Globalization and Capitalism

GlobalizationBoth, capitalism and globalization have often been vilified –sometimes even paired up as a supervillain duo. They have been charged with pretty much everything going wrong in our lives. Granted, sometimes, poorly implemented versions of both phenomena are to be blamed (The Cyprus debacle being one of the most recent manifestations). However, a careful and more detailed analysis will reveal that things are not as simple as they are often believed to be. In other words, let’s not shoot the messenger.

In reality globalization and capitalism are like twin siblings, both with their own unique capabilities and flaws, not always walking or running at the same speed, but in the long run, they always end up walking hand in hand.

First things first. By definition, globalization has existed since the very beginning of mankind. It is an inherent component of human nature. For a more in depth explanation, read our article: What is globalization?

Capitalism, as we know it today, was born when the credit system was incorporated into the monetary economy. More on this in Robinson Crusoe and The Monetary Economy. And as monetary systems grew more complex with the growing interconnectivity between countries, it has become clear that capitalism is one of the many manifestations of globalization.

capitalism-crash

Like every human process, globalization and capitalism can spin out of control if not handled adequately. Some thoughts from Gandhi come to mind:

“The world is big enough to satisfy everyone’s needs, but will always be too small to satisfy everyone’s greed”.

Since the dawn of mankind, capitalism has become a driving force of globalization and vice-versa. If we were to visualize global society as an F1 car, capitalism and globalization would be two of its most powerful engine boosters. Like every high-speed booster, they are a double-edged sword that have the power to win the race if adequately used, or crash the car if used improperly.

Contrary to common belief, globalization isn’t the big bad wolf that some people pose it to be; neither is capitalism; turns out that the big bad wolf is ourselves.

Our inability to understand globalization and capitalism, and rise up to the occasion is what is keeping us from riding the wave, rather than wiping out (mainly due to a lack of skills, narrow-mindedness, ignorance, lack of a true competitive attitude –the latter being the most frequent and important).

The many limitations capitalism has proved to have are invariably related to perverse incentives and a typically untempered greedy attitudes. Those same limitations also apply to globalization.

“The Roots of Violence: Wealth without work, Pleasure without conscience, Knowledge without character, Commerce without morality, Science without humanity, Worship without sacrifice, Politics without principles.”

–Mahatma Gandhi

The above statement is a very simple, yet a profound way to visualize that there is nothing inherently wrong and/or perverse about globalization. It all depends on how the actors interact with it.

Constructive, successful, globalization can be summed up in one concept: high competitive spirit/action based in each individual’s unique comparative advantages. This, of course, also fully applies to all levels of society  (organizations, countries, etc.).

Hence, the solution does not reside in throwing away both, globalization and capitalism, but in learning how to  handle them appropriately. In fact, globalization and capitalism seem to be with us forever. They are not expendable. We all must constantly strive to substantially improve these dual pillars of contemporary and future society.

Cyprus and the World

globalization1Cyprus is a tiny country with a population of 1.1 million. Yes, on its own, demographically and even economically, Cyprus is a  relatively insignificant nation. However, Cyprus is a full member of the EU, since 2004. As such, at a critical juncture, whatever Cyprus does (or fails to do) in the economic, monetary and banking front can be crucial for the rest of the EU and even for the world at large.

“Globalization is such a powerful force that not even the Vatican can subtract itself from it.” This was last week’s post opening statement. And it can’t be more true. Now we see the extremely intertwined connections between the global society and one of the tiniest nations on Earth.

The initial agreement in the bailout package reached between the cypriot government and its major creditors on Sunday, March 17 was a catastrophic one. If that agreement had not been modified, it would have implied, at the very least, a classic bank run on Cyprus banks. The probability of a contagion effect in the rest of Europe, probably beginning with nations like Spain and Italy, was extremely high, almost inevitable.

Understandably, the terms of any rescue package raise questions in regards to future bailouts for other troubled nations. From this standpoint, there are some common-sense universal rules that any nation integrated into the global financial community must adhere to.

