UC Berkeley - HIST 186 - 2012 Spring - Sargent - International and Global History Since 1945 - Lecture 25 - A Crisis of Capitalism? - 01h 12m 14s

Course Evaluations

[0:00]

Okay, it's about time to begin. This is the penultimate lecture of the series. So in other words Thursday's lecture will be the last lecture of the semester. Then you of course have exams and I have to catch up on all of the writing that I was supposed to do this semester.

[00:20]

Being that this is you know pretty close to the end of the semester today we're going to do course evaluations. I'm doing these today rather than on Thursday because I have a graduate student's comprehensive examination to administer at eleven.

[00:37]

So I need to be on time for that. So it made a lot of sense to do these today. What I will need in order to be able to do the evaluations according to the appointed procedure is to ask one of you to volunteer to return the completed evaluations to the history department.

[00:54]

It would make sense you know if there's somebody who has to go that way after the lecture who would be willing to do that. So can I have a volunteer?

[01:04]

Okay, Mark, terrific. So what I'm going to do with the evaluations is I'm just going to leave them here.

[01:11]

And then at the end of the lecture -- I'll go off about quarter of eleven --if you could take responsibility for distributing these and collecting them and returning them to 3229 Dwinelle Hall which is the history department main office on the...it's actually on the third floor but if you enter via the entrance that is opposite the Valley Life Sciences Building then it's the second floor, so...we're not going to get in the architecture of Dwinelle Hall today.

Lecture Overview: The Global Financial Crisis

[01:39]

So we'll try to end the semester on a positive note. So today I'm going to talk about the global financial crisis and the economy into which you are all going to be graduating. A crisis of capitalism or not?

The Washington Consensus

[01:51]

Let's start by talking about the sort of policy consensus that emerges around globalization in the 1990s. A policy consensus that becomes you know kind of widely discussed as the Washington Consensus↗.

[02:08]

What is the Washington Consensus? What do we mean when we talk about the Washington Consensus? Well, there are synonyms for this term, right. Thomas Friedman↗ who publishes The Lexus and the Olive Tree↗ in 1999 talks about the golden straitjacket↗, and it in essence means the same thing.

[02:25]

The terms imply that there are a set of you know policies that countries should follow if they are to prosper and flourish within the globalizing world economy. Now what are these policies? The easiest way to answer this question is to go back to the...original sort of Washington Consensus that was formulated by the economist John Williamson↗ in 1989.

[02:46]

Williamson wrote an article called the "Washington Consensus" in which he sort of synthesized what he saw as the major pieces of policy advice that the Washington based international financial institutions had to offer to countries participating in the global economy.

[03:03]

And these you know pieces of advice are fairly predictable. The Washington rules, as John Williamson saw them, include you know first an expectation that countries be fiscally responsible. This is that they avoid large deficits.

[03:19]

That their incomings more or less balance their outgoings in terms of tax revenue on the one hand and public expenditure on the other. The Washington Consensus expects that countries invest in productive public investment rather than disbursing public funds on unremunerative subsidies.

[03:40]

So rather than subsidizing unproductive parts of the economy the Washington Consensus tells us that countries should invest in, you know, education and infrastructure, in those you know sort of particular areas which are likely to be productive of economic growth in the future.

[03:56]

It advises countries to moderate taxes, to embrace programs of tax reform so as to incentivize you know productive entrepreneurship. It advises that interest rates be determined by the market not by the fiat of a sort of central bank or government. It also advises governments to maintain flexible but competitive exchange rates.

[04:22]

Countries should also liberalize restrictions on trade particularly where they have quota restrictions on trade. The Washington Consensus puts particular emphasis on removing quantitative restrictions on trade. Tariffs are, you know, discouraged but it's quota restrictions that are particularly the focus of IMF↗ and World Bank↗ advice.

[04:43]

Countries are also encouraged to liberalize restrictions on the influx of foreign direct investment or FDI. They're encouraged to seek sort of foreign investment in their economies. Privatization is also embraced. Countries are encouraged to privatize state-owned enterprises or SOEs.

[05:00]

This of course was something which began in the United Kingdom under the Thatcher administration. Deregulation, something else that occurred in the United Kingdom in the Thatcher administration, and in the United States beginning under the Carter administration, is encouraged as part of this policy package.

[05:18]

Finally the tenth point that Williamson makes: countries are encouraged to respect the rights of property holders -- to uphold the prerogatives of property holders via stable rule of law.

