Introduction: Progressive politics after the financial crisis

Olaf Cramme and Elena Jurado

The full implications of the current global financial crisis are hard to assess at the present juncture, whether in relation to our economies or with regard to wider political dynamics. However, three striking developments are already discernible. First, the crisis demonstrates the stark reality of global interdependence in the 21st century. The suggestion that global economic growth – particularly among emerging markets – had somehow been “decoupled” from the health of the American economy has been proven hollow. Instead, barely any nation has remained untouched by the crisis in the inadequately regulated global financial system.

Second, the crisis has exposed the fragility of globalisation. As sources of financing dry up, we are witnessing a dramatic fall in world trade, with drastic effects on big exporting nations such as China, Germany and Japan. No longer willing to accept large emerging market risk exposures, banks are pulling in their horns to domestic markets. Rescue packages aimed at European and US industries threaten to reverse decades of hard-won multilateral trade liberalisation. All over the world there is a perceptible increase in anti-immigrant feeling. Indeed, several observers are already talking about evidence of de-globalisation.

Third, the neo-liberal faith in laissez-faire as the dominant guiding principle for the organisation of markets has been shattered. The crisis has glaringly exposed the limits of excessive market liberalisation: left to their own devices, markets cannot be guaranteed to serve the public interest. In a similar fashion to the radical ideological shifts which took place at the end of the 1970s, we are currently witnessing the demolition of the political foundations of neo-liberalism and the irrefutable ending of its intellectual hegemony in the western hemisphere.

These developments have huge implications. First and foremost, they present progressive governments and policymakers around the world with the task of re-building an international economic and financial order at a time when the tendency is to focus on state-level solutions. Importantly, this challenge concerns developing and developed countries alike. Globalisation must remain the key framework for thinking about progressive politics; otherwise we risk undermining the progress made so far, including the creation of unprecedented levels of wealth which helped lift millions out of poverty around the world.

At the same time, as faith in unregulated markets crumbles, progressives urgently need to fill an ideological vacuum which risks being taken over by populists. Yet the “end of neo-liberal hegemony” is interpreted differently by people in different societies, depending on their prior conceptions and experiences of markets. The result is vastly different views on the needed reforms, including the viability and effects of global stimulus plans, the benefits and scope of increased financial regulation, or the measures needed to correct global economic imbalances.

In short, the challenges ahead carry a great opportunity for progressives but also a risk. On the one hand, the strength of modern social-democratic politics has always been to recognise and come to terms with new realities. On the other hand, this “progressive moment” will requires a fundamental overhaul of centre-left policies, recognising not only the urgency and severity of the current crisis, but also the complex relationship between the quest for social justice, the need for economic dynamism and sustainable development in the global age. If the centre-left fails to present a credible alternative which can actually serve the population at large, it will risk fading into political irrelevance and further aggravating the crisis.

The intellectual challenge we face therefore encompasses two dimensions: Internationally, the task will be to devise a more equitable and sustainable system for international cooperation, regulation and intervention which addresses the diverse needs of industrialised, developing and the least developed nations, as well as the emergence of a global society exposed to common risks. Domestically, it is about rethinking a modern role for the nation state in shaping a more stable economy which combines economic dynamism and growth with a more equal distribution of wealth and life-chances. Meeting this challenge will require a critical but forward-looking debate on the issues and options available for reform.

The aim of this “handbook of ideas” is to advance this debate by bringing together short policy recommendations and proposals by leading international thinkers on how progressives should approach the major economic and political challenges thrown up by the global crisis. The handbook does not claim to be comprehensive: the contributions touch on challenges which governments of all stripes need to address, but which we think are of particular relevance for progressives, in some cases even presenting major dilemmas. We have divided the contributions into three sections for ease of access but, given the overlap and connections between the issues discussed, each contribution should be read in its own right.

The handbook begins with a first section dedicated to the challenge of financial market governance. With credit markets frozen and equity prices plummeting, by far the most urgent priority facing governments around the world is the task of rebuilding financial market activity. However, restoring the necessary investor confidence will not be easy. The credit crunch has left many feeling that financial markets have become too far removed from real production and value addition and must therefore be reigned back. Indeed, as governments continue to provide the liquidity needed for the financial system to survive, the wider public has protested about the injustice of “bailing out” those banks whose irresponsible behaviour created the crisis in the first place. How, in these circumstances, do we re-conceive the role of the financial system and better inject into its future activities a proper taking into account of the “public interest”?

