The World Bank recently announced that the world economy as a whole will shrink for the first time since World War II, meaning for the first time since the end of the Great Depression that afflicted the globe in the 1930s. This is a highly unanticipated occurrence, dealing a heavy blow to the optimism that, in spite of periodic recessions since the economic recovery after the World War, has pervaded both government policy and the economists’ writings and projections.
As the last two or so decades have passed on, little serious attention has been paid to the phenomenon of recession, and its worst case, depression, as it has periodically affected particular countries or regions. The developed world’s economists and economic policy-makers have generally made the assumption that the sophistication of their models and prescriptions were capable of manipulating the movements of national economies and global economic trends to the extent that dips in economic activity could be relatively quickly corrected. National economic failures have been attributed to policy errors by those with responsibility for the conduct of national policy, or for ensuring adequate coordination of the interlinked economies of an increasingly globalised and liberalized economy.
So, for example, at the level of the American national economy, the economists felt that they could reasonably clearly show what was responsible for the partial recessions of the Nixon era and then of the Reagan era, what corrective measures were needed, and how they could be effectively implemented. Keynesian economic theory and practice was deemed to have shown the way in this regard, and the creation of computerised systems of modelling, which increased predictive capability as to how economies would respond to specific policy measures, increased confidence in this regard.
A particular presumption underlying global confidence in these matters was that the American economy, as the biggest, most technologically dynamic and most dominant in international trade and production, had basically overcome the busts and boom syndromes of earlier eras. Further, that as that economy came to dominate the growth and rhythm of other national economies of the North Atlantic world, and then the East Asian world in particular, American policy-makers in concert with the policy-makers of those regions, could moderate the negative aspects of these economies. As long as America was vibrant, the rest of the world would have long-term vibrancy.
The veracity of these presumptions was enhanced by the process of liberalization, and then globalization, of national economies, based on the revolution in communications technology led by the United States. This, in the view of Western economists and policy-makers, was now stabilised by the creation of a governance architecture reflected in the creation of the Group of Seven, the Basle arrangements and finally the World Trade Organisation system. In that context, developing and emerging economies were advised to fit their economic policies within these presumptions, summed up in the so-called Washington Consensus exemplified in World Bank and IMF practice. In that context, major Latin American economies like Brazil and Argentina, going through deep recessions from the mid-eighties onwards, were advised to follow the consensus to resumption of growth.
Such was the confidence in these instruments and the efficacy of recommended policy measures that three phenomena of the last decade of the nineties and the first decade of the 21st century were largely attributed to policy errors capable of correction. The first of these was the sudden, virtual collapse, of the so-called emerging economies of East Asia – in particular South Korea, Thailand and Indonesia — which had been seen as proceeding well on their way to eventual First World economic status. Under the aegis of the IMF and the World Bank, the governments were quickly made to understand that what had happened to them was the result of policy errors, rather than deficiencies of the essential (Western) economic methodologies or models which they had been implementing. The spectacle of the then Managing Director of the IMF standing with arms folded over a seated President Sukarno as he signed an IMF agreement, and transmitted around the world, summed up the sense of Western superiority.
The second phenomenon was the threat of financial collapse of the Mexican economy in 1994, just after the government had signed the North American Free Trade Area Agreement (NAFTA) with the United States. The agreement was meant to signal Mexico’s emergence into the category of emerging economies. With the threatened collapse, deemed largely to excessive state-domination/regulation, the US quickly provided substantial monetary assistance to Mexico, on the basis that that country would continue to implement the liberalizing policies necessary to ensure the ‘success’ of NAFTA principles and measures. The subsequent financial stabilization of the Mexican economy gave further confidence in this approach.
Then, thirdly and most importantly, although Japan, the most successful of the post-war non-Western economies fell into a deep recession in the nineties – now referred to as its lost decade — from which it seemed incapable of emerging, a general assumption of governmental and international institutions’ policy-makers was that the country would, given the sophistication of its economic infrastructure, inevitably recover, once Japanese policy-makers opened their economies to a greater extent than they had done previously.
But, as is now apparent to most observers two new phenomena – one a hangover – have appeared to dent this unwavering post-war optimism of both economists and policy-makers. First, the delay in Japan’s recovery – indeed its apparent return to deep recession – induces pessimism about the revival of this locomotive economy of South East Asia; and secondly, the rapid decline of the American economy itself does not leave that country in a position to function as a support system for periodic defaults of other countries of the capitalist economy. This latter is made worse by the fact that American policy-makers’ presumptions that they could quickly reverse the downward trend in their own economy is now apparently seen not to hold.
This is leading to much questioning of the model of growth and regulation adopted by the US itself in the era of the Milton Friedman/Reagan-Thatcher economic theory and policy revolution. As pessimism grips the American intellectual scene, it is beginning to be felt that the basic assumption that the new system could be largely self-regulating and subject only to very limited state regulation, was erroneous.
But it is now clear that with that sort of institutional (or minimal institutional-control) arrangement, the masters of private finance have, in effect, taken the American policy-makers for a ride. And that phenomenon is reflected also in the conduct of the British economy which, during the period of Blair rule, oversaw a certain dismantling of the state’s role in regulation, including increasing the autonomy of the Bank of England, and opened the economy to the eventual dominance of financial services over the manufacturing sector. The overturning of the intellectual revolution of the 1980s and after is no more clear that in the support of former Federal Reserve Chairman Alan Greenspan’s backing for a temporary government takeover of significant elements of the banking system in the United States; and the quick move by Prime Minister Brown to take substantial equity in the commercial banking system of the Britain.
As the stock markets continue to gyrate, often downwards, it is clear that policy-makers and their economist advisers are fishing for new instruments – without, as yet, any apparent positive outcome. The continuing withering of the world economy confirms this in practice.