Whatever the system, we're all in it together

Articles and op-ed

Published in The Australian

26 January 2013

A GIANT of a man, Helmut Kohl told us in 1989 just months before the Berlin Wall came down that there must be no more European wars, that there must be a united Europe. Scarred by the horrors of war, as foe invaded another country by simply marching over a hill, Europe would form an economic union whose genesis was not really economic but political.

A year before, Bob Hawke and his travelling entourage had spent hours at the White House with president Ronald Reagan, hearing of his meeting with Russian president Mikhail Gorbachev and the friendship he and Nancy had formed with him and his wife, Raisa. "Bob," he told us, "they are good people."

Bob, too, had formed that view, having spent more than two hours discussing the future of the Soviet system with Gorbachev. Bob had asked me to remain behind with him at the state guest house till 2am, preparing for his historic meeting with the Russian leader.

Reagan, Gorbachev, Kohl and others were reshaping the world, fashioning world peace, dismantling the iron curtain.

A decade later, communism was finished. Karl Marx had incorrectly predicted that capitalism would devour itself, and that communism would emerge as the supreme economic and social system. Such was the failure of the state-controlled economy that author Francis Fukuyama in 1992 declared the end of history, that we were living in a unipolar world in which capitalism and Western liberal democracy had triumphed.

Yet capitalism as it existed at the dawning of the new millennium of the Judeo-Christian calendar survived barely seven years.

China's re-emergence after almost 300 years of dormancy created a huge new pool of national savings that was deployed in the capitalist system, enabling US banks to give low-interest loans to families who otherwise would not have been able to afford them.

When these risky mortgages were bundled into financial instruments that could be sold on, offering investors an income stream as the loans were repaid, the developed world's banking system took a big stake in US mortgages. But as low-income mortgagees began defaulting on their loans, driving down US house prices which in turn caused more home borrowers to default, no one could reliably put a price on the fast-falling value of these bundled-up, second-hand entitlements to income streams.

Less than a decade after capitalism had been awarded supreme bragging rights, it, too, had fallen, as governments in the US and Europe bailed out failing banks and auto companies. A form of American and European state capitalism has emerged from the global financial crisis. Ironically, as China continues its liberalisation, it is also evolving into a system of state capitalism. So, too, are the emerging economies of Brazil, Russia, India and Indonesia.

Rather than declare another end of history – this time that state capitalism is the naturally stable economic system – it makes sense to accept that the world economy and those of its member states are again in transition, as they have always been.

And rather than inaccurately forecasting where the global economy is heading, it is wise to seek the application of a few guiding principles from world leaders to lock in jobs growth and fight poverty. Pre-eminent among those principles is the lesson from the Great Depression – that policies aimed at benefiting one economy at the expense of others will ultimately be self-defeating.

This week at the World Economic Forum in Davos, Switzerland, I made this argument as forcefully as I could: that countries adopting policies designed to impede imports through trade barriers and currency manipulation would only invoke retaliation. Any gains would be short-lived, the world economy would be damaged, jobs would be lost and a new round of protectionism would ensue, causing further job losses in a negative sum game.

Europe appears to have stabilised, China has resumed strong economic growth and the US economy looks ready to slip into a higher gear. All the right sentiments were expressed at Davos this week. There are reasons for optimism about the world economy, poverty alleviation and global peace and security. US President Barack Obama's recent inauguration speech inspired the notions of freedom, peace and opportunity for all people. A new Chinese leadership team has been selected to carry on that country's transition.

The world is undoubtedly a better place for the ending of the Cold War and the creation of a peaceful Europe. And the rise of China, India, Brazil, Indonesia and other developing countries has liberated hundreds of millions of people from poverty.

Let's not divert our energies into predicting the next permutation of economic organisation. Instead, let's channel them into applying the principle that every one of our fellow human beings deserves the dignity of work, free of the effects of policies designed to destroy jobs in some countries in the futile hope that they will sustain them in others.

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