twentieth century
Towards a return of the past?
From the ashes of the Second World War rose a new world order designed by representatives of only two states, the United States and Great Britain. The outcomes of subsequent multilateral negotiations were also shaped by Stalin’s Soviet Union. The United Nations Charter was more democratic than any- thing seen in international relations ever, yet the UN system was soon para- lysed by the cold war. Liberal democracy prospered in the better-off parts of the Western world, particularly in Japan and Western Europe, as well as in a handful of neutral countries. Moreover, the Bretton Woods system was cre- ated to replace the nineteenth-century institutions of free trade, globalising finance and gold standard with the system of capital controls and the collect- ive management of exchange rates that were tied indirectly, via the dollar, to gold. The Anglo-American politico-economic agreements reached during the dark days of the Second World War were different from anything that the industrial and capitalist world had seen before. They established rules for a relatively open and multilateral system of trade and payments, but they did so in a way that would reconcile openness and trade expansion with flexibly fixed exchange rates, capital controls and commitments of national governments to full employment and economic and political stabilisation.
The Bretton Woods system was a compromise between various positions.
Most notably, Keynes and the British wartime cabinet emphasised imperial preferences, full employment and state interventionist policies for political stabilisation. The American State Department favoured a traditional, laissez faire free trade position (see Ikenberry 1992). The compromise with the classical free trade liberalism notwithstanding, the Bretton Woods system represented a partial victory of productivism over financial capital; it imposed significant constraints on the freedom of movement of financial capital (Gill 1997: 7). From the point of view of economic growth and prosperity, particularly in the OECD world but also elsewhere, the Bretton Woods era was a great success, ‘the golden age of capitalism’. In 1950–73, world popula- tion grew very rapidly at a pace of 2 per cent a year and per capita income 3 per cent a year, by far the fastest growing phase in human history (see Maddison 2005: 6–7). At the same time, although uneven industrialisation continued to widen the prosperity gap between many regions and countries,
income inequalities diminished within most countries, except perhaps in Latin America (see Cornia 2004).
From the 1970s onwards – well before Lenin’s heritage came to an end in 1989–91 – the Bretton Woods system was gradually being transformed into a neo-liberal world order. This transformation is usually described in terms of the concept of globalisation. The term ‘globalisation’ is relatively new and was not generally known before the 1980s. In its short history it has been associated with the ideology of transnational neo-liberalism that emerged in the 1970s and ascended in the 1980s. The ground was prepared by the use of such terms as ‘transnational’, ‘global’ and ‘globalism’ in the 1970s, and also stimulated by outer-space pictures of the earth and rising ecological aware- ness. In the 1980s, the notion of globalisation was first discussed by some critical sociologists, such as Roland Robertson (e.g. Robertson and Chirico 1985; Robertson and Lehner 1985). During the second half of the 1980s, however, ‘internationalisation’ and ‘globalisation’ became commonly used terms in intellectual, business, media and other circles.
Transnational neo-liberalism assumes that globalisation of the economy and business has made the world an economistic unity; or that (the only) rational economic policy, when implemented by most states, will soon lead to a harmonious coming together of the world economy.1 The rearticulation and advocacy of neo-liberalism began in the early 1970s by the followers of Milton Friedman, Friedrich A. Hayek and, more generally, orthodox neo- classical economics; and by transnational think tanks such as the Trilateral Commission. Increasingly, organisations such as the City of New York or the International Monetary Fund (IMF) and countries such as Chile started to implement neo-liberal policies. Since the 1980s, the economic policy requirements of this ideology have been spelled out in the ‘Washington con- sensus’. According to this consensus, economic growth can be best achieved via ‘free’ international trade, sound budgets – meaning normally fiscal austerity, which translates into cuts in welfare spending – low inflation, privatisation, economisation of social life, and deregulated markets, including financial markets.2
Globalisation as a political project rests on claims about peace and prosper- ity (on economic efficiency and consumers’ freedom of choice). The economic claim is that free market economic policies – particularly those associated with ‘the Washington consensus’ – not only solve a number of day-to-day economic problems but also speed up economic growth and thereby benefit everyone, including the poor of the planet. The political claim is basic- ally two-fold. First, the world is united in its interest to promote economic liberalism (the harmony of interests thesis). Second, globalisation of liberal democratic rule implies that there will be no more wars between states (the democratic peace theory).
