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  December 17, 2012

Incomes Earned on Assets Rising while Labor Income is Falling

Yilmaz Akyüz: The crisis is not big enough for a fundamental change in economies like the United States; if we don't do the right things, we're bound to have bigger crises
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Dr. Yılmaz Akyüz was the Chief Economist and the Director of the Division on Globalization and Development Strategies at the United Nations Conference on Trade and Development (UNCTAD) when he retired in August 2003. He was the principal author and head of the team preparing the Trade and Development Report, and UNCTAD coordinator of research support to developing countries (the Group-of-24) in the IMF and the World Bank on International Monetary and Financial Issues. He taught at various universities in Turkey and Europe before joining UNCTAD in 1984 and after his retirement, and published extensively in macroeconomics, finance, growth and development. He is the second holder of the Tun Ismail Ali International Chair in Monetary and Financial Economics at the University of Malaya, established by Bank Negara. He is now Chief Economist of the South Centre, an Intergovernmental Think Tank of the Developing Countries, based in Geneva.


Incomes Earned on Assets Rising while Labor Income is FallingPAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Baltimore.

We're continuing our discussion of what to do about the global economic crisis. Now joining us again from Geneva is Dr. Yilmaz Akyüz. He's the former chief economist and director of the Division on Globalization and Development Strategies at the United Nations Conference on Trade and Development, or UNCTAD. He's now chief economist of the South Centre, an intergovernmental think tank for the developing countries, based in Geneva. Thanks very much for joining us again.

So we're--been talking about the nature of the problem. What should be done? Instead of a decade or more of deep global depression, what policies might make a difference?

YILMAZ AKYÜZ, CHIEF ECONOMIST, SOUTH CENTRE: Well, I think we should recognize that once you make so many mistakes, and once you accumulate problems, there is no easy way out.

In Europe, I think the current strategy is designed to save the euro, not to save the countries concerned. And it might succeed, it might succeed to save the euro, in the sense that countries don't get out of it and it won't collapse.

But under current strategy, even if euro is saved, I don't think Europe can return to growth, because of serious structure imbalances within the community. For Europe, Germany should start acting as a locomotive. Germany, by contrast, has so far been dead weight in Europe. It should act as a locomotive, and it should actually do so by raising wages, by raising domestic demand. And German wages rising will restore the [incompr.] in competitiveness between periphery countries and Germany.

Of course, this doesn't mean that the periphery countries should not do anything. I think they should [incompr.] but they should get out of this difficulty in the context of growth, not in the context of retrenchment, because the history of developing countries show that retrenchment is not a way out.

As far as the South [is] concerned, I think Latin America needs to reduce its dependence on foreign capital and its dependence on commodities. And this is not a new agenda. We've been talking about it for several years, several decades. But rather than doing so, what we see is the deepening of such dependence in Latin America. This is a long-term problem, and it requires a new set of policies in Latin America, including industrial policies, industrial policies in countries like Brazil, to restructure the industry and to go into manufacturing and to become a major player in the world economy. But I'm afraid Brazil is pinning its hopes on oil reserves in South Atlantic.

For China, it's very interesting to note that the commodity prices continued to rise from 2009 onwards, it went faster in some cases, even though Europe and U.S. went into recession. The main reason is that China shifted from export-led to investment-led growth. And Chinese investment has a lot higher commodity intensity than Chinese exports. This is why metals and minerals and oil have shown very rapid rises since the outbreak of the crisis. And the main beneficiaries are the commodity exporters, including in Latin America. And now many Latin American countries started thinking that China is more important to them than European Union, and they're more worried about Chinese going down than the European Union getting into a second dip.

Now, of course, if China goes from investment-led demand to consumption-led demand, this will have impact on commodity prices. But if China doesn't move to consumption- led demand, eventually China will deteriorate significantly, and that will hurt everybody, everybody including the commodity suppliers to China, as well as suppliers of parts and

components like Taiwan, Japan, and Korea, who are the main suppliers of manufactured parts and components.

For other countries, India has been exporting labor. And India needs to move to manufacturing. I don't know any country which has succeeded in attaining $30-40,000 per capita without industrialization. So, therefore, India should turn from service economy towards industrialization, and for that there is an important role for the government investment, particularly in infrastructure, which is very poor.

