Global economy

Level the playing field

“Anyone who has visions should see a doctor,” former Federal Chancellor Helmut Schmidt used to quip. But while it is true that government thinking needs to be realistic, Schmidt’s witticism obscures the fact that theories and visions provide orientation – which is needed, especially in times of crisis.

By Uwe Jens

Uwe Jens last contributed to D+C/E+Z in autumn 2012 as a book author. His latest book "Zukunft der Weltwirtschaft" (future of the world economie) was published last year by Wochenschau-Verlag (Schwalbach). 

German politicians are proud of what they call the country’s “social market economy”. The term is not clearly defined however. It was coined by the liberal economist Walter Eucken, whose basic premise was that the market needs a regulatory framework, backed by strict anti-trust laws, for example, to guarantee competition and prevent the emergence of monopolies that might reap in undue profits and exercise illegitimate power. When they hear “social market economy”, many Germans also think of the state-run insurances introduced by Bismarck way back in the days of the German Empire to manage the risks of old age, illness and unemployment.

The reality of the Federal Republic of Germany today no longer reflects those relatively simple principles, so the concept of the social market economy no longer offers clear guidance. Politicians – especially in the ruling coalition – still do not fully understand that the global wave of liberalisation in the 1980s went too far. That was especially so in the financial and banking sector, which ultimately led to the collapse of the investment bank Lehman Brothers in 2008 causing a global shock, from which the world economy has still not recovered.

Policymakers have fallen prey to the financial sector. Governments have been forced to spend billions to avert a global depression, support weakened industries and rescue ailing banks. Even the crisis the European Monetary Union now faces is due to the shockwave of 2008. Countries like Spain and Ireland had to go deep into debt to afford bailout schemes.

Politicians need guidance in the present difficult situation. They should be clearly expressing public interests and deciding what should be done on the basis of recent research and scientific evidence. Instead, just as before the crisis, they are making themselves dependent on the financial sector and looking nervously at ratings and government bond interest rates. Let’s not forget that, when speculative bubbles trigger financial crises with potentially catastrophic results, the market is not the only thing that has failed. Such events are always a consequence of failed governance too.

Anyone taking a fairly detached look at world economic developments since World War II will fast accept that the vision of pure socialism has failed. Classical socialist dogma is now propagated in only two countries of the world anymore. Cuba and North Korea, however, are patently not pioneers of modernity but relics of a failed ideology.

Distorted capitalism

However, leftist criticism is justified too. Capitalism is not in good health. It exists in a number of distorted forms. The three main aberrations at present are:
– oligarchic capitalism: it is found in Russia and taking root in the EU, characterised by a technocratic concentration of power in the hands of bureaucrats and corporate elites virtually impervious to electoral influence,
– authoritarian state capitalism, as exemplified by China, and
– state oligopoly capitalism as found in Japan, Korea and France, marked by a power-sharing relationship between government and big business.

A positive model of capitalism is arguably the “democratic capitalism” practised in Scandinavia, where markets are broadly free, while high sales taxes are used to fund extensive welfare states and government-run education programmes. This system ensures a degree of equality of opportunity, which is an age-old ­lib­eral ideal that market-radicals have pretty much ignored in recent decades.

Dyed-in-the-wool socialists want poli­tics to govern economies. We know, however, that command economies do not work. Walter Eucken was basically right to posit the need for a clear governmental framework that allows private interests to develop independently. That framework needs to protect markets from their own tumorous growths. It must also ensure social inclusion and provide people from all strata of society with opportunities for personal advancement.

The long-term goal of policymaking must be to create fair conditions. We need a level playing field on which everyone has the same basic chances and plays by the same rules. The special challenge today, in this era of globalisation, is to create a level playing field worldwide. The framework needed for business can no longer be provided by the nation state. Action needs to be taken by the industrial nations in particular. Highly developed countries can only expect fair play from weaker and aspiring partners if they set the right example themselves. In many cases, they are not doing so.

Dangerous monetary policy

Since 2008, the leaders of the world’s largest economies have met regularly at G20 summits to discuss, amongst other things, ways to improve regulation of the globally interconnected financial sector. So far, however, they have achieved precious little in that respect.

Meanwhile, the US Federal Reserve and the European Central Bank (ECB) have taken the unfair line of furnishing domestic private banks with practically interest-free loans – in each case to the tune of more than a billion euros. This “cheap money” is now also finding its way into emerging economies, where high yields and high interest rates are beckoning.

Hot money flows fast – in and out. It allows rich-country investors to profit from the upswing of emerging markets. At the time, it has a destabilising impact on those very markets. Brazil’s President Dilma Rousseff is the only one who has spoken out clearly against this policy. She also understands the second, even more worrying effect of loose monetary policy: the relative devaluation of the dollar and euro against other currencies mean that exports from the USA and the EU are becoming cheaper, whereas imports to those markets are becoming more expensive.

We have seen it happen before, In the 1930s, all nations used devaluation as a tool to secure a competitive edge in the world market. But because everyone did so, no one benefited. The vicious circle just deepened the Great Depression. Today, it would be good to see the International Monetary Fund (IMF) play a coordinating role and persuade major central banks to adopt uniform rules for a fair monetary policy.

After initial successes, the World Trade Organisation (WTO) has similarly lost its way. The Doha Round of negotiations was launched in 2001 with the goal of improving developing countries’ chances in world markets. The round is deadlocked – largely because of unwillingness to compromise on the part of the EU and USA. Both adamantly refuse, for example, to stop subsidising cotton and sugar production – despite the fact that trade distortion in the agricultural sector, where poor low-wage countries have a competitive advantage, categorically obstructs the creation of a level playing field.

European and North American poli­ticians frequently accuse China of dumping practices – a charge that is easily made but certainly not always justified. Dumping does not mean selling products abroad at a lower price than at home; it means selling them at a price that does not cover the production costs. EU experts currently complain that the Chinese government subsidises the manufacture of solar panels by providing low-interest loans. However, such charges ignore the fact that Europe’s expansive monetary policy has the similar effect of keeping interest rates very low.

What is also unfair is the support provided to corporate giants of global stature. Most of these multinationals are from rich nations. The privatisation of the German postal service in the 1990s, for instance, gave rise to two corporations that are listed on the stock market: Deutsche Post and Deutsche Telekom. The state is still a major shareholder in both cases, by the way. Supported initially by subsidies and tax concessions, the two corporations were transformed into global players. The domestic privatisation of the post office went hand in hand with the deliberate development of national champions strong enough to take on international rivals. Creating such champions was certainly not fair play.

The world economy needs a fair regulatory framework if it is not to succumb to the law of the jungle, where might makes right. The rich world needs to set a good example. Its governments, however, seem oblivious to the fact that they are squandering trust.

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