Simple economic evidence seems to question the first two claims. Average global per capita economic growth has actually slowed down if not come to a near halt. In retrospect, the oil crisis of 1973–74 appears as the starting point
of not only neo-liberalism but also a long and gradually deepening recession.
There are many indications that decade after decade, there has been, globally, less per capita growth and more un- and under-employment of industrial and human capacities. To put it bluntly, more ‘globalisation’ seems to have meant less per capita economic growth. Also the harmony of interests thesis looks rather weak. Moreover, although the defenders of neo-liberal globalisation (Bhagwati 2004; Wolf 2004) usually claim that poverty and disparities in the world are decreasing (usually resting their case on the increasing prosperity of hundreds of millions East Asians), this is at best a one-sided partial truth.
Following the second oil crisis in the early 1980s, an increasing number of countries and people have been impoverished in absolute terms in the context of persistently high population growth.3 While there has been rapid per capita economic growth in parts of Asia, many other parts of the world have experienced long term economic decline. Inequalities have again been on the rise within most countries. Although the OECD world remains mostly very affluent by world historical standards,4 and although some Asian countries have grown and industralised (as their ‘globalisation’ has remained selective), the harmony of interests thesis seems to rest on assumptions that do not stand closer empirical scrutiny.
In this chapter, I explore two sets of issues. First, what are the causes of the ongoing downward phase of the world economy? Have neo-liberal economic policies played a role in these developments? What kind of a role? How should we then explain the adoption of these policies? Second, what does this all mean politically? What are the implications of a sluggish, ambivalent and unequal growth to democratic peace? Apart from violent conflicts in parts of the global South, is it also possible that the logic of violence and war return to the core areas of the world economy? Will the liberal dream of eternal peace collapse once again? By taking some steps towards explaining the past and present trends, I also hope to shed some provisional light on possible futures.
Economic developments since the 1960s
In retrospect, the oil crisis of 1973–74 appears to be the beginning of a long and gradually deepening recession. Although relatively few economists have actually studied long-term global trends in any systematic fashion, there have been some notable exceptions (e.g. Freeman and Louçã 2001; Maddison 2005). Although David Felix (1995) may not be an expert of long-term trends and cycles, he is among the first to have systematically compared different eras of the second half of the twentieth century. Felix’s focus is on figures for the G7 countries in the periods 1946–58, 1959–70 and 1974–89. In the Bretton Woods era the real per capita growth rate was about 4.5 per cent, whereas for 1974–89 it declined to 2.2 per cent. A much bigger sample of 57 countries points to the conclusion that this has been a general worldwide trend. It seems that at the turn of the 1990s per capita growth seems to have come to a halt (or at least dropped to something like 1 per cent or less).
There are of course different ways of calculating average per capita growth, yielding different results. For instance, Alan Freeman (2003) uses constant per dollar values and IMF data. According to his calculations, whereas in the 1970s the per capita growth was, on average, more than 3.7 per cent, it was slightly negative in the 1990s and early twenty-first century (in constant 1995 US dollars, converted from national currencies at current exchange rates). In 1988 global GDP per capita was USD 4,839 and in 2002 it was USD 4,748. From this perspective, there seems to have been virtually no per capita growth since the late 1980s.
Obviously, even if we leave aside the methodological difficulties of compar- ing different growth rates, it is clear that the situation is not similar in every country. In some places – in a few OECD countries, and particularly in China and India – there have been, and may continue to be, rapid growth. Yet more people are also living in countries with stagnant or declining standards of living. Measured in constant 1995 dollar terms, the absolute world GDP might have begun to decline in the mid-1990s. The Asian crisis of 1997–98 that had also spread to Russia and Brazil pressed a hollow in the graph that otherwise had shown stagnating growth. As a consequence, per capita world economic output in 2002 seemed essentially the same as in 1980 and, as indicated, slightly less than in 1988 (see Freeman 2003). It seems that the years 2004–06 have seen faster growth but still within the confines of the long-term slowdown. Figures 5.1 and 5.2 display per capita growth in
Figure 5.1 Slow-down of economic growth in high-income countries.
Source: World Development Indicators (WDI) data.
high-income countries and the world as a whole, as measured in 2,000 US dollars (compiled by the World Bank, available in the World Development Index).
