While this trend did not directly cause any of the present problems, it has built up risks that have left our economies -- and politics -- vulnerable. If we are to avoid repeated crises of this nature, we need to reverse the trend to some degree.

Petrol station in Singapore

In almost all countries, the economy is now in some distress. High oil prices, now in the US$130 – 140 range, affect virtually everyone. Food prices roughly doubled or more in the last few years, striking at one of the most basic of necessities. Together, they drive inflation to levels not seen in over 30 years.

Protests are breaking out in countries as diverse as Egypt, Vietnam, Portugal, Kenya and Thailand, whether over food prices, oil prices (and subsidy cuts), or inflation in general. In turn they become political problems.

Needless to say, the issue is highly complex. Many factors, some global, some local, are in play, and there are plenty of suggested explanations for the present state of affairs, e.g. speculative money flowing into commodities as the US Dollar declines, Russia's oil and gas output beginning to dip, or Iraq and Iran's oil industries remaining moribund for lack of new investment. Then there's the biofuel fad and the rising middle class of China with its voracious appetite for meat and fancy cars.

Mostly, each explanation is valid in some way. But it may be useful to take a step back and ask: Did we have to be so vulnerable? Economies go through cycles; prices go up and down. From a long perspective, the recent climbs in oil and food prices are not ahistorical, and we can already glimpse the possibility that people will change their consumption behaviour and prices will moderate.

But while the crisis lasts, for millions of people, the pain is real. A trucker who cannot make a profit when the diesel price rises 40 – 50% overnight is one who effectively becomes unemployed. Families that  already spend 40% of income on groceries cannot afford a 20 - 30% increase in food prices. 

Hundreds of millions are vulnerable because they were below the poverty line or only barely above it when the problems began. In other words, there is no margin of safety for economic fluctuation. But why, after a half-century that was truly ahistorical in terms of economic performance, are there still so many people in such a precarious position?

You guessed it: Although the general trend has been a steady growth in income, the benefits have not been equally distributed. In fact, accompanying the same 50-year trend in economic growth has been a widening income gap.

Even if we consider countries that have done reasonably well through most of the last half century -- that is, leaving out subsaharan Africa and other failed states -- only a fraction of the population has benefitted substantially. Hundreds of millions of shanty-town dwellers, migrant workers and farmers, even if they have seen improvements in their living standards, have not progressed enough to economic safety.

A Brazilian favela (shanty-town)

 
Economic trends of the last 50 years

Look back 50 years and the economic landscape is strikingly different. Instead of globally integrated economies, national economies were often walled off from each other through tariff and non-tariff barriers. Within a national economic space, the power of government loomed supreme over other economic actors. Especially in communist states, but even in many non-communist ones, governments were motivated by socialist ideology to play a formidable role in the economy, typically in a redistributive way.

In any case, trade unions were very strong in Europe, Australia and even North America, bargaining hard on behalf of the workers. As I pointed out in the essay What lurks beyond globalisation and capitalism, up till 1982, salaries for management and workers were quite equitable. In that year, American Chief Executive Officers (CEOs) were paid, on average, 42 times the average salary of a production worker.

Then globalisation began and with it came a huge redistribution of power. Corporations could exploit the wider economic stage, but governments' reach still went no further than their borders. Trade unions, which hitherto had negotiating strength because they could claim to represent a significant proportion of the workforce, saw that strength whittled away as corporations set up operations abroad and hired workers that the unions didn't represent. At the same time, exploiting cheaper manufacturing locations (and later on, service industry locations too) boosted the corporate bottom line.

Why, as corporations expanded across borders, trade unions signally failed to likewise expand internationally is an interesting question which perhaps might be worth a scholar someday researching.

Gradually, corporations gained the strength to play one government off another, just as they learned to play one workforce off another. Governments gave way behind the figleaf of a new philosophy: privatisation, free markets and tax-cutting. In addition, Communism collapsed in the late 1980s and capitalism could trumpet itself as inerrant. But behind the hailing of a new ideology, the prosaic truth was that governments needed to keep the corporations sweet, lest investments move offshore, while other countries, eager to attract the big companies, dangled all sorts of incentives and tax holidays.

Between corporations' newfound scope to exploit cheaper locations and financial incentives, and the tax cuts available at home, wealth aggregated to them, which naturally enriched their executives and stockholders.

As I mentioned in the earlier essay, by 2005, the average total compensation of CEOs of 367 leading US companies was 411 times higher than the average salary of the an American production worker, never mind the average wage of the worker in the Chinese, Vietnamese or Romanian subsidiary.

Most governments, squeezed by the new economic realities, did the minimum they needed to keep their people from revolting, e.g. by subsidising fuel prices or food essentials. For example, you might have noticed how as China's GDP per capita grew, its public health system deteriorated. Much of the previous ambition to redistribute wealth in a determined way for the goal of social equity fell by the wayside.

While indeed free markets have been beneficial, lifting hundreds of millions out of dire poverty in China, India and elsewhere -- and the socialist and communist systems they used to live under had eventually become so perverted that few would want the old days back -- these gains do not compare with the wealth accretion that corporations and their insiders enjoyed.

 
What happened to social justice?

But there was something in socialism and communism, namely the ideal of social justice, that capitalism does not inherently have and which no society can do without. That's why we have governments. That's why civil society, including trade unions, serves a useful purpose. Either they bargain on behalf of common people, or they exert pressure on governments to act.

West African rice farmer

Take food production. Much depends on public investment, e.g. irrigation, transport and storage infrastructure. Also needed is research into crop yields and pest resistance, and agricultural extension programs in order that best practices reach even the remotest farmers. Governments took their eyes off the ball during the last few decades. Crop research, for example, was left mostly to the private sector, but the result is genetically-modified seeds that can only produce one crop. The farmer must purchase new seeds for the next crop from the multinational corporation. Such a system makes sense for the corporation's bottom-line, but it makes much less sense for farmers and for food security in general.

Take oil. We've known for decades that oil will run out. We've also known that global warming is going to cause havoc. But no government has seriously invested in alternative energy technologies. The US government in particular has been too cosy with automobile manufacturers, allowing lax fuel efficiency standards for too long. Today, we're caught off-guard.

Take disease. There is utterly inadequate investment in research for diseases of the Third World, because there are no obvious profits in it. Here too is a role for government and civil society philanthropy.

The general rule is that capitalism does not provide all the answers. But unfortunately, we have relied too much on it ideologically.

The diminution of the relative power and roles of government and the people sector in the current economic arrangements is not sustainable. This trend towards ever widening income gaps cannot go on. Even if we get past this price cycle, another one will hit us. Perhaps there will be shortages of clean water or clean air next -- not things that corporations inherently care very much about. Or some acute shortage of medicine when a global epidemic breaks out.

The mistake was that as corporations became global, governments and civil society stayed parochial. By doing so, they failed to effectively counterbalance the greed so generated. It would have been better if governments could co-ordinate their economic strategies to avoid the beggar-thy-neighbour tax-cutting they engaged in, and which soon undermined their ability to redistribute income.

How different too it might have been if civil society and trade unions networked across borders, ensuring more equitable wages in developing countries or more concern for the environment.

Capitalism must not run unbridled. It has to be tempered so that even as prices rise and fall, we don't have people going hungry or freezing in their homes because they can't afford fuel. Or children who have to walk to school because bus fares have gone up.

© Yawning Bread