point protesting against globalisation because globalisation is a process, not
an ideology”. That was one of the more interesting establishment responses to
protests against international summits (WTO Seattle etc.) In response, some
groups have said that they are not anti globalisation but for “alternative
globalisation” based on “fair trade” rather than “free trade”. Another response
is to say that it is not globalisation but “neoliberalism”
that is the problem: a combination of deregulation and privatisation which
leads to power and wealth being transferred from governments to corporations.
However, sticking the label “neoliberalism” on this
process is not enough to explain its failures. In particular, it fails to
specify how neoliberalism differs from the 19th
century laissez-faire approach, and how existing critiques of classical
free-market economics should be adapted to the current situation.
difference is the burgeoning of financial derivatives
such as stock options
and hedge funds. Most of
these were originally designed to protect businesses against future market or
exchange rate fluctuations over which they had no control. Yet they have since
become a sort of global mega-casino in which vast sums of money - far more than
needed for international trade in goods and services - are transferred electronically
around the world each day. What these financial instruments have in common is a
sort of guessing game in which financial experts try to predict the future.
arise when this “crystal-ball capitalism” is seen to be more profitable than
trade in real goods and services. Over-optimistic prediction of the future is
another problem, as seen in the bursting of the dot.com bubble. It can also
lead to “financial engineering” in which tinkering with a company’s figures is seen
to be more profitable than traditional business expansion strategies. And there
is only a thin line between “financial engineering” and fraud, as seen in
scandals like Enron and WorldCom.
Privatisation in the crystal ball
interesting aspect of “crystal-ball capitalism” is that in some circumstances it
can destroy the claimed benefits of privatisation. A classic argument for
privatising public services is that they can be carried out more efficiently
and therefore more cheaply in the private sector. This often results in people
losing their jobs, so that the government has to pay out more in unemployment benefits,
wiping out the savings from cheaper services.
crystal-ball economy, there is another factor. A privatised company may need to
to hedge itself against exchange rate fluctuations or other external risks over
which it has no control. Without this, it may fail to achieve the credit rating
necessary for it to borrow money at favourable rates on financial markets.
Governments, however, nearly always have stronger credit ratings, and their
treasuries often already hold enough foreign currency reserves to avoid the
need for hedging risks. This provides a financial incentive to keep public
services in the public sector.
do not like this, so when a state-owned corporation makes use of the government’s
good credit rating to obtain low-interest loans or avoid hedging, they claim that
this is unfair competition for the private sector. If, in response, the
state-owned corporation is forced to pay more interest to the government for
its loans, this only serves to make public ownership of public services more
attractive by generating more government revenue. This in turn discourages
privatisation, achieving the opposite of what the neoliberals
Short-circuiting globalisation and
the crystal ball economy
encumber themselves with derivatives and “financial engineering”, one obvious
response is to eliminate them. Richard Douthwaite, in
his book “Short Circuit”,
showed that small businesses producing locally to meet local needs can compete effectively
against multinationals by cutting out items such as transport costs. They can also
cut out the use of derivatives and “financial engineering” providing they can
obtain access to credit on favourable terms.
trends in international banking legislation favour big business when it comes
to access to credit. The new “Basel
II” banking principles are likely to make
things worse for small and medium-sized enterprises by forcing banks to introduce
a more complex (and expensive) system of credit ratings. The danger is that
banks will refuse to make loans to small businesses because it will cost too
much to evaluate their creditworthiness.
possible response might be to finance business expansion by using venture
capital rather than loans. However, Basel
II might in fact produce the opposite effect, making things harder for
venture capital, according to the European
Private Equity and Venture Capital Association.
some of the methods in Douthwaite’s book can be used
to “short-circuit” the Basel II rules before they are fully introduced. For
example, if businesses can obtain goods by bartering rather than cash payment,
this could reduce the need to borrow money for working credit. Under the JAK system,
businesses can obtain interest-free loans in return for receiving no interest
on positive bank balances for an agreed period. Another option is social and ethical investment.