ON THE CURRENT STATE OF THE
WORLD CAPITALIST ECONOMY
By Prabhat Patnaik
Professor of Economics
Jawaharlal Nehru University
Capitalist world economy of today is characterised by a number of features
of which the prominent ones are the following:
there is a tremendous globalisation of capital in the form of finance,
so much so that trade- related financial flows account for just about
two percent of total cross-border financial flows.
notwithstanding sharp increases in the DFI flows internationally, their
total magnitude still remains comparatively small; they still have not
broken free from the situation where the North invests largely within
the North; and even within the South they tend to come only to those
countries which have high levels of domestic savings anyway. In short,
a break with the historical pattern of DFI flows to a point where capital-in-production
is so mobile that merely removing barriers to its flow would automatically
shift it to low- wage countries, is nowhere in sight. To put these first
two points sharply what we have witnessed so far is globalisation of
capital-as-finance but not globalisation of capital-in-production.
this tremendous financial fluidity has undermined the ability of the
nation-State to intervene in the economy to maintain high levels of
activity. This explains to my mind not only the high levels of unemployment
prevailing in the capitalist world, but also the crisis which afflicts
the entire spectrum of theoretical tendencies which invoked an interventionist
State, viz. Keynesianism, Social Democracy, Third World Nationalism,
and even socialism as traditionally understood.
notwithstanding differences among the advanced capitalist countries
on numerous issues, and their rivalries in matters of trade, the present
conjuncture is marked on the whole by a far greater degree of unity
among them than has been the case over the last hundred years (except
the post-war situation when there was a sort of artificial unity imposed
by U.S. "superimperialism" upon the vanquished and the rest of the victors
of the war alike). This unity in turn owes not a little to the fluidity
of finance which has attenuated the scope or the activities of the nation-State.
this fluidity of finance represents globalisation in the double sense,
not only in the sense that finance flows everywhere, but also in the
sense that it is sucked out of everywhere, not only from Latin America,
from India and other third world countries, but even from the Soviet
Union in the Gorbachov era. In other words it is not just finance from
the advanced capitalist countries flowing everywhere, largely in the
form of "hot money", for quick and speculative gains, but finance all
over the globe looking for opportunities all over the globe.
the degree of unity among the advanced capitalist countries vis-à-vis
the third world has made it possible for the former to impose on the
latter a whole new international trading arrangement (via the WTO) whose
objective is to revive (admittedly at some remove) the colonial pattern
of international division of labour. The WTO thus becomes a new instrument,
in addition to the usual IMF and World Bank conditionalities, for subjugating
the third world to the dictates of imperialism. In short, three inter-related
phenomena: globalization of finance, a pervasive capitalist crisis (manifested
in huge rates of unemployment), and a fresh attempt at recolonising
the third world on the basis of a degree of unity among capitalist powers,
define the current international conjuncture. 2. The relationship between
financial fluidity and production crisis, i.e. between the emergence
of globalised finance on the one hand and huge rates of unemployment
on the other, is worth exploring a little further. There can be little
doubt that the success of post-war capitalism in keeping down the rates
of unemployment, compared to historical experience, owed a lot to the
application of Keynesian policies of "demand management" . And indeed
so successful were these policies that many writers, including Marxist
writers, believed that capitalism had at long last learned to manipulate
its contradictions. Little did they anticipate that "demand management
itself would become difficult once finance capital had reasserted its
dominance. The reason why State intervention in "demand management"
becomes difficult in a world of financial fluidity is as follows.
we talk of Keynesian demand management, or of social democratic welfarism,
or of third world State intervention and planning, (or even of socialist
planning as conventionally understood) the point of reference in every
case is the "national economy". The basic premise of all these different
conceptions of interventionism is that the national economy constitutes
the "control area" of the State, within which, subject to whatever political
economy constraints it may face, the State can act in order to achieve
objectives more or less in conformity with its intentions. True, the
national economy is linked to the larger international economy, but
this link, it is supposed, can be adjusted through instruments such
as trade policy or exchange rate policy, leaving the "control area"
as amenable to control as before.
