This article attempts to provide a deeper explanation for the United States’ trade imbalances, which U.S. President Donald Trump has cited as a pretext to impose tariffs and catastrophic retaliatory measures while ignoring the structural weakness of the U.S. economy itself. Such unilateral action has a profound impact on the global economy and institutions such as the WTO.
Initially, Trump targeted imports of steel and aluminium from several key trade partners, including the European Union and South Korea, and just recently, he imposed another series of protectionist measures that went beyond any previously seen in the post-war period. The reasoning given for imposing such high tariff duties is the U.S.’ perception of the “unfair” trade practices currently being enacted by China. China responded to this by adopting a tit-for-tat strategy of imposing tariffs on selected U.S. products. Since August this year, both countries have together imposed tariffs on $100 billion worth of goods and which will almost certainly escalate further with increased trade retaliation (Guardian, 2018).
An ongoing trade war between the U.S. and China would adversely affect global economic growth, and their unilateral actions on trade apparently seem to be designed to bypass the rules set by the WTO, and could thus have a serious impact on global trade and governance. It seems clear that the U.S. is purely diverting attention from its own structural problems, and which are ultimately themselves responsible for imbalances in trade. President Trump, however, is attempting to establish a (probably erroneous) link between rising U.S. imports and the decline in its manufacturing industries.
The recent increase in import tariffs by the U.S. in its steel and aluminium sectors is claimed to be an important step towards helping its domestic steel and aluminium industries. President Trump imposed import duties of 25% on steel and 10% on aluminium by invoking the Trade Expansion Act of 1962 that allows for the protection of domestic industries on the grounds of national security (Guardian, 2018). However, this act is in clear violation of the WTO’s multilateral trade rules – which the U.S. leadership itself help to negotiate – where then U.S. agreed that developing countries could reduce their import tariffs by a small proportion compared to more advanced economies worldwide (Siddiqui, 2016a).
This principle of non-reciprocity was accepted as the basis for tariff cuts at the WTO’s Doha Round negotiations (Siddiqui, 2015a). This unilateralism is seen as discriminatory against a number of countries that includes China, and which is a clear violation of WTO rules. It is inconsistent with the provisions of the WTO’s Dispute Settlement Understanding (DSU). Article 23(a) of the DSU is obligatory for every member, who is advised that rather than make a judgement on other acts, their grievances must instead be taken directly to the DSU. The WTO’s dispute settlement process has sole authority to adjudicate in, and to resolve, any dispute between members (WTO, 2015).
Ironically, it is China that seems to be most interested in restoring and saving the tattered economic order. The U.S. has witnessed a sudden reversal of its fortunes that to a large extent were brought about by a number of factors including its engagement with an open economic order, and also by giving further concessions to its own large corporations and its pursuit of the policy of deregulation, rather than providing incentives to big corporations to invest locally in more productive sectors of the economy and to create jobs.
Economic theory holds that trade surpluses are a sign of an undervalued currency (Siddiqui, 2016b; also see Siddiqui, 1998). During the Presidential election campaign, Trump repeatedly accused China of pursuing unfair trade practices through currency manipulation, subsidies and stealing intellectual property rights from U.S. companies. However, after becoming President, Trump did not speak about the fact that the Chinese yuan has risen 8.6% against the U.S. dollar since January 2017. Indeed, since Trump took over, U.S imports from China have increased from $463 billion in 2016 to $506 billion in 2017. As a result, the trade deficit has widened from $347 billion in 2016 to an all-time high of $375 billion in 2017 (McBride, 2017). That means that China accounts for nearly half (43.6%) of America’s total trade deficit with the entire world.
Concern about China’s trade policy was also apparent during the Obama administration. The U.S. has for some time been reviewing policy options as to how to deal with China’s growing economic power, and questions were raised in Congress about the need for a shift in U.S. policy towards China.