We all are well aware how tough and tiresome those kinds of negotiations can be. In this particular case, it seems like Cyprus’s new government administration (with knowledge and, at the very least, tacit consent of the so-called troika –the EU, European Central Bank and the International Monetary Fund), was willing to venture into new grounds: partially confiscating small bank deposits, through a new tax, called a ‘stability levy’. That is, for good reason, a superlative No-No. Yes, Cyprus is one of the less transparent offshore financial centers in the world, with tens of billions of dollars worth of Russian money. the cypriot Frankenstein-financial status got there thanks to the relative indifference of the EU in the first place. Moreover, when Cyprus was accepted as a full member of the EU, therein was an implicit approval of its financial soundness. With the benefit of hindsight, that was utterly wrong. The EU has to assume its responsibility in that decision and provide the means to solve it.

The repudiation reaction of the international financial community to Cyprus originally proposed bailout was swift, decisive. Financial markets did what was expected, producing a sizeable down day in Asian risk assets. Europe, in turn, opened on Monday morning with a likewise significant loss, reversing during the day when the vote in the Cyprus parliament was postponed for the following day, to give more time for the Cyprus Ministers to reformulate their proposal to parliament.

We can imagine how many telephone calls, mails, and even some last-minute meetings took place between the evening of Sunday 17 and early Monday morning (Europe time). In most likelihood top government US officials must have played a crucial role, as well as the highest posts in the EU itself.

Regardless of how the evolution of this Cyprus affair in the coming weeks and months, the quick reversal of the proposed bailout package currently in progress is a most welcome development. The gained level of economic consciousness from this experience about the extremely close (irreversible) interconnectedness among the world’s nations is very relevant.

It is not an exaggeration to state that a very strong evolutionary change in world governance, in the right direction, has occurred. Granted, it only refers, for the time being, to the monetary and economic aspect. Nonetheless, the monetary and economic aspects of society are a profound component of it. They are part of society DNA. Politics without economics do not get far, and viceversa.

A new virtuous precedent has been set. There is not other similar event before this one.

The world’s global society is far from a formal unified globalized governance system. It may still take a few decades to get close to it. However, the immediate and decisive reaction of world monetary and economic authorities, not ruling out direct intervention of presidents and prime ministers, to the big mess unattended Cyprus would have done, is a very promising manifestation about most likely developments in the coming decades.

Further down the road, additional political integration in different regions is to be expected in the coming years. The major reasons behind it, are of the most pragmatic nature. It does not have much to do with political ideology. It’s all about the world and its countries functioning in the most appropriate way, for the benefit of society at large.

The global society is inexorably moving towards a more formal level of socio-economic integration. The Cyprus incident is a strong testimony in that direction.

Globalization and the Catholic Church: Popes Benedict XVI & Francis

Relogions of the worldGlobalization is such a powerful force that not even the Vatican can subtract itself from it.

Beyond its 1.2 billion followers, the global influence of the Catholic Church is undeniable. In many respects, it is a unique human institution. In addition to its sheer size, powerful traditions, and long history, the influence it exerts in many global affairs is evident. From a conventional perspective, Catholicism is the second oldest religion, after Judaism. The historic influence and contributions –though not always virtuous ones– of the Catholic Church to global society have been a constant throughout the past 20 centuries.

Even an ancient, relatively rigid religious institution as the Catholic Church, has recognized the increasing need to be more attuned with current and coming challenges and opportunities. Many paradigms have been broken, and much more is yet to come.

The unprecedented resignation of Pope Emeritus Benedict XVI, was an almost incredible act of wisdom and pragmatism from former Cardinal Joseph Ratzinger. How in the world can anyone reasonably justify life-long tenures, be it the Church, the Judiciary –the US Supreme Court–, or anywhere else? The mostly negative feudal vestiges of contemporary society have to be overcome. Pope Benedict XVI showed how it has to be done. Hopefully that precedent will be replicated in the future within the Vatican itself and other institutions around the world. This is a most basic precept of best practices and of sound governance.

The election of Pope Francis as the new head of the Catholic faith is a recognition to the internal demographics of the church, a deference to the largest group of followers the Catholic faith has: the Latino community (42% of the world’s Catholics are Latin America, whereas only 25% are european). Catholicism has a particular stronghold in Latin America because of the Spanish and to a lesser degree, Portuguese influence (colonization of Latin America in the 16th and early 17th centuries). In a larger context, this stronghold is also extensive to the developing countries around the world, where major growth of new followers is taking place.

