Neo-liberalism seems to have reached a dead end

Donald Trump's desperate attempt to reduce unemployment in the US is not a matter of mere idiosyncrasy

  • Published 13.03.19, 9:16 AM
  • Updated 13.03.19, 9:16 AM
  • 5 mins read
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Official figures may show the current US unemployment rate at a mere 4%, but there has been a notable decline in the ratio of labour-force to population in the US since the crisis of 2008, owing to the ‘discouraged worker effect’ arising from meagre employment opportunities. Shutterstock

The decision of the American president, Donald Trump, to remove several of India’s exports to the United States of America from the zero-tariff list has a significance much beyond questions like how much it would hurt India and what the US would demand as a quid pro quo for its reversal. It indicates, coming on the heels of US protectionist measures against China, that the neo-liberal regime has reached a dead end.

The essence of neo-liberalism was the relatively free flow of goods and capital, including finance, across country borders; but if the most powerful capitalist country in the world starts putting up barriers against the free flow of goods, then that is a clear indication of the unsustainability of neo-liberalism. Liberal opinion would no doubt put the blame for such protectionism on the idiosyncrasy of a Donald Trump, but Trump is responding, no doubt in his own maverick manner, to a situation which liberal opinion scarcely even recognizes, namely the acute distress and unemployment among American workers.

Official figures may show the current US unemployment rate at a mere 4 per cent, but there has been a notable decline in the ratio of labour-force to population in the US since the crisis of 2008, owing to the ‘discouraged worker effect’ arising from meagre employment opportunities; if one adjusts for this decline, then the unemployment rate becomes as high as 8 per cent. And Trump’s act is a desperate measure to bring it down as no other way seems possible under the neo-liberal dispensation.

The US maintained near-zero interest rates for a long time without starting a new boom, and such low rates could not persist for ever without arousing the ire of rentiers. Fiscal stimulus for a new boom, through larger government expenditure, can be effective only if such expenditure is financed through either a fiscal deficit or taxes on capitalists (taxing workers to increase government spending does not create much additional demand since the workers spend much of their income anyway); but finance capital is opposed to both fiscal deficits and taxes on capitalists. Besides, any increase in demand in the US will ‘leak away’ in the form of higher imports, creating greater employment elsewhere while increasing the external indebtedness of the US. And no other country can expand demand by fiscal means (which could also help the US), because doing so would drive finance away from it causing a financial crisis. There is, in short, a logjam at present.

This is why Trump has turned to protectionism. But protectionism as a means of generating employment amounts to snatching markets, and hence employment, from other countries. It amounts to a ‘beggar-my-neighbour’ policy whereby the protecting country in effect exports unemployment to others. It can work for the protecting country only if others do not retaliate, which is what Trump’s negotiations would now be aiming at. But whether others do or do not retaliate, the basic point is that there are no means available today for increasing world aggregate demand. (Indeed, if others do retaliate, then the ensuing tariff war, by discouraging investment everywhere, would lower world aggregate demand.)

The one obvious way of breaking this logjam would be a coordinated fiscal stimulus undertaken by the entire set of major economies, for then, no matter how much globalized finance capital dislikes such a move, it can do little about it. In fact during the 1930s Depression, a group of German trade unionists had made such a suggestion, as had John Maynard Keynes; but it was not considered seriously. In the present context there is not even such a suggestion; there is consequently little prospect of breaking the logjam in which neo-liberalism is caught.

For countries like India this has serious implications. As the world economy stagnates, and as the US resorts increasingly to protectionism, the prospects of ‘export-led growth’, which had opened up for a select group of East Asian countries in the 1960s and 1970s because of their proximity to the US (exemplified by their support for that country in the Vietnam war), and which had become much wider when the neo-liberal dispensation established its sway over the world economy, are now becoming increasingly dim. The basis of growth in the new situation that is unfolding will have to be the home market. For large countries like India and China this would mean their own national markets, but for smaller countries this would require a coming together by several of them to create a market of a certain minimum size. For India, therefore, what Trump’s protectionism signals is the end of a conjuncture that began in 1991 with ‘economic liberalization’.

Expanding the home market would require not only a greater degree of economic equality, but also a faster rate of growth of agricultural output through greater State support and protection for peasant agriculture, and for petty production in general, which had been squeezed drastically in the neo-liberal period. And no such change in course can be effected if the economy remains open to free capital flows, especially financial flows.

Capital controls would therefore be necessary, and, consequently, some amount of trade controls as well, in order to manage the balance of payments when capital controls are in place. In short, there has to be a change of course from the one the country has been following since 1991. This is not just a matter of choice; it will become essential in the new situation, much the way that import-substituting industrialization had become essential for several third world countries, especially in Latin America, in the 1930s, when the Great Depression had sealed the fate of the earlier ‘open economy’ growth paradigm.

But as the Latin American experience of the 1930s shows, any such change of economic course requires a change in the class nature of the State. In Latin America in the 1930s, the old alliance of foreign capital, domestic landlords, and comprador bourgeoisie, which had exercised State power until then, was challenged, though not successfully everywhere, by a new political alliance led by the manufacturing (‘national’) bourgeoisie. In today’s context, a change of course away from neo-liberalism would require again a shift from a neo-liberal State towards an alternative State that enjoys the support of the workers, peasants and petty producers and of sections of the bourgeoisie and middle class wishing to break with neo-liberalism.

Such shifts would not be specific to India, but would be on the cards in a number of third world countries. Even countries like China which have been remarkably successful in promoting ‘export-led growth’ will have to adjust to the new situation by moving towards an alternative strategy based on greater home consumption; and for this they will have to move ‘Leftward’ in the sense of essaying a more egalitarian society.

Such movement will not be easy. It will involve struggles, not all of which will be successful in the immediate future. In fact, the current upsurge of fascism all over the world can be seen as a way of forestalling such a change of course, a means of preserving the existing neo-liberal order marked by the hegemony of globalized finance capital (albeit modified by metropolitan protectionism). We are at the threshold of historic changes, not at the end of history.

The author is Professor Emeritus, Centre for Economic Studies, Jawaharlal Nehru University, New Delhi

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