This section also contains proposals that focus specifically on the weaknesses exposed by the current crisis in financial regulatory structures. The failure of national regulators to prevent the excesses of the banking industry has led many to call for strengthening the supervisory role of international financial institutions. But it is not clear what can in practice be achieved, beyond better pooling of information and closer mutual dialogue. At the same time, pooling sovereignty in new international structures may raise difficult questions of accountability. How can progressive governments and policymakers resolve the overall dilemma of building legitimate and effective global economic governance structures?

Improving governance of financial markets is ultimately only one component, albeit a crucial one, for building a more equitable and sustainable international order. This challenge is more relevant today than ever but must be tackled in light of the transformed economic circumstances.

One of the key transformations we are witnessing is the risk of a new “economic protectionism”. The current economic and financial crisis has placed heavy burdens and demands on nation states to act and find their own solutions to unprecedented market failure. Immediate reactions have included the raising of tariffs, much wider resort to subsidies for domestic industries and bank bailouts. Public resentment of migrant workers is growing. The Doha Round appears blocked. While the measures adopted so far are not yet far-reaching, they are evocative of the protectionist wave that marked previous economic recessions. Section two of the handbook therefore begins with a series of proposals on how progressives should respond to the current crisis without undermining the gains made by trade liberalisation.

The onset of the global financial and economic crisis is likewise is also creating a grave situation in developing countries. In recent years, most developing countries have focused their economic strategies on export-led growth and openness to foreign investments. However, as recession deepens in advanced industrial countries, export markets and capital flows are drying up. Economic growth through commodity-price booms as seen in oil-rich countries is also slowing, leaving a vacuum of strategies for developing countries. In addition, donor countries have started announcing cuts in aid spending, with harmful consequences for the least developed countries. In this context, is it possible to articulate a new progressive model of economic development and what form should this model take?

Finally, as the current political debates on emission allowances for hard-hit industries make clear, the global economic downturn is exacerbating tensions between promoting green policies and protecting jobs and livelihoods. This raises difficult questions for progressives, who must ensure that the process of overcoming the climate change challenge does not create an additional burden for the least well off in both the developed and developing world. Section two therefore ends with a series of contributions on how the climate change challenge may be tackled without compromising on the principles of equity, solidarity and progress.

The third and final section of the handbook focuses on a modern role for the state in the new economic and social paradigm. Having shaken the foundations of unquestioned belief in free markets, the global crisis has led to growing calls for the state to be a more prominent facilitator of growth, by spending on public works or by providing incentives for new “green” industries. Indeed, the crisis presents an opportune moment for the centre-left to re-define the role of the state in “industrial policy”. However, the risk will be that a badly considered interventionist framework will repeat the mistakes of the past, potentially descending into economic nationalism and hampering the most productive aspects of open market economies. Against this background, what steps should be taken to ensure that the state plays an efficient and effective role in promoting sustainable growth?

With levels of unemployment and distress rising, the need for modern social protection policies is greater than ever. Even the most ardent supporters of market-based solutions for social needs are starting to realise that the state will need to play a more active role, as, for instance, the US debate on healthcare illustrates. Indeed, over the last two decades, countries with active social investment strategies have demonstrated that it is possible to reconcile high-levels of social protection and a dynamic labour market. For this to happen, the state must act as protector, investor and moderniser in the right measures. It is not clear, however, how the state will be able to sustain a more active role in the face of rising public debt and budget deficits. In this context, what kind of welfare state and social policies should we strive for?

Expectations for what progressive politics can deliver are very high. So are the stakes of the challenges we are confronting. This “handbook of ideas” made up of 40 short contributions, each offering a handful of proposals, attempts to help progressives meet these expectations. Bearing in mind the competing claims on the attention of our readers, made up of academics and policymakers, we have asked each contributor to limit their proposals to approximately 700 words, a task that is by no means easy given the complex issues at stake. While important nuances have undoubtedly been left out, the concision and directness of the resulting handbook should help focus attention on the most critical issues and stimulate debate.

We would like to thank the authors for engaging so positively with this initiative, which we hope will make an important contribution to this year’s Progressive Governance Conference and beyond.

Olaf Cramme is the director of Policy Network and Elena Jurado is head of research at Policy Network

Special thanks to Annie Bruzzone, Alfredo Cabral, Simon Latham, Michael McTernan and Priya Shankar for their excellent assistance in editing this handbook.