The selection of Francis is also a recognition to:

  • The need to show a re-energized and reloaded attitude of adaptation to the new realities, challenges, and opportunities of contemporary society, beyond the traditional reach of the Catholic Church.

  • The increasing influence of emerging societies in world affairs.

 

Lighting-VaticanThe election of Cardinal Jorge Mario Bergoglio from Argentina, a theological conservative with a strong social conscience, as the new Pope sets many new precedents in one of the world’s most ancient religions:

  • The first Latin American to be elected.

  • Also the first Pope from a developing nation. Karol Wojtyla’s case can be visualized in a different light, being Poland an European country.

  • The first Jesuit in history to become Pope.

  • Francis is, for practical purposes, an outsider. Cardinal Bergoglio is a newcomer to the Vatican’s highest circle; a late-bloomer, appointed archbishop of Buenos Aires in 1998, and a Cardinal in 2001. In other words, the newly-elected Pope has relatively shallow ties to the Curia and the Vatican.

  • Cardinal Bergoglio’s decision in selecting Francis as his new name as Pope –after the legendary St. Francis of Assisi– sends a strong message of humility and simplicity, very distant from the otherwise pompous Vatican ways. He is a very modest and down-to-Earth person.

  • Yet, at the same time, by being a direct an immediate descendant of Italian immigrants, Francis should have a significant appeal to the Italian population, as well as to the rest of European traditionalists. Europeans have held the Pope position for most of the Catholic Church’s 20 centuries of existence.

  • Francis is the third non-Italian Pope in a row, after an uninterrupted four and a half centuries of Italian Popes. The fact that most of the world’s catholic population lives outside of Europe must have played heavily in this decision.

  • At the age of 76, Cardinal Bergoglio is above the Papacy’s ideal age. This can be interpreted as a strong conviction from the majority of the Cardinal College to designate someone of a certain profile, in spite of his relatively advanced age.

  • Last, but not least, the strong pastoral background of Francis can prove to a be a big plus. Having lived most of his life in Argentina, a more-often-than-not turbulent country, with a military Junta in power three decades ago, provides Cardinal Bergoglio with a different perspective from many fellow cardinals.

It is still too early to determine the most likely characteristics the new Pope will show in power. However, the outstanding traits of his personality paired with his previous track record can be a very good indication of what to expect from him as Pope.

The unprecedented decision reached in the March 12-13 Conclave of the Catholic Church at the Vatican is a very delicate balancing act of multiple interests and needs. It seems to have been pulled-off in a great manner. It is a very promising and hopeful sign of pragmatism and an effort to try to reach out to an increasing globalized society. The mostly positive implications of such a momentous selection of a new Pope bodes well for the future of the world at large.

Venezuela & Italy: A Tale of Two Horrors

Democracy1Contemporary political systems have a very ineffective reward system for meritocracy. Venezuela and Italy are extreme examples of this.

With the benefit of hindsight, it is now crystal clear that the checks-and-balances of contemporary political systems are outdated, highly out of touch with reality, and mismanaging many of the growing and most pressing needs of society.

In many respects, the misalignment of interest between the people and society versus political parties and politicians could not be more abysmal. But how could it be otherwise? The world is essentially operating with the same political system implemented by the US’s founding fathers, conceived over 230 years ago, with no major improvements made so far.

Those chief contributions, at its core, implied a substantial transfer of power to society through the emergence of strong, relatively functional legislative and executive powers. The quantum, virtuous change consisted in forever leaving behind the monarchic, despotic systems of government. The US’s founding fathers were finally able to reap the rewards envisioned since the great Greek thinkers before Christ, retaken and refined by the great political minds of The Enlightenment. The benefits reaped were both huge and almost instantaneous. A true virtuous circle was born.

Understandably but most unfortunately, over 230 years later, that quantum political leap has become stagnant at best, or severely deteriorated at worst. The original checks-and-balances built into this system, which were so successful at first, have proved ad nauseum to be very inadequate, markedly insufficient for the multiple and growing needs of contemporary society. That is, by and large, the chief reason behind the most pressing challenges in employment, income, health systems, and alike.

Both, Venezuela and Italy, are prime, extreme examples, of the ineffectiveness of contemporary political systems.

Venezuela is indisputably a basket case.