"control area" ceases to be amenable to control by the State if it gets
caught in the vortex of international capital, especially of "hot money"
flows. State intervention can hardly achieve its objectives if the capital
account of the balance of payments behaves in a manner not anticipated
by it, and since expectations play a crucial role in this behaviour,
exchange rate policy (trade policy disappears with "trade liberalisation")
can not insulate the economy from speculation-engendered balance of
for this reason, however, State policy gets directed towards keeping
the international rentiers happy so that they do not precipitate payments
crises. For this the interest rates have to be kept high, the fiscal
deficit has to be kept in check and tax rates have to be kept low, all
of which contribute to deflation and stagnation. Moreover, workers'rights
have to be restricted to ensure their acquiescence in this deflation.
And if perchance a capital flight does occur despite all this, domestic
resources and assets have to be offered for sale "for a song" to entice
such capital not to leave the shores. In short, the policies of the
nation- State, instead of having the autonomy that any form of "demand
management" presupposes, are dictated by the caprices of a bunch of
brought home most vividly when Mitterand was first elected the President
of France. Reflating the French economy to bring down unemployment was
a part of his election promise . But the moment reflation was attempted
there was a speculative run on the French Franc and Mitterand had to
abandon, for the rest of his entire tenure, any attempt to reduce unemployment
through "demand management" in France.
question naturally arises: how did this ascendancy of finance capital
come about? The entire thrust of post-war "demand management" and "Welfare
State" was in fact a retreat on the part of finance capital. True this
so-called "Welfare State" represented above all a redistribution from
the employed to the unemployed in so far as the governments' social
expenditures in the form of unemployment and other benefits were matched
by social security taxes levied on the workers by the State, but even
this would not have been acceptable to finance capital but for its tremendous
weakening because of the war. The tact that Keynesianism despite its
anti-rentier thrust and its advocacy of State activism triumphed for
such a long lime in the advanced capitalist countries, is testimony
as much to the severity of the crisis of capitalism between 1913 and
1951, which made a degree of restructuring, no matter how unpalatable
to finance capital, essential, as to the success of capitalism between
1951 and 1968 in keeping inflation in check, through an adverse movement
of terms of trade for primary producers despite the fact of decolonisation.
But the onset of inflation from 1968 onwards as a lagged consequence
of the Vietnam War provided the first rumblings of discontent against
Keynesian "demand management" policies. Capitalism, as Marx had pointed
out long ago cannot do without a substantial reserve army of labour.
The depletion of this reserve army not only weakens the coercive power
of capital over labour ("workes get out of hand" in the language of
the capitalists), but produces "unmanageable" conflicts over distribution,
which, in conditions of monopoly price-fixing by capitalists, manifest
themselves in accelerating inflation. When this happens then all sections
of capital, not just the rentiers who in any case oppose every instance
of inflation, become panicky and join in the demand of finance capital
for deflation and unemployment as an antidote to inflation. This is
precisely what happened in the advanced capitalist world after 1968.
of course there had been a progressive strengthening of finance capital,
initially owing to the continuous U.S. budget deficits (which produced
a flood of Eurodollars) and subsequently owing to the oil-price-hikes
(which produced a flood of petrodollars) And with this strengthening
the fluidity of finance had increased, as mentioned at the beginning
of this paper. All these factors contributed to a climate where the
policies and the ideology of "liberalisation" gained ascendancy. Reaganomics
and Thatcherism represented this ascendancy.
4. As a
matter of fact, however, the real victims of Reaganomics and Thatcherism
were the third world economies. As far as the advanced capitalist countries
were concerned, Reaganomics and Thatcherism did not lead to such a great
transformation in economic policy as they had promised. Reagan did cut
taxes but the U.S. fiscal deficit widened to record levels and stimulated
a rather Keynesian boom. Like- wise, Thatcher did not succeed in carrying
out much of privatisation, did not succeed in slashing the National
Health Service, and did not succeed in having a persistently lower budget
deficit. In short, the constellation of social, or class, forces in
the advanced Capitalist economies was such that the ascendancy of finance
capital did not succeed in enforcing the adoption of an economic policy-package
of its choice.
third world however this policy package could be enforced with apparent
impunity. The IMF acted as the agency through which the interests of
metropolitan finance capital could be served. And the rentiers of the
third world itself tended to make common cause with metropolitan finance
capital since the gains from privatisation and financial liberalisation,
from their point of view, promised to be large enough to outweigh the
possible financial losses from deflation.
the matter differently, the IMF, more than ever before, acts today as
the guardian of the interests of metropolitan finance capital. The IMF
had always been a conservative organisation, prescribing "stabilisation"
policies to countries whose balance of payments problems forced them
to take recourse to borrowing from it. These stabilisation policies
were always of the kind that deflated the economy, cut welfare expenditures,
and hit the working people hard through both greater unemployment as
well as lower social wages. But, now a change has taken place both in
the position of the IMF as well as in the policy- package it prescribes.
was most clearly visible between the first and the second oil-shocks.