[05:30]

This is a you know sort of package of advice that Williamson argues is already being sort of offered by the Washington based international financial institutions. And that's an important point. This is not advice in Williamson's view that is coming principally from the US government. The Washington Consensus in this case applies to the Washington based international financial institutions or IFIs. These are you know of course the World Bank and the International Monetary Fund.

[06:00]

The United States you know sort of broadly follows similar counsel in its recommendations to foreign governments but when we talk about the Washington Consensus we're really talking about the institutions not about the United States as an international power.

[06:16]

So this is the substance of the Washington Consensus. It's a set of policy prescriptions. How is it sort of implemented? By what means do the Washington based IFIs work to encourage developing countries, and perhaps developed countries as well, to follow the tenets of the Washington Consensus? To abide by the terms of you know what Friedman calls the global straitjacket -- sorry -- the golden straitjacket↗.

Policy Conditionality

[06:43]

Policy conditionality↗ is one important such instrument for establishing or implementing the sort of policy advice that the Washington Consensus has to offer. In what context can policy conditionality be imposed? Well, it can usually be imposed when a particular country or nation-state has cause to turn to the International Monetary Fund or to the World Bank for lending assistance.

[07:10]

Right, if you're a developing country and you experience a major financial crisis, and you have nowhere else to go but the International Monetary Fund, then the International Monetary Fund has some leverage with you when it comes to the need to make domestic policy adjustments.

[07:24]

Sometimes the International Monetary Fund will insist upon the implementation of specific policy changes as a quid pro quo for the provision of lending assistance -- in the context of a financial or other economic crisis. This becomes known as policy conditionality. It's a sort of move that makes lending assistance contingent upon the adoption of specific policy choices: the kinds of policy choices that are described and identified in Williamson's Washington Consensus piece.

[07:57]

Where does this happen? When does this happen? Well, we could go through...sort of all of the particular cases but that would take too long. So let me just give you three representative cases in which the International Monetary Fund imposes expectations of policy change as a condition for stabilization funding.

Policy Conditionality in Great Britain in 1976

[08:17]

First, really good example comes from Great Britain in 1976. The British economy in 1976 was in a very serious predicament. Public spending far exceeded public receipts. The government was running systemic deficits. It was not able to balance its books. The government was beset, you know, moreover, by rising unemployment and a stagnating economy.

[08:41]

Britain in the mid-1970s looked sick indeed. This is a topic that we've already covered. In late 1976 the Callaghan↗ government in Great Britain turns to the International Monetary Fund with a request for bailout assistance.

[08:54]

How to balance the budget? How to balance Britain's trade deficits? When it comes to the second question the International Monetary Fund can be of some assistance. And it is.

[09:05]

But IMF assistance to Great Britain comes with strings attached. The IMF requests and requires that as a quid pro quo for stabilization funding the British government implement certain policy changes -- that it implement measures to reduce its deficits and to stabilize its public finances.

[09:23]

The lesson of this crisis is that policy conditionality is not simply something that is imposed on poor countries by rich countries. In this case it's imposed on Great Britain by the International Monetary Fund. So it's a misconception to see policy conditionality as something that only applies to the affluent.

[09:41]

You can ask any Greek today and they would sort of corroborate this claim. Of course whether Greece still counts as an affluent country or not is you know maybe more open to debate. Couple of years ago it was.

Policy Conditionality in Latin America in 1982

[09:52]

A similar dynamic occurs in Latin America in 1982. We've talked about the Latin American debt crisis of 1982. After the oil crisis most Latin American countries turn to international lending so as to finance the now more expensive imports of oil for which they have to pay. Well, international, international oriented banks like Citibank in the United States lends Latin American countries and they do so...you know to very sort of high levels of indebtedness.

[10:28]

In part this reflects a misconception on the part of private financial institutions like Citibank that sovereign borrowers can't go bust. Of course a more expanded view of history would reveal the fallacy of this presumption. Sovereign lenders can go bust, and they do in Latin American in 1982.

[10:45]

The debt crisis is really, really serious. It in effect stalls Latin America's growth for an entire decade. It's not until the 1990s that Latin America will begin to recover, Mexico apart, which begins to recover a little earlier from the effects of the debt crisis.

