Is the world getting richer?

There’s a Twitter hashtag called #firstworldproblems. Your WiFi packs up, a fat person sits next to you on the train and talks into their phone for the entire journey, Waitrose runs out of Italian Prosciutto slices forcing you to buy ordinary ham. Mildly irritating events that appear all-consuming, prompting you to take to social media to vent your frustration and simultaneously display a mature self-awareness that your petty grievances are as nothing in the scheme of things.

For accuracy although not brevity, #firstworldproblems should be rebranded #firstworldproblemsofthereasonablyprivilegedindevelopedcountries. A tweet complaining, ‘Had to wait 1 ½ hours for baked beans & noodles at the food bank today! #firstworldproblems’, doesn’t sound right.

Is, though, economic stagnation and decline a ‘first world problem™’? The 2008 Global Financial Crisis had, as its name suggests, a world-wide impact but has been felt most severely in developed economies. The UK’s economic ‘recovery’ disappears into thin air when GDP is calculated per capita – ie per person, taking into account the increase in population over the last six years. Europe has suffered two recessions since 2008. The near zero interest rates in evidence throughout the developed world betray the fact that no real economic recovery has taken place. If it had, borrowing by companies to invest would have pushed the price of money – the interest rate – upwards. This hasn’t happened.

By contrast, consider China. The Chinese economy has slowed to a growth rate not seen since the last year of the 20^th century. But, at 6.8%, it still stands at a level that makes developed economies green with envy and represents a record of economic growth they have rarely equalled at any time in history. Per capita income in China grew fivefold between 1990 and 2010. In advanced economies, the story is the opposite. Between 2005 and 2014, real incomes were flat or declined for two-thirds of households in 25 rich economies.

Elsewhere, India, now the world’s seventh largest economy, has achieved an average of 7% annual GDP growth for the last two decades. The Turkish economy has grown by nearly 4% a year since 1999.  So is the malaise of weak economic growth, halting business investment and dwindling wealth limited to developed economies? Is it a first world problem?

Paul Mason, in his book Postcapitalism, marshals the evidence to suggest it is. According to him, the era of globalisation (the late 1980s onwards) has witnessed a palpable growth in the incomes of two-thirds of the world’s population. In terms of GDP per person, the developing world, he says, has grown by 404% since 1989, a spurt of economic expansion that outpaces even the post-Second World War boom, which was centred in Europe and the US.

In contrast, the people who have decidedly not benefited from globalisation live in the developed world. “They gained almost nothing from capitalism in the past twenty years,” Mason writes. “In fact some of them lost out.” The losers of globalisation include “black America, poor white Britain and much of the workforce of southern Europe”.

Branko Milanovic, a World Bank economist, argues that while the global 1% and the middle classes of so-called ‘emerging market’ economies have been the main beneficiaries of globalisation, they are not, by far, the only ones. The poor have also got decidedly less poor. “The surprise is that those at the bottom third of the global income distribution have also made significant gains, with real incomes rising between more than 40% and almost 70%,” he says. It is this rise in wealth at the bottom of the ‘global pyramid’, claims Milanovic, which is responsible for the startling fall in the ranks of the world’s ‘absolute poor’ over the last 20 years.

Milanovic does not spare the hype, calling this change, ‘probably the profoundest global reshuffle of people’s economic positions since the industrial revolution’.

Have the poor inherited a bit more of the earth?

But is the hype justified? Are we in the West largely blind to the material progress that has been made in other parts of the world? One reason, however, to remain sceptical of claims of mass global enrichment is that it rests heavily on poverty reduction in one country alone – China. Home to 1/5^th of the world’s population, China has been responsible for more than three quarters of global poverty reduction. Without China, whose internal political economy is configured very differently to the market triumphalism dominant in most of the world, the World Bank’s poverty figures would look markedly less impressive.

Another reason for distrust is that world GDP statistics don’t bear out the world-bestriding optimism. “The relative stagnation of the economy since the mid-1970s is a global phenomenon,” insists US Marxist economist Andrew Kliman. He argues that slowdown in economic growth that has taken place in the US since the 1970s is “somewhat less drastic” than that of the rest of the world (advanced and developing countries alike). After 1973, says Kliman, the growth rate collapsed by more than half in Africa, Latin America and the Caribbean, as well as in Europe and Japan. Remove China and India from the mix and the Asian growth rate shows a similarly sharp contraction.