For instance, in 2017, the U.S. Trade Representative to Congress stated that “It seems clear that the United States erred in supporting China’s entry into the WTO on terms that have proven to be ineffective in securing China’s embrace of an open, market-oriented trade regime”.
The present trading system began to emerge at the end the Second World War when representatives of 44 countries, largely from Europe, North America and Latin America, met in Bretton Woods in the U.S. to lay the foundation of a new international economic order suitable to the new world leader, i.e., the US. Moreover, one of the most important tasks was to create a system, which could reduce the tension between countries by increased trade and economic cooperation among capitalist countries (Siddiqui, 2018a). The governments of the developed economies then prioritised higher levels of employment, and a number of further measures were undertaken to improve the living conditions of the populace. The period between 1950 and 1972 was known as the “Golden Age of Capitalism”, when average incomes in North America, Europe and Japan grew at a faster rate than they had for over the past century.
In the 1980s and the 1990s, trade and investment policies changed radically, and in 1994 the WTO was established. Rather than regulating investment and finance towards productive investments and the creation of employment, as attempted in previous decades, they instead deregulated. Deregulation was also imposed on developing countries by IMF/World Bank-led neoliberal reforms, also known as the “Structural Adjustment Programme” (Girdner and Siddiqui, 2008).
Trade liberalisation has been very good for the United States for the last seven decades or so, but this no longer seems to be the case (Siddiqui, 2018b). The U.S. extended its full support to corporate globalisation in the hope that this would create a new era for U.S. dominance, but since 1990s free trade deals negotiated through the WTO have benefitted U.S. much less than expected, and indeed are currently shrinking. U.S. corporations, rather than investing profits from globalisation into productive and employment-generating areas of the economy, choose instead to shift their capital into speculation.
For the last three decades or more, financialisation of the economy has expanded rapidly in both the U.S. and the rest of the world. This has defined the massive and extensive accumulation of interest-bearing capital, and has profoundly transformed the organisation of economic and social reproduction. These transformations not only include the outcomes but also the structures, processes, agencies and relations through which those outcomes are determined across production and employment.
Financialisation encapsulates the increasing role of globalised finance in ever more areas of economic and social life. In the United States and other advanced economies, Fine and Saad-Filho (2017:692) argue that: “the realisation that the operation of key neoliberal macroeconomic policies, including ‘liberalised’ trade, financial and labour markets, inflation targeting, central bank independence, floating exchange rates and tight fiscal rules, is conditional upon the provision of potentially unlimited state guarantees to the financial system, since the latter remains structurally unable to support itself despite its escalating control of social resources under neoliberalism”. However, soon after the global financial crisis of 2008, as Adam Tooze (2018) explains that in the U.S. and Europe, “The failures of banks forced “scandalous government intervention to rescue private oligopolists” (Cited in Wolf, 2018).
Ten years have passed since the global financial crisis of 2008 which nearly reduced capitalism to bankruptcy. However, it did not lead to the same kind of complete meltdown as happened in the Great Depression of 1930 for the majority of the developed economies. The 2008 crisis affected the global economy adversely, particularly developed economies, with a subsequent decade of slow growth, low investment, and low productivity which has further been marked by increased public debts and current account deficits. According to the World Bank, the overall investment level in the United States has fallen from 25% of GDP in 1980 to 19% in 2017 (McBride, 2017). Since the 2008 financial crisis, the U.S. economy, despite some recent signs of improvement, is still far from achieving sustained economic growth.
At the same time, the Chinese economy was, at least initially, adversely hit by the global financial crisis, (Siddiqui, 2015b) but the country was able to recover in only a short period; a decade later, the country had emerged as a major economic power. In China, state capitalism was seen as an important policy tool with which to assist the economy and state-owned enterprises were not abandoned, as happened in the early 1990s in Russia. As a result, since the crash China has emerged as the world’s second-largest economy and the world’s biggest manufacturer and exporter of goods (Siddiqui, 2015c). During the same period, the U.S. economy has, relatively speaking, weakened, and consequently Trump considers China to represent a serious threat U.S. trade hegemony (Wolf, 2018).
