(Revised version of a talk given at the Forum on “Why is Obama Worried and Gloria Isn’t?” PRRM, Quezon City, Jan. 13, 2009.)
22 January 2009
We are into the fourth or fifth month of a very, very rapid unravelling of the global economy and financial institutions, and one very interesting phenomenon is that actual developments in the US and internationally have been much worse than the projections of the experts. From the decline in growth rate to the rise in unemployment rate, to the collapse of the financial sector, things have consistently been much worse than predicted. Naming Names
Now, this is very interesting because it just goes to show how, in many instances, economic analysis is less a description of reality than wishful thinking. There seems to be the fear that if you name something different from what it really is, it will somehow change reality. So instead of naming a depression that is unfolding a depression, economists are saying it's a deep recession. Between deep recession and depression, while the two terms might technically have the same meaning, it’s less painful to hear ‘deep recession’--like there is still some hope that things won’t turn out too badly.
This is true not only for forecasts about the US economy but also for the Philippine economy. You hear statements like we’re not doing too badly, we won’t get hit as bad as the others, remittances won't decline as much as some people think, etc I think we should really look at these as projections of desire and hopes rather than descriptions of fact.
Before we move into a discussion of the Philippines, however, let us look at the situation in the eye of the storm, the US economy. The figures are unbelievable- in 2008 an unprecedented 3.6 million jobs were lost; the unemployment rate now is up to something like 7.6 or 7.8%. In December alone, the total number of jobs lost was about 520,000; this exceeded predictions that ranged only from 490,000 to 500,000.
At the height of the Great Depression, around 1931 to 1932, the unemployment rate in the industrial countries was around 20-25% of the workforce. Some people are saying that we really should begin to think about the US and other developed economies moving into double digit unemployment very soon. If we read between the lines in the Economist or Financial Times or Wall Street Journal, the big fear is how deep will the depression be? When will the economy hit bottom? These are the imponderables at this point in time. The problem here is that what we now have is a vicious cycle where recession leads to unemployment which leads to lower consumer demand which leads to disinvestment which leads to deeper recession. This is the opposite of the virtuous circle of growth during the boom. Now in a period of decline, you have a vicious cycle gaining momentum, and you don’t know when the economy is going to hit bottom. The image that I think is most appropriate for this is a submarine: you have been depth charged, you’re severely wounded, you’re headed for the bottom, and you really don’t know how far down you’re going to go before you settle on the seabed. And the big question is how do you get back to the surface?
The big question for economics at this point is how does one go about reviving a global economy that is rapidly contracting? This is a new situation, compared to before, when economies were not yet globalized. Then national policies could, to a certain extent, be effective in terms of insulating the local, national economy from the global economy. This is the first serious deep recession or depression in the globalized era and in terms of the methods of reviving a contracting global economy, people still are at the experimental stage or the theoretical stage. This is what’s new about the current situation. A New Capitalist Pragmatism?
What do we expect in terms of some of the responses in the advanced capitalist economies at this point? We had a recent debate on the internet where, basically, some of us were saying that we really should expect fairly significant, non-neoliberal approaches to come out of the leading circles of the advanced capitalist economies. A lot of these will be real departures from neo-liberalism. There will be, as is currently happening, massive stimulus spending. We are all aware that neo-liberalism does not like this kind of massive, state-oriented or state-directed spending to revive the economy. If you were a real neoliberal, you would rather minimize state spending and just let the economy purge itself of its excesses--whatever it takes, and whether that will bring down big corporations or not, because it is better to have a thorough purging so that capital can live again and have a second or third life renewed and reinvigorated.
It’s possible that there will be more than major stimulus spending; government, in fact, has already begun to take over firms. We may have very, very strict regulation of financial sectors that will emerge; we will have massive social spending especially for unemployment compensation. I think some of the international economic measures will include massive aid, and maybe even the suspension of trade related intellectual property rights. I think we’re gearing for a period where there will be, in my sense, a strong effort to reform global capitalism.
Obama is very appropriate for this kind of process. Some people have said, “Oh well that’s not likely to happen because the dynamics of capitalism won’t allow that,” or that neoliberals are still influential. But the problem is that when you have a terrible crisis happening, the immediacy of the crisis will trump ideology. If it will mean massive spending and some social redistribution to save capitalism, capitalists will undertake that, and I think we should have no doubt about this because they already did it during the 1930s
If we’re still thinking that neo-liberalism is the big enemy, my sense is that’s wrong; and that’s fighting the last war. We should be thinking now how to meet this new challenge. Take, for instance, French President Sarkozy; he already said that free market capitalism is dead, “we are going to engage in massive industrial policy to save industries and put the unemployed to work,” basically going against neoliberal ideas. We know that Sarkozy has been identified with anti-immigrant sectors, and he can create an alliance with capitalists and white workers around this nationalist industrial policy, while maintaining an anti-immigrant, exclusionist policy. These are some of the populist policies, some of them with a dangerous edge, that we should prepare for.
I think Obama has the possibility of becoming the big reformist figure of capitalism. Now, people say that his Treasury appointee, Tim Geithner, is a neoliberal; that the head of the national economic council, Larry Summers is a neoliberal; and, that one of his advisers, Robert Rubin, is also one of the people responsible for the Asian economic crisis. Yes, that’s true, but I think when confronted with crisis, the neoliberal solutions won’t work and we can expect pragmatic people like Obama to take drastic measures. Obama is a blank slate; the main thing for him is social management. And his main criterion of success is success at social management, not adherence to ideology. We should probably not underestimate the capacity of capitalism to reform itself, through drastic measures that might have been unthinkable in the neoliberal era. This, I think, is something that we should really watch out for: the pragmatic capacity to reform, to the point of taking redistributive measures and making changes to the property system. State of Denial
When it comes to the situation in the Philippines, we at FDC have been warning over the last few months that we cannot underestimate the depth of the crisis. We have already been pushing for measures, the calls for which have been taken up by other organizations, like the moratorium on foreign debt service. FDC has said that the government cannot continue to afford allocating massive amounts for debt repayment when the economy is likely to contract, and we should be channelling investments back to the local economy in the form of social spending to be able to buffer it from economic contraction. Other FDC demands that have resonated widely are the cancellation of illegitimate debt and the demand that the Value Added Tax (VAT) be rescinded-- these measures and others are, in the short term, quite essential to be able to really prime the local economy to meet the impending crisis.
Our main problem when it comes to taking the necessary immediate steps is that there’s a systematic effort on the part of the government to downplay the crisis. People who are looking in from the outside raise this—why does the Philippine government seem to minimize the crisis when other countries already on war-footing? In spite of some concessions on the part of administration spokespeople that things do not look that well, there is no strong policy statement that says that given the contraction of the international economy and its sure-fire impact on our export-oriented economy, we should declare a state of economic emergency.
The reason for what is tantamount to a state of denial is that the main agenda of the GMA administration, in my view, is still charter change. If it says that economic contraction is the big problem, then the urgency of charter change will be blunted because, basically, what you’re saying is that we will need to focus on saving the economy. The priorities are quite different, depending on your definition of the need of the moment. Clearly in other situations it would have been urgent for an administration to define economic crisis as the number one issue, but today’s context is one where there is a desperate administration that really wants, in my view, a shift to a parliamentary system so that the first family can stay in power beyond 2010 and avoid being prosecuted for high crimes after the first day of the presidential changeover in 2010. I think this is what is pushing the de-prioritization of the economic crisis.
Aside from the question of short-term measures, my sense is the crisis right now opens up the opportunities for a real discussion and debate on where the Philippine economy should be going strategically. So, let me just pose a number of issues of a strategic character that can serve as a springboard of debate over the next few months. The End of EOI
First of all, the economic model that reigns in the Philippines at this point is what we call export-oriented growth, or export-oriented industrialization (EOI). This was a model that was prescribed by the World Bank in the late 1970s, and the idea was to stop thinking about internal markets, because internal markets were small and limited. What you really needed to do was to take advantage of the demand in export markets and reorient your industry to these more promising magnets for your economic growth. Of course, the context was one where a large part of the agriculture was already export oriented; that is, our agriculture had developed in the traditional, colonial pattern, with specialization in export crops like sugar. But what the Bank was saying was that it was also really important to reorient the industry to export oriented development.
In the first phase of structural adjustment that we experienced in the 1980s, the main element was trade liberalization. We were subjected to a process of trade liberalization that was very radical, that really brought down the average tariff in this country to low levels. This structural adjustment took place at a time of international recession. That’s why in 1983-1985, structural adjustment and global recession led to the 1984-1985 depression, as Dean Rene Ofreneo of the University of the Philippines called it. What happened was a collapse of the economy in ’85 and we cannot understand the ouster of Marcos without realizing that it wasn’t just political alienation that led to Marcos’ ouster in 1986 but a terrible economic crisis as well.
Then the consolidation of export-oriented growth happened during the period of Corazon Aquino, where many internal measures were made to begin the process of deregulation and to push the economy to the priority of servicing the external debt. This meant that since we could not pay our debt in pesos--and we had such massive debts at that point in time--the only way to service our debt was to earn dollars, and the only way to earn dollars was to make exports competitive and channel investment to export industries. Debt repayment as the national economic priority was what led us to consolidate export orientation.
And then finally, during the Ramos period, we had a second wave of trade liberalization, which was imposed by doctrinal technocrats who were in command at that point, like Ciel Habito. They aimed to bring down, across the board, all tariffs between 1 to 4%. Their model in this exercise was the Pinochet government in Chile, because at that time in Chile they brought down, across the board, the average tariff to 11%. Their thinking was that if the Chileans can withstand tariffs being brought down to 11%, then of course we Pinoys can bring down our tariffs to 1-4% and we will survive. What that accomplished was to accelerate the crisis of our industries during the Ramos period. More and more firms fell into bankruptcy; the investment atmosphere was so bad that the local industry refused to invest significantly. So basically, this process tied into the process of globalization that really became the official ideology and the official push in the Philippines in the 1990s. What we now have is really a crisis of a reoriented Philippine economy. It has been oriented from the import-substitution, “inward-looking” industry of the ‘50s and ‘60s to one that is now thoroughly integrated into the global economy. That, of course, seemed like a good thing because growth globally would translate into growth locally. What our technocrats never anticipated was that there would be a major downswing and a major collapse and that this would be a very, very drastic sort of unravelling. What they did not anticipate is that once the global economy begins to go down, you also go down with it. This is now what is happening: all these dynamic economies, including China and other South East Asian economies that tied themselves to this globalized integrated market, are now also the ones that are suffering the most in this downturn. There is a very interesting comparison of the decline in growth rates among different developing countries: it is the export-oriented economies in Asia and Latin America that are going down fastest whereas in those economies that were smarter and did not thoroughly liberalize themselves, the decline in growth rates has been much smaller. Basically, the economies that will be able to buffer themselves more fully are those that only undertook very selective and discriminate liberalization. So don’t expect the Philippines to be one of the blessed.
In the collapse of this model, we really are at the end of the globalization project because whatever happens at this point in time, there will be a move away from globalization. Issues and Challenges for a Strategic Program
What should we be looking at in terms of programs of reform?
I think we should really begin to reorient our economy back to the domestic, back to the local, to derive dynamism from our population, from our resources, and from our internal market. And, I think, to be able to successfully do this, we need to address several challenges.
One is the articulation of industry and agriculture. Our agricultural development and our industrial development have been out of synch for a long, long time. Whereas agriculture and industry were complimentary in the newly industrializing countries like Korea and Taiwan, in the Philippines this has not been the case. When we look at some of the successful Asian economies, we find that very important in the first stages of their development was agrarian reform. Agrarian reform created a prosperous peasantry that then became a market for industry. So, actually, if we look at Korea and Taiwan, the first phase of their industrialization was rural industrialization--the creation of implements and other inputs by industry to support agriculture. I think this is often forgotten now, but since most of our population is in the rural areas, agrarian reform is really going to be the key to raising purchasing power to stimulate sustained industrialization.
The second thing that I think we should address is our economic relations with the outside world. One of the lessons to be learned from the Asian financial crisis of 1997 and the current crisis is the importance of capital controls; what has brought us to this crisis is the unregulated capital flows globally. It would be very important at this point that capital controls are brought back to act as speed bumps in the flow of global capital, so that this kind of high-speed or cyber-speed flow is slowed down and controlled and so it does not destabilize the global economy and the local economy. Equally important is we really need to be able to move away from the free trade agenda. My sense is that very central will be a new agenda of managed trade; that is civil society and the state must act to actively supervise trade rather than let the market have its own way. I hesitate to use the word protectionism because it has negative connotations, but I think, at the same time, the way protectionism in the past has been practised in the Philippines has not been good. It was one of uncoordinated protectionism that mainly served vested interests. It was not a coordinated strategic protectionism that was meant to build up the economy through industrial policy. In other words, the Philippine industrial class has been very, very short-sighted. For instance, in the 1990s, we worked with FPI, Federation of Philippine Industries, and we collaborated in formulating a program what would lead to a trade policy that would be basically one of managed trade. We thought that there was serious engagement in the process from the Concepcion group. However, once Raul Concepcion got the protection he wanted—meaning that the tariffs on the goods he was specializing in would not be lowered—he abandoned the coalition. He left us holding the bag. Basically he said, “I’ve gotten what I want, bahala na kayo sa sarili niyo.” In other words, the main problem with protectionism in the past was that it was very much vested-interest protectionism. And what we really need to be doing is using managed trade or strategic protectionism to build up and deepen our industries.
What this means is that we should be open to the fact that we can use protective tariffs as well as selective liberalization as weapons to make the economy more solid. We should be able to pragmatically de-protectionize or protect industries depending on our strategic economic objectives. The Japanese say that there are sunrise industries and there are sunset industries. You protect and support sunrise industries, and you find a way to lay the sunset industries to bed, with a great deal of social support for the people affected and making sure to move the workforce from those industries to the dynamic industries. This kind of forward -looking protectionism needs to be one of the things that should characterize the new economy.
A third area that we should be looking at is a reconfiguration of the system of property ownership. There used to be a really dynamic debate on this in the late ‘80s and the early ‘90s, when people were talking about the “mixed economy” –you have the private sector, you have the state enterprises, you have the cooperatives, you have collectives, you have private-state partnerships. Essentially, what you aim at is a variegated property system, instead of one consisting of just private and state enterprises. I think that what we need is rethinking or reconfiguring the property base of the economy in the interest of both effective development and social justice. But we have to have an important proviso, which is that we will never let the transnational corporations be part of this mixed economy. I think that this would make it quite important still to retain the nationalist provisions of the constitution.
The fourth item in a strategic agenda is an expansion of economic democracy. This means two things. One is a major effort at income and asset redistribution to end poverty and expand purchasing power, something we already touched on when we discussed agrarian reform. The second is expanding democratic decision-making to the enterprise level as well as to the making of meso-economic and macroeconomic decisions. For instance, it should not be left up to technocrats or the market to determine whether we should build a computer industry or an automobile industry. We must subject decisions such as these to a democratic vote.
The fifth issue that I would like to flag is the relations between labor and capital. I think that the situation in this country has been such that labor has been extremely weak and capital has almost total hegemony. This is, of course, not good, not only for social justice reasons but for reasons of development. In fact, if we let capital be hegemonic, it will always provoke a race to the bottom; that is to seek dirt cheap wages, which means that you do no not create the base of expanded purchasing power that is the centrepiece of a dynamic industrial economy. So when people argue for decent wages, they do not just argue for social justice reasons, they also argue for economic reasons. This is why I think there should really be preferential support for labor within this reconstituted economy, whereby we make rising living standards and wages central to dynamic economic growth. What this would mean of course is that the state and civil society will have to really play a very important role in bringing about this new relationship between capital and labor.
Of course--and I will not take this up but just mention it-- all these reforms should be done in the context of a sustainable economic development strategy that is very sensitive to the environment and the environmental crisis, especially at a time of climate change. This means that the kind of technological base and the kind of growth that we have will really have to be very, very sensitive to green considerations, because there is no returning to the ecologically damaging industries of the past.
These are some of the strategic issues that we really need to confront and discuss as we enter this era of crisis to just make sure that when we see the light at the end of the tunnel we shall have generated the conditions for a move forward rather than a step backward.*Walden Bello, President, Freedom from Debt Coalition, Senior Analyst, Focus on the Global South, Professor of Sociology, University of the Philippines