But the claim that globalisation represents ‘the greatest economic event in human history’ does not rest on development since the 1970s but since the late 1980s and, in particular, the early 2000s - when Mason’s figures show growth as particularly marked. But even here Kliman dissents, arguing that “for the period since 2000, World Bank figures indicate that growth of real GDP per capita accelerated only minimally.” According to Kliman, world GDP per capita stood at 1.3% between 1990 and 2000 and at 1.6% between 2000 and 2008. Far from earth shattering and nothing like the 3.2% global growth that occurred in the decade between 1960 and 1970.

You can balk at the notion of using GDP growth as a surrogate for people’s average incomes. GDP growth per capita (per person) does reflect the reality better than bare GDP figures, as the UK’s experience shows, but it is far from perfect. If GDP represents national income, it offers no clue as to who, within the nation, receives that income. So a country with modest GDP, could be internally egalitarian and effective at reducing poverty. Left-leaning Latin American countries such as Uruguay, Bolivia, Venezuela and Ecuador may fall into this category. But GDP still gives a broad indication of how rich a country’s inhabitants are.

You might also have suspicions about the insights of an avowed anti-capitalist like Kliman. Consider then those of Ha-Joon Chang, an ‘institutional economist’ who believes capitalism to be the “best economic system humanity has invented”. According to Chang per capita income growth in the developing world stood at 3% in the 1960s and ‘70s. But it fell by nearly half, to 1.7%, for the two decades from 1980. Income growth did rise in the 2000s, says Chang, bringing the growth rate up to 2.6% for the entire 1980 to 2009 period. This is still, though, below the pre-1980s record, and much of that growth has depended on the commodity boom which Chinese economic growth hugely stimulated. With the Chinese slowdown, the commodity boom has ebbed as well. The South African economy, the 2^nd largest in Africa, is ‘in crisis’, the government there admits.

The growth rate for particular regions illustrates a downward trend, hardly commensurate with the greatest spurt of development in human history. Latin America, notes Chang, grew 3.1% in per capita terms in the 1960s and ‘70s. But between 1980 and 2009 at a rate of barely one-third that level – 1.1%. Per capita income growth in Sub-Saharan Africa was 1.6% in the 1960s and ‘70s but only reached 0.2% between 1980 and 2009. For many years in the 1980s and ‘90s African growth, under the tutelage of destructive Structural Adjustment Programmes, was actually negative. According to the NGO, Global Justice Now, in 2008 there were 562 million people living on less than $2 a day in Sub-Saharan Africa, a figure almost double 1981’s 288 million. The overall population of Africa has also increased since the early ‘80s, “but even proportionally, there has been almost no improvement in poverty rates in sub-Saharan Africa since 1981,” the NGO says.

Paul Mason claims that during the post-war boom capitalism suppressed the development of the global south and that “unequal trade relationships forced much of Latin America, all of Africa and most of Asia to adopt development models that led to super-profits for Western companies and poverty at home.” The coming of globalisation “changed all that”.

This is only partly true. Exploitation by the West intensified in the 1980s and ‘90s, and globalisation, for most countries, has not really remedied that disadvantage. So while some large non-western countries, specifically China and India, have grown spectacularly (although poverty reduction is much more marked in China), the great ‘global reshuffle’ is much less profound for most of the world’s population.

Financial crisis: Why and what's the reason for?

There’s an old Bob Dylan song called ‘Who killed Davey Moore?’ It’s the tale of a boxer killed by a fatal punch and the song recounts the protests of those involved – the referee, the crowd, the gambler, his manager and his opponent – that they weren’t the ones really responsible for his death. “It wasn’t me that made him fall,” they all cry. “No, you can’t blame me at all.”

That song springs to mind whenever anyone apportions blame for the 2008 financial crisis. There are no shortage of culprits. And given that the world may experience similar economic tremors in the near future, the question of who is to blame is extremely relevant.

Who really did make the system fall?

Culprit # 1 Senior Bankers

Bankers are, unsurprisingly, the most likely suspects. Adjectives like reckless and greedy have clung to banks like leeches since 2008 (which may be an apt analogy). But according to Dutch author Joris Luyendijk, the fatal flaw was not so much greed as wilful incompetence. The recently released movie The Big Short exemplifies, he says, the atmosphere in run-up to 2008. Days in which extremely clever finance geeks took advantage of the fact that senior managers in most banks had no idea what was really going on in their organisations. The impenetrable financial products they devised combined to make them vast fortunes and lay the seeds for financial meltdown.

Luyendijk quotes former UK Chancellor Alastair Darling who laments the fact that top managers in US and UK banks “failed to understand – or even ask – what was making them so much profit and what were the risks.”