Between 2009 and 2017, the Chinese economy tripled in size, and by 2012 had overtaken Japan as world’s second largest economy. Its economic growth continued at a rate of around 10% until 2011, and thereafter by nearly 7% per annum, which is above the worlds’ average economic growth of 3.9%. China’s per capita income had risen from $3,500 in 2009 to $8,800 in 2017. In 2017, China created 11 million jobs compared to just 1 million in India.
In recent years, China has begun to move away from low-cost, export-led growth towards a gradual increase in domestic consumption and the acquisition and development of a high-tech base. As a result, the trade to GDP ratio has fallen from 37% in 2008 to 20% in 2017, while the domestic consumption of GDP has increased steadily since 2012. There is further evidence that China has been undergoing a structural change in recent years. For example, between 2011 and 2017, the share of earlier key industries such as cement, steel, coal and iron declined from 75% to 60%, while for the same period the share in other sectors such as energy, healthcare, entertainment and high-tech has risen and service sector employment has increased from 33% to 45% over the same period. Moreover, in 2017, China had 109 companies in Fortune Global 500, which has risen from 10 in 2001 to 30 in 2008 (McBride, 2017).
The recent initiative by Chinese President Xi Jinping, “Made in China 2025”, sets out plans to develop Chinese technology in key industries such as aircrafts, robotics, pharmaceuticals and defence. This has further antagonised the U.S.; the U.S. Trade Representative described it as an attempt at “seizing economic dominance of certain advanced technology secto rs” (McBride, 2017).
Moreover, China is challenging the advanced economies monopoly in robotics and 3D printing. The Chinese government has undertaken a huge investment drive in aviation engines, electronic chips and set a target to become the largest investor in R&D in the world. Despite all these changes, the United States wants to keep the U.S. dollar as the de facto global currency, even at the expense of huge trade deficits.
The question arises as to whether the United States’ protectionism is justified. Therefore, in order to assess this, we will attempt to take a somewhat long-term view regarding the external payments situation of the U.S. Figure 1 provides a summary of the external sector of the country from just before the breakdown of the Bretton Woods System in 1971.
To understand the situation more clearly, we need to analyse the U.S. trade in goods and services and its current account situation on the basis of available statistics. Figure 1 shows the external sector payments of the US from 1970 to 2016. Apart from few exceptions, most of the time its current account was negative in goods. However, the late 1980s service sector gained a surplus and is steadily rising. Despite these changes, the rise in service export was unable to fill the gap created by the general trade imbalance in goods. Moreover, since 2014, service export has stagnated, which has thus become a real problem for the U.S. The United States trade deficit kept on rising, and has grown remarkably over the last two decades. This was coincidental with the period when China joined WTO, all of which appears to have given the U.S. the excuse to blame China for raising its trade deficits.
Figure 2, which shows the trade in goods between the U.S. and China, indicates that the U.S. had trade deficits in goods with China since the early 1990s, which has grown up sharply. For example, the deficit was only $10 billion in 1990, but by 2000 had reached $100 billion; by 2005 it had risen further to $200 billion, by 2012 it rose to $315 billion, and by 2017 it had reached $376 billion. The sharpest rise was since 2001, which also coincided with China joining the WTO. For example, China’s exports to the U.S. increased from $125 billion to $505 billion, while U.S. exports to China rose from merely $19 billion to about $130 billion for the same period.
The question arises as to the extent to which China is responsible for the U.S.’ rising trade deficit. To answer this, we need to examine the US trade performance with the other major trading partners.
Figure 3 indicates that China is an important trading partner for the U.S., but that China still has less than half of the U.S.’ overall trade deficits. For example, according to the statistics, in 2017 the U.S.’ trade deficit with China was $375 billion, however, its overall trade deficit was $775 billion. This means that even if the U.S. were to eliminate its trade deficit with China, its trade imbalance problems would still exist.
China is largely facilitating the final assembly stages of global production networks of vertically integrated high-tech industries. To explore the magnitude and patterns of trade arising from cross-border production networks, it is necessary to separate parts and components from final assembled products traded within global production networks. The U.S. trade war, if broadened, will adversely affect U.S. corporations as well.
Exports of global production network (PN) exports from China rose from $47 billion in 1993 to $1.3 trillion in 2015, where these products accounted for more than 70% of China’s total manufacturing exports as indicated in Figure 4. This pattern shows China’s dominant role as an assembly centre within global production networks. In 2015, China accounted for 27% of the total global network product exports worldwide, compared with an 18% share in total world manufacturing exports (see Figure 5). This means the shares of both final assembly and components were notably higher than the aggregate global export share.
In fact, U.S. trade imbalances are largely self-inflicted. The U.S. needs to address factors within its economy rather than blaming others, especially China. Trade deficits (i.e., imports more than export), reflects the saving-investment gap in terms of national income, which is associated with low levels of domestic saving rates (Siddiqui, 2016c). Most economists and policy makers have barely touched on this important issue, namely that consumption has risen while saving rates have declined, or otherwise remained low. For example, the U.S. domestic savings rate was never higher than 24% in the 1950–60s, but for the last two decades it has steadily declined and is now below 17% (McBride, 2017).
In conclusion, the article indicated that there are serious structural weaknesses in the U.S. economy which needs to be addressed. Blaming its trading partners might help the U.S. in the short term, but will certainly not be effective in the long term. Trump, rather than addressing structural crisis, has taken the initiative to cut corporation tax and increase tariffs, which seems to give short-term relief and will at the same time increase imports. In 2002, during the Bush administration, higher tariffs were imposed on imported steel and aluminium, but rather than helping, this adversely affected the automotive and construction industries, which are amongst the largest employers in the U.S.
The United States has witnessed a decade of slow growth, low investment, and low productivity, all of which has been further marked by increased public debts. All of these factors have contributed towards higher levels of current account deficits. Further, by raising import tariffs, the U.S. has violated the WTO’s multilateral trade rules, which ironically were negotiated earlier under the United States’ leadership.
About the Author
Dr. Kalim Siddiqui teaches International Economics at University of Huddersfield, UK. He is an economist, specialising in Development Economics and has written extensively on development economics, economic reforms as well as on the political economy of development. He may be reached at [email protected].
References
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Capitalism, Globalisation and Inequality
By Kalim Siddiqui
With rising global inequality and environmental crises, capitalism is unable to resolve the crises and thus has become an obsolete social system – The author discusses the history and impacts of capitalism, trends in globalisation, and persisting inequality among countries and proposes that an alternative economic system should be adopted.
Since the mid-18th century, capitalism has not only shaped modern societies, but has also witnessed periodic crises that have often threatened these societies’ very existence. A number of theorists have sought an explanation at to why such setbacks to stability and growth take place. For Karl Marx, it was due to control of wealth by a privileged few and he argued that the system produces wealth at one pole and poverty at another and simultaneously becomes immensely strengthened. Rosa Luxemburg proposed that these cycles are due to exhaustion of new land for colonisation and markets; Keynes suggested the lack of demand and the saturation of markets and Kondratieff stagnation in technological development. Despite their differences they all agreed that capitalism was not a natural system and was bound to end sooner or later.
The prominent Austrian economist Joseph Schumpeter characterised the dynamics of capitalist development as displacing old equilibria and creating radically new conditions. For him, economic development is accompanied by growth, i.e., sustained increases in national income, which occurs discontinuously rather than smoothly. According to him, the immediate stimulus for development emanating in the sphere of industrial and commercial life takes place due to innovation (i.e. new products, methods of production, markets and sources of supply). The innovation process “incessantly revolutionises the economic structure from within, incessantly destroying the old one, [and] incessantly creating a new one. This process of creative destruction is the essential fact about capitalism” (Schumpeter, 1950:83). The prime motives of entrepreneurs are accumulation and enlargement of profits.
Capitalism as a socio-economic system arose in Europe initially as “merchant capitalism” and subsequently through a technological revolution which metamorphosed into “industrial capitalism”. Slavery and colonial expansion were the main forces behind the establishment of capitalism, first in Britain and later on in Belgium, the Netherlands, France, Germany and Italy. The big question is where the principal accumulation of wealth came from? Of course, slavery and colonialism played a big role. Historically, capitalism always fought for new territories and markets. It was also instrumental in imparting ‘vertical’ and ‘horizontal inequality’ in the world. However, there was a reaction to colonial capitalism which resulted in the Russian Revolution (1917) and the Chinese Revolution (1949) and decolonisation. However, unequal economic relations and Western control somehow persisted in the former colonies in the form of “neo-colonialism”.
In the West, after successive crises, capitalism has been successful in rescuing itself mainly through exogenous support. For instance, during the “Great Depression” of the 1930s, Keynes advocated in favour of increased government spending to lift the economy out of recession. When consumers and businesses slow down, the government should increase spending to increase demand for goods and services. This fiscal stimulus could take the form of public housing, healthcare, education and infrastructure projects. However, we should not ignore the role of government spending in boosting the defence sector, which is seen as a new avenue to increase profits and also creates jobs. Thus, military Keynesianism became popular among the ruling elites in the post-war period and large corporations also saw military spending as an important form of government intervention to make profits. These defence expenditures in advanced economies such as the U.S., UK and France also helped to counteract the threat of recession in their economies.
In the aftermath of the “Great Depression” and Second World War, capitalism was transformed with the increased role of government in the economy, a strong workers union and welfare state. There was a sea change from the economic system and policies which existed in Western Europe and the United States in the 1920s. After the Second World War, the social democratic governments under Keynesian economic policies were prompted, with active state intervention, to preserve economic stability and social justice within the framework of capitalism, which is known as the “Golden Age” of capitalism. Markets were brought under social control and a number of policies were designed to protect societies from the disastrous policies of the past.
Furthermore, the ruling elites in the West came to the realisation that economic stability could not be achieved unless the poor sections of society were guaranteed some basic benefits, the costs of which were to be shared with the state. In addition, the state must have some sort of regulation over markets. The workers were brought on board to accept property rights and inequality in exchange for political democracy and wage bargaining.
However, in the 1970s economic crisis deepened in the advanced economies, with both rising prices and unemployment, and such arrangements were being questioned. To control rising prices, deflationary measures were adopted along with attacks on trade unions and welfare policies. In order to increase investments, the governments resorted to public borrowing to meet their fiscal commitments. Financial markets were deregulated and liberalised. As a result, the financial institutions started taking ever increasing risks and their reckless drive for higher profits eventually brought the entire system into collapse in 2008. The declining profits on investments adversely affected global growth in output, with money shifted into the financial sectors and speculations and this bubble eventually burst in 2008. The governments had to rescue the financial institutions by bailing them out using public funds, which resulted in a dramatic rise in sovereign debts, which was then followed by severe austerity policies.
Michal Kalecki observed a rise in the “degree of monopoly” within metropolitan capitalism, which provided an opportunity for a greater squeeze on the producers of primary commodities of the developing countries. Samir Amin (2018) found that unequal exchange was manifested in the fact that the value added by a unit of simple labour in the periphery (i.e. developing countries) amounted to less than the value added by a unit of simple labour in the metropolis. This he called super-exploitation of the farmers and workers of the periphery. Amin also developed Paul Baran and Paul Sweezy’s ideas of economic surplus to explain a globally monopolised system in which Marx’s “law of value” takes the form of a “law of globalised value”, generating super-exploitation of the workers in the periphery. Under globalised capitalism, financial capital dominates worldwide production and distribution. Amin also predicts that capitalism’s current phase of neo-liberal globalised capitalism has reached a dead-end (Amin, 2018).
Conservative historian Niall Ferguson equates contemporary political developments with the period at the beginning of the 20th century, when the globalisation collapsed as a result the two World Wars and the Great Depression. He totally ignores colonialism and its impact on today’s economies, both advanced and developing. Others enthusiasts predicted the end of the nation state through rising foreign capital investments and trade, while the critics supported globalisation, but also argued for programs in favour of state-led infrastructure investment and some control over global finance to offset the adverse effects of globalisation. To address this, we need to analyse the trends in globalisation.
Globalisation means that the rate of growth of world trade is greater than the rate of growth of world’s production of goods and services. This would indicate that the world economy is becoming integrated, as cross-border trade and foreign direct investment (FDI) increasingly replaces the production of goods and services for domestic markets. The previous policy of protectionism and import substitution was reversed. This was the case during the inter-war period when import tariffs were imposed along with exchange controls. This began in 1914 as tension between European powers increased. However, after the Second World War, we saw a change in the world economy towards a sharp reduction in tariffs and growth in world trade, which grew on average at 10% annually, outstripping growth of world output two fold.
However, since the 2008 financial and economic crisis, both world trade volumes and FDI have slowed down. According to a recent OECD report, foreign investment flows declined by 7% in 2017 and thus dropping global outputs to 2.2%. Under the new situation, the U.S. has enacted various protectionist measures since 2009, mostly against China. In such critical times, Trump hopes to triumph by riding on economic nationalism, triggered by increased competition from China’s growing economy, which has now become a net exporter of capital.
During the first wave of globalisation, which was between 1850 and 1913, the colonies supplied raw materials and provided markets for manufactured goods from the metropolis, which led to vast accumulation of wealth in Europe. The treasures captured in the Americas, Africa and Asia by looting, plunder, enslavement and murder, were brought back by Europeans and were turned into capital. Karl Marx highlighted how Britain created an empire and trade through primitive accumulation of capital based on slavery and plunder of its colonial “possessions”. Of course, technological advances in the 19th century, especially with the introduction of railways, shipping and telegraph aided this process. This expansion of trade and business was far from peaceful, and growing economic expansion overseas was backed by military boots on the ground and the Royal Navy at Sea (Siddiqui, 2018a). Commenting on the two opium wars in the mid-19th century, (first opium War (1839–1842) and second (1856–1860)) involving China and Britain over the export of opium and China’s sovereignty, John Newsinger (2006) states in his book The Blood Never Dried, that “the British Empire was the largest drug pusher the world has ever seen”. And finally the British and French troops plundered, looted China and burned down the Summer Palace in 1860, afterword’s China plunged into civil wars, which continued for next ninety years until the communist revolution in 1949.
The colonisation of the economies in Asia and Africa and Latin America in the late 18th and early 19th century put a break on the internally initiated progressive reforms and structural changes. It also imposed de-industrialisation, reoccurrences of famine and forced integration of their economies with the occupying powers. To strengthen their occupation various types of compromises were made with the pre-capitalist and reactionary forces and the policies of ‘divide and rule’ which brought untold sufferings to the people in the colonies.
The colonies did not see any modern industrial growth and the world’s manufacturing remained firmly rooted in the advanced countries. The colonies were forced to specialise in the production of primary commodities such as sugarcane, cotton, coffee, tea, indigo, jute, opium and rubber rather than in modern industries.
The prices of these commodities were often suppressed; extortion and theft rather than a free market became the normal behaviour of the colonialists. The surpluses extracted from the colonies helped capital accumulation to be invested in the modernisation and industrialisation of the mother countries, but also gave them extra capital to be exported back to colonies in the form of railways, mining and plantations. All these lucrative areas of investments were only available for Europeans and therefore accentuated the unequal development between countries.