[11:01]

In the context of Latin America's debt crisis the International Monetary Fund will once again impose policy conditionality as an expectation for assistance. In order to receive IMF bailout help Latin American countries will begin to have to disestablish the extensive public sectors which they've built up during the 1950s and 1960s and 1970s through an era of state led ISI dominated growth.

Policy Conditionality in East Asia in 1997 to 1998

[11:27]

A similar sort of dynamic recurs in the context of the East Asian financial crisis of 1997 to 1998. When...Thailand and South Korea turn to the International Monetary Fund for...assistance in the aftermath of major currency crises the price once again will be policy conditionality.

The Course of Reform from Policy Conditionality

[11:50]

So these cases among others you know sort of give some sense of the ways in which financial crises, major economic disruptions and dislocations, can provide opportunities for international institutions, international financial institutions, to hold national policymakers to task: to encourage and even require national policymakers to abide by the policy norms of an integrating global economic system.

[12:19]

But does this mean that globalization is something that is imposed upon individual nation-states by the will of the international community? By the will, if you're really cynical, of international financial interests? This is much harder to say. If we look at these individual crises that we see not only the imposition of policy choices as a condition of international assistance but we also see the failure of prior growth regimes.

[12:48]

In the context of Latin America for example it doesn't seem clear that, you know, Bolivia just to pick on you know one particular case, was doing all that well before the economic crisis that forced it to turn to the International Monetary Fund for assistance. Inflation as you will have read in the Yergin↗ and Stanislaw↗ book was rampant. The economy was you know quite literally beginning to fall apart.

[13:10]

Whether the crises that provide sort of opportunities for the International Monetary Fund to impose expectations of policy conditionality are a consequence of globalization or are endogenous to the economic regimes that predated globalization is a difficult question and one that you should think about.

[13:31]

From this perspective we might see policy conditionality not so much as a sort of shock that is imposed from without but rather as a process of transition that some countries experience as they make the journey from sort of relative autarky↗ and economic independence to an era of increased global integration.

[13:53]

We should also be sensitive to the ways in which policy actors within individual nation-states serve to orchestrate and produce transitions to more market oriented policies. It's not as if you know the politics of economic adjustment are so simple as the international community imposing conditions upon unified national polities.

[14:16]

Within these national polities there are individuals, often quite powerful individuals, within the government and within the national bureaucracy that favor policy adjustment along the kinds of lines that the IMF and the World Bank propose.

[14:29]

What policy conditionality does is it enables reformers within nation-states to in effect forge transnational coalitions with international institutions in order to build an emboldened case for reform. So the politics are complicated. It would be wrong to see the politics of policy adjustment as involving sort of unified national blocs or states. Rather international actors are able to forge alliances and coalitions with reform minded constituencies within nation-states so as to orchestrate change.

Nonequivalence of the International Monetary Fund and the United States

[15:02]

One final point: it's sometimes tempting particularly for critics of globalization to sort of treat the IMF as if this three letter acronym is somehow synonymous with another three letter acronym: USA.

[15:16]

Does IMF equal USA? Well, I think it would take some contorted algebra to make that you know come to pass. The IMF is an independent institution and this is important to remember. The IMF operates under its own auspices even though the United States is the sort of primary...financier behind the International Monetary Fund.

[15:37]

But the point about the IMF's autonomy can probably be best sustained by thinking about the areas where the United States disagrees with the IMF. The IMF, under a succession of European Secretaries-General, has promoted a sort of rules based approach to globalization. The IMF has put central emphasis on the roles of institutions like the IMF as managers of globalization.

[16:00]

Michel Camdessus↗, who's pictured here in the slide, was a French director of the International Monetary Fund for most of the 1990s. And he favored a sort of approach to the management of globalization in which there would be a central role for the International Monetary Fund as an institutional architect and arbiter of the whole process of global financial integration.

[16:24]

What he favored was a sort of dirigist↗ approach to globalization. This does not necessarily win full support from the United States. Frequently the United States is reluctant to support the IMF's rules based approach to globalization, and favors what might be described sort of loosely as market based alternatives.

[16:45]

Rather than you know having the IMF play a central role as a sort of surveillor of national economic conditions American economists and policy leaders will argue that the markets can manage themselves to a greater extent than the IMF is often willing to permit.

[17:02]

So there are tensions between the International Monetary Fund and the United States of America that have to do with, sort of with, the architecture of globalization. How regulated? How managed should globalization be? When this question comes to pass differences between the United States and the IMF will be exposed and these differences are often quite powerful.