Ironically, in many respects, not far from Venezuela is Italy. Not surprisingly, the core reasons behind the coincidental mess in both nations is tellingly similar: highly dysfunctional political systems in both instances.

 

Democracy2

In Venezuela’s case, it was an extremely poor checks-and-balances political system which allowed a highly unqualified person to win the presidency, back in 1999. Through successive political maneuvering and changes to Venezuela’s constitution, the recently deceased Hugo Chávez became a de facto dictator of that nation. That painful grabbing of power shouldn’t have taken place at all. Only a highly imperfect political system can allow something as destructive as this to occur.

Mexico, was very close to sharing a similar fate to Venezuela’s back in the year 2000, when a Hugo Chávez alike politician (Andrés Manuel López Obrador) barely missed the winning stake for the presidency. In that respect, at that time, Mexico’s political system was not far different from Venezuela’s. So, in that respect, Mexico is also a compelling testimony of the severe shortcomings of contemporary political systems. Fortunately, Mexico seems to have successfully turned the corner in this regard.

Venezuela’s socioeconomic situation consistently went from bad to worse under Chávez’s presidency (disregarding GDP per capita, which has been essentially stable). However, lurking under the surface, lies an unstoppable downward economic spiral, unless drastic and courageous decisions are taken. Among Chávez’s “master strokes” and major economic legacies:

 

  • A galloping double-digit inflation and an acute shortage of imports and many basic supplies.
  • Despite the recent sizable devaluation of the Bolivar, Venezuela’s currency is still severely overvalued –a quick way to prove this is the booming internal black market for US dollars.
  • He became a de facto feudal lord by taking control of the country’s judicial system and turning PDVSA (the state-owned oil monopoly) and the Central Bank into obscure off-budget spending vehicles, using a substancial part of those proceeds to finance giveaways to the most needy sector of the population. In his own peculiar way, Chávez was very charismatic; and this charisma paired with the unprecedented giveaways, turned him into an almost God-like figure, assuring him a mass of blind and die-hard followers.

How could the population of that country have kept a person like Chávez in power against an overwhelming evidence of incompetence and corruption? We all are well aware how despots’ repressive ways can (most unfortunately) stretch their permanency in power.

What difference does it make to the dead, the orphans, and the homeless, whether the mad destruction is wrought under the name of totalitarianism or the holy name of liberty and democracy? –Mahatma Gandhi

Most worrisomely, keeping all proportions, the case of Italy is not that different from Venezuela’s. Granted, there are some great contrasts among both nations. Italy is a developed nation, Venezuela is not. However, at the core, both nations are remarkably similar: two highly incompetent and corrupt persons have had an excessive influence in their domestic politics. On the surface, Silvio Berlusconi does not seem to share many common features with Hugo Chávez. But beyond the apparent deep differences (Berlusconi is a media tycoon, presumably with a very conservative agenda), deep below they are remarkably similar. Both are populists, and will do almost any conceivable thing in order to remain in power (or to regain it, in Berlusconi’s case). And foremost, their personal interests have clearly been above anybody’s else.

Italy’s electoral results on February 25 were a dramatic reminder about its deep state of political decay. In addition to the relatively surprising return of Berlusconi, with 30% of the vote, another clown (a real one, in this case), Beppe Grillo, captured a surprising 25%. The worrisome conclusion is that the majority of Italian voters have expressed their despair and frustration by voting for extremists, with potentially very dangerous results. Italy’s case, in many respects is still more worrisome than Venezuela’s, since it is not only an EU founding country, but also a pillar of the largest economic bloc on Earth. If things come to worse in Italy, the possibility of a catastrophic economic contagion for the Eurozone is very frightening.

All over the world, to a lesser or greater degree, most politicians use power for their own, and/or their group’s benefit over the people’s interest. Major improvements in governance have to effectively address this issue. Otherwise, the economic mediocre growth rates upon us can become unnecessarily lasting.

The Closing Political Gap Between Developed and Developing Nations.


economy and politics

There is a very natural, yet vastly generalized misunderstanding about the connection between the political and the economic world.

By an almost inevitable extension, the economic development of a nation has been generally regarded as being a consequence, a near perfect reflection of its political development. That seems to have been a paradigm for over two centuries (if not longer) up to recently. Not anymore.