In the mid-18th century, the South had accounted for 73% of the world manufacturing output, but this share fell to 50% by 1830 and by 1914, at the end of the first wave of globalisation, the share dropped to only 7.5% (Bairoch, 1995). Contrary to this fact, Niall Ferguson still portrays British Empire as benign and benevolent. However, the fact is that the process of globalisation was violent and exploitive, brought famines and wars and decimated the native population in the colonies. It is estimated that more than 29 million Indians died in famines during the British rule, while at the same time millions of tons of wheat were exported to Britain while famine raged throughout India (Siddiqui, 1990). For instance, in 1943, up to four million people in Bengal died when the Winston Churchill diverted food to British soldiers. When asked about the famine Churchill said: “I hate Indians. They are a beastly people with a beastly religion. The famine was their own fault for breeding like rabbits.” And when few conscience-stricken British officials wrote to Churchill in London pointing out that his policies were causing needless loss of life, and then he wrote back “Why hasn’t [Mahatma] Gandhi died yet?” Capitalism was responsible for underdevelopment, deprivation, racism and poverty. In fact, colonialism did not contribute to the development of the productive forces of the colonies but conversely inhibited their development. Prior to the Industrial Revolution in Britain, Western Europe had been poorer in natural resources and less developed economically than either China or India (Siddiqui, 2018b).
The second phase of globalisation began slowly in the 1950s, but was limited to the few developed economies of Western Europe, Japan and North America. However, in the 1980s the international debt crisis and mismanagement provided an opportunity for the IMF/World Bank to impose a “Structural Adjustment Programme” (SAP) in developing countries (Siddiqui, 1996). The opening up of domestic markets was one key element of the SAP. Taking advantage of these crises, the mechanisms controlling cross border direct investment, trade and financial flow were removed. The creation of integrated world markets meant that workers had to compete under the fear of capital outflows and jobs moving away. Any country that tries to pursue a path independent from the Western-dominated financial oligarchy is criticised. Further, the IMF/World Bank discredited and dismantled institutions which could have promoted economic independence and self-reliance in the developing countries.
The final success came with the collapse of the Soviet Union in 1991 and the globalisation project received a further boost and almost the entire world economy was open for trade and capital liberalisation. The current drive of globalisation for further integration of markets was also boosted by the development of information and communication technology (ICT). At the same time, governments deregulated the financial sector, which led to the increased financialisation of the world economy which has now become “financialised and globalised oligopolies” located primarily in the U.S., Europe, and Japan. This is global oligopolistic capitalism, in which finance capital has come to dominate worldwide production and distribution. This means expansion of financial markets and an increase in the portion of income generated by the financial sector worldwide. It has also led to further fuelling of global capital flows with a profound impact on global and national economies.
However, when neo-liberal policies were imposed in the South after the debt crisis mainly through the IMF, World Bank, and WTO, the aim was to create a just and stable global economic system. However, the global recession along with the financial crisis betrayed the neo-liberal claim. This was largely due to the change in the nature of global capital from “productive” to “fictitious”. The “new rich” have enhanced their wealth not by creating “real value” via production but by engaging in speculative businesses. This sort of a “capital” makes the global economy unequal, unstable, unproductive and unsustainable. It is unlikely that crony capitalism will promote economic growth with social and environmental justice.
Donald Trump becoming President of the U.S. last year seems to have successfully convinced U.S. political and business elites that protectionism will restore American power and will harm the U.S. much less than its rivals. For example, in the United States trade measured nearly 30% of total output in 2016. This is compared to 167% in Belgium, 85% in Germany, 59% in the UK and 42% in China. This means that any move towards protectionism by the U.S. will be less adverse than in other advanced economies. Martin Wolf (2017) notes that Trump: “appears to be intent on replacing multilateralism with bilateralism, liberalism with protection and predictability with unpredictability.” Therefore, the future of globalisation depends on the outcomes of such tension in the world and also within the U.S. ruling elites.
