The world economy 90 years on – 1933-2023 |12 February 2024

Impoverished protesters clash with police in New York in 1934 (Photo: Contributed)

History is not only about the past; history is also the study of change. At the beginning of this new year, I started to reflect on how various financial systems have risen and fallen over the last 90 years and on the international institutions and some of the key individuals who have contributed to shaping the global economy over that period.

In 1933, world leaders gathered at the World Economic Conference in London to plan how to respond to the Great Depression, the worst economic crisis in modern history. The Great Depression lasted from 1929 to 1939 until the beginning of World War II. It was caused primarily by a fall in aggregate demand i.e. a decline in consumer spending which was so severe that it could be restored only by large increases in government spending. This decline in consumer demand was accompanied by mounting consumer debt, decreased industrial production and the rapid and reckless expansion of the US stock market which crashed in 1929.

In trying to understand the Great Depression during the 1930s, a British economist, John Maynard Keynes, was inspired to think differently about the nature of the economy. He developed a macroeconomic theory about government spending in the economy and its effects on output, employment, and inflation. Keynes advocated the use of fiscal and monetary policies to mitigate the adverse effects of economic recessions and depressions. Keynesian economics proposed a managed form of capitalism: one that could be directed to be fairer, more far-sighted and prevented from sliding into recessions.

Post World War II led prominent economists and world leaders to focus on how to redesign the world’s financial systems to prevent a recurrence of depression. International regulation under the Bretton Woods system, the International Monetary Fund (IMF), the International Bank for Reconstruction and Development (IBRD) 9World Bank) and the General Agreement on Trade and Tariffs (GATT) encouraged ‘neoliberalism’ i.e. market-oriented reform policies such as eliminating price controls, deregulating capital markets, lowering trade barriers and reducing state influence in the economy. They represented a market system of international trade embedded in societal needs where states were encouraged to implement domestic policies that supported trade globalisation.

Some economic historians have argued that this globalisation was largely a one-sided affair in favour of the western states gaining access to new markets, promoting their own economic growths and introducing increased competition where local businesses had to compete with multinational corporations largely from the western hemisphere that produced cheaper goods at lower costs, thus putting the local producers at a comparative disadvantage.

The IMF’s initial mandate was to help member states smooth out temporary balance of payments problems. The IBRD was created in 1944 specifically to help rebuild Europe after World War II. Assistance in the form of loans and technical advice to middle and credit-worthy low-income member countries of the World Bank only came later, much later.

The Bretton Woods Institutions did bring about an age of economic stability, growth and some degree of social harmony, but the benefits were skewed in favour of the developed countries. That bred resentment from the less developed member countries. Within nations, welfare states,where the national government and trade unions played key roles in the protection and promotion of the economic and social well-being of thier citizens, came under pressure. The stress, failure and new focus resulted in ‘neoliberalism’, accompanied by privatisation of state assets, a rising emphasis on the wisdom of markets, and the departure of Keynesian economics. In the UK, between 1979 and 1990, under the direction of Prime Minister Thatcher the sale of public assets helped break the power of the trade unions in the public sector.

Backed by well-funded corporate sources, Milton Friedman, the founder of monetarism, was relentless in pushing the doctrine of neoliberalism in the 1970s and 1980s. It is said that Friedman served as an unofficial economic advisor to President Ronald Reagan and Prime Minister Margaret Thatcher in 1980. He advocated that if left alone, markets will produce the most efficient and just outcomes. In other words, the free-market mechanism should be allowed to direct the fate of human beings. The economy should dictate its rules to society, not the other way around. But the great scholar, Karl Polanyi (1886-1964) had much earlier questioned the validity of self-regulating markets in his book ‘The Great Transformation’ He asserted that it is this ideology that has led directly towards the "demolition of society" where the gap between rich and poor has gotten wider and wider. The famous writer, George Orwell (1903-1950) also warned us about how power and greed can easily lead to unfairness and injustice and destroy our society.

Today, in 2023-24 the global economy lies in tatters. It is said that the 2008 financial crash remains the second largest economic crisis in history, after the Great Depression. The 2008 crisis was caused by predatory lending in the form of subprime mortgages targeting low-income homebuyers, excessive risk-taking by global financial institutions, a continuous buildup of toxic assets within banks, and the bursting of the United States housing bubble which culminated in a "perfect storm" that led to the crisis.

Deregulation in the financial industry was the primary cause of the 2008 crisis. It exposed the faults in neoliberalism and allowed speculation on derivatives backed by cheap mortgages, available to even those with questionable creditworthiness. Many banks around the world incurred large losses and had to rely on government support to avoid bankruptcy. Some banks were bailed out without major actions being taken against the bankers.

It can be argued that the economic policy response was both piece-meal and short-term. But we have to admit that most central banks reacted promptly as did the IMF and the World Bank following the collapse of Lehman Brothers. Fiscal and monetary stimulus prevented the financial meltdown of 2008 from turning into a total collapse of the global economy. Recently, the former chair of the Federal Reserve Bank of America, Ben Bernanke, highlighted how important it was to address the threats of poorly regulated markets via a well-functioning bank regulation. At the height of the Covid-19 pandemic, 2019-2011, central banks took swift action in concert with fiscal authorities following the downturn in global growth.

Some people have suggested that stronger action should have been taken against the perpetrators of the 2008 financial crash to teach them a lesson and reduce the risk of recurrrence. Others say that the world economy needs a capitalism that can be fairer to poor countries and to the poor within countries.

The World Governments Summit 2024 taking place this week in Dubai can serve as a good platform for the international exchange of ideas.Governments can learn from each other’s experiences and press for innovation and progress. We need global cooperation in exploring solutions.

We have to be ready to come up with viable replacement policies which will restore power to communities and democratic states while instituting the rule of law and fair distribution at the international level. Of course, business and the market have their place but they cannot occupy the entire sphere of human existence. Perhaps access to fairer capitalism requires another revolution in economics.

Today, the world is facing new crises:

•           the armed conflicts in Israel and Ukraine,
•           the potential risk of devastating epidemics and
•           the serious threat of climate change.

With advanced technology, people are more interconnected and interdependent today. Yet, as in 1933 over 90 years ago, our leaders seem paralysed. They are being pulled in all sorts of directions. We require non-partisan diplomacy and coordinated global responses to deal with the three new crises. Time is of the essence.

by

A G Yakub, January 2024