Paradigms that condition the course of global economy

This article highlights four emerging paradigms that carry significant weight on the course of global economy: (i) the fragmentation and geographical dispersion of the capitalist production process, (ii) the universalization and homogenization of consumption patterns, (iii) production and consumption’s subordination to financial capital and (iv) the crisis and reformulation of the Welfare State.
1. The fragmentation and geographical dispersion of the capitalist production process

Over the past few decades, there has been a real seismic shift in the global production process. Hundreds of large companies in the US and some European ones have transferred part or large part of their production and distribution chain towards China, India and other Asian countries, induced by the competitive advantages provided by low wages, human resources of acceptable standards in terms of technical and managerial aspects, and a domestic market undergoing clear expansion in the receiving countries. This has generated the fragmentation and geographical dispersion of the capitalist production process, which has become a ‘denationalized’ process that sets apart and fragmentizes the notions of ‘nation’ and ‘industry’; the category that dominated the analysis of industrial capitalism, decision making and generation of policies for decades is transformed: ‘the national industry’. This profound structural change constitutes a new paradigm that will be consolidated as the industrial internationalization and its fragmentation are facilitated with accumulated experience, technology and breakthroughs regarding communications, transport and logistics.

2. Universalization and homogenization of consumption patterns

In concordance with the internationalization and fragmentation of the production process, a process of universalization and homogenization of consumption patterns at a global scale has developed. This tendency has emerged long ago but has been accelerated in the last decade, mostly encouraged by the expansion of the middle class in the emerging countries of Asia, Africa and Latin America. Merely in China alone in the past thirty years 700 million people have overcome poverty and integrated the middle class.

The new middle class expansion phenomenon in several emerging countries is the structural base for the globalization of consumption patterns favoring the universal presence of large brands, including luxury brands oriented to the growing number of large fortunes in India and China. This tendency grew with the global financial crisis, to the extent that two thirds of the GDP growth rate is no longer originated in the affluent countries but in emerging economies instead.

In order to grasp the dimension of this emerging world one needs only to remember there are already eighty countries growing at a higher rate than the United States. If this process continues at a similar pace and tendency, the global middle class amounting today to 1.8 billion people, would reach 4.9 billion by 2030 (over a world population of 8.3 billion) and 80% of its growth would take place in the emerging countries. In two decades the world would turn into a middle class society, framed in between two other groups: big millionaires on one hand and, on the other, an enormous proportion of poor people inhabiting countries that, because of natural resources’ availability, economic subordination or poor political management, are not favored by the process of global development. In short, a global society with a large emerging middle class, concentration of wealth of unimaginable proportions and, consequently, growing inequity between both ends of the income distribution curve.

3. Production and consumption’s subordination to financial capital

The third paradigm is the intensification and globalization of an old Marxist projection: financial capital’s control over the productive process. In addition to the analysis by the classic authors, the sophistication, profoundness and extent this phenomenon has had over global capitalism must be considered. Almost without regulations and globalized, the financial system has managed to take over, control and submit to their own interests the production process and society as a whole: the generation of wealth gradually moves away from its original functions of acquiring risk in order to finance consumption and the generation of goods (intricate to industrial capitalism) and is transferred onto speculation and foul play, among others, the establishment of extremely sophisticated products that disguise toxic assets and promise high short-term profits. All of which is enhanced by the constant development of technology and communications.

This way, the energy once invested in generating wealth is transferred onto the generation and acquisition of papers and not assets, origin of the global crisis we are still immersed in. This process reached its pinnacle in the final stage of President Bush’s administration where the degree of deregulation, already initiated during Clinton’s administration, displayed its highest level. President Obama’s administration hindered to some extent the perverse process of banking and capital market’s deregulation. The same has happened in Europe with several initiatives from the European Central Bank, such as the course towards the Banking Union and the demands for banking capitalization. However, the intricate institutional network slows down the decision making process in the European Union while the financial sector continues to profit from the sovereign debt crisis and limit or freeze credit for companies and families, which gets in the way of recovery and deepens the economic, social and politic crisis in which Europe is in, especially Mediterranean Europe.

No doubt the banks are the veins through which runs the sage of the capitalist system: credit. Therefore, they are irreplaceable for the development of production, consumption and commerce. This has been taking place for decades since the industrial revolution. But once financial capital, banks and capital markets are released to their own dynamic and voracity, they go from being a platform that promotes real economy to being those who smother it. The management of financial resources is separated from their possession and the dynamic choking real economy is accelerated: the issue is that management logic is even much more voracious and short-termed. Economy transforms into a world of papers, whose values are generated and burnt depending more on speculative variables than on parameters related to employment, investment, profitability and innovation. The struggle to regulate the financial system in a way that it can return to its original function will condition the next few decades; the outcome is obviously uncertain. A fact to reflect upon: regulation and even ownership of the banks in China on behalf of the State is very important; perhaps there lays the great difference regarding the success of Asian development, which is still capitalism, before the western and Japanese’s.

4. Crisis and reformulation of the Welfare State

In many European countries the Welfare State had reached its summit as an economic-institutional role model capable of generating wealth, wellbeing and a better income distribution. With the sovereign debt crisis certain veils are withdrawn exposing a highly indebted State and a public sector in deficit, which wastes resources, corrupt in several cases, but with a great ability to issue and place debt at low rates, covered by the Euro symbol, a coin with a presumably significant backing. Of course the financial system (mostly the German one) played its role and was accomplice to this fiction revolving the emission of large volumes of sovereign debt in order to finance a budgetary deficit with which the Welfare State in Greece, Spain, Italy, Portugal, Ireland and other European countries was financed.

The destruction and particularly the reformulation of this structure in countries that up until recently were considered to be role models worldwide will require hard work while the suffering of those who have been victimized by the crisis worsens. It will be necessary to analyze more thoroughly the institutional organization and the process of generation and distribution of public assets that prevails in several Nordic countries, in which the Welfare State has resisted the strikes of the global crisis and of Europe in particular.

Ultimately and should there not be any further social and political transformations, the consolidation of the aforementioned tendencies will constitute a global economic scenario in which the financial system (slightly more regulated) will continue to control the production process that will continue to become more internationalized and fragmentized, progressively more oriented to fulfilling homogeneous and global reach consumption patterns.

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