European Proponents of the Washington Consensus

[17:25]

It might you know sort of finally be sort of useful to note on this point that some of the leading proponents of the so-called Washington Consensus during the 1990s are Europeans. Within the European Economic Community, Jacques Delors↗, the head of the European Commission↗, is a strong proponent of financial liberalization. It's at Delors' initiative that the European Economic Community, as it was at the time, in 1988 forces all of its member states to remove capital controls.

[17:59]

And that's a European decision and it applies not only to capital controls between the European states but also between the European states and the larger world. And that's a decision that is implemented at the European level. Michel Camdessus, another French economist, head of the International Monetary Fund, is a sort of leading proponent of rules based globalization in the 1990s.

[18:22]

So some of the key actors behind sort of rules based globalization are not American. In fact French economists are ironically prominent. It's sort of ironic when you sort of think about the French election that is ongoing now because the French election is increasingly assuming the character of a referendum on globalization -- a referendum in which the French are likely to vote no.

India and Globalization

[18:44]

What does this all look like from the perspective of developing countries? Well, this is a really hard question to answer. Because developing countries are not a...you know singular type. The experiences of developing countries in the 1990s and the first decade of the 21st century are quite varied.

[19:04]

But what I would like to do is sort of talk you through the history of globalization in the 1990s as it looks from the perspective of one of the world's most important developing countries: the Republic of India.

[19:17]

How does India's relationship with the global economy and particularly with the policy regime of globalization evolve from the late 1980s through to the first decade of the 21st century? Well, it's important as we answer that question to establish what the starting point is.

India's Statist Economy from Post-Independence to the Mid-1980s

[19:36]

India, as late as the mid-1980s, is still a highly statist↗ economy. The Indian economy is still centrally planned. The central planning regime was of course a legacy of the Nehru↗ Era. An era to which we've paid quite a lot of attention this semester.

[19:53]

India's political economy could be characterized by a distrust of markets, a dependence on sort of state permission in order for industry and entrepreneurship to occur and upon widespread public ownership -- particularly of core extractive and productive industries: mining, electricity, steel and so on.

[20:13]

This is a highly statist political economy as late as the mid-1980s. It's also an economy that is characterized by a somewhat hostile relationship to the larger global economy. Nehru at the moment of independence had conceived that the Indian economy would develop more or less in isolation from the larger world.

[20:33]

After independence extensive controls and barriers will be established so as to protect the Indian economy from foreign competition so as to demarcate the Indian economy from the larger world economy of which it is not really part.

[20:47]

The Indian currency, the rupee, will be nonconvertible. This is...gives India a high degree of monetary autonomy from the larger global economy. Trade barriers will also demarcate the Indian economy from the larger world economy thereby protecting national industries as part of a coherent ISI-led growth strategy for the nation-state as a whole.

[21:13]

The Indian government also maintains extensive restrictions on foreign direct investment in India. It's very difficult, you know close to impossible, for much of the 1950s, 1960s and 1970s for foreign corporations to invest in India.

[21:29]

Now it...there are exceptions to that with the permission of the central government it can be done but it is very, very difficult to orchestrate and accomplish.

[21:39]

What are the achievements of India's statist political economy from the late 1940s through to the late 1980s? Well, rates of growth will be low. This is not an economy that fulfills the growth targets that Jawaharlal Nehru envisages for it. But in other respects the record of successes is much more impressive.

[22:02]

The state does succeed in sort of redistributing income so as to benefit India's very poorest people. Probably the most important marker of success is the one which the economist Amartya Sen↗ emphasizes which is the fact that India does not after independence experience a famine.

[22:21]

And when you situate that fact in the larger context of Indian history it becomes more remarkable. Famine had prior to independence been a recurrent theme of Indian economic history. After independence India does not experience a famine. And Amartya Sen argues that this is because India as a democratic nation-state is much more responsive to the economic needs of its ordinary citizens than it could have been under British imperialism or indeed under the sort of empire-states that governed India before the British conquest.

[22:54]

So there are accomplishments that the statist Nehruvian model↗ is responsible for even though this model does not achieve the high rates of growth that Nehru hopes that it will produce.

India's Economic Problems During the 1980s

[23:06]

Ultimately India's economy struggles in the 1980s. It struggles so much that it careens as the decade progresses towards crisis. Crisis unfolds in...the late 1980s and sort of peaks in 1990, 1991.

