This article in Foreign Affairs makes a good effort to describe the broad events that are reshaping the global economy. It argues that the economic challenges faced by the US, Europe and Japan are leading to a crisis in Democracy itself. Some suggestions are made about what might be done in response to the tensions between capitalism and democracy that have been exacerbated by the forces of globalization, but fixing the problem is not as easy as describing it.
Globalization has been led by the relatively independent decisions made by large multinational corporations to take advantage of technologies that have enabled them to become more productive in manufacturing. They can produce products and services more efficiently with modern technologies, and they have exploited the international labor market to their advantage. This combination has led to lower demand for labor in most western nations, and falling wages for the middle class that was built upon a base of manufacturing. The problems of a shrinking middle class and rising inequality in western nations have led to a crisis in democracy. Governments are better at distributing benefits than they are at distributing sacrifices. They have not responded well to problems of a shrinking middle class and the high cost of providing social safety nets. Partisanship is on the rise, and the media provokes partisanship rather than informing the public. The economic stimulus package in the US was passed without a single vote from republicans in the US House. The poor response by western governments to their problems, and the rising economic performance in Asian countries, which have different forms of government, has raised additional questions about the viability of liberal democracies.
Western nations have been able to manage business cycles by employing fiscal and monetary policy to moderate the business cycle. One of the problems today is that decisions that are made elsewhere also impact national economies. China has managed it currency in ways that effect economies in Europe as well as the US economy. Investors and rating agencies have made decisions which affect sovereign debt and interest rates and Europe's sluggish response it its crisis has an impact on the US and the rest of the world. Even the performance Hyundai, which has improved quality and has increased its market share, has led to changes that cannot be dealt with by national governments.
It has also been more difficult for western nations to work together cooperatively to deal with international problems. Dealing with global warming and the isolation of Iran requires the use of a broader network of nations than it has in the past. The G7 has given away to the G20.
Europe's crisis of governability has led to a renewed nationalism in many countries. There is increased opposition to European integration and globalization. This has been fueled by economic problems and other factors. Globalization has led to shrinking middle class even in Germany. Its middle class shrunk by 13% between 2000 and 2008, and its social safety net has been weakened as well. Spain has a 23% unemployment rate and its youth unemployment rate is above 40%. The youth unemployment rate is high throughout Europe. The younger generation does not share the memories of the older generations in Europe of the devastation brought on by wars, and they are less responsive to need for the integration. There has also been a negative response to the immigration policies that were necessitated by an aging population in Europe. The rise of right wing political groups in Europe has been in response to the economic problems and the poor integration of immigrants into the nation states.
Japan also has problems with globalization. In 1989 its per capita GDP was the fourth highest in the world. Today it is 24th in the world. Jobs and investment have increasingly moved to the " Asian Tigers". It has a shrinking middle class and higher levels of inequality similar to that of the West. The effectiveness of government has eroded in response to its failures to deal with economic decline. Japan has had 6 Prime Ministers in the last 5 years, and only 18% of the public has a favorable of the party in control of the government. There are major divisions within the two political parties and the dissension between the two parties has increased as well.
The article concludes with the challenge to provide a 21st century solution to the tensions between capitalism, democracy and globalization. It warns against protectionism, but it only offers a vague indication about what the 21st century solution should look like. The nation states should engage in strategic planning to improve competitiveness, and they should encourage a progressive populism instead of the reactionary populism that we see on the right. The focus should be on improving their control over the political economy, and its ability to deal with globalization and the demands of society for a more equitable distribution of rewards and sacrifices. Its hard to see how this can be done when those are precisely the issues that divide our nations politically. The nation states have the authority to deal with these problems, but there is a question about whether they can take charge of the process of globalization that has been driven by the corporations which make the most important decisions. They are driven to make decisions which improve their financial performance, and they are made independent of the domestic problems in the states in which they are domiciled. They have to power to influence government to assist them in achieving their individual goals. The question is whether governments will use their authority to manage the political economy in the public interest.
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