The ever-evolving cycle of crises
WHEN the Berlin wall came crashing down 20 years ago the Cold War ended, and the mood was celebratory in the West. Instead of two superpowers there was one, and the only ideology that survived was capitalism -- a brash form of capitalism at that. The elder George Bush arrogantly proclaimed that the world had better learn how to do things the American way, because it was they who knew what worked. He said: "Free markets work." The reach of the market grew longer over the next two decades, encompassing China, India, and former Soviet Union along with its satellites.
The characteristic rapid growth of capitalism brought impressive poverty reduction, particularly in China and India. There were few Poles or Czechs who were gripped with nostalgia for the days when Moscow pulled the strings.
But it always remained inevitable that sooner or later globalisation would run into trouble, and what we have seen over the past two years is just the beginning. We ought not be fooled by the rally of the past six months. Americans are again running down savings to consume goods they can no more afford. In tandem, China's export of consumer goods is booming. The global imbalances are back.
A combination of political change and technological revolution produced the upheaval. That was true when the Spinning Jenny followed the great European Enlightenment, and it was true when a second wave of inventions coincided with the crumbling of the 19th Century balance of power.
Digital technology and bio-science will catalyse the third industrial revolution, but this change will take place when the spread of the market has vastly increased the labour forces. So, America's hegemony is now being threatened by the rise of China. The appearance of the first cracks in the new global order came rather too soon.
The golden age, i.e. America's uni-polar moment, lasted barely for half a decade -- the period between the lifting of the Iron Curtain and the creation of the World Trade Organisation in 1994. But it was the successive financial crises that started on the periphery of global economy and gradually worked their way towards its centre. That was the indication that the transition to market nirvana couldn't be either steady or smooth.
Understandably, the policy-makers were left bemused by the first systematic crisis of the global age. Until 2007 they had thought mistakenly that their job was to only tinker with market economies. They were rudely awakened to reality when the seed of new crisis struck the root surreptitiously. They were faced with an existential challenge. Where do they go from here? There are several options to choose and pick.
Option one is the process of creative destruction. The problem of the financial system in a market economy has precisely been the problem of not allowing the market to function properly. The badly run banks responsible for the market failure should be encouraged to fail and ultimately perish, so that the good banks conducive to the growth and functioning of the markets are allowed to come up and thrive.
The second option is that of business as usual. Predictably enough, it is the one forward by London's financial district and Wall Street. Given the size of their welfare cheques from the taxpayer, big finance can hardly demur at the prospect of tougher regulation although it is lobbying hard against more radical change.
The third option is business as usual plus extras. This recognises that there has been a systematic problem in the financial sector but sees the answer in tighter supervision, better surveillance of the global economy by the International Monetary Fund (IMF), changes to capital adequacy rules to ensure that banks cannot lend as freely during the booms. Both Barack Obama and Gordon Brown seem to be pursuing this option.
There is a motley band for whom business as usual, with or without extras, means another looming crisis which will erupt before too long. They argue that the exiguous nature of current reform proposals is explained by the institutional capture of governments by the investment banks, the world's most powerful lobbying groups.
There is also an idea of splitting the banks into retail and investment arms. Others would go even further. A recent report by the UN Committee on Trade and Development (UNCTAD) urged rethinking of the "conventional wisdom that dismantling all obstacles to cross-border private capital flows is the best recipe for countries to advance their economic development."
Finally, there are those who believe that any conventional reform would yield nothing because any growth-based model is at odds with the viability of the planet. The political centre of gravity may be lying at a point between option two and three. Yet, a crisis is brewing up somewhere right here, right now as testified by human history and experience.