[23:29]

This is a crisis which is a sort of garden variety debt crisis. India is committed under its Nehruvian statist political economy to expansive government spending. As government expenditures outpace government revenue collection India comes to depend, as other developing countries do, upon foreign lending in order to finance its domestic deficits.

[23:51]

India's overall balance of payments deteriorates. The fact that India is not exporting enough to the world to finance its imports only exacerbates the crisis. When the world price of oil spikes in the context of the 1990 Persian Gulf War the whole situation becomes sustainable.

[24:11]

India's deficits, slow deficit crisis, turns into a major economic crisis. India is broke and it turns to the IMF to seek bailout assistance.

[24:25]

The IMF requires India to undertake structural reforms as a precondition for assistance. IMF economists come in and they say, you know, India's economy is far too state regulated. There is far too much government expenditure here in relation to government revenue collection. India needs to make serious structural reforms.

[24:46]

There needs to be liberalization and there needs to be deficit reduction. These are the basic recommendations that the IMF offers in the context of the 1990/1991 Indian crisis.

Economic Reform in India

[24:59]

A new government will be responsible for implementing these changes. The Prime Minister, Rajiv Gandhi↗, is assassinated in 1991↗ for reasons that have nothing to do the with the economic crisis and a new government comes to power. The new Prime Minister will be P. V. Narasimha Rao↗ -- a fairly sort of unprepossessing leader of the Congress Party↗.

[25:20]

More consequential will be the new finance minister Manmohan Singh↗: a man whom you should all recognize as the Prime Minister of India today.

[25:29]

Manmohan Singh is an Oxford trained economist -- an economist who had written his PhD dissertation on trade liberalization and its benefits. Manmohan is a reformer by anybody's standards and as finance minister he orchestrates a major package of structural economic reform.

[25:47]

This reform package will include a transition to currency convertibility. This is a major move. Prior to 1991 the Indian rupee had been nonconvertible. This meant that you couldn't legally convert the rupee for foreign currencies.

[26:01]

Singh ends the non-convertibility regime and makes the rupee convertible. He also devalues the rupee so as to -- so as to...improve the playing field for Indian exporters to try to encourage the growth of Indian export industry.

[26:16]

Manmohan Singh orchestrates trade liberalization. He removes all quota barriers on foreign imports to India and reduces tariff barriers too. So Manmohan, Manmohan Singh, substantially liberalizes sort of the trade arena for the Indian economy.

[26:33]

Foreign direct investment is encouraged. Domestic economic controls are liberalized. Government spending and government deficits are reduced. What Manmohan Singh does is straight out of the playbook of the Washington Consensus.

[26:48]

And what are its results? Well, let's start by talking about the evolving relationship between India and the world economy. This chart does not show you how India grows. What it shows is simply a sort of index number that represents in the blue bars the formal controls that the Indian state maintains on economic interactions between Indian nationals and the larger world economy.

[27:12]

And what you can see is that this index number remains very low until 1991. After 1991 India liberalizes its policy regime. India becomes more globalized in terms of the sort of regulatory framework that governs India's interactions with the larger world economy.

[27:32]

So the blue bars show sort of the policy regime. The yellow line shows actual flows of money and goods -- to what extent is the India economy actually integrated with the larger world economy. And you can see that these two things move more or less in tandem. As policy controls are liberalized so do Indians engage in more trade and financial exchange with the larger world economy.

[27:58]

And it's very clear when you look at the chart that 1991 constitutes something like a big bang moment for this. India begins to liberalize and to globalize following the crisis of 1991.

Comparison of India and China in terms of Globalization

[28:11]

Let's compare India to another sort of major East Asian country: China. Like China India globalizes. The two countries experience similar kinds of change. What this chart shows you is sort of...the net trade and services and in merchandise, they're all part of the same figure, as a percentage of national GDP.

[28:41]

And the comparison between these two cases is sort of interesting. Because you can see China marked here in yellow bars begins to sort of globalize, at least so far as its trade and services and goods is concerned, earlier than India does.

[28:56]

China's big bang moment comes in the late 1970s with Deng Xiaoping's↗ reform agenda. India's sort of reintegration to the larger world economy comes later: from the early 1990s. But India sort of begins to catch up during the 1990s and into the first decade of the 21st century in terms of its integration to the larger world economy. So India does reglobalize. It does so somewhat belatedly by comparison with the People's Republic of China.

