13 September 2001 Edition

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Trading Places

Stock market crash - globalisation protestors vindicated


Even before the destruction of the World Trade Centre in New York, and the closure of the two US stock exchanges this week, the international economy was in severe difficulties. Falling share values in New York, London and Japan all signaled a collapse in confidence in the potential of the industrial world to pull out of the recession into which it is slowly spiraling.

However, the stock exchange collapse has also shown who is pulling the strings in the global economy, and why the globalisation protestors' case has been vindicated. The share price falls also highlight the need to re-examine just what role stock exchanges play in our economies. The case for a Tobin Tax on speculative financial transactions has also been hugely strengthened by the events on international stock exchanges over the last week.

113,000 jobs lost

Last Friday, 7 September, unemployment statistics from the United States, the largest single labour market among market economy states, registered a four-year high of 4.9%. 113,000 workers were made redundant during the month of August. Apart from panic selling on Wall Street, lowering both the Dow Jones and Nasdaq indices, there was little other reaction to the unemployment figures.

This week the stock market crash suddenly seems insignificant compared to the grief of the US public and their coming to terms with the devastation in New York and Washington. However, in weeks to come, the problem of how the international economy operates will return to centre stage
US President Bush promised, ``we are going to do something about it... It is real and is affecting too many lives''. Paul O'Neill, the US Treasury Secretary, the Bush administration's finance minister, tried to talk down the growing pessimism about not only the US economy but the deteriorating situation in Asia, Japan and Europe. O'Neill believed that the US economy was in a ``cyclical downturn'' and would revive later this year.

Perdro Solbe, EU Commissioner for Economic and Monetary Affairs, was another who, like O'Neill, predicted an economic recovery ``before the end of the year''. How such upbeat predictions square with the reality of increasing unemployment figures and downbeat economic surveys is not really clear.

For example, a survey published by the Centre for Economics and Business Research showed that up to 20,000 people will lose their jobs in London's financial services sector by the end of 2002, and the EU commission believes that the 15 member states' economies will only grow by just over 2% this year.


The key, it seems, to kick starting the international economy is to pull the US one out of recession first. The plan being formulated by the Bush administration is to cut taxes on income and capital gains. In Ireland this will strike a familiar chord, as such tax cuts have been a central plank in economic policy for the last decade. Similar tax cuts here have widened hugely the gap between the most and least well off in society, with those on high incomes benefiting significantly more than average and low paid workers.

The theory is that if US households have more cash to spend, they will begin to buy more PCs and other technology products that will in turn have a positive multiplier effect on the rest of the economy. As the US economy grows more rapidly, so will those of Europe, Asia and Japan. The end result of applying the logic of this very simplistic model is that a long-term recession can be avoided.

It is interesting that an important element of guaranteeing the future prosperity of the Irish and broader European economies depends on the disposable incomes of Americans. However, the US policy proposals and the accompanying support for them in Japan and Europe clearly also shows that the globalisation protesters' concerns about the way the international economy operates are well founded.


We cannot have an international agreement on greenhouse gases because the US government effectively vetoed the Kyoto Treaty. We cannot have a deal on canceling the debt of less developed economies because at the highest level there seems to be no supporters for such a write off among the EU and US dominated G8 group.

However, when the US economy is under threat, and George Bush has one eye on re-election, suddenly the powers that dominate the global economy can form a consensus and act quickly.

An important outcome of the share price falls is the need to re-examine the role stock markets are playing in our economies in the first place. Stock exchanges exist primarily as a way for firms to get investors. The success of many firms is driven by the strength of their products and events in the wider economy. Electronic dealing has transcended this function and exchanges have become complex casino games, where real world economic events often have little real impact, except possibly to deter real investors from entering the market and put their money in firms in the expectation of a long term stable return on investment. Why do this when you can buy and sell by the second?

An example of this fall in investment can be seen in the 26-County economy, where a 3i/Price Waterhouse survey shows that after a year of record private investment in Irish companies last year, the level of investment will be halved this year. One wonders how much new funds have been invested into the full stock market if such investment falls are being registered elsewhere.


One way of taming international markets is to look at the Tobin Tax. Nobel prize winning economist James Tobin proposed a tax on speculative international capital movements, which are being undertaken solely for short-term gain.

Tobin's proposals have up until now been rejected out of hand. However, now Horst Kohler, the managing director of the International Monetary Fund, has admitted that, ``if it is necessary to look again at the Tobin Tax and related issues, we should certainly do so''. Coming from the normally immovable IMF, this is almost an admission of failure on their part.

This week, the stock market crash suddenly seems insignificant compared to the grief of the US public and their coming to terms with the devastation in New York and Washington. However, in weeks to come, the problem of how the international economy operates will return to centre stage. We need to face up to all aspects of the problem.

It is doubtful that Bush's tax cuts will have the desired kick start to the US economy. If they do work it is only a short-term fix to a US and international economy that cannot grow in perpetuity. There are limits to growth, limits to profits. There should be no limits set on ensuring everyone in the world has a dignified standard of living with real educational opportunities and with health services and housing, all in the context of a sustainable environment.

If there really is one world economy, there should be one set of living standards for all, and one world where everyone has a say in how that one world economy develops.

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