Crisis, what crisis?

If you believe the headlines, the world is about to experience a serious economic slowdown with many developed nations likely to experience a recession.

Australia may even experience tough times ahead should China’s economic growth slow considerably, with many Australians likely to lose their jobs and houses at a time of higher prices for rent, food, fuel, utilities, and services.

Such a scenario follows 16 years of relatively high economic growth, although it did not prevent the labour share of the industrial world’s national income reaching a record low of 53.7 per cent while profits climbed to a record 15.6 per cent by 2007. The high economic growth also did not prevent record home unaffordability as Australia’s household debt to income ratio increased from 70 per cent in 1996 to 160 per cent by December 2007.

But the real issue of concern is yet to be addressed. After all, the current financial crisis is merely a blip of history within the ongoing struggle of nations competing for resources and the influence of particular ideas. With the governments of developed economies pouring hundreds of billions of $US into their banking system in an attempt to restore consumer confidence, it remains to be seen just whether further borrowing will maintain the West’s prosperity and international economic growth, or whether debt levels will become unsustainable.

So do not believe the lies that will soon emanate from a more confident simplistic Left who will attack the so-called neoliberal policies of recent decades which favoured the private sector and less government intervention.

Though the 2008 financial crisis is likely to promote greater government regulation and perhaps much greater public spending in time, this unfortunate situation is merely part of the ongoing and extremely difficult struggle of nations seeking to balance national and international considerations via freer trade.

As the recent financial crisis indicates, no group of nations (and their associated ideas) have ever proved capable of ensuring certainty and prosperity for the entire world. This is despite the endorsement of liberalism being paramount to promoting order and co-operation at the international level for many decades; at least from a Western perspective.

Hence, any ongoing criticism of recent policy trends has to give adequate attention to future policy difficulties if one is genuinely concerned about meeting the needs of poorer people around the world. After all, freer trade has helped developing Asia to average about 6.2 to 6.3 per cent annual growth in per capita GDP terms between 1988 and 2007. This is especially the case with China which increased its share of world GDP (in purchasing power parity terms) from 4.6 to 11 per cent between 1973 and 2007.

But there is also a need to reflect the competitive nature of international relations, including the ongoing reality that the wealthy democracies will always seek to uphold their high standard of living. This is a prime reason why the US, EU (25 nations), Japan, Canada and Australia alone still comprised about 69 per cent of world GDP (nominal terms) in 2007.

But if one is to believe that liberal-minded nations are both competitive and compassionate, at least more so than prior to balance of power arrangements before 1945, Western nations (led by the US) have had little choice but to adopt considerable economic reform to address their relative decline from the early 1970s; while maintaining general support for freer trade as part of their international leadership since the late 1940s to avoid the dangerous protectionism of the previous decade.

With the US effectively ending fixed exchange rates and capital controls during the 1970s in order to enhance its own economic competitiveness and attractiveness as a prime destination for investment, its policies had a profound impact with most Western nations (including Australia) floating their currencies and deregulating their financial sector in order to maximise national interest in line with the new rules of the international economy.

Competitive realities are a prime reason why Australian governments have adopted competitive economic polices since the early 1980s, including labour market reform and lower taxation rates for corporations, and high-income earners in line with developments in most OECD nations.

It is also why Australia and other Western nations have relied on the growth of financial services, consumption and debt to help boost domestic activity and the growth of the international economy after losing their domination and reliance upon manufacturing.

But while the policies of certain Western nations (led by the US) were intended to both enhance the growth of the international economy through a willingness to accept trade deficits and make respective national economies more interdependent, the recent financial crisis has finally ended the brief illusion that all is well if only all nations simply adhere to free trade.

There was something obviously wrong when just 497 billionaires possessed $3.5 trillion of the world’s wealth in 2004 (more than 7 per cent of world GDP), $25 was being spent on debt repayment in 2006 for every $1 provided in aid. Furthermore, 85 per cent of the world’s population still lived on $10 or less a day by 2005 (50 per cent on $2.50 or less), and an estimated 12 million American mortgage holders owed banks more than their homes were worth after many had already lost their homes due to unmanageable (and dubious) sub-prime housing loans (Rex W. Huppke, Chicago Tribune October 13, 2008).

And with recent moves by Western nations to restore confidence and well-being in their economies, as indicated by a greater willingness of the British government to basically take control of key banks in exchange for an injection of capital, the promotion of liberalism via freer trade will again be tested by their willingness to hold on to their influence and power (in financial terms at least).

Whether Western nations will be prepared to lose their economic dominance remains to be seen. After all, China and even India, have been able to develop industry at a much faster rate than the West as they exploit their own populations without the same limitations caused by effective pluralist societies which force government to give greater attention to social and environmental considerations.

And, though the promotion of freer trade does not hide the reality that many developed and developing nations still offer significant industry assistance despite lower tariff protection, Western governments are constrained as they continue to give much greater attention to social welfare needs forcing a greater reliance upon the private sector for many infrastructure needs.

No matter what rhetoric is offered by Labor or the Coalition, it is indeed getting much harder to meet a variety of economic, social, and environmental policy needs as governments have increasingly limited the growth of public outlays as a percentage of GDP; although extra spending will indeed by provided to offset the dramatic upheaval that may be caused by an economic recession.

So while Australian policy-makers will long look to Asia to boost its economic fortunes, a strategy that may prove instrumental in helping Australia maintain high levels of social welfare spending, what if China’s gain is to be made at the expense of other Western nations because its rich will long benefit from cheap labour with hundreds of millions of Chinese still earning less than $2 a day?

Economic success by China and other developing nations may also mean the further decline of domestic industries in Western nations, an ongoing possibility that will place even further pressure on wages and taxation levels.

To conclude, the competitive nature of international relations ensures that nations will long compete with each other in economic terms at least, despite many nations sharing cultural similarities that may aid co-operation.

For us Westerners, who take pride in the leadership role played by liberalism, the key question is either do we continue to accept freer trade in its present form, or do we temper its pace at the expense of poorer nations?

While the consequences of recent policy trends are now more evident after freer trade has been given decades to work, the alternative policy approach (greater protection and regulation) will never provide any magical solution, as may be suggested by many on the Left who urge much greater government intervention.

Denying developing nations their economic opportunities may even lesson environmental degradation, as slower economic growth may temper rising greenhouse gas emissions, but it will hardly lesson the risk of conflict (especially civil war), terrorism, or greater resentment.

If we do continue to support freer trade then Australians may have to accept tougher times ahead, an aspect guaranteed by tougher rules in regard to access to credit in the future and the likelihood that national governments will long compete with each other in taxation and in terms of labour cost.

Of course, Australian policy trends will long be influenced by what happens in more powerful and influential like-minded nations. As Fareed Zakaria stated in The New York Times (May 1, 2005), the ultimate challenge for the US was whether it was prepared to adapt to a more level playing field “as other countries and people rise in importance and ambition”.

But at a time when the flaws of recent policy trends have indeed become evident, it is essential that greater intellectual honesty is offered to also reflect ongoing policy difficulties ahead. After all, the strengths and weaknesses of freer trade will hardly go away no matter what policy outcomes are decided in the future, long after the current financial crisis subsides.