He attributes this failure to lack of personal liability. In the days before the Big Bang, financial firms were organised as partnerships, rather than publicly floated corporations which any person, or hedge fund or other company could buy shares in. Partnerships ensured managers kept an unblinking eye on their organisation’s activities, says Luyendijk, because if things went awry they were personally liable for the cost of mistakes. But when partnerships were taken over by publicly floated banks or the investment divisions of major banks began marketing their own financial products, this discipline was lost.

I believe that while deliberate blindness on the part of senior managers was a factor in the financial crisis, it is far from a complete explanation. Firstly, bank executives were not as unaware as Luyendijk or The Big Short suggest. From pooled mortgages, to Libor and Forex fraud, the idea that senior executives were utterly oblivious to the machinations going on beneath them is not credible. When apologies become necessary, incompetence is always preferred to culpability.

In 2004, it was agreed that banks needed to have capital or deposits worth a mere 8% of the risky loans they had on their books. That agreement, known as Basel II, was “largely written by the banks themselves” says Mark Blyth in his book, Austerity: The History of a Dangerous Idea. Banks became massively indebted in the early 21^st century (they still are) and that was a conscious decision on the part of senior managers; a way of securing more profit by increasing the amount of money they loaned out. European banks, especially, became chronically ‘over-leveraged’ and may yet have to be recapitalised ‘on a scale yet unimagined’. To blame all this on unruly traders is way too convenient.

Second, the financial crisis was not just about the risk-laden products, the famous mortgage backed securities, collaterized debt obligations and credit default swaps, that boomeranged on the institutions that devised them. It spread across the world with such devastating effect because other institutions – other banks, companies, governments and NGOs – bought those toxic assets. And they bought them because they seem to embody the irresistible combination of low risk and high yield.

Lastly, risk-taking by banks was not merely an internal transgression. They were subject to pressure, possibly decisive pressure, from outside …

Culprit # 2 Shareholders

“In the run-up to the financial crisis, shareholders failed to control risk-taking in banks,” concluded the UK Parliamentary Commission on Banking Standards, “and indeed were criticising some [directors] for excessive conservatism. Some bank leaderships resisted this pressure, but others did not.”

So it wasn’t just that senior executives in banks failed to control super-intelligent and ambitious underlings who could reel off all the prime numbers up to 100 in 2.5 seconds. As directors of publicly floated companies, they were also under constant pressure to deliver greater and greater profits for the owners, the shareholders. And aware that if they didn’t succeed, they needed to look elsewhere for regular remuneration. In the words of Citigroup chief exec Charles O Prince in 2007, (in an article written by Luyendijk) “as long as the music is playing, you’ve got to get up and dance.”

To whose tune were the senior bank managers dancing? Other banks, primarily. Financial behemoths like Barclays, JP Morgan and Deutsche Bank top a list of 147 multinationals who literally own each other through interlocking shareholding. Other major shareholders include hedge funds, fantastically wealthy individuals and pension funds.

What these owners have in common is a need to maximise yield. According to Paul Mason, economics editor of Channel 4 News, big institutional investors such as pension funds, in their pressing need for higher returns on their investments, have become “crucial drivers of instability”. The signature products of the 2008 crisis, mortgage backed securities and collaterized debt obligations, seemed, before they exploded, low risk. So major shareholders were happy to buy them and to breezily criticise banks for ‘excessive conservatism’.

What lies at the root of this predilection for risk-taking among shareholders is the same weakness that Luyendijk criticises bank executives for – that if things go drastically wrong, they know they won’t be accountable. Just as bank executives are cushioned by a lack of personal liability, so shareholders enjoy the protection of limited liability.

Limited liability means that shareholders can lose only their investment in a company; they are never on the hook for the entirety of its bad debts. It is a right granted by the state. Limited liability first originated in Britain in the 1850s and was opposed in an earlier time by the father of market economics, Adam Smith, because of the dangers he saw in separating ownership and management.

The situation is complicated by the fact that, while shareholders seem very adept at pressurising the managers of the corporations they own to maximise profit without heed to public welfare, they are positively impotent when it comes to reining in harmful behaviour. Senior managers seem able to set their own pay which has mushroomed to 180 times that of the average worker in Britain. When shareholders do revolt over excessive executive pay – as they did at Shell in 2009 - they find that their opinion is merely advisory. In many ways, the senior management of large, shareholder-owned corporations are a law unto themselves.