Granted, the economic per capita income gap between a developing country, versus that of the developed nations’ is colossal. Let’s take Mexico and the US, for example. Mexico’s per capita income is roughly one third that of the US. Yet, curiously enough, the political gap between these two countries is not that wide anymore.

The major reason behind this intriguing political gap closing, is the great stagnation the developed nations’ political system has been experiencing during recent decades. Simultaneously, some developing nations have been steadily getting nearer to the (highly imperfect) political level of development of their advanced brethren.

The relative dysfunctionality of contemporary political systems is beyond any reasonable doubt. To the extent that said dysfunctionality has been prevailing, the huge political gap between developed and developing nations has been getting narrower. In other words,  that gap has been getting smaller, not out of virtue from the developing world, but rather from the relative dysfunctionality of the global political system, which is more noticeable among the developed group of nations. The (relative) political stagnation of the developed world has made it increasingly easier for developing nations to close that gap.

The two most recent major world crisis are a testimony to the high dysfunctionality of the contemporary political system. Both, the subprime crisis as well as the European debt crisis have made it grotesquely evident just how dysfunctional the political systems of the two largest socioeconomic blocks on Earth are. Without having to be that way, it seems like the complexities of the challenges posed by those crisis have been beyond the actual capability of their respective systems.

The misalignment of interests between what the population (ideally) should expect and what the actual legislative and executive agreements can achieve could not be more abysmal.

We all are quite aware that, most unfortunately, political parties and individuals in power are more concerned about keeping that power (or regaining it, when out of it), than about doing what is right, regardless of the (short-term) political consequences. This most dramatic circumstance has a lot to do with a highly distorted incentives system.

Contemporary political systems have not yet been able to figure out how to appropriately balance long-term objectives versus the short-term political implications. A profound incentives restructuring is imperative.

So, by contrast, the combination of the subprime and the European debt crisis have comparatively made most of the emerging nations look very good. How much of this phenomena is real and lasting, and how much of it is a mirage?

Nobody has the right answer. However, it seems fair to acknowledge that a substantial part of it seems to be structural, permanent. But, again, this is a rather perverse reflection of the humongous stagnation of the world’s political system, more than a manifestation of virtue in the developing world.

No major improvements have been made in the world political system since the dawn of the US, back in 1776. At that time the bold experiment the US’s founding fathers were doing was truly revolutionary. It took mankind many centuries (over 2,000 years if the great Greek philosophers are considered the precursors of modern political systems) for a visionary team of people to dare to drastically change the world’s political status quo, in a constructive way.

Even in the developed world, there is an abysmal difference within countries when compared. InternationalComparisons.org, created by Dr. Sherman Lewis,  compares different quality of life factors among the most advanced democracies in the world.  In his studies, Dr. Lewis has come to a very interesting concept that goes right along our line of reasoning:

The United States is the least developed of the advanced democracies in most areas. The US has high personal income, high productivity, large houses, and ample higher education; however, it is the most militarized nation, has the highest population growth, the most uneven distribution of income, mediocre basic education, the lowest health status, the highest health care costs, much higher crime, less leisure time, more abortion & teen pregnancy, and a lower status for women. The United States is the least environmentally sustainable of the advanced democracies, the most polluting, and the most dependent on fossil fuel.

––Dr. Sherman Lewis

Professor Emeritus of Political Science

California State University in Hayward

 

Over 170 years ago, Alexis de Tocqueville very wisely warned: “The American Republic will fall when the politicians learn they can bribe people with their own money.” The “American Republic” part of the quote can be replaced with any nation on Earth, since most contemporary political systems are roughly aligned to the US’s.

A dreadful combination of highly irresponsible political parties (and politicians) with a naive and also irresponsible society have resulted in a horrible combination, ultimately producing a vicious circle which has caused the big public financial mess the world is currently immersed in. That is why swift, permanent solutions have been so elusive. The current political system does not allow profound, adequate solutions to surface and prosper. Any sensible proposal is quickly asphyxiated and or severely scaled down.

Until and unless this structural status quo is modified, the world is, at best, condemned to grow substantially below its true long-term potential, with a gigantic opportunity cost (worth trillions of US dollars a year of output not generated). Read our Full-potential Economic Growth post.

 

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