Will democracy survive a second wave of global economic crisis? (3)

[dropcap]W[/dropcap/e asked a group of economists and publicists the following question: Today, it seems obvious that private companies, like credit rating agencies, have a potentially greater influence on the state of society than democratically elected institutions. Capital globalised, democracy did not. Is it possible to change that and how? Will democracy survive a second wave of global economic crisis

Jerzy Osiatynski: Increasing unemployment is a real threat for democracy

Democracy is dependent on the relationship between citizens and the state at every level of government, including local government. It is also related to the freedom of operating for non-governmental organisations. The globalisation of financial markets affects the extent and ability of local authorities’ and NGOs to function, but it won’t annul or invalidate democracy on these levels. It is, however, a challenge for the democratic character of the relationship between central government and its citizens. It can lead to the supplanting of the rule of democracy with the rule of money, which isn’t a new thing after all.

A new threat, however, is the influence of the globalisation of capital on the economical and political sovereignty of particular nation states. The freedom of capital flows, if it is supposed to be preserved in the long run, needs established rules of financial policy, private sector enterprise competitition policy and policy governing the distribution of national income. This means a voluntary limitation of a particular countries’ sovereignty for the sake of international institutions, while the political responsibility of those who establish the rules remains the domain of national politicians. This in turn limits the scope for the democratic decision-making process at the level of individual countries. The extent of these limitations should be decided by a balance of what is to be surrendered among the categories of the political democracy system’s areas on the one side and the benefits and threats related to the globalisation of capital on the other. While balancing the benefits and the risks of the globalisation of capital we need take into account the danger relating to short-term sudden flows of capital which – as we can see – can destabilise even strong and healthy economies. This can be prevented by limiting the freedom of short-term financial speculative flows (e.g. charging them with a special tax and introducing limits for short-term selling and buying of securities and currencies) and increasing funding of the private sector by bank credits and not by the stock market, where in times of insecurity the herd instinct prevails. As for the second wave of the crisis, in my opinion it is becoming a more and more inevitable consequence of mistaken economic policies – especially the distribution of national income – and of the underlying economic doctrine, and also, to a lesser extent, the globalisation of the financial markets. The erroneous policy of national income distribution may weaken the social connection, increase the sense of social marginalisation and loss of opportunities, all of which endanger the participating citizens’ democracy, because they result in election abstention and nurture national and populist political movements and, in extreme cases, lead to open rioting and rebellion.

An important, though not the only, guarantee of a stable democracy is, possibly, full employment, where a high proportion of the whole population have a regular income coming from – present or past – employment, which is stable in relation to the income of the top 5% or 1% of the households in a particular country and who have some capital accumulated during the time of their professional activity. Meanwhile, during the last 25-30 years in leading market economies there has been a huge erosion of the middle and working class household’s income and a deep stratification of people’s incomes. In the United States the upper 1% of households by income is receiving about ¼ of the national income and controls 40% of the national property, while 25 years ago it was receiving just 12% of the national income and controlling 1/3 of the national property. We can observe the same polarisation processes in Great Britain and other European countries where the state is not intervening, leaving the setting of income policy to the market forces.

These changes in national income distribution lead to the reduction of domestic consumer demand and, as a result, to the limiting of private investment, the slowing down of the economic dynamics and the increase in long-term unemployment. The rapidly growing income of the wealthiest is being held back as savings and so does not go to make up for the decline in spending by the middle and lower employed classes. What sort of business will risk investing in growth, even if running costs and taxes are dropping, if there are no buyers for their products? Lowering taxes for the people earning the highest income increases income stratification, but does not guarantee new jobs. At the same time, a so called “healthy public finance” doctrine, representing rather the interest of speculators not industry, in practice, makes it impossible to prevent stagnation tendencies and constantly high unemployment rates. Meanwhile, the considerable and ever-increasing percentage of people deprived of jobs, property and chances are becoming a real threat to democracy.

*Jerzy Osiatynski – Professor of Economics, former minister in Tadeusz Mazowiecki’s and Hanna Suchocka’s Governments, presently President Bronislaw Komorowski’s economic advisor.

Translated by Katarzyna Abramowicz