Most of the recycling of petrodollars that took place during the second
oil-shock was under the aegis of private banks; the IMF itself had very
little funds. And this has been the case ever since. Private banks need
the IMF to provide them with a "security cover". They loan to countries
which are under IMF-conditionalities, because only such countries are
hardly surprising. Within a country, when a creditor gives a loan to
a debtor, he or she is "protected" by the paraphernalia of laws of the
country which are ultimately defended by the State. But in the international
arena there is neither a world-State nor political control of the colonial
kind. The IMF acts as a watchdog body on behalf of metropolitan finance
capital to ensure that no debtor flouts the rules of the game. In other
words, as metropolitan finance capital became stronger, the IMF progressively
became less and less a mediator of financial flows to the third world,
and more and more a watchdog on behalf of metropolitan finance capital
which now determined the financial flows.
fluidity of finance explains both the drive towards "liberalisation"
that is being imposed upon the third world as well as why this drive
has serious adverse implications for it. "Liberalisation" serves among
other things to open up the economy institutionally to the unrestricted
flow of capital-as- finance .
be sure is not the only reason why the imperialist countries and their
institutions like the IMF and the World Bank are forcing "liberalisation"
upon the third world. One can discern at least two additional reasons:
first, given the current high levels of unemployment in the advanced
capitalist world and the difficulties of persisting with Keynesian "demand-
management" policies in a situation of fluidity of finance, opening
up third world markets, not just for goods but also for services, can
help them to "export unemployment", i.e. precipitate "deindustrialisation"
here while creating some jobs there to keep domestic working class anger
in check. This after all is capitalism's conventional response to a
crisis: it can alleviate the sufferings of one section of the workers
i.e. the domestic working class, only by shifting the burden to another
section of the workers, i.e. those located in third world countries.
additional reason for forcing "liberalisation" upon the third world
is to break the latter's self-sufficiency in producing food and other
essential commodities and to make them hooked to the international market
as agricultural, and more generally primary commodity, exporters, and
to become food importers. This would help the imperialist countries
both to obtain essential primary commodities cheap, and to get rid of
their surplus food stocks (produced with huge subsidies) while exercising
crucial leverage through food exports.
these factors are important, nonetheless the biggest push for "opening
up" the third world is provided at present by capital-as-finance.
6. To say
that metropolitan financial interests, whose cause the IMF has increasingly
been championing, supported in this instance by metropolitan producers
as well, constitute the main entity behind the structural adjustment
package being imposed upon the third world, does not by any means imply
that there are no domestic supporters of such measures within the third
world itself. We have already seen that domestic rentiers have a vested
interest in measures of privatisation and liberalisation. What is more,
within the third world where the bourgeoisie itself is of recent origin
the distinction between the rentier and the "entrepreneur' elements
cannot be too strongly maintained. Even sections of the "industrial"
bourgeoisie in other words, who would be normally expected to oppose
measures of deflation and trade liberalisation, may nonetheless support
structural adjustment in so far as the new dispensation allows them
to put on their "rentier" hats (or become junior partners of multinational
corporations) and make substantial gains.
the fact that some sections of the domestic bourgeoisie in the third
world countries do well out of "liberalisation" does not mean that the
economies of the third world do well too. On the contrary, "liberalisation"
spells stagnation and retrogression for the third world economies. This
is not only because Of the reduction in wages via inflation that export
agriculture entails, in a situation where public investments in agriculture
and infrastructure (the main source of growth in the agrarian economy)
are curtailed in pursuit of "sound" financial policies. This is not
only because the fear of capital flight, as mentioned above makes the
pursuit of contractionary policies imperative. This also happens when
vast amounts of finance capital are moving into the country. This last
may appear odd at first sight. If foreign exchange even in the form
of hot money keeps coming in, why can it not be converted to productive
capital through the intermediation of the State? In other words can't
the mobility of finance capital itself be made use of through judicious
macroeconomic policy to push up the investment ratio in the economy?
