7:50 AM Jan 11, 1995


Geneva 10 Jan (Chakravarthi Raghavan) -- It was to have been the start of a new era in the Global Economic System, with the new "powerful", rule-based World Trade Organization in Geneva acting in tandem with the Washington-based International Monetary Fund and the World Bank.

By the reckoning of some Biblical scholars, the New Year's day of 1995 which ushered in the WTO (without any New Year's eve party or New Year celebration ala Vienna), is also the beginning of the third millennium Anno Domini, despite the Papal sanction for the Gregorian calendar, according to which the new millennium is six years away.

For the prophets (and advocates) of Alliance Capitalism in the North -- the South is increasingly looking more like the old colonial style capitalism -- in a global economy being fast knit together by the transnational Market System, it would have been both a throwback to the laissez faire order of the 18th and 19th centuries and a new assurance of perpetual prosperity.

But the holiday season saw its own contre-temps.

The essential political stability that needs to underpin any order was feeling new tremors across the globe. Not all of Washington's sole-Superpowerdom nor Boutros Boutros-Ghali's valiant efforts at a New Agenda for Peace were of avail.

On the economic front, as if the national review process (of WTO rulings and a three-strikes-against-us-and-we-will-walk-out) was not enough to dent the credibility of the rule-based system, the United States has already threatened its own unilateral actions over the EU's banana regime -- without even the slightest attempt to go through the motions of invoking the WTO rules and dispute settlement.

And some of the basics of the economic philosophies and theories got further challenges.

If the "investments" in financial derivatives by the little known (outside of the United States) Orange country administration that went awry, making that county seek protection under the US bankruptcy laws, had its ripple effects in financial and bond markets across the globe, Mexico in Latin America (as in 1982) set off an earthquake of sorts.

There had been though enough warnings, but not the identification of any epicentre, for quite a while.

The inevitable slowing down of short-term capital flows to Mexico and other Latin American centres, and the likely outflow of the massive inflows (from pension funds, market players chasing arbitrages across countries, and other fickle investors) of the last few years -- as the US and European short-term interest rates tighten and edge up -- had been foreseen for quite a while by several Latin American observers and economists.

These have been warning of the unsustainability of the Latin American/Mexican model of capital inflows financing consumption rather than productive investments, but have largely been ignored by decision-makers in these capitals.

There was a strong deja vu flavour, reminiscent of the 1980s, about the reassuring statements now spewing forth from leading financial and economic journals, and leading officials in the IMF, World Bank and US Treasury and elsewhere about the temporary nature of the Mexican peso problem (triggered by the failure of the previous Mexican administration to take hard decisions in time) and the governments having to persevere in further adjustments to retain and attract the foreign investors moving their money away.

At that time too the debt crisis was first described as a cash flow and liquidity problem, and then a case of mismanagement of the economy by governments and hence needing some strong medicines, and ultimately acknowledged as a serious enough problem caused also by some external elements and needing debt write-offs etc.

That Mexican debt crisis (itself triggered by the US Federal Reserve's high interest rate policy a year or more earlier) in 1982 set off a chain of events rolling across the developing world: the saga of Structural Adjustment Programmes tutored and monitored by the Fund and the Bank, with government after government in the South embracing and ardently preaching the virtues of liberalism and the market.

The belt-tightening of that era for the common man (continuing without respite) and increased profitability for capital and a small percentage of the upper middle class pursuing Northern lifestyles, and the liberalisation of markets, the "disciplining" of the workers and the unions -- all supposedly set Mexico off on a high upward trajectory of which the outward symbols were its becoming a part of the North American Free Trade Area, a member of the Organization for Economic Cooperation and Development (and withdrawal from the Group of 77).

The Mexican success story was being held out as an example for others to follow -- and many of the Latin American countries to its South did.

There were some uneasy "facts" in the global economic scene that crept coming up -- not the least the rising and stubborn figures of unemployment, and the decreasing share of the benefits (and increasing poverty, and even hunger) at the growing bottom and the high prosperity for the few at the top.

But the solution, according to the neo-theoreticians of this economics, ensconced in international secretariats in Paris, Washington and Geneva was the same: "adjustment" and "more adjustment" and liberalising the labour markets and reducing (if not eliminating) labour-market rigidities and freeing employers from social security burdens.

It was in line with the socalled "medium term strategy" of bringing down inflation (purportedly caused by wage-inflation and union-driven labour market rigidities) and restoring private sector profitability to encourage private investments and private initiative for a private-sector investment-led non-inflationary growth.

The theme was also there in the year-end Economic Outlook of the Paris-based OECD secretariat, though some of its annexed tables seem to bear out what economists elsewhere have been arguing, namely, that inflation is now profit-driven and not wage-driven.

The OECD data show that, except in Japan, real public consumption expenditure in the G-7 countries has been coming down from the averages of the 1970s and the highs of the mid-80s.

Inflation has come down very much from the high levels of the 70s and 80s, with the OECD average expected to come down from the 4.1 in 1994 to about three percent in 1996.

Unit labour costs in manufacturing industry has been dropping fast, with the drops in the US high, and so has been the compensation per employee in the business sector.

The rates of return on capital have been going up with a G-7 average of 15.7% in 1993 and projected to rise to 18.1% in 1996.

In 1994, it is estimated at 18.4% in the US, 13.4% in Japan, 13.8% in Germany, 14.7% in France, 15.2% in Italy, 11.5% in the UK and 17.1% in Canada.

Three elements constituting the price are labour costs, material costs and the profit margin.

But with unit labour costs going down, material costs rising a bit but non-oil commodities in real terms accounting for only 0.6 percent of the GDP in OECD countries, the inflationary pressures are thus clearly coming out of or are driven by profit margins.

Yet, in a knee-jerk fashion, the economic apostles of the new order continue to call for further attacks on labour market "rigidities" and reducing the pressures on wages.

The post-war prosperity, the socalled golden age over which the GATT-IMF-World Bank presided, was postulated on not only economic elements, but a social and political order, with a built-in distribution system, for a fairer share of the benefits of the system.

Unlike in Adam Smith-Ricardo capitalism theories, this post-war order was postulated on capital accumulation, not by the private individuals, but by corporations.

The full employment and social security systems freed individual wage-earners and salary-earners from worries of the future -- for themselves and their families -- and they engaged in a binge (aided by various credit mechanisms) to pursue consumer-spending.

The corporations used the profits to further capitalize and invest and produce more, to promote more consumerism etc.

Whether or not the new awareness of ecology calls for a halt to this, the rising unemployment, and the theory of the moving NAWRU (non-accelerating wage inflation rate of unemployment) to ensure low-inflation, the whole concept now of reducing state provided social security and telling wage-earners and salary-earners to look also for private social security is bound inevitably to put a spoke in the wheels of the earlier consumerist capital accumulation.

But yet, the drive is all for cutting wages and staff costs, and thus the disposal incomes of these people, and yet expect them to fuel a consumerist economy -- with a increasingly marginalised growing poor and a very affluent upper middle class at the top.

And with the new ethos putting a higher premium on speculative activities (of finance capital) over industrial and production activities, sanctioned and being pushed now under the aegis of the WTO, the underpinnings of the new system based on the old are giving way.

And there is nothing in the horizon to take its place.