So this is the picture in the South. The only country really that can push ahead independent of the others is China. But there we face the serious re-distributional problems, which have important political repercussions.

JAY: But isn't the fundamental problem the global elites aren't capable of following policies like this that's a kind of rationality that implies a sort of long-term view and looking--you could say, looking at the interests of the global economy. And there's no evidence the global elites think like that and are even capable of following that.

AKYÜZ: Well, I think you're absolutely right. You see, we have gone for integration of markets to trade liberalization to financial liberalization, liberalization of foreign direct investment, and still we have problems with global governance. There is effectively no effective multilateral discipline over countries that matter for the world economy, and countries are pursuing their own interest, their own interests, without much respect for its global repercussions.

We had a good start with G20 in 2009, very promising start in the response to crisis, but soon everyone went their own way. Europe, Japan, United States, they're totally gone in policies that do serve their interests. U.S. flooded the world economy with liquidity, and many developing countries have been screaming that they're being caught in crossfire between European Central Bank and the Fed [incompr.] seen as a competitive devaluation, getting out of difficulties by exporting them.

So we need a global system that can put these together and protect the global economy from these kind of excesses and instabilities. And, unfortunately, the international organizations, which are actually dealing with these kind of issues, have been unable to--been ineffective in the prevention of crisis or in their management.

JAY: So is the underlying--really underlying issue, then, has capitalism simply run out of steam? Is it not capable, in terms of the real politics--who has power, how decisions are made--is it not--is capitalism simply not capable anymore of sustained growth? It's only capable of bubbles and crashes.

AKYÜZ: What's been happening recently is that increasingly economic booms are driven by financial factors.

Now, why is this happening? I think finance has become important, for obvious reason that when countries and people accumulate so much wealth and they start looking for earning money on their accumulated wealth instead of on their labor--and, in fact, almost everywhere, incomes earned on assets have been rising while labor income has been falling.

The accumulation of wealth has taken the financial form, as a result giving the financial markets upper hand and promoting them as a major force in the economy. And governments have increasingly given in to the demands from [incompr.] from the city. And as a result what you have is that finance-based globalization is driving the world economy, and we're going up and down with the financial bubbles and bust.

Now, after every crisis, you know, governments are trying to regulate the system so that it won't happen again.

This race between the governments or regulators and the finance is constantly won by markets. Why? Because the current approach to finance leave a lot of room for innovations, innovations. And unless you stop that, we are doomed to have these bubble-bust cycles [incompr.] That is, you have what I call giving too much room. You have a negative risk approach to financial regulation. That is, these things are not allowed; everything else is free.

Now, therefore what we need is perhaps a totally different approach to finance. And perhaps we can go back to the so-called positive risk approach to finance: you can do this, that, and the other; everything else is prohibited. Remember, in the United States, the interest rates were regulated until the 1980s, and it was only 1980s that the caps were [incompr.] So a lot of policies, a lot of measures that we used in the past effectively actually have been left behind. As a result, the finance has much more space today than ever. Now the fashion is macroprudential, but macroprudential is also based on the same liberal philosophy of allowing space for financial markets and institutions for innovation. And we should learn that innovations are not necessarily good for efficiency, stability, and growth.

JAY: But the reality of power in the United States is you can't pass even the weakest regulation. The Commodities Futures Trading Commission tried to pass a watered-down position limits on commodity trading, and they can't even get that through. You can't--you know, you can pass a Dodd–Frank, which was weak to begin with, and then they can't pass any regulations that would actually implement Dodd–Frank.

AKYÜZ: That's true. And I think the direction is perhaps not to do what you and I have been talking about. And I think perhaps this is because this crisis is not big enough for a fundamental change in economies like the United States. Perhaps we need bigger crisis. And if we don't do the right things, we're bound to have bigger crises.

JAY: Well, on that happy note, thanks very much for joining us. I think the--I mean, the conclusion I'm left with with all of this is that it's up to ordinary people to take their fate in their own hands, the elites of this world. There's lots of rational policies they could follow that would mitigate the crisis, that would alleviate some of it, but they don't seem interested in doing it. It's going to be up to ordinary people, I think. What do you think?

AKYÜZ: I agree with that.

JAY: Thanks very much for joining us.

And thank you for joining us on The Real News Network.


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