to this question, which is central to an understanding of what a "liberalised"
economy entails, consists of two parts: first it is risky in any case
to use hot-money as the basis of an investment- drive. A country which
does so is in effect "borrowing short to investment long" i.e. getting
into a more and more risky portfolio-mix. But important though this
consideration is, it is not over-riding. The State could always choose
a pattern of investment, e.g. in quick- yielding projects which have
the effect of raising supplies of potentially-exportable commodities
(raising agricultural output would be a good example), which minimise
the risks of an investment drive.
serious constraint arises from the fact that under the logic of liberalisation
the State begins to withdraw from the role of a principal player in
the arena of production itself. As a result "liberalisation" leaves
the economy without any agency capable of transforming potentially investible
resources into actual productive investment, i.e. capable of using the
"slack" in the economy to step up its rate of growth. Direct foreign
investment does not flow in, to any significant extent, to take advantage
of global markets; domestic private investment dwindles owing to low
inducement to invest (which removal of protection entails) and the greater
profitability of speculation; and the State progressively reduces its
role as an investor. Not surprisingly economic atrophy ensues even as
speculation thrives and foreign exchange reserves accumulate.
inflows for stimulating productive investment therefore becomes almost
impossible in a "liberal" regime. As a consequence not only does investment
and growth suffer, but macroeconomic policy itself runs into a dead-end,
like India's macroeconomic policy has done, where, even under the best
of circumstances, i.e. even assuming that large foreign exchange inflows
on the capital account continue to take place, the economy experiences
a combination of stagnation, stock-market speculation, accumulating
exchange reserves, and government impotence. And it, because of accumulating
exchange reserves, the State is compelled to "liberalise" trade further,
especially of consumer goods imports, then this precipitates a domestic
deindustrialisation financed by depleting reserves built up on the basis
of "hot money" inflows, i.e. the country not only borrows short to indulge
in luxury consumption but deindustrialises its economy in the process!
The argument advanced for "liberalisation" therefore is based on a gigantic
fraud. This argument claims that owing to "liberalisation" lots of capital-in-
production would flow in which would stimulate investment and growth.
As a matter of fact, because of "liberalisation", capital-as-finance
flows in which strengthens speculation, and retards investment and growth.
8. It fluidity
of finance causes unemployment, stagnation and even retrogression everywhere,
not just in the third world but even in the first word, then are we
justified in talking at all of imperialism? Are we rather not seeing
a situation where all productive systems no matter whether they are
located in France or in India have to be victims of deflation, have
to witness wage-cuts etc., in which case there is nothing special about
the plight of the third world?
is an erroneous view. As mentioned above the flow of finance, when it
occurs towards the third world, is used for expanding the local markets
for metropolitan products. And even otherwise the third world markets
are opened up for metropolitan goods and services, often at the expense
of domestic deindustrialisation, financed by capital inflows of various
kinds. But if hot money flows out or debt payments fall due, the third
world economy offers its natural resources, land, natural wealth, or
produced assets in lieu of such capital or in order to entice such capital
to stay. In other words the impact of financial fluidity cannot possibly
be symmetric between the developed and the underdeveloped economies.
Any such symmetry would always be vitiated by the fact that the former
would capture the latter's markets, at the expense even of the latter's
own production, and get paid for their sales by the latter's assets
words the fluidity of finance and the universal production crisis engendered
by it necessary has an uneven impact on the world economy because it
is accompanied by and hastens the process of centralisation of capital
on a global scale.
9. To sum
up, the current phase of capitalism is marked by the rise to dominance
of financial or rentier interests, and the fluidity of finance across
national boundaries. This has the effect of undermining the "control
area" of nation-States, of making all agendas of State intervention
for improving the living conditions of the people appear vacuous, of
precipitating stagnation and unemployment even in the metropolitan countries,
and of prising open the third world economies for penetration not only
of metropolitan goods, but even more importantly of metropolitan finance.
