Failure of the World Economy
Posted on February 4th, 2023 S. Amaratunga

The new wealth produced by the world since 2020 has been USD 42 trillion. Two thirds of this huge amount of wealth has gone into the pockets of 1% of  the world population which comprises the billionares of the world. The whole of the rest of the world population, ie 99%, will have to do with one third of this wealth, which was largely produced by them. Apart from the gross unfairness of this world order the fact that its indefinite continuation may not be possible without huge social upheaval and irreperable environmental damage should be obvious to the discerning mind.

There are leading economists who think that one of the driving forces of the present global economy is international debt. The 2008 recession was overcome by the granting of huge amounts of debt. By 2018 the global debt volume had risen to USD 250 trillion which is three times the annual global output. The developing countries’ share of this debt had risen from 7% in 2007 to 26% in 2017. Several leading economists who have studied the impact of debt  on economic growth have reported that increasing public debt has a negative effect on economic growth (Reinhart & Rogoff  2010). A 1% increase in public debt could result in a 0.012% slowing down of growth. The reasons for this could be 1) discouragement of private investment as government borrowing competes for funds in country’s capital markets, 2) higher long term interest rates caused by an excess supply of government debt, 3) higher taxes to fund rising debt repayments and 4) increase in the rate of inflation.  While the recepient of debt end up with negative growth the the system ensures that the flow of wealth is from the poor to the rich. This is how two thirds of the wealth created by the poor finds its way into the pockets of the billionares.

Fault is not only with the imperialist rich but the ruling elite of the poor countries too. They take huge loans and spend it on unproductive projects aimed at boosting their own image and their bank accounts.  A foreign loan should be taken only if it is possible to pay it back with the foreign exchange generated from the project that is funded by the loan. Seldom is this maxim observed when governments of developing countries take loans. Moreover the total loan repayments should never exceed the total export earnings. The increases in government debt levels have positive growth effects when debt levels are low, but these effects become negative when debt levels increase beyond a certain threshold level (Reinhart & Rogoff 2010).

Sri Lanka’s total public debt in 2018 was USD 52 billion, an increase of 5% from 2017. Was this increase justified? Hardly, because the export earnings in 2018 increased only by 2%.  And what happened to the money? It was not used for any foreign exchange generating project but to stabilize the foreign reserves. Subsequently these foreign reserves were used up to pay for import of fuel etc.

Just as much as international debt enables rich countries to exploit the poor countries the large corporate establishments within countries use debt to grow richer at the expense of labour. They take loans for new investment even when they have sufficient funds and thereby evade tax which the government may badly need for its public expenditure and welfarism.

Thus its a rich man’s world, rich countries get richer at the expense of poor countries and rich people get richer at the expense of poor people both in the rich as well as the poor countries. Capital development, at the expense of labour and environment, has reached its zenith in the developed countries. The richest cannot accumulate more without causing abject poverty in their own countries, and worse, destroying the world. World Inequality Report, based on a worldwide study by 100 researchers, presented in Paris (Andrea Barolini 28 Jun 2018), reveals how the rich get richer at the expense of the poor. During 1993 to 2013, in Italy, the poorest 90% lost 15% of their wealth which was pocketed by the top 10% . In the developed countries, the richest 1% are twice as wealthy as the poorest 50%. In China, the top 10% own 41% of the wealth, in Russia 46%, in the US 47%. This increase in inequalities more or less parallels the decrease of public wealth, compared to private wealth. These facts and figures show how diligently these countries have followed neo-liberalist policies.

Isn’t it time to stop this madness? There is no need to develop the developed. They have reached the zenith of development that is possible in this planet. Other countries would never be able to reach their standard, simply because there isn’t sufficient resources in this planet. If the rich develops any further it will have to be at the expense of the poor in their own countries and the other poor countries. This has been happening at a faster pace since the IMF and the World Bank were restructured to serve neo-liberalism.

International debt plays a critical role in this unfair global economic system.

Obviously this cannot go on indefinitely without causing abject poverty as is happening in some developing countries in Africa and in Asia. Poverty rate has increased in Africa, causing lowering of household income and rampant malnutrition. Even in India, which records a high GDP, 30 million people have gone below the poverty line, mainly in the east and northeast states in the last six years. Sri Lanka is bankrupt.

What is the alternative to debt dependency for poor countries? Could they manage without foreign debt which endanger and compromise their sovereignty, independence and national assets ? If Sri Lanka could produce the essential food it needs, the import expenditure could be reduced by 50%. If import of non-essential goods is stopped another 25% could be saved. Then our export earnings could easily pay for the essential needs of fuel etc. Moreover if the goal of 70% of renewal energy could be reached, which should not be difficult in a country perenially bathed by sunlight, we could save enough of the export earnings for development work. All developing countries must strive for self-sufficiency and move away from export oriented, debt dependent economy. This would be a good thing for the poor as well as the rich and would save the world from destruction.

But do we have the freedom and the political courage and leadership to breakaway from the shackies of the present global economic system ? Sooner or later all third world countries will have to do that for existential reasons. Very soon it will be a question of survival not just for the poor but for the rich as well. S. Amaratunga

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