Vishav Narain Sharma*
Leviathan is a mythical sea monster capable of wreaking colossal destruction. The international finance industry is akin to this leviathan, as it possesses the power to activate weapons of mass destruction. To understand the finance industry in simple terms, it encompasses companies that provide a broad range of services such as banking, investment, insurance, and stock market services (including hedge funds, venture capitalists, and private equity firms). This article aims to raise awareness about the role of financial systems in influencing our daily lives and how they undermine democracies. Whether knowingly or unknowingly, we are affected by its impact and our prosperity depends on it.
According to reports from the IMF and OXFAM, the international financial industry is directly or indirectly responsible for income inequality, poverty, inefficiency, unemployment, and political corrosion. The inefficiencies it generates can make young people feel that their prospects are constrained, no matter how hard they work. Consequently, feelings of powerlessness, disconnectedness, and disengagement can take root.
Little History of Finance World
Swami Vivekananda once said, “Any thoughts that come from the West must be rejected, and any thoughts that come from India must be accepted.” These lines are more relevant than ever, as most of the world has imported the failed model of casino capitalism (Anglo-Saxon model) from the West and has accepted their solutions for the problems they created, following major frameworks like the Washington Consensus. Despite this, the world is still facing a global slowdown, while India is on a growth trajectory.
This Leviathan has caused numerous economic booms and busts around the world in the past, such as the Great Depression (1928) and the Lehman Brothers banking crisis (2008). The unregulated financial market was responsible for the Great Depression, which at its peak resulted in a loss of 24.9% of the nation's workforce, a 42.5% decline in national income, and 1 out of every 4 individuals in the US being unemployed. Additionally, 9,000 banks failed, and $140 billion of bank deposits vanished. To address the economic depression, President Franklin D. Roosevelt enacted the Glass-Steagall Act and formed the Securities and Exchange Commission (SEC), similar to India's Securities and Exchange Board of India (SEBI). These acts were passed to safeguard the public from market manipulation by regulating the financial industry.
Ironically, in India, SEBI is permitting loss-making startups funded by international financial venture capitalists, private equity firms, etc., to launch initial public offerings (IPOs) at unreasonably high valuations, only for the stocks to be dumped later, leaving the public with worthless digital stocks while making founders and foreign investors billionaires.
Golden Age of Capitalism
After World War II, the Bretton Woods system was established by world leaders to create the foundation for the international monetary system, including institutions such as the International Monetary Fund (IMF) and the World Bank. One prominent economist of the 20th century, John Maynard Keynes, who served as an economic advisor to the British Treasury, played a significant role in designing and advocating for the regulation of the finance industry and the implementation of capital controls.
Interestingly, the period between World War II and the 1970s witnessed one of the most prosperous economic growth phases in the world, with relatively low income inequality. From the 1960s to the 1980s, global national income expanded from $1 trillion to $10 trillion, and global GDP per capita quintupled. During this time, Japan achieved the world's fastest growth rate for many years, and it still holds the record. Japan's economic model relied on controls and a highly regulated financial market, resulting in significant growth with low income inequality. This approach, known as collective capitalism or “Kamikaze capitalism,” was later imported by Deng Xiaoping in China, leading to the lifting of 800 million people out of poverty in just 10 years.
However, despite the success of these Eastern models, much of the world has predominantly followed the Western model without giving much thought to alternative approaches. It is worth noting that during the same period, India opted for a more socialist approach, which Vladmir Lenin referred to as the “commanding heights of the economy”. This approach, characterized by the implementation of the license raj, price controls, and high tariffs, resulted in a lack of incentives for wealth creators and contributed to poor growth rates.
It is essential to consider these historical experiences and explore different economic models to address contemporary challenges effectively. While each country's circumstances are unique, learning from successful examples and tailoring strategies to fit specific contexts can lead to positive outcomes in terms of economic growth, income equality, and poverty reduction.
End of Boom
During this period, there was indeed a rise in planned economies and a more regulated international capital market, which contributed to a period of prosperity. The period was often referred to as the “golden age of capitalism.” One notable aspect of this era was the relatively low occurrence of economic or banking crises worldwide.
