Stock markets across the world seem to be following David Bowie’s 1976 classic song “Always crashing in the same car” over the past weeks, a volatility compounded by sensational reporting of hundreds of billions of dollars wiped off on the fateful ‘ > Black Monday ’. One should, however, put these things in perspective. Decline per se in these market indices does not mean any actual loss because the highs in these markets are values purely on paper and not realisable unless sold. And the very act of realising this value by selling en masse leads to its precipitous fall. At the same time, withdrawal of finance, especially international, can have far-reaching impact on the real economy by creating volatility in exchange rates, falling reserves, etc.
Rohit Distributional issues At the heart of it are issues of distribution of income and wealth. In a system with antagonistic classes of workers (wages), capitalists (profits), rentiers (interest rates), along with the state (taxes) contesting for a share in the pie, their shares are determined by their relative bargaining strength.
In the aftermath of the Great Depression, the state, through legislation, and the workers — to some extent — through trade union movements, had gained strength vis-à-vis the other two classes, resulting in a rise in share of taxes and wages in the First World. It lasted till the early 1970s when staggeringly high inflation rates further cut into the share of finance. Finance struck back with a vengeance, demanding financial deregulation within and outside the First World as well as a rescinding of the post-War state-led model.
China’s Rightward shift reinforced this tendency. Both the state and working class were on the retreat, with the share of taxes and wages falling across the First World (French economist Thomas Piketty has written extensively on the latter). But here is the irony: a fall in state-led investment and a fall in consumption by workers also meant a fall in size of the pie itself.
The only way the pie could still keep expanding was if finance itself stimulated activity. After very low growth till the mid-1990s, the U.S. saw high growth rates (till the Great Recession hit it), first as a result of the Dotcom bubble and later as a result of the real estate bubble, both propped up by finance. Once the latter bubble burst, finance started looking for opportunities more aggressively outside of its safe haven. It flew into the emerging markets in a big way.
Finance ruled the roost not just in the First World but much of the Third World through a gradual change from import-substitution based industrialisation to policies based on greater linkages with the global economy. There are two ways (or in combination) in which they could get coupled: trade and finance. China adopted primarily the first, while India chose the second.
> China grabbed the opportunity of high growth in the First World by undercutting the producers of the First World and became the poster boy of export-led growth in the Third World. It managed to do so by squeezing the share of the workers in its national pie. But herein lay the contradiction of this growth model. First, you can only grow in so far as the export markets grow, something which is beyond your control. Second, it can only happen at the cost of suppressing domestic demand resulting from falling wages. All is well till the music is playing. But all hell breaks lose when it stops.
A crisis in the U.S. meant a failure for the Chinese model. It was absurd to even think of ‘decoupled’ emerging markets, led by China. By virtue of having put all its eggs in one basket, China is stuck with a ‘new normal’ (read low growth) now. It can’t just switch from export-oriented to domestic-oriented growth. With receding exports, the Chinese authorities invested heavily in domestic investment but the structure of domestic demand was not in tune. As a result, firms were saddled with excess capacity. With low returns, finance flew into the real estate sector resulting in a zooming stock market which was bound to fall. The tipping point came with Beijing announcing a depreciation of its currency in order to revert to its export-oriented strategy. Finance’s response was to flee.
Economy and ‘Make in India’
There are some in India — this includes the > Niti Aayog vice chairman — who argue that this is India’s moment and that one should grab it with both hands. This conclusion reflects naivete.
First, China is losing out on exports not because its goods have become relatively more expensive giving Indian producers an opportunity to undercut but because the export market itself has shrunk. In other words, who will they sell to? Second, in such bearish export markets, those who have been in the game for long, like the Chinese producers, have far deeper pockets when it comes to cutting prices. It will be a race to the bottom with the working class of these countries forced to struggle against each other for their capitalists to grab an ever-elusive share of the pie in the international goods market.
Third, any competitive devaluation of the currency will result in a trade war with no victors. Fourth, India is more integrated with international finance owing to its lax tax laws and capital account regulations, so, to keep finance happy, India is forced to keep the returns on finance (interest rates) high, which again acts to the detriment of investment in the real economy.
Overall, the global economy is in for a long haul. It took 10 years to recover from the Great Depression and its aftermath included a Rightward shift in the political discourse, ending in the Second World War.
While there is a clear Rightward shift happening in a number of countries including ours, there is also a glimmer of hope in the rise of the working people as well as the New Left. Which way the tide would turn only time can tell but it will definitely mark a break, for better or for worse, in the character of the system that we live in.
(Rohit teaches Economics at Jawaharlal Nehru University. Email: rohit@jnu.ac.in )
