An acid test for liberal democracies

Though Western governments have already adopted measures costing many hundreds of billions of dollars in order to ensure the viability of financial systems, protect savings, and aid consumption, they will indeed have to make their economies more productive in the longer term.

This is easier said than done: Western societies are unlikely to allow their governments to obliterate public social welfare expectations or reduce wages dramatically to make their economies more competitive.

Indeed, the mobile nature of production and capital across national boundaries may cause further social upheaval in Western nations as each society decides just which issues should be assisted or targeted most in these difficult times.

With old and new policy demands requiring greater resources, such as the environment and health with its ever-improving technology, many Western governments in recent decades have already increased public debt levels or privatised public assets in order to maintain such high levels of social welfare expenditure.

So while I have long argued that Western societies should remain supportive of freer trade, promote democracy, efficiency and transparency, and distribute resources in a most productive and efficient way to meet the policy issues of the day, this belief may be wishful thinking.

If Western governments cannot convince their societies of the need for dramatic reform, and rising developing nations do not conform to Western expectations, then much greater economic conflict may be on its way.

The time has indeed come when the competitiveness of the international economy will test the ability of the influential liberal democracies to uphold any willingness to balance national and international aspirations, through institutions committed to freer trade. Though most nations will be affected by global wealth shrinking considerably from a peak of $US109 trillion in 2007, how prepared are Western nations to give further ground to developing nations - with China, Brazil, Russia and India representing about 13 per cent of world GDP in 2007 in nominal terms?

The idea that freer trade would provide a win-win situation for all participating nations has always been nonsense, notwithstanding the concept’s greater potential to promote wealth and efficiency amongst nations.

In the longer term, there is no way that Western nations with their high levels of wages and social welfare spending can ever compete in industry terms with authoritarian governments who are less constrained by various interest groups or pubic opinion.

Compare the current policy response by the US and China.

China’s government announced a $US600 billion stimulus package during November primarily to assist infrastructure spending and to a lesser extent social welfare, despite China’s economy being one-fifth the size of the US. This will further enhance China’s wealth creation once the current crisis subsides.

In contrast, the US has focused on stabilising the financial system and aiding consumption. First, the US Congress agreed in October to a $US700 billion Troubled Asset Relief Program. Second, a stimulus package of $172 billion gave 87 per cent of the amount to consumers on the basis that consumption accounted for 72 per cent of US GDP with just 13 per cent going to producers. Third, on November 26, $US600 billion was provided to support mortgage-backed assets in order to boost the housing market, with another $US200 billion program to ease commercial lending on debts to aid student, business, and car loans.