In The Wealth of Nations, legendary economist Adam Smith had written about the genesis of a new form of human activity, popularly known as industrial capitalism, which changed the role of the state with respect to the society. It was perceived as the solution for global hunger and poverty. Over the last two centuries, its proponents claim that it has brought significant sections of the population out of poverty. The recent global events, however, have revealed its underbelly. The Covid-19 pandemic and the resultant economic fallout have highlighted the limits of an increasingly globalised world order. Just when the world was beginning to get used to the “new normal”, the Russia-Ukraine war has cast another shadow on the global economic recovery this year, with experts saying that the biggest impact of the war will be on Europe. Against this backdrop, India’s chief economic adviser, V. Anantha Nageswaran speaks about the changing world order and the role capitalism plays in it. Edited excerpts:
US president Joe Biden’s recent call to move manufacturing to the US, which some see as a direct counter to Chinese manufacturing, seems like the continuation of former president Donald Trump’s “Make America Great Again” pitch. Critics are calling this the end of free-market capitalism. What does it do to the idea of globalisation in the 21st century?
Nothing lasts forever. Globalisation and localisation, state-led and market-led development or even large-scale and decentralised growth, all these questions and choices have their own time and phase. Then they fade and reappear after a time. It is cyclical. Globalisation had its heyday between 1889 and 1914. Then came the two world wars with an economic depression in between. Post World War II, it was all state-led catch-up growth and convergence. Once that had run its course, problems began to emerge and, from the 1980s, it became market-led growth. That has run its course.
Usually, pandemics have marked the end of one epoch and the beginning of another. Post the pandemic, for security reasons and to secure supplies of essential goods, countries would look to re-shore first and also create buffers. Hence, globalisation, as we have come to know it in the last four decades, may not continue. But, it is difficult to predict at this stage what shape and substance it will take. Perhaps this decade will be a transitional decade and a clearer picture will emerge by the end of it.
Most countries are unhappy with the US’s use of its currency as a financial weapon. Its ability to print dollars without any underlying assets has fuelled inflation across the world. As Russia and China fight the US dollar hegemony in world trade, what could be its possible outcomes?
Unconventional and ultra-easy monetary policies left in place for too long have created imbalances in the developed world and spillovers in the emerging world. It includes, but is not limited to, asset-price inflation and excessive leverage. But, for now, there are no alternatives to the US dollar.
In a sense, the financial crisis of 2008 never ended. Governments across the world kept on buying more time by resorting to a Keynesian model of growth without having the means to repay the debt. Do you think that the Russia-Ukraine war is a result of that financial burden that the West, as well as Asian economies, face?
I do not think that this war can be traced to the financial burdens that countries face. To me, it appears to be a bit of a stretch. Unproductive financing of economic activity by the state or by the private sector can and will lead to financial or fiscal sustainability challenges down the road, as revenues from unproductive financing will not be adequate to meet repayment and other servicing obligations.
Former US president Donald Trump wanted to withdraw the US from its role to save the world in climate talks and also in safeguarding democracies. Do you think that the commitments under climate talks have put additional pressure on Western democracies?
Western democracies face multiple internal and external challenges–climate commitments is one.
Do you see a relationship between the rise of strong sovereign leaders and capitalism in crisis?
No, I do not. Capitalism is in crisis, in part, due to its excessive financialisation.
What are your views on capitalism’s role in improving the standard of living of people in developing and indebted economies? What do you have to say about the increasing income disparity in the world?
Capitalism had delivered prosperity to hundreds of millions, and even billions, of people around the world. It raised their standards of living and instilled hope in them that their children and grandchildren would have a higher quality of life than they did. As mentioned earlier, a good deal of the unpleasant and undesirable consequences of capitalism, as it has come to be practised in recent decades, can be traced to excessive financialisation. Income disparity is one such consequence.
What is the scope for sovereign nations to continue being welfare states against the backdrop of an uncertain world order and falling economic growth?
Maintaining fiscal stability and providing a social safety net to the vulnerable sections of the population amidst faltering economic growth is a challenge for many countries. Solutions are not easy and will run into resistance and political and economic constraints–domestically and globally. There has to be a comprehensive social and economic compact within and across nations. Else, large-scale migration across borders, caused by economic deprivation, could be a consequence. All stakeholders must have a long enough horizon to be able to engage in meaningful give and take so that social stability and peace are maintained. Existing multilateral institutional arrangements and power structures may have to be reinforced to bring about such national and international compacts.
Will there be a new world order and what will be its role in setting the idea of sovereignty?
It will not be proper to give a facile answer to this question. We are in a moment or decade of churn. Some of these things will be clearer in hindsight. As was said by someone, it should be easier to predict events after they have happened.