Moreover, the remaining growth has also become more volatile and sensitive to disturbances (ibid.: 8). In particular, in the OECD countries and Latin America the ratio of investments to GDP has also declined rapidly. Oil- exporting countries and sub-Saharan Africa were only very partial exceptions, largely following the trend. Only a number of Asian countries provided a true exception in this period, sustaining a high and relatively stable growth with a rising ratio of investments to GDP (ibid.: 8–9). In Japan, profit rates were halved when compared to the period before 1970 and at the same time the growth of net capital stock, productivity and wages declined steeply (see Brenner 2002: 7–9). However, this may, of course, have been in part due to the fact that Japan was undergoing a technological transformation, massive reinvestment and early outward investment which stimulated growth else- where in the region in this period.
What is also important is that the slackening growth has been accom- panied by growing disparities between countries and regions, and between different social classes. The ratio of the richest one-fifth of countries to the poorest one-fifth was 30:1 in 1960, 60:1 in 1990 and almost 90:1 at the end of the 1990s. It seems that the global poor have remained as poor as they were Figure 5.2 Slow-down of economic growth in the world as a whole.
Source: World Development Indicators (WDI) data.
in 1820, and that the fruits of industrialisation have been experienced only by some countries and people (UNDP 1999: 2–3, 29–38). Moreover, as shown in Figure 5.3, in 1980 about 120 million people lived in those nine countries where per capita income declined in the previous decade. In 1998 there were 60 such countries, with a total of 1.3 billion inhabitants. This is also a qualitative change compared to the Bretton Woods era. For the first time since World War II the world economy seems to have become close to a constant (or even negative) sum game where many are losing in absolute terms. Although relative inequality has steadily risen since the industrial revolution, the average citizen in the 1950s and 1960s seems to have bene- fited from economic developments to at least some degree in most countries.
Following the second oil crisis in the early 1980s, the situation has become quite different. An increasing number of countries and also people in many regions have been impoverished in absolute terms (Freeman 2002).
In addition, inequalities have been on the rise also within countries. As Figure 5.4 displays, the share of the top 0.1 per cent of incomes declined in the US until the 1970s, but this development has been reversed from the late 1970s onwards (see Piketty and Saez 2003: 36, Figure XII). In the US the share of the pre-tax income that goes to the top 1 per cent of households increased from 17.5 per cent in 2003 to 19.8 per cent in 2004 in one year alone (Aron-Dine and Shapiro 2006: 1). The situation in the United States in 2004 had become similar to what prevailed in 1917, before the US joined the First World War. The difference lies in the composition. A larger rise of
Figure 5.3 Number of people living in countries with declining per capita income.
Source: Freeman 2002: 1.
the top wages explains the restoration of the upper class share of incomes, although it is now different in composition as capital incomes constitute a much smaller share than in the first decades of the twentieth century. The overall developments have been similar in many countries, although very few countries match the US in terms of rate of growth of inequalities.
More globally, research based on the World Income Inequality Database (WIID), co-developed by WIDER and UNDP, including information of about 73 major countries that represent most of the world’s population and all the continents, show a general fall in inequality during the Bretton Woods era (except in Latin America and parts of sub-Saharan Africa). These devel- opments have been reversed, as a clear rise in inequalities has occurred, par- ticularly over the last two decades (see Cornia 2004; Cornia et al. 2004). In the 1980s and 1990s, wage and income differentials grew in most of the OECD countries, particularly in the US and the UK but also in such trad- itionally egalitarian countries as Sweden and Japan. However, the fastest ever recorded changes in income inequality took place in Eastern Europe and the CIS (including the former Soviet states in Central Asia) after the collapse of the Soviet model.
Similar trends are also evident in the countries of the global South. All but three Latin American countries experienced a rise in the already very high inequality levels. In the Southeast and East Asian economies, the reversal of the stable declining inequality trends started in the late 1980s and was exacerbated by the 1997 Asian crisis. In sub-Saharan Africa the picture is more ambiguous and the figures also less reliable. It seems, however, that while in some countries the urban–rural divide has become less severe, Figure 5.4 The restoration of upper class share of incomes.
Source: Piketty and Saez (2006) Updated Data Series.
inequalities in general between households are rising in others (the overall context in Africa, however, is that of a general economic decline). North Africa and the Middle East are less well documented by WIID, yet countries of these regions also seem to concur with the general trends of economic decline and/or rising inequalities. Of the 73 major countries surveyed by WIID, only 5 per cent of the population were living in countries with declin- ing inequality. The use of purchase power parity (PPP) values does not affect the picture of growing disparities within countries in any way. The number of the relatively poor has been rising in many, including the poorest, countries, not to speak of income inequalities per se.