However, the prosperity of this period was disrupted by the oil shock of 1973. The Organization of the Petroleum Exporting Countries (OPEC) declared an oil embargo, leading to a sharp increase in energy prices. This oil shock caused a global wave of high inflation, particularly for countries heavily reliant on oil imports from OPEC. The high energy prices and subsequent inflation had a significant impact on economic growth rates, endangering global political stability.
Throughout history, economic crises have often been linked to democratic breakdowns and shifts in power. An example often cited is the Weimar Germany, where the Wall Street Crash of 1929 contributed to economic turmoil and paved the way for Hitler's rise to power.
These historical examples serve as reminders of the complex relationship between economic crises, political stability, and changes in leadership while economic crises can create social and political instability.
Road To Serfdom
Most of the public is unaware of the fact that one book has changed the dynamics of the world and the transition to a new era with different economic principles. Hayek, an Austrian economist, wrote this influential work, which later earned him the Nobel Prize. ‘Road to serfdom' became the bible and free market economics was the gospel.
During periods of economic crisis and political instability, leaders like Margaret Thatcher in the UK and Ronald Reagan in the US rose to power. Both leaders were politically inspired by Hayek's free market ideas, and his book had a lasting effect on them. Thatcher, in particular, mentioned the book in parliament, expressing that it provided a solution to their problems.
Prime Minister Margaret was 18 when she read the book that left an everlasting effect on her. Under the leadership of Thatcher and Reagan, significant reforms were implemented, promoting free market principles and deregulating financial markets. The Glass-Steagall Act, a regulatory measure that had separated commercial and investment banking in the US, was dismissed. These reforms aimed to revive economic growth, create jobs, and restore prosperity in their respective countries.
The success of these reforms in the US and the UK led to the packaging and exportation of this model to other parts of the world. Following the fall of the Berlin Wall and the collapse of the Soviet Union, many countries were advised to adopt free market capitalism and open up their economies. This globalization of the free market model contributed to the growing influence and power of the finance industry.
Aftermath
Since the 1980s, there has been a notable increase in income inequality, according to the Organization for Economic Cooperation and Development (OECD). Moreover, we have witnessed crises occurring approximately every 10 years, such as the Asian economic crisis, Latin America debt crisis, and the global economic recession. Let's focus on the example of the 2008 banking crisis that originated in the US and had a widespread impact on many countries, thanks to globalization.
The 2008 crisis led to a collapse in global trade and a rise in global unemployment by 3%, resulting in approximately 30 million people becoming jobless. Banks in Europe and South America faced bankruptcy as a consequence of the crisis. A particularly interesting case was Iceland, a country with a GDP of $13 billion in 2008, which suffered bank losses of $100 billion. Iceland had implemented deregulation measures in 2001. They played with the wealth pf public.
This serves as an example of how interconnectedness and globalization can amplify the impact of financial crises, affecting numerous countries around the world. The consequences of such crises emphasize the need for prudent financial regulations, responsible governance, and safeguards to protect public wealth and mitigate the risks associated with global financial interconnectedness.
The Curse of Income Inequality
Income inequality is the gap in income distribution among a population. The uneven distribution of wealth creates social unrest, economic crises, unemployment, and inflation. According to the World Inequality Report 2022, in 2021, 50% of the global population earned only 8.5% of the total income, while the top 10% owned 76% of the wealth.
The effects of income inequality on the economy can be understood by analyzing India's growth. From 2000 to 2004, India had an average growth rate of 5.5% with job creation of 60 million. However, from 2004 to 2014, the average growth rate was 8.5% with job creation of only 2.7 million. The growth was not for everyone; there is no fun in having a high growth rate if its fruits are not for everyone. Jobless growth is an ambiguous phenomenon caused by the Piketty effect – Growth for the rich and poverty for the poor.
According to research conducted by two senior staff members of the IMF research department, when a country enters a period of growth, income distribution becomes the most important factor that determines how long the growth will last. The more equal the distribution is in a country, the longer the growth will sustain. Sustainable growth is only possible if its benefits reach everyone. Income inequality not only shortens the growth period but also triggers financial collapses.
*Author is one of the Co-founders,
Equinox Foods & Hell's Angels Hospitality,(Brewbakes Cafe, Janipur, Jammu