Inequalities among nations were stabilised in the early decades of the post-colonial period (i.e. 1950-70) due to decolonisation and commodity boom, but in the 1980s and 1990s rose massively during the debt crisis due to financial instability and the global economic crisis of 2008. For the last three decades, there have been huge economic changes taking place globally and structural changes and patterns of trade have also taken place both in advance and developing countries. However, some developing countries have achieved faster growth rates than the advanced economies, particularly China, India, Indonesia and Turkey. However, they constitute a small numbers among the developing countries, but accounts large number of its population. In fact, international inequality in terms of distribution of per capita incomes among the countries’ population has declined in the last two decades. Trade liberalisation and with the removal of trade barriers did have some positive impact on country’s growth but not all the developing countries have benefitted from it. We also find that with globalisation, transnational companies largely from the advanced economies driven by competition at home for markets (Siddiqui, 2018b) and higher wages and low returns, driven rising competition for markets, whilst also seeking to cut their costs, have started investing abroad especially given by the rise of global value chains since the 1990s.
Under neo-liberal policies the world’s wealth and income has been concentrating into fewer hands. According to a recent Oxfam study, in 2015 the total wealth of the world’s 388 richest was on a par with that of the bottom half of the global population. In 2017 the top eight richest people’s wealth equalled that of the bottom half. In the U.S. alone, 0.1% of Americans enjoy 90% of the country’s wealth.
Currently, the word “globalisation” in India means capitalist expansion, through over-exploitation of natural resources with the inevitable consequences of marginalisation of tribal peoples, uncontrolled growth of inequalities, and transformation of the country into a crony capitalist state and proliferation of billionaires who symbolise the capitalists’ de facto control over the country’s economic sovereignty. Neo-liberal policy unleashes a vigorous process of primitive accumulation of capital in the countryside, where the domestic corporate oligarchy and multinational corporations impinge on the small landowners and petty producers, causing them great distress. The big businesses attempt to restructure the government by forcing it to be functionally autocratic through bureaucracy, and by legislating centralisation to substitute democratic procedures (Siddiqui, 2017).
Since the 1980s, inequalities within countries has risen sharply, especially after the adoption of neo-liberal economic policies. In India, for example, during the last quarter of a century under neoliberal policies inequality within the population has widened further. According to the latest Human Development Report of UNDP, 55.3% of Indians are under multidimensional poverty. On the Human Development Index (0.624), India’s rank among 188 countries is 131. According to the recent World Bank World Development Report (2018), 172 million Indians live in extreme poverty, thus making India home for 24.5% of the world’s poor. The recent Oxfam Study points out that the richest 1% of Indians now own 58% of the country’s wealth. Another recent study by Chancel and Piketty observed that the top 1% of Indians owns 22% of country’s total income. There is also a concentration of landed wealth in India. 70% of India’s rural population is landless, only 30% owns land. Persistent agrarian distress has been making the life of the majority of people miserable. According to an official estimate, since 1995 more than 300,000 farmers in India have committed suicide (Siddiqui, 2017).
Capitalism has been moving on a relentless march towards automatisation through displacement of labour. This situation has led to further weakening the position of workers towards secure jobs as they are threatened by artificial intelligence and driverless cars. The world has become too vulnerable with the rising craze for automation, robotisation and artificial intelligence. With rising global inequality and environmental crises, capitalism is unable to resolve the crises and thus has become an obsolete social system. Randell Collins (2013) believes that capitalism has reached a dead end, and at present it has no escape routes. In this predicament, we need an alternative economic system which respects ecological diversity, environment, democracy, social-economic equality and facilitates fair and reasonable redistribution of incomes and wealth.
About the Author
Dr. Kalim Siddiqui teaches International Economics at University of Huddersfield, UK. He is an economist, specialising in Development Economics and has written extensively on development economics, economic reforms as well as on the political economy of development.
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