US-led Global Capitalism Has a Foot in the Grave

The Jakarta Globe, December 5th 2008

Berly Martawardaya

Global capitalism as we know it is a dead corpse. Omnipotent deities of Wall Street have turned into sinful mortals that hardly deserve their multimillion-dollar bonuses. Bear Sterns, Lehman Brothers and Merrill Lynch used to be the gold standard of professional finance and investment, now they are confined in the dust bin of history, with the once mighty Citigroup likely to follow.

The big three US car manufacturers used to be the largest producers in the world. But the chief executives of General Motors, Ford Motor and Chrysler recently landed in Washington, still too proud to hitchhike someone else’s private jet, hat in hand with a tin can, begging for money from US Congress.

The real estate bust is forcing massive debt write-offs, in turn leaving banks wary of lending. Companies facing reduced liquidity must quickly slash their cost structures, with cutting employees and investment the easiest path. Homeowners who once felt wealthy with inflated price tags attached to their houses are now pinching pennies and thrift is the new slogan. But if everyone is saving, who will spend?

How about a $700 billion bailout in the United States and a 400 billion British pound bailout in the United Kingdom? Done that. The G-8, G-20, ASEM and APEC? More acronyms and well-crafted statements of world leaders have been rolled out.

Government holds the checkbook, yet private companies and capitalism are still the key to wealth creation

So, who will replace the United States? Even before the crisis, it was projected that China would surpass the United States to become the world’s largest economy by 2025 and that Brazil would overtake Japan by 2050 to move into fourth place. Then there’s the European Economic Community, Asean plus 3 and the African Union to further dilute US influence.

The expanding number of competitors has been coined by PricewaterhouseCoopers as the Emerging Seven, or E-7, to replace the G-7 as the global economic powerhouse by 2050. E-7 economies — China, India, Brazil, Russia, Indonesia, Mexico and Turkey — will outstrip the current G-7 — the United States, Japan, Germany, UK, France, Italy and Canada — by between 25 percent and 75 percent.

But in this globalized world, can we really say that this is the United States’ problem? Weak economies in the United States and Europe will drag down consumption; luxury goods will nosedive first, but other goods will likely follow and reduce our exports. The fight for capital will induce higher interest rates in developing countries, just when we need accommodative monetary policy to jump-start demand. It is imperative developing countries coordinate to avoid the race to the bottom.

Churchill once said that capitalism is the worst system there is, except for all the others. In other instances in the last century, capitalism seemed to be on the brink of collapse. The Great Depression underlined the indispensable role of government during economic downturn. The end of World War II saw the rise of social security in the form of health and unemployment insurance. Stagflation in the ’7s highlighted the importance of energy costs and inflation. Capitalism has shown its ability to adjust itself. Now it has a new set of challenges. The world needs more of a balance of power and less unilateralism.

At upcoming World Trade Organization meetings, developed countries should follow through on their promise to cut agriculture subsidies. Cutting subsidies would create more opportunities for developing countries to supply to the developed world and earn much-needed income.

The world can’t afford to recede into a cocoon of protectionism, even in its regional form. A sudden and strict self-sufficiency policy would cause a loss in productivity. The government holds the checkbook, yet private companies and capitalism are still the key to wealth creation.

While the United States will be less dominant with the rise of China, India and new players, it will remain the most powerful country, at least for a while. It’s up to the new US administration to determine whether it’s worthy of retaining its status.

The writer is a lecturer in economics at the University of Indonesia and writes a regular blog for Kafe Depok.