The global economic crisis – reflected in stock market crashes, growth slowdowns, banking crises, capital flights and large job losses – has indeed halted the march of neo-liberalism as the dominant ideology of our times. It marks the end of a phase in which finance capital enjoyed historically unprecedented rights and privileges in deciding economic policy. Whether it leads to a total collapse of the present financial system or not, it also marks the end of a phase where the “minimalist role” of the state was hailed as supreme. The crisis has forced the governments of many developed nations to intervene, regulate, and even nationalise financial institutions; as French President Nicholas Sarkozy was to admit, “laissez faire is finished.”
This is not the first time in its history that capitalism has faced such a massive crisis. The Great Depression of the 1930s was a classic demonstration of the consequences of the domination of finance capital over the production sector. To “save” the capitalist system from collapse, John Maynard Keynes had recommended “a somewhat comprehensive socialisation of investment” in the economy. Nation states intervened with massive public investment, raised levels of employment and moved out of recession. After the War, Keynesian demand management and the provision of a host of welfare measures were central to economic policies in both the developed and developing world. This conjuncture was highly favourable to growth and employment generation, leading some to refer to the 1950s and 1960s as the “golden age of capitalism.” Importantly, this period was marked by a shift in the balance of class forces in favour of the working class, which wrested major concessions from the ruling class making use of their stronger bargaining position.
However, the neo-classical counter-revolution in the 1970s and 1980s ensured the return of “laissez faire capitalism” as the guiding ideology of world capitalism. The neo-classical counter revolution was associated with concrete changes in the material conditions under which economies across the world operated. There was a radical transformation of both the structure and management of the world economy, beginning from the late-1960s. The above transformation, both quantitative and qualitative, was significant in that it finally seemed to offer the historic possibility of creating a truly unified global capitalist economy. In other words, it was the new stage in the “centralization of capital” that shaped the material ambience for the neo-classical counter-revolution. In theory, monetarism returned with a vengeance. In policy, laissez faire capitalism was packaged into the Washington Consensus.
The counter-revolution unleashed from the 1970s onward did not simply return global capitalism to its pre-Keynesian form of organization. While capitalism before the First World War was marked by the global mobility of “capital for production”, the new form of capitalism was marked by the global mobility of “capital as finance.” It was not a merger of identities of finance and industry, but a condition where finance dominated the sphere of production. The new mobility of capital was not characterized by rising trade transactions across the globe, but by short-run speculative capital flows. Alongside, a slew of innovative financial instruments were unleashed to meet the growing needs of financial mobility as well as to hedge against the rising risks.
A corollary to the domination of globally mobile finance was the shrinking of the space available for the state for autonomous economic policies. Growing economies that are open on the capital account invariably attract capital inflows, whose size is often significant relative to the GDP. This turns into a Gordian knot. The sustenance of capital inflows becomes dependent on certain parameters of the economy. Any effort by the state to expand economic activity, or to adopt a redistributive social policy, makes speculators uneasy. The speculators begin to worry about inflation, fiscal deficit, exchange rate depreciation and above all, political radicalism. Capital flight begins, and as volatility in financial flows leads to dampening of growth, governments try to stem the capital outflow by rolling back their policies. As Prabhat Patnaik has noted, “state intervention presupposes a ‘control area’ of the state over which its writ can run; ‘globalization’ of finance tends to undermine this ‘control area.’”
For the developing world, the era of finance capital implied the death of the “development project.” By the development project, we refer to the set of socio-economic policies and national goals that the newly independent colonies pursued in the 1950s and 1960s. In these countries, such as India, the bulwark of the development project was the nation state. Indeed, most of these nation states were elite-controlled, and pursued elite interests. Agrarian reforms were only sparsely undertaken in the developing world, and consequently the agrarian question remained a critical unresolved issue. Nevertheless, there were limited gains. Import substituting industrialization created a protective environment in which the industrial sector expanded and self-reliance grew, albeit slowly and unevenly. The banking sector was brought into the public domain and regulated, which contributed to investment credit needs to a significant extent. In many countries, banks were actually nationalized. The limited welfare state regime protected workers to some extent from the aggressive exclusiveness of the market.
Of course, the real task of nation-building required more than a mixed economy. The contradictions left behind by the mixed economy-path, themselves generated new fetters to growth. Yet, the mixed economy path also sustained an important nationalist platform in the political arena, from where deeper struggles to complete the development project could be launched.
In the new era of finance, however, the role of the nation state stood undermined vis-à-vis the development project. With the “confidence” of international speculative investors attaining the status of a policy imperative that could not be questioned, other domestic policy measures were dovetailed to this end. As a result, interest rates were kept high (to incentivize financial inflows), the financial sector was deregulated (to ensure retention and prevent outflow of finance), government expenditures were compressed (to keep fiscal deficits controlled), labour rights were restricted (to allow free entry and exit of firms), public enterprises were disinvested or sold off (to ensure financial discipline in the public sector) and external trade was liberalized (to attract inflows of foreign capital in export oriented sectors and encourage export growth). This set of policies was packaged as the Washington Consensus (WC) by the World Bank and the IMF, and forced to be implemented by the developing world in the 1980s and 1990s. The supplement of the Post-Washington Consensus (PWC) was primarily intended to render the package more palatable; without deviating from the central ideas of stabilisation and structural adjustment, the PWC was an attempt to integrate the state and a minimum of anti-poverty measures into the framework of WC.
The actual experience with the WC in the developing world has been profoundly negative. Levels of economic growth in the 1990s and 2000s have been typically below the levels of 1950s and 1960s. Rates of poverty reduction have slowed down. The number of people forced to live in income-poverty (even if a destitution cut-off of $1 a day is used) continues to be appallingly large. Inequalities and economic insecurities have been fostered on a massive scale. The fiscal conservatism of the WC has led to relative declines in development expenditure, particularly in social welfare. The liberalisation of trade has been deeply asymmetric, and this has had deeply adverse impacts. The neo-liberal promise that trade liberalisation would lead to expansion of world trade in primary commodities, and thus export-led growth, has remained unfulfilled. Indeed, the most perfect demonstration of the disaster unleashed by the WC comes from the transition to full-fledged capitalism in the Eastern bloc countries.
The current financial crisis has thrown into sharp relief the abject failure of the economic model championed under the WC. It is clear now that it was not just the livelihoods of large sections of people that were rendered fragile and vulnerable, but the economic system itself was rendered so.