Implications of unbridled financial growth

Dharmalingam VENUGOPAL

In 1972, the study ‘The Limits to Growth’ by the Club of Rome gave the wake-up call that there are clear limits to global economic growth. The authors, with the use of computer modelling, drew some ominous conclusions.

Within a time span of less than 100 years, the world would run out of the non-renewable resources like oil, leading to a collapse of the economic system, which can be avoided only by an immediate limit on population and pollution as well as a ‘cessation of economic growth’.

There were, of course, others who counterargued that man’s ingenuity, aided by science and technology, would make good the depletion of resources and the damage caused to the environment.

However, international opinion turned out to be on the side of caution as underscored by the United Nations Conference on the Human Environment, which met at Stockholm in June 1972.

The reasoning, in simple terms, ran like this. The pre-agriculture economy, which was based on subsistence and barter, was resources-friendly. Later, agricultural economy prospered on a combination of labour and seemingly endless land.

Still later, industrial economy brought in physical capital (inventions of machinery and tools) as well as financial capital (money, banking and joint stock companies) and modern economy added organization (capital markets, exchange markets and multinationals).

All through these changes, which occurred over several millennia, man assumed that land and its resources were inexhaustible, notwithstanding the damages caused by wars, revolutions, population growth and the unprecedented post-war prosperity.

Threat to ecology

The study, ‘The Limits to Growth’ and the Stockholm Conference, exposed not only the possibility of resources depletion but also the looming crisis for human environment and ecology. It took 20 more years for the world to fully realize the threat facing mankind and get into action.

The Rio conference of 2002, popularly known as Earth Summit, brought the international community together to institute action on various fronts such as combating climate change, conservation of biodiversity and energy.

Ironically, around the same time that the world was woken up to the possibility of limits to economic growth, the global financial growth was unshackled from its traditional, time-tested moorings.

The oil crises of the 1970s and their aftermath brought to end conventional restraints on financial growth, both within and across national economies, all in the name of market efficacy.

As countries the world over switched to the floating exchange rates after decades of fixed rates, the foreign exchange market began to grow by leaps and bounds. In the United States alone, forex transactions leaped from 10.7 percent of the GDP in 1970 to 195.3 percent within a decade.

Similarly, between 1980 and 2008, the size of the world stock markets is estimated to have swelled from about $3 trillion to over $35 trillion, most of which are said to be of speculative nature.

The world derivatives market, again, is estimated at about $480 trillion face or nominal value, 12 times the size of the entire world economy.

Whither real growth?

This kind of financial leveraging appears to have reached incredible levels in the current global meltdown.

According to the latest McKinsey report, the current debt levels amount to more than three times the GDP in the United States and Europe, where historically they have been around 150 to 200 percent.

The implications of unbridled financial growth can only be awesome. The world is being run on debt, which is untenable. ‘Can swelling be muscle? Can debt be money?’ goes an ancient tribal proverb. Instead of being a catalyst or the sinews of economic growth, finance has become an end in itself.

The consequences of financial growth running far ahead of real growth are already blatant. Income differentials have been skewed both within and across nations, not only widening the chasm between the haves and have nots but also leading to a colossal waste in the name of consumerism.

The real economy based on agriculture, manufacturing and services has been undermined and neglected. The unprecedented surge in money and capital and their free flow across economies have globalized money laundering fuelling terrorism and many other anti-social activities.

Courtesy: The Hindu