This economic milieu however has the effect of producing greater unity
in the advanced capitalist world (where there is talk even of supra-national
States, as in Europe), but as a dialectical counterpart of this, greater
disunity in the third world, with tendencies towards separatism, divisiveness
and disintegration acquiring prominence. The question which naturally
arises is: are we now doomed to this fate forever? Or, can we overcome
of the "joint exploitation of the world by internationally united finance
capital" had been envisaged by Karl Kautsky the eminent German theoretician
of the Second International. Kautsky's position however had been attacked
by Lenin who had argued that the pervasiveness of uneven development
under capitalism made any agreement among the capitalist powers temporary,
to be followed by intensified inter-imperialist rivalry as the terms
of the old "truce" are rendered obsolete by new configurations of strength.
sense the present debate is reminiscent of the Kautsky-Lenin controversy
but in another very important sense it is not. Both Kautsky and Lenin
derived their concept of finance capital from the German context, and
Lenin expressed this as representing a coalescence of banking and industrial
capital. In other words the concept encompassed nationally-based, bank-controlled,
industrially- operated gigantic blocs of capital which were either in
truce or in conflict. The finance whose fluidity was being talked of
above, however, simply consists of enormous sums of money being pushed
here and there by rentiers and speculators, big and small. This finance
therefore is a somewhat different animal from the finance capital that
both Lenin and Kautsky had in mind. About this finance hilferding's
dictum that the nationalisation of half a dozen banks would be the end
of finance capital is even less appropriate than it was to the finance
capital of his time. On the other hand, notwithstanding this difference,
the two general perspectives articulated by Kautsky and Lenin continue
to be of abiding interest.
raised above can be decomposed into two separate questions: first, can
we think in terms of some agency transcending the nation-State that
can be invoked as the agency for intervention in this new era? Secondly,
if we can not, and the nation- State still remains the only possible
agency for intervention on behalf of the people, then how can it ever
revive, since by our own argument its capacity for intervention has
to these questions are difficult because they still remain hazy. They
will emerge with clarity only in the course of time. Nonetheless one
can advance some hypotheses. I believe that in the context of the third
world at any rate the possibility of the emergence of an agency beyond
the nation-State as an agency for intervention in the interests of the
people remain remote. What is more, if the nation- State is incapable
of intervention then any such agency too would be equally incapable
of intervention. Enlarging merely the size of the agency would in no
way contribute to the solution of the basic problem. On the other hand
I do believe that the nation-State can and will revive as an agency
It is impossible
to imagine that the levels of unemployment prevailing in the advanced
capitalist world would become a perennial feature of metropolitan life
without causing serious social disruptions. And any attempt, no matter
what its nature, to reduce the levels of unemployment would necessitate
a revival of the nation-State, and controls over financial fluidity.
True, such attempts in the context of the advanced capitalist world
could well come from the Right, rather than from any radical quarters,
in which case such a revival would have a very different complexion,
entailing chauvinism and jingoism, from the welfarist and social democratic
conceptions of the post-war era: and the tremendous spread of racialism
and neo- Fascism all over Europe may be a pointer in this direction.
But, no mater what the nature of the revival of the nation-State in
the advanced capitalist countries, any such revival would once again
create the space required for a similar revival of the nation-State
in the third world. This is not to say that one should welcome Right-wing
nationalism in the advanced capitalist world, or be indifferent between
a radical revival of the nation-State and a chauvinistic revival; this
is only to underscore the fact that it is impossible to visualise such
a revival not occurring if the world looks somewhat Kautskyite at the
moment, that does not by any means signal the victory of the Kautskyite
perspective in the debate between Lenin and Kautsky.
for us in the third world, it is not even the case that we have to sit
quietly until the nation-State has been revived in the West. True, the
scope for State intervention has been greatly reduced, but it has not
disappeared altogether. What is required is that the State has to take
the constraints of living in a world with financial fluidity into account
in planning its intervention. While I consider any emulation of the
East Asian model in the rest of the third world neither desirable (since
this entails a neo-mercantilist development strategy that is necessarily
accompanied by a degree of authoritarianism which is unwelcome), nor
feasible (since it is the product of a very specific domestic class
configuration as well as international correlation of forces), East
Asia does demonstrate in a way the possibility of successful State intervention
in a contemporary world marked by financial fluidity.
such as ours if the nation is to remain united then the resuscitation
of an agenda of development that entails conscious intervention by the
nation-State in the interests of the people, as opposed to leaving economic
development to be determined as a mere fall-out of the caprices of international
speculators are absolutely essential. This requires however an alternative
class-alliance underlying the State, one that would both enforce accountability
on the State, as well as provide it with sufficient sinews to face up
to the challenge of a international finance which is out to undermine
its capacity for intervention. The forging of such a class alliance,
which would necessarily be centred around a worker-peasant alliance,
however is a matter for political praxis.
address was delivered at a Seminar on Globalisation of Economy)
Source: The Working Class, Monthly journal of the CITU Vol.27 No.9 May-June,
1997 pages 75-80