Bracing for the Double-Dip: The Imperative of Development

At the beginning of the second quarter of 2010, the danger of a "double dip" that is, a sudden second economic plunge seems to be looming. Some of the indicators that by now must be considered structural of the new economy have been a see-sawing in performance of the major stock exchanges in the world (the Dow Jones Industrial Average has plunged by more than 200 points on at least three occasions in 2010, not including the freak 1000 point drop suffered in April.) The Euro currency has lost a lot of its value in the spring and while this would be good news for a region where manufacturing weighs heavily in the economy, this development has not had the expected effects because the more advanced European economies don't base their economic output on industrial performance but the service industry. More to the point, the doubts cast by poor performance of Greece, Spain, Portugal, and now Ireland and probably Italy, will have Eurocrats in Brussels think twice before extending the Euro to the newest members of the EU in Central and Eastern Europe. This is because there, the economic downturn of late 2008 and 2009 is still simmering.

Central and Eastern European foreign direct investment has been propelled by banks from middle European powers, such as Denmark, Sweden, Finland and Austria, to name a few. By world standards, the Central and Eastern European market is small, but for the banking sector of those countries, it is substantial. For example, the Danish Sampo bank, by being established in the Baltic States, literally doubles its market share. This is why even the smallest countries are "too big to fail." The failure of the banking sector in Eastern and Central Europe has to do with basic consumer spending habits, and the liberality of credit provision. With the reforms that are sure to come in that sector, spending in what amounts to a large part of Europe threatens to slow up as consumers change their habits. So the double dip may come not only on the heels of the economic see-sawing operating in the United States (and affecting every economy in turn), but also due to the fact that European banking and financial institutions have to prevent their entry to a similar cycle. As any amateur economist will tell you, it all depends on the capacity to generate ever higher levels of consumption.

This brings us to the core of our argument. The double dip threat carries with it the seeds of global economic and developmental renewal. If consumers' attitudes are radically changed in the so-called "developed world", then the system must replace those exhausted (or better informed?) consumers with new ones. The Middle-East and Africa, Latin America, as well as important parts of Asia (India and China stand as exemplars) have enormous populations and most of their inhabitants live in abject poverty. The security aspects of this situation have been discussed elsewhere by official circles (the Club of Rome in the 1970s, by the UN, with its Millenium Goals in 2000, to name the most important) and there is no need to repeat them here. There will come a time where economic satisfaction at home in the developed world will have to be equated with real welfare and economic opportunities in the developing world. If, as the UN and humanitarian organizations claim, 2 billion people live on less than a dollar a day, it is not too difficult to fathom the economic boost of having 2 billion people living on one dollar an hour.

The developed world gave itself a moral mission, ever since the era of de-colonization: a) not to colonize (economically or culturally) anymore, b) to lend humanitarian and development aid to newly independent states in the wake of the Second World War. The economic success witnessed in the last twenty years has been due in great part to the lowering of trade barriers in Europe and North America and with the integration of the former communist states into the (excessively) free market. Then the experience should be extended to the developing world. If Europe, North America and the most economically advanced parts of Asia and the Middle East applied the same level of commitment towards the economic and human development of their periphery, those 2 billion people would find a stake as consumers and self-developers in a more integrated and globalised economy. More importantly, however, the nascent middle-classes in the developing world which saw its hopes of continued and increasing development dashed with the economic downturn of the late 2000s, will find less incentive to seek redress (either by challenging the established order, or by violence against scapegoats). The trickle-down effect in the labour market is already at work in South East Asia. India and China are adopting the trappings of a post-industrial economy, and even smaller actors are outsourcing production in poorer countries. While not much can be done with the natural progression of economic development in China and India, the outsourcing of labour from hitherto developing economies towards really downtrodden states is alarming, because it threatens the establishment of a middle class that has a real chance at improvement.

The establishment of a larger pool of middle-income people is a sine qua non condition for the economic recovery to take hold. Until now, the demographic increases in the developed world had been sufficient, but as the birth rate stagnates and habits change, that role must be fulfilled by the developing world. It may seem obscene even to the analyst to equate as many people not to human beings, but merely to consumers, i.e. agents seen only with an economic function. This is where the challenge really lies; how to effect that development without losing sight of the advantages we want to confer, and not the culture. The risk here is that our desperation may make the aim of development serve the process of cultural homogenisation, a process already visible in Eastern and Central Europe with the near universal taste for anything British, German, or American in terms of consumption value. Cultural homogenisation would be condemned as another form of colonialism. What need to be introduced are the advantages of free market and democratic norms, such as freedom of choice. Unfortunately, the market has its own tricks to direct those choices, and this too leads to homogenization. But at the very least, a commitment to achieving the goal of generating a universal middle class from the developing world would raise the standard of living there so that individuals could make that choice. How do we know that an increase in income is an increase in standard of living? The fact that asylum seekers take such risks to reach Spanish, Swedish, Italian, American and Canadian shores testifies to the idea that the standards of living on those shores is objectively "better" than the standard they left at home.

The first step in making a commitment for development requires the easiest thing of policy-makers in the developed world; to formally admit to themselves, their constituents, and also to the developing world that their economic model is "good", and worthy of some emulation. Because it is worthy of emulation, it is then thought of as near-universal. Because it exists in some parts and not in others, means that it should exist where it is absent. If it is absent, the developed world's commitment must include to a certain extent the imposition of an economic model susceptible of generation of an adequate standard of living which will leave constituents with a full stomach and a free spirit to decide their own destiny. The extent to which a foreign model must, can or should be imposed is a matter of debate. This debate cannot be entertained here, but the outline can be defined: a) must democracy precede economic development, or is the other way round possible? b) must democracy be the only form of government, or is enlightened despotism "acceptable" if the state demonstrates that it caters to its responsibilities? and most importantly: c) what degree of imposition, and in what mode? Advisory? Neo-colonial? Clientalistic? Paternalistic?

This debate requires a lot of courage and open-mindedness. Most of all, the development of a universal middle class and the attendant consumerism which it promises does not avoid the conundrum as to what to do when the whole world is "sufficiently" developed, meaning that an individual in Sri Lanka can enjoy the fruits of his labour, provide for his family, send his children to school and still save enough money to pay fair taxes and put some aside for retirement, the same way (but not necessarily in the same amount) as someone in France, Canada or South Korea, for example. In other words, what will we do when we will all be fortunate enough, and the value of our respective labour will make quality goods prohibitively expensive? Then the globe will not have the luxury of a middle class in waiting. The fundamental problem of consumerism is far from solved with the suggestions made here. But basing development on the necessity of north-western economic recovery should provide an avenue of activity which will make humanitarian and development spending greater and better accepted in the developed world than at any time before. The current crisis allows us to resolve the West's moral dilemma about development. While it does not address the greater one of consumption-driven economy, it is better than nothing.