high probability of default.

Financial liberalization, ineffective regulation and supervision  poor oversight  excessive risk taking  financial institutions, merchant banks, investment banks and 

commercial banks operating a  shadow banking system  chain reactions leading to systemic risk.

Greed and CorruptionSpeculation fuelled by search for windfall profits – fraud and conflicts of interest in the absence of transparency and accountability.

Politics of

Austerity

Politics of Austerity

Austerity measures have been pursued by governments of all colours.

Austerity measures seek to reduce government spending by slashing government spending.

reduced welfare payments and cutting public sector jobs. 

Some (e.g. UK PM David Cameron) have called for a permanently ‘leaner’ government. 

Austerity drives in Germany, Switzerland and Sweden have been moderate – and mirror weaker effects of 2008 financial crisis.

More severe measures have been introduced in Poland & UK.

Draconian measures in Portugal, Spain, Italy, and Greece.

Effects of Austerity

Those working part-time in Europe but need to find more work make up:Switzerland:  6% of part-time workers  France:  about a thirdGreece & Italy  about halfSpain:  a staggering 66% 

Youth unemployment:UK  around 17%Sweden, Poland & France  over a thirdItaly  over 40%Greece & Spain  over 50%

Effects of Austerity

‘Flexicurity’Aim is to create a flexible job market in which workers accept higher risk of losing their job – hardship eased by unemployment benefits and further training. 

BUT during an austerity drive it is easier to do the first part (remove people from work), but much harder to do the second, that is, get access to benefits and training or have real prospect of new jobs.

Inequalitywithin and between

Countries

How has the percentage share of national income of the richest 1% changed over time?

Share of global wealth of the top 1% and bottom 99%

Wealth of the 80 richest and of the bottom 50%

Wealth of 80 richest people in the worlddoubled between 2009 and 2014,

while the wealth of the bottom 50%was lower in 2014 than it was in 2009.

Number of billionaires it takes to have accumulated the same amount of wealth as the bottom 50% of the global population

Global Inequality

Capital in the Twenty-First Century by Thomas Piketty, translated from the French by Arthur Goldhammer Harvard University Press  http://www.amazon.com/Capital-Twenty-First-Century-Thomas-Piketty/dp/1491534656

Review of the book by Paul Krugman‘Why We’re in a New Gilded Age’, New York Review of Books, 8 May 2014

http://www.nybooks.com/articles/archives/2014/may/08/thomas-piketty-new-gilded-age/

Power Shift

Economic Multipolarity

With the start of the 21st century the global economy has become increasingly multipolar

 US economic dominance &  globalization = contributing factors

Globally, economic power is shifting. 

Following the reconstruction of Europe and Japan and the creation of the European Union, we have seen developing regions gaining in importance and developed regions becoming less dominant. 

Rise of East Asia

Emergence of BRICS

Share of World Goods Exports Selected Countries, 1950-2004

Source: WTO (http://people.hofstra.edu/geotrans/eng/ch5en/conc5en/shareworldexports.html on 16 September 2006)

E7 and G7 growth paths in PPP terms

China’s Central Role in World trade China’s imports as a percentage of world

total

The Asian Infrastructure Investment Bank

Twenty-one Asian countries signed a memorandum of understanding on 24 October 2014 to establish the bank

Led by China, headquarters will be in Beijing

Will help finance construction of roads, ports, railways and other infrastructure projects in Asia – authorised capital of $50bn, eventually to be raised to $100bn.

Expected to be fully established by end of 2015

As of 15 April 2015, there are 57 prospective founding members, 37 from within Asia and 20 from outside the region

Taming the Market

A Global Approach

Key Principles

Economic Inequality   Ecological sustainability

 Transparency

 Regulation & Oversight

Subsidiarity

 Accommodation of diverse interests

Economic governance in a multipolar context 

Institutions

Radically renewed international framework

A major new organ of the UN system to replace existing Economic and Social Council – equal in status to UN Security Council – to have oversight over all UN related organisations and agencies with economic functions (including IMF, World Bank, UNDP) – and intensive consultation with national governments and other relevant organisations

A third chamber within the UN system (made up principally of representatives of business peak bodies, professional associations and civil society organisations) with powers of oversight and advocacy

A streamlined system of consultation and coordination between regional institutions (e.g. European Union, African Union, BRICS) and the UN system 

Periodic national, regional and global summits to review economic trends and set broad economic benchmarks.