So some have concluded that protecting the public from the selfishness of corporations requires removing both the limited liability of shareholders and the personal liability of company directors. “The most effective way of curbing predatory practices is to withdraw limited liability and hold the shareholders and directors of these enterprises personally liable,” argues Essex University’s Professor of Accounting, Prem Sikka.

Sikka wants alternatives to the corporate model – mutuals, cooperatives, not for profit and worker owned enterprises – to thrive and be promoted by government. “All are subjected to community pressures and control by employees, savers and consumers,” he says. “They see something beyond making a fast buck.”

The trouble is, during the crisis of 2008/9, the eyesight of these supposedly alternative enterprises seemed as myopic as anyone else’s.

Culprit # 3 the global market

The list of mutuals in Britain felled by the financial crisis is embarrassingly long. The Dunfermline Building Society, the Scarborough Building Society, the Chesham Building Society, the Derbyshire Building Society and the Cheshire Building Society all either collapsed or had to be bought by other financial institutions. In the case of the Dunfermline, the Bank of England bailed it out and ran it for a time.

Building societies don’t have shareholders. They are owned by, and in theory accountable to, their members – people who have mortgages or savings with them. But, though they didn’t create the banks’ financial ‘weapons of mass destruction’, they were just as reckless with the way they lent money.

In May last year, regulator Andrew Bailey, the chief executive of the Prudential Regulation Authority, warned building societies that they must not return to the ‘fatal’, high risk lending that helped trigger the financial crisis. He cited evidence that building societies were resuming the pre-crisis practice of making loans many times larger than their customers’ income and property.

These failings are not limited to Britain. In 2009 two of Germany’s famous state-owned Landesbanken, were forced to merge after they had borrowed too much capital and invested it in toxic US sub-prime mortgage assets. Four others had to be bailed out by state governments in Germany to the tune of millions of euros.

In Spain, savings banks, known as cajas de ahorros, are owned by non-profit foundations and dedicated to charitable activities as well as savings and mortgages. But they were at the heart of the implosion of Spain’s housing bubble. Of 45 cajas in existence at the start of the crisis in 2007, only two survived. The rest collapsed and had to be taken over by banks or the government. The effects have been catastrophic. Hundreds of Spaniards have been evicted every single day and the unemployment rate has reached a staggering 25%.

The financial crisis may have been hatched in corporate-land but it unfolded like a virus throughout the world because of markets. And allegedly alternative enterprises were as starry-eyed about these markets as anybody else.

Why then did alternative enterprises, which presented themselves as different to soulless, money-grubbing corporations, turn out to be not so different after all? Partly, because of a lack of real accountability. Though they were accountable in theory, they weren’t in practice. German Landesbanken had advisory boards that were meant to keep senior management in check but merely rubber-stamped their activities. In Britain, the Cooperative Bank’s woes can be attributed to the fact that its elected board didn’t have the knowledge or confidence to challenge the ‘incredibly optimistic’ assumptions of the management team. In this sense, the corporate and mutual sectors suffer from a similar affliction – out of control senior executives.

We don’t live in democratic societies. People don’t have the knowledge, time or inclination to hold the powerful to account. Without a conscious change in that level of knowledge and intention, mechanisms of accountability will remain empty shells.

But perhaps the problem is deeper still. The Marxist economist Andrew Kliman argues it is foolhardy, in a capitalist economy, to expect nationalised or worker controlled banks to behave differently to their corporate equivalents. “In order to survive, a state-run (or worker-run) bank must pursue the goal of profit maximisation, just like every other bank,” he says. “As long as there is capital, what are actually in control are the economic laws of capitalism.”

Those economic laws of capitalism mandated that building societies and other mutuals compete with major banks for market share and profitability. And doubtless many members, at the time, agreed with these aims. Governments in Britain have since the 1980s relied on rising house prices to ensure re-election. When that measure goes into reverse, as it did for the Conservatives in the early ‘90s, they watch as erstwhile supporters desert them in droves. Pensions funds are a ‘crucial driver of instability’, yet many millions rely on them to deliver high investment returns to fund their pensions.

This is not to descend into the ethical void and assume that everyone is equally guilty. Some people are infinitely more culpable than others. A tiny elite get to set their own pay. A tiny elite have been bailed-out by government and their wealth rescued by state action. A tiny elite get to make – and rig – the rules of the game. But, as in Dylan’s Davey Moore parable, it is the rules of the game that need altering. The blame game confers only an ephemeral pleasure. A bit like shopping.