Economic Growth in India Following Economic Reforms

[29:27]

What are the implications of this for India's growth? Let's move to our next slide.

[29:36]

If you look at the...chart which shows both Indian GDP as a percentage of world GDP in the yellow line and India's per capita GDP which is shaded in blue in the area part of the chart you can see a story of...relative decline from the sort of 1950s through to the 1980s and then a resurgence thereafter. And the resurgence is pretty striking.

[30:02]

In 1950 India's GDP constitutes about 4% of the world's GDP. Today India is closing on 7% of the world GDP. So India accounts for almost twice as much as a share of total world economic production today as it did at the time of its independence.

[30:22]

The key turning point here, as the chart you know sort of illustrates, comes in the early 1990s. In India's case you know globalization does seem to encourage growth. What does this mean for ordinary Indians? Are ordinary Indians getting richer or poorer?

[30:39]

Well, this chart doesn't tell you that. All it tells you is how the average Indian fares in the context of India's globalizing shift. But here the picture is a pretty good one. Average GDP per capita increases fairly substantially.

[30:53]

At the time of independence in 1950 GDP per head of capita in India was less than $750 in real terms. Today it's closer to $3,000. So Indians have certainly got richer over the past sixty years much of that increase has come after 1991: more than half of it.

[31:14]

This you know transformation in the Indian economy has benefited some. We could look for example at the Bangalore information technology industry as an example of Indian success in the post-1991 globalizing Indian economy. India has excelled in particular in information technology as well as in telecommunications and services.

[31:40]

We might explain this in terms of policy changes: the opening to foreign investment and trade that comes with the 1991 reforms. We should probably also emphasize some of the comparative advantages that India enjoys.

[31:52]

One of the obvious comparative advantages that India has, particularly so far as IT is concerned, is the English language -- a legacy of British imperialism. It would be remiss however not to mention the major investments in public education that are made by the post-independence government.

[32:08]

Although the Nehru government was antithetical in its attitude toward the world economy Nehru did invest in engineering and in science and in public education. All of these investments will enable India to compete better in the integrating global economy that Manmohan Singh steers India towards after 1991.

Social Effects of Economic Growth in India

[32:30]

What about the social consequences of growth? We've talked a little bit about sort of the reasons for Indian success. But what does India's economic transformation after 1991 mean for Indian society?

[32:44]

It certainly produces an expanding middle class. This is unabashed accomplishment of India's sort of reengagement with the integrating global economy. India's -- Indian society begins to sort of manifest a more aggressive kind of consumer culture. And this a remarkable sort of change for a society whose sort of basic reality had been endemic poverty in the 1950s and the 1960s. Indians in the 1990s and after become more oriented towards consumption.

[33:17]

And this is a shift. In the early decades of independence even affluent Indians had tended to sort of guard and veil their consumption because prolific conspicuous consumption was not something that was you know sort of socially to be celebrated or put on display.

[33:35]

From the 1990s onwards Indians will become more comfortable with conspicuous displays of wealth. Of course such displays of wealth only serve to exacerbate the contrast between India's new affluent and the enduring realities of mass poverty in a country that in the average remains very poor.

[33:54]

There are important implications too for the domestic politics of caste in India↗. Prior to India's sort of liberalization economic life, particularly business life, had tended to be dominated by a small number of castes. With the liberalization that occurs after 1991 Indian business becomes more open to a breadth of caste participation.

[34:19]

So in key respects a traditional society is being transformed in the 1990s and after by its reengagement with the sort of global economy.

Limits to Globalization in India

[34:29]

We shouldn't see the sort of reglobalization of India after 1991 as being total however. There are key respects in which the Manmohan Singh reforms are limited. One important limit is on sort of consumer markets. Supermarkets notoriously, foreign supermarkets, are prohibited from setting up shop in India.

[34:51]

In order to protect traditional sort of purveys of market goods India protects consumer markets for you know groceries and other sort of household commodities. Unlike in China where Walmart establishes a major foothold in the 1990s big box retailers from outside of India will not be permitted to compete in India and this remains the case through to the present day.

[35:15]

Though the Indian government provides institutions, notably sort of the rule of law, that encourage and incentivize foreign investment other institutions in India remain lackluster by global standards. And particularly by comparison with India's neighbor China.

