Just as the ConDem coalition is trumpeting a “return to
growth” – one that is more apparent than real – their hopes for a sustained economic
recovery have been shattered by the eruption of new phase of the global crisis.
Late last night Turkey’s central bank joined India’s in
emergency measures designed to stem the flight of capital from their countries
as investors continue to withdraw funds from “emerging” economies around the
world.
In attempting to reverse the collapse of its currency, the
lira, and against opposition from prime minister Tayyip Erdogan, who is in the
midst of a corruption scandal and desperate to maintain growth in the run-up to
an election, Turkey’s central bank raised interest rates to levels which
shocked economists, more than doubling its overnight borrowing rate from 3.5
percent to 8 percent.
The Reserve Bank of India’s rate rise of 0.25%, small by
comparison, is the third since September. But the country is struggling with
10% inflation, a halving of its projected growth rate to 5% and the value of
the rupee falling 11% last year as investors moved their money out of the
country. The Congress party government of Manmohan Singh, also battered by a
corruption scandal, faces an uphill battle in elections due by May.
These are just two of the countries whose problems were
dramatically accentuated by the US Federal Reserve’s decision last month to
slow the creation of credit by way of “quantitative easing”, aka printing of
money.
The flight of capital was already underway long before the
Fed’s decision. Just suggesting the possibility of reducing the $75 billion a month programme of money creation in
June 2013 was enough to start the ball rolling. Now it shows all the signs of
turning into a rout, a panic.
So-called “emerging” countries are those willing and able to
provide global investment funds with favourable high-profit conditions –
including cheap labour, low taxes, and government-funded infrastructure. They
became the home for trillions of dollars of the new credit, invented in the
desperate attempts to resuscitate the world economy following the 2007-8 crash.
Ironically, throughout the half-century leading up to the
crash, global corporations had taken advantage of cheap labour by the transfer
of manufacturing from the relatively high-wage, richer, “developed” economies
to the ultra-low wage economies. In doing so they reversed the competitive
drive for productivity which tends to increase the ratio of fixed capital
investment to the quantity of labour. The rate of growth of productivity – the
quantity of value produced per hour of labour – slowed as a result.
So, globalisation of manufacturing and finance led to two
significant results – a slowing in the rate of productivity growth, and far
more volatile markets for finance capital, which was invested in easily
tradable emerging countries’ bonds and currencies rather than in factories,
roads and other infrastructure.
In the wake of the crash, capital investment to replace ageing
facilities, let alone new manufacturing, came to a virtual standstill. As a
result, in 2009, productivity growth turned negative. The emergency rescue
measures managed a reversal. A temporary reversal. The trend has continued downward ever since.
That, in brief is the back-story to the Financial Times’ warning for the ConDem’s absurdly euphoric
chancellor Osborne. “Scratch beneath the surface, however,” says the FT’s
economics editor “and Britain’s deepest economic challenge just got deeper.
“The problem is that the trend the Bank of England, the
Treasury and economists want to see most – an end to productivity stagnation –
appears to be absent. In the latest labour market figures… total hours worked grew
1.1%, indicating that output per hour worked fell again in the final quarter.
“Unless Britain’s productivity performance improves, the
economy can catch up its lost ground with people working longer and
unemployment falling. But once this is done, prosperity will stagnate, as it
has for the past six years.”
To say that the dynamism of capital is waning is to put it
mildly. Add in the flight of capital from India et al and you have the recipe
for another global crash. Whatever the ConDems’ fantasies, capitalism isn’t
working and the so-called upturn is built on sand.
Gerry Gold
Economics editor
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