Methodological choices make a difference. For instance, it may be reason- able to use purchase power parity (PPP) values instead of constant dollars, as I have done in Figures 5.1 and 5.2.5 Consequently, the world economic growth would seem somewhat higher and the differences between countries signifi- cantly less dramatic than, for instance, in Freeman’s constant dollar-value calculations. This is because the price level in less well-off countries tends to be and become lower than in better-off countries, and thus dollar-converted values make them look poorer than they actually are. The difference is par- ticularly striking in the case of India and China. Nevertheless, the use of PPP- values does not really change the general picture. In spite of rapid growth in India and China, there has been a wide-ranging slow-down of per capita economic growth. For instance, the 2004 Report of the World Commission on the Social Dimension of Globalization (World Commission 2004), which was set up by the International Labour Organisation (ILO), uses the World Bank figures measured in PPP terms and includes China and India. Consist- ent with Figure 5.2, it shows that the growth of world GDP per capita was 4 per cent in the 1960s, 2 per cent in the 1970s, 1 per cent in the 1980s, less than 1 per cent in the 1990s, and even less in the first years of the twenty-first century. Also according to PPP figures, inequality has been increasing at least between the richest 10 per cent and the poorest 10 per cent of countries, although obviously the difference between the average of the OECD world and those in Asia who have prospered has become smaller.
The GDP of a country is defined as the market value of all final goods and services produced within a country in a given period of time, which is only a way of measuring the size of an economy. Calculating Gini coefficients is a standard technique used by economists to measure the distribution of income among the participants in a particular economy, but there are other possible ways of assessing levels of inequality. GDP and Gini coefficient calculations are not supposed, of course, to tell any unambiguous truth about world economic developments. Forming a global picture of the world economic growth and inequalities based on statistics requires a number of method- ological and interpretative choices. For instance, what is the base year? How should the currency conversions be done? What weight is thereby (implicitly) given for instance to the rather significant economic growth that occurred in India (3–4 per cent per capita per annum) and China (6 per cent per capita
p.a.) in the 1990s? And how should we interpret developments in India and China? India and China are among the few countries in the global South that have thus far spared themselves the debt crisis, maintained capital controls and developed large sectors of heavy industry. Freeman (2002: 13; 2003:
158–59) argues that an exception should in fact be made of China, particu- larly when the focus is on the effects of neo-liberal globalisation, since ‘the Chinese state has dominated over market and global processes’. However, in terms of internal inequality, China and India do not necessarily constitute exceptions to the rule. Although absolute poverty has been declining in China during the era of high growth (World Commission 2004: 45, Figure 19), at least until 2003 when a reversal seems to have taken place despite further growth, it is also clear that income inequalities between households and regions also grew there in the 1990s.6 The trends in India are ambiguous and difficult to interpret. However, household surveys in India do not show increased per capita consumption, and at any rate, developments in India have involved a moderate rise in recorded consumption inequality and, possibly, by a larger one in unrecorded inequality (Cornia 2004: 7).
Despite these methodological reservations and interpretative qualifica- tions, my overall conclusion on the basis of various GDP per capita and Gini coefficient statistics is:
1 that per capita economic growth has slowed down significantly since the 1960s and 1970s, despite rapid growth in China, India and some other Asian countries,
2 and that inequalities have been on the rise – in many contexts quite dramatically so – since the 1970s.
What matters for the purpose of establishing a research problem and hypoth- esis is whether or not a qualitative judgment can be made that there has been a general and clearly discernible pattern, not the exact figures. Global GDP and income inequality data form only two synthetic series in representing the variation of a complex monetised ‘quantity’ that is in a sense the creation of a statistician (Schumpeter 1939a: 18). At best, a general trend of this kind can only be taken as a possible surface level indicator of some deeper mechanisms and processes.
In the remainder of this chapter, I try to answer tentatively two sets of questions. First, what are the mechanisms that have caused the decline of world economic growth and the rise of inequality? On the basis of proposed hypotheses about these mechanisms, are there reasons to expect a new era of growth or, alternatively, on the basis of this iconic model, are there reasons to anticipate further crises? Second, I also indicate some of the social and polit- ical consequences of slackening global economic conditions and growing dis- parities. What sorts of connections are there between the long-term world recession and related economic crises, on the one hand, and worldwide con- flicts, foreign policies of states, and even wars, on the other?