[35:32]

There's no better example of this than India's...public transportation infrastructure which sort of a picture from which is shown in the slide. This is a Bombay Mumbai commuter train in 2012 this year.

[35:48]

By comparison with I guess Shanghai would be the relevant Chinese point of comparison. I should have had a picture of Shanghai but I can assure you that the Shanghai commuter train does not look like that.

[36:00]

India's infrastructure remains you know sort of in relative terms impoverished. Whether this will at some point become a check on Indian economic growth is hard to say.

Economic Growth and Poverty in India

[36:11]

But we should talk finally about the plight of India's poor. The poor after all constitute an overwhelming majority of Indians. How have they fared in the context of integrative economic change that has unfolded in India since the early 1990s?

[36:28]

Here the story is less encouraging. There has been a gradual decline in poverty as the chart indicates but no sort of big bang moment equivalent to the big bang in you know sort of trade globalization that occurs after 1991.

[36:45]

If we define poverty at sort of a...average -- at an income of about $2 per day then...you know the results are discomforting. Some 90% of Indians were poor by that standard in 1978. Today over 70% are still poor.

[37:02]

So there's been a decline in poverty but poverty remains endemic. Poverty remains at the sort of ordinary experience of most Indians.

[37:13]

India remains an overwhelming rural country. In 1978 over 70% of Indians are sort of inhabitants of rural villages. Today a little less than 70% are inhabitants of sort of rural...society.

[37:32]

If you look the at line in red here what it shows you is the decline in India's rural population as Indians sort of move to the cities and become urbanites as they find jobs in the market economy. There is a trend towards urbanization but it's a fairly slight trend.

[37:50]

So there is change for India's poor but it's very, very gradual even glacial in pace. However India's rising sort of affluence does provide the Indian state, the Indian government, with greater resources with which to combat the scourge of poverty on its own terms.

India's Lessening Dependence on Foreign Aid

[38:11]

And one way that we can sort of illustrate this point is by thinking about India's dwindling dependence upon foreign aid. Through the 1950s and into the 1960s and after India remained highly dependent upon foreign development assistance. That is development that was provided by foreign governments to the Indian government.

[38:32]

The United States was a major benefactor of India, so too did West European countries, and countries within the socialist bloc including the Soviet Union, provide India with developmental assistance. As a very poor country India was dependent upon the larger world's largess.

[38:49]

As late as 1970 India consumed more than 20% of all of the development aid that was provided in the entire world. So India is the world's major recipient for much of the Cold War era of development aid provided by foreign governments.

[39:05]

By contrast India received a very, very small total of the world's foreign direct investment. India's share of world FDI flows is marked in blue. And it's only really in the present millennium after 2000 that India's share of total global FDI flows has begun to tangibly increase.

[39:26]

If we look at these figures not in global terms but rather in terms of India's GDP then we see a somewhat more striking picture. This shows development aid and foreign direct investment as shares of India's GDP.

[39:43]

What you can see here is that development assistance from foreign governments constitutes a fairly substantial fraction of India's GDP through much of the Cold War era.

[39:54]

By the late 1960s foreign aid counts for almost 3% of India's GDP. This begins to change. India becomes much less dependent on foreign direct -- sorry on foreign development aid from the late 1980s onwards. In the 1990s, in the first decade of the 21st century, India's dependence upon foreign development aid really dwindles.

[40:17]

Conversely India attracts larger and larger flows of foreign direct investment. This signifies that positive change is occurring in the Indian economy. That foreign investors increasingly see India as a good bet, as a site where investments can be made, that will prove remunerative over, over, time.

[40:39]

So what this chart suggests is that India in the two decades after 1990 makes sufficient improvement that it is able to depend upon trade and foreign private investment rather than upon developmental assistance.

Jeffrey Sachs and the Transition from a Rural Subsistance Economy to an Interdependent Market Economy

[40:57]

And the economist Jeff Sachs↗ argues in an important book that he publishes in 2005↗ that this sort of takeoff, which he identifies as occurring in India after 1990, represents a sort of paradigmatic example for the developing world writ large.

[41:13]

The first steps in the transition from a sort of dependent, rural subsistence economy, to an interdependent market economy are, Sachs argues, the hardest. And these are the steps that India succeeds in taking after 1991.

[41:31]

India still has a great deal to accomplish but the Indian government today is increasingly capