The reasons for the current turmoil in International
money markets such as panic selling go back to August 2007 when the
Sub-prime market in the US collapsed which resulted in huge loses for the
worlds investment banks, hedge funds and finance houses as all of them had
placed large sums of money in the US real estate market.
The collapse of the sub-prime market had such a large
ripple effect it led to a run on Northern rock (Britain's 5th
largest bank) and has brought to an end a decade of economic growth with the
possibility of a world-wide recession. As the threat of a US-driven recession
looms ever larger, it is state intervention that is keeping the market economy
afloat. In December 2007, central banks across the world coordinated to pump
billions into the global financial system in an effort to loosen the effects of
the credit squeeze (because banks refuse to lend to each other in case such
money is defaulted on). In January the much dreaded spectacle of state
investment funds from South Korea, Singapore and Kuwait taking stakes in US
corporate giants such as Citigroup, the world's largest bank, to offset the
impact of the sub-prime mortgage crisis and the biggest loss in the bank's
history took place.
What follows is a selection of myths about free trade
and free markets:
Free trade and markets are the most efficient way of
allocating resources that in turn will eradicate poverty
Since the 1960s, the prevailing
theory of economic development, known as modernisation theory,
maintained that industrialisation and the diffusion of liberal economic ideas
would transform traditional economies and societies. These influences would
place poor countries on a path of development similar to that experienced by
Western industrialised nations during the industrial revolution.
However consider the following: Poverty is the state
for the majority of the world's people. 3 billion people in the world live on
fewer than two dollars a day, the third world owes over $1.2 trillion in debt,
another 1.3 billion people live on less than one dollar a day; 1.3 billion have
no access to clean water; 3 billion have no access to sanitation and 2 billion
have no access to electricity. The developing world now spends $13 on debt
repayment for every $1 it receives.
Although Free trade has created some of the richest
people in the world it has also created a vast disparity between the rich and
poor and this remains its major failure. A number of surveys have highlighted
that free trade has created even more poverty stricken people in the world. The
7th December 2006 saw the culmination of a global study - from the
World Institute for Development Economics Research of the United Nations. Some
of its findings are staggering; by gathering research from countries all over
the world the studies findings concluded that the richest 1% of the world owns
40% of the planet's wealth and that only 10% of the world's population owned
85% of the world's assets. [1]
Capitalism views the distribution of wealth of
secondary importance and because of this although western economies are growing
the generated wealth remains with just a handful of the population. The UK for
example generated wealth (GDP) of £2.2 trillion in 2005, this was an increase
from the previous year which for liberal economists means people have more wealth,
have more to spend thus they must be happy. However if we look at how much the
60 million population of the UK received of this generated wealth, 2005
statistics from HM Revenue and Customs show that the richest 10% have more than
50% of the nation's wealth and that 40% of the British population shared in
only 5% of this wealth. This has resulted in the majority of the population
resorting to borrowing to fund their lifestyles and this is why UK consumer
debt is more the £1.3 trillion, it is more than the actual economy. The US
situation is even worse, the US may generate $13 trillion a year in wealth but
National debt is $8.5 trillion. This means US citizens are funding their
lifestyles by borrowed money rather than the $13 trillion the economy generated.
In a 2005 Harvard report it was calculated that 10% of the population owned 71%
of the wealth, and the top 1% controlled 38%. On the other hand, the bottom 40%
owned less than 1% of the nation's wealth.
This is the case in the developed world who have lived
under free markets for over a century. In perhaps the most comprehensive study
of poverty to date, Scorecard on Globalization 1980-2000, Mark
Weisbrot, Dean Baker and other researchers at the Centre for Economic and
Policy Research documented that economic growth and rates of improvement in
life expectancy, child mortality, education levels and literacy all have declined
in the era of globalization (1980-2000) compared to the years 1960-1980. From
1960-1980 many countries maintained protectionist policies to insulate their
economies from the international market to nurture their domestic industries
and allow them to become competitive. Those policies are the same ones on which
US economic prosperity was built. Hence free trade was the direct cause of
poverty for the third world.
The Industrialised nations developed due to the
adoption of free trade and markets
Britain is regarded as the fountain of laissez-faire
doctrine and the only country to have practised free trade. Britain is regarded
as the only nation to have developed with little or no state intervention;
however this cannot be further from the truth - Britain was the first country
to establish infant industry protection.
The 1721 reform of the mercantile law was summed up in
1907 as: "manufactures had to be protected at home from foreign
finished products; free exportation of finished articles had to be secured; and
where possible, encouragement had to be given by bounty and allowance. [2]
This meant import duties on raw materials were lowered, duties on foreign
manufactures goods were significantly raised. Specifically Britain banned the
imports of superior goods from some of its colonies if they happened to
threaten British industries.
The next big change came in 1846 with the repeal of
the Corn Laws, which were import tariffs ostensibly designed to protect British
farmers and landowners against competition from cheap foreign grain imports.
But this was intended to halt the move to industrialization on the continent by
enlarging the export market for British agriculture. British technological lead
that enabled the shift to a free trade regime had been achieved behind high and
long lasting tariff barriers. The overall liberalisation of the British economy
was a highly controlled affair overseen by the state and not achieved through a
laissez-faire approach.
With the use of industrial promotion strategies, Britain
when it reached its pinnacle in 1800 was navigating the seas in search of
riches around the globe. This programme of aggressive colonisation entrenched
Britain's position in the world and changed battles from being fought for
territories to offshore markets. It was this colonial war machine that drove a
large chunk of Britain's scientific research, innovation, new ways of
organising labour and military strategy. The liberal values which are trumpeted
as the source of Britain's development arrived after achieving global
domination. It was only after Britain achieved global supremacy that it
championed free trade and this was to gain access to foreign markets. Free
markets most certainly came after development rather than being the trajectory
that launched the British Empire.
US development also occurred in similar fashion, It
wasn't until after WW2 that the US began to liberalise trade and the reasons
for this was outlined by Dr Joon Change expert in economic history at Cambridge
'it was only after WW2 that the USA - with its industrial supremacy
unchallenged - finally liberalized its trade and started championing the cause
of free trade.'[3]
Once western countries establish industrial dominance
behind protectionist walls, they tend to advocate free trade in order to kick away the ladder from the
followers and consolidate their dominance; this was
certainly the case for Britain in the mid 19th century which led the
liberalisation drive in Europe. The United States followed a similar path a
hundred years later.
Free Trade leads to development
This most certainly was not the case for Britain or the US, rather both nations progressed behind protectionist policies. China today represents a nation that has developed completely opposite to the formula the West continues to sell to the developing world.
China has evolved from its decade’s long narrow and reactive approach to global affairs in the past. China is abandoning its long-held victim mentality of 150 years of shame and humiliation and adopting instead a great power mentality (daguo xintai). The natural extension of this is the increasing role of China in global issues. With the abandoning of the victim mentality and the adoption of a great power mentality China is increasingly seeing itself more akin to the world's major powers. This represents a shift from the 1990's, China is now openly speaking about the need to share global responsibilities and this is the lens through which China's strategists view the world.
China represents an interesting conundrum for orthodox
economics experts and for all those who believe the adoption of liberal values
equals economic success. China firstly undermines the belief that progress is
exclusive to the western formula of free markets, democracy and liberal values and
demonstrates how much of the wider world remains unconvinced of such a formula.
China has managed to achieve phenomenal economic
growth and industrialisation by not adopting democracy but by remaining deeply
authoritarian, where liberal values have not featured remotely in China's
economic rise. China's President Hu Jintao said in 2004 'We will never
blindly copy the mode of other countries political system. History indicates
that indiscriminately copying western political systems is a blind alley for China.'[4]
This shows there is very little likelihood that China will adopt liberal values
in the near future secure in the knowledge that it has achieved success without
the Western model of development.
Economically China has utilised and retained its centrally
driven and interventionist approach similar to Japan and Germany. China has
extensive levels of government involvement across all market sectors. By being
centrally driven China has been able to direct its resources in one direction
which has propelled it into a regional power and the largest economy in the
world after the US. China has received little assistance from the Western world
mainly due to its historic communist credentials and has shown that an
independent, nation first policy driven centrally can attain economic success.
Free trade ensures economic stability
Capitalism has been praised for the amount of wealth
it has created and for the development it has brought to many parts of the
world. However aside from the mass inequality in wealth distribution and
poverty it has created across the world capitalism has a track record of the
regular busts, recessions, depressions and economic collapse. Richard Robbins
in his award winning book 'Global Problems and the Culture of Capitalism said, 'The
emergence of capitalism represents a culture that is in many ways the most
successful that has ever been deployed in terms of accommodating large numbers
of individuals in relative and absolute comfort and luxury. It has not been as
successful, however, in integrating all in equal measure, and its failure here
remains on of its major problems.'[5]
The great depression if 1929 still bewilders
economists. Economists continued to hold, against mounting evidence to the
contrary, that time and nature would restore prosperity if government refrained
from manipulating the economy. Unfortunately, approved remedies simply did not
work. The economy did not behave in the way assumed by the
"classical" economists, which was the dominant school for over a
century, but times had changed and what were required were different government
policies. New explanations and fresh policies were urgently required and this
ushered in the era of government intervention in the economy until the Thatcher
and Reagan period.
Government involvement in the economy led to the rise
of protectionist policies which ensured recessions generally were restricted to
nations rather being worldwide. As each segment of the capitalist economy
relies on the proceeding segment the system is built upon creating artificial
needs to keep consumers purchasing more and more goods to keep the main segment
(catalyst) going. This is why the developed world witnesses regular recessions
when enough people have spent beyond their means there would inevitably be a
reduction in aggregate spending by consumers as a large chunk of disposable
income is now used to service debt, this cycle of spending - increase in
production - more jobs - purchasing more goods is never sustainable and has to
end somewhere.
The current threat of recession is due to the fact
that the US has been experiencing economic growth that has been fuelled by the
expansion of personal debt, which in turn is being fuelled by the high price of
housing or real estate. As the cost of housing rises, house owners have
increasingly been taking out personal debt, offering equity in their homes as
collateral. This process of effectively re-mortgaging homes in order to fund an
extravagant lifestyle has been a nationwide phenomenon for the US and the UK. As
long as house prices continue to rise, consumers will be able to take out more
debt against the value of their homes. This practice has been evolving since
the 1990's, and we now have a situation where house prices are so high that
they have outstripped salaries by several times. This means that the situation
has reached a dangerous level where this debt is now struggling to be serviced
and houses are increasingly too expensive to be bought by people. This came to
its peak last summer when the sub-prime market collapsed. US household debt is
$8.5 trillion and 20% of households have more debt than assets.
The fact the global investment banks and hedge funds
can easily move capital around the world has only compounded the situation. The
current crisis and those which occurred before clearly prove that capitalism
does not cause stability but in fact is the cause of speculative wealth driving
up prices and the bubble reaches a point where it will inevitably burst.
Japan and the Asian tiger economies developed due to
free markets
The 'tiger' economy was a term coined to describe
South Korea, Singapore, Hong Kong, and Taiwan who underwent rapid growth and
industrialisation in the 1960's and 1970's. The four 'Tigers' share a range of
characteristics with other Asian economies, such as China and Japan, and
pioneered what has come to be seen as a particularly "Asian" approach
to economic development, that of an export driven economy. These countries and
territories focused on developing goods for export to the industrialised West
and domestic consumption was discouraged through government policies such as
high tariffs.
A closer look at the development of such nations shows
there development was a largely centrally driven affair with huge government
subsidies and protectionist policies to achieve development.
Japan developed from policies which are the complete
opposite to free markets and globalisation. The Japanese government wanted key
sectors to develop and protected them from foreign competition. The government
retained the right to allocate foreign exchange, and by this it was able to
restrict inward investment, to manage the acquisition of foreign technology by
Japanese firms and to influence the composition of foreign trade. The export
bank of Japan and Japan development bank were setup to become the main vehicles
for expanding the flow of finance to government targeted industries.
Central to the development of Japan has been the role
of Ministry of International Trade and Industry (MITI) which was a ministerial
department. This central government department regulated production and the
distribution of goods and services. It developed plans concerning the structure
of Japanese industry, controlling Japan's foreign trade; ensuring the smooth
flow of goods in the national economy; promoting the development of
manufacturing, mining, and distribution industries; and supervising the
procurement of a reliable supply of raw materials and energy resources. Hence
Japanese development was centrally driven and not left to the free market to
allocate resources.
South Korea pursued a similar strategy of central
government intervention. In 1961 the first of many 5 year plans were initiated
by central government, as only it rather than the free market had the capacity
or resources to direct such drastic change in a short time. The economy was
dominated by a group of large private conglomerates, known as chaebol, and was
also supported by a significant number of public corporations in such areas as
iron and steel, utilities, communications, fertilisers, chemicals, and other
heavy industries. The government guided private industry through a series of
export and production targets utilising the control of credit, informal means
of pressure and persuasion, and traditional monetary and fiscal policies.
Central government by 1965 extended government control
over business by nationalising banks and merging the agricultural cooperative
movement with the agricultural bank. The governments direct control over all
institutional credit further extended central governments command over the
business community. The Economic Planning Board created in 1961, headed by a
deputy prime minister allocated resources, directed the flow of credit, and
formulated all of South Korea's economic plans.
In the case of South Korea and Japan government
intervention played an important role in their development and is seen as the
backbone to progress. Taiwan, Singapore and Hong Kong followed similar
strategies and this clearly shows orthodox capitalism has not been followed but
rather government intervention has steered the Asian tigers into the positions
they are in today. The tiger economies are fundamentally consumer led where
exports are the driving engine for the economy.
The various economic crisis in the last 50 years were
primarily a result of nations not being liberalised (having free markets)
In reality all the crises in last 50 years were a
direct result of economies being liberalised (left open) due to the pressure to
modernise (free markets) and in the last two decades globalisation. The
problems many nations faced were compounded due to the economies of the
nations concerned being unable to control the flow of wealth due to free trade,
a few examples prove this:
§ By 1997, Asia attracted almost half of total capital inflow to
developing countries. The economies of Southeast Asia maintained high interest rates
attractive to foreign investors looking for a high rate of return. As a result
the region's economies received a large inflow of hot money and experienced a dramatic run-up in
asset prices. At the same time, the regional economies of Thailand, Malaysia, Indonesia, the Philippines, Singapore, and South Korea experienced high growth rates, 8-12%
GDP, in the late 1980s and early 1990s. This achievement was
broadly acclaimed by economic institutions including the IMF and World Bank, as
the Asian economic miracle. But then the story turned sour.
From 1985 to 1995, Thailand's economy grew at an average of 9% per
year. In May 1997, the Thai baht was hit by massive speculative attacks
as investors tried to cash in on their money. By withdrawing their cash in
large sums the currency collapsed, this set off a domino affect where financers
lost confidence in the region and began moving their money out in large sums
leading to the infamous Asian financial crisis. The only country in the region
to survive the fall out was Malaysia as it was not under the control of the
IMF's structural adjustment program and had placed restrictions on capital
withdrawal from its country which meant speculators could not affect the
country. The rest of the region left their economies open hence they were
unable to do anything when speculators withdrew their capital, thus proving
free trade was the problem. This problem was aptly encapsulated by Economic
expert Paul Krugman of Princeton University "As long as capital flows
freely, nations will be vulnerable to self-fulfilling speculative attacks, and
policymakers will be forced to play the confidence game. And so we come to the
question of whether capital should really be allowed to flow so freely."[6]
§ Turkey in 2001 faced the brunt of the IMF's globalisation policies as US
investors withdrew large amounts of their capital. Turkey was ordered to peg
its currency to the US dollar, a peg works on the basis that a currency is
linked to another currency by ensuring the exchange rate remains within agreed
bands on the open market. If the currency moves out of the bands then the
government would literally sell or buy currency to bring it within the bands.
As investors scrambled to buy foreign currency, the Turkish central bank
reached the point where it could no longer support the exchange rate, hence it
abandoned it and was about to default on its loans. The peg to the dollar was
realistically never sustainable and by liberalising the economy it was only a
matter of time before foreign investors cashed in and moved out. The currency
peg, which controlled the movements of the lira, was the centrepiece of the
IMF-backed financial reform package designed for Turkey. By removing
restrictions on capital flight Turkey was unable to defend itself. Akyüz and
Boratav, well-known economists from Turkey (Akyüz is Director of the UNCTAD
Division on Globalisation and Development Strategies and Boratav is Professor
of Economics at the University of Ankara) at the time commented, "In
many respects the Turkish economy today is in a worse shape than it was on the
eve of the December 1999 stabilization programme." They went on "the
policies advocated were based on a poor diagnosis of economic conditions in the
country and the Fund was experimenting with programmes that lacked sound
theoretical underpinnings."
§ Latin America for decades has been a laboratory for free market
treatment which began in 1973 when Augusto Pinochet came to power through a
military coup widely considered US backed. The military junta received the
document 'the brick' from the University of Chicago’s Economics Department
which was considered the epicenter of the laissez-faire doctrine. The Chile
project involved the wide scale sale of state owned banks, introduction of
cutting edge new forms of speculative finance, removal of all restrictions to
imports and the cutting of government spending on education and health.
Pinochet was confidently advised that government withdrawal from the economy
would allow the 'natural laws of economics to rediscover their equilibrium.'
Chile's experiment with free markets led to the economy being swamped with
imports leading to most local businesses closing. In 1974 inflation reached 375%
the highest in the world at the time, the cost of basics such as bread went
through the roof. 45% of the population fell below the poverty line whilst the
rich who incidentally supported the coup saw their incomes rise to over 85%. In
the case of Chile free markets quite clearly created the problem.
In March 2003, the IMF admitted in a paper that globalisation may
actually increase the risk of financial crisis in the developing world. "Globalisation
has heightened these risks since cross-country financial linkages amplify the
effects of various shocks and transmit them more quickly across national
borders" the IMF notes and adds that, "The evidence presented
in this paper suggests that financial integration should be approached
cautiously, with good institutions and macroeconomic frameworks viewed as
important."[7] In addition, they admit that it is hard to
provide a clear road-map on how this should be achieved, and instead it should
be done on a case by case basis. This is a shift from the "one size fits
all" style of prescription that the IMF has long advocated.
Globalisation is the pinnacle of free trade and
essential for economic development in the 21st century
The first time the word globalisation was used
was in describing the activities of the large American companies in the
mid-1990s. The end of the cold war put the US in a conundrum; the arms race
with the USSR resulted in financial circles pouring money into the US resulting
in an expensive dollar which in turn made the climate for US multi-nationals to
export their goods virtually impossible. US companies found it too expensive to
maintain a competitive position overseas when it was costing them so much to
make the products at home. Hence cheaper foreign markets had to be found.
The setting up of production facilities in a foreign
country making use of the cheap labour, with very little labour laws and
outright abuse was termed globalisation. The first nation to be given the
globalisation treatment was Russia. The fall of communism in 1990 and the
break-up of the Soviet Union represented a wonderful opportunity for capitalist
institutes to transform a huge centralist economy to a market orientated one. A
total of $129 billion poured into Russia with the IMF and the World Bank
implementing a number of its development schemes. The Russian economy was
opened to foreign investment and industry was sold to foreigners leaving the
country vulnerable to swings in world prices. In 1997 due to a loss on
confidence in Russia speculators begun to withdraw their money and Russia
couldn't even defend itself as liberalisation required there to be no
restrictions on capital flow. The crisis raised poverty from 2 million to 60
million, a 3000% increase. UNICEF noted that this resulted in 500,000 'extra' deaths
per year. Russia is a clear example that globalisation directly allowed the
crisis to reach the peak it did.
Globalisation today in reality is the superpower
pushing for various policies that imply free trade which is in reality a
continual repeat of mercantilist processes seen throughout history. The US
broke away from British colonial rule in 1776, recognising the unfairness and
harshness in Imperial Britain's policies. However, the US has now taken on that
role and is doing the same things that the British once did to others. Shortly
after the War of 1812 was fought to defeat British mercantilist trade
practices, US statesman Henry Clay pointed to the necessity of the United
States developing a defensive capability by quoting a British leader, "Nations
knew, as well as [ourselves], what we meant by "free trade" was
nothing more nor less than, by means of the great advantage we enjoyed, to get
a monopoly of all their markets for our manufactures, and to prevent them, one
and all, from ever becoming manufacturing nations."[8]
The Reagan and Thatcher era in particular, saw free
trade pushed to most parts of the globe under the guise of globalisation. Almost demonising anything that
was public, and encouraging the privatisation of anything that was owned by the
public, using military interventions if needed. Structural Adjustment policies
were used to open up economies of poorer countries so that big businesses
from the rich countries could own or access many resources cheaply.
Conclusions
The credit crunch reverberating around the world has once
again highlighted the real nature of what's called the free markets in modern
capitalist economies - neither free nor transparent, and utterly dependent on
state support. As the fallout from what shows every sign of becoming a wider
economic crisis becomes clearer, demands for alternatives are certain to grow.
It was the British Empire in the 17th
century that championed free markets when it was at the height of it power and
today the US champions Globalisation when it is at the height of its power.
Both nations developed by central government involvement and both advocated
free trade once this was achieved. Free trade today has no success stories
rather as some of the myths have shown free trade has a successful track record
of destroying economies, producing wealth inequality and creating booms and
busts.
The Muslim world should take lessons from the track
record of Capitalism and look at its history which clearly proves an alternative system exists which can bring
stability, growth and equality for all citizens.
[2] Brisco N, 1907, 'The economic policy of
Robert Walpole,' New York, The Colombia university press
[3] Joon Chang H, (2003) 'Kicking away the
ladder; development strategy in historical perspective,' Anthem Press
[4] Mary Hennock 'China's graft: Tough talk,
old message,' 27th Sep 2004, http://news.bbc.co.uk/1/hi/world/asia-pacific/3693714.stm
[5] Richard H. Robbins, 'Global Problems and the
Culture of Capitalism,' (Allyn and Bacon, 1999), pp. 11-12
[6] Paul Krugman, MIT Professor of Economics,
Princeton University, 'How Washington Worsened Asia's Crash; The Confidence
Game, 'http://thenewrepublic.com/archive/1098/100598/krugman100598.html
and http://web.mit.edu/krugman/www/myth.html
[7] Eswar Prasad, Kenneth Rogoff, Shang-Jin Wei
and M. Ayhan Kose, 'Effects of Financial Globalisation on Developing
Countries,' International Monetary Fund, March 17, 2003, retrieved 23rd
Jan 2008, http://www.imf.org/external/np/res/docs/2003/031703.pdf
[8] J.W. Smith, 'The World's Wasted Wealth 2,'
(Institute for Economic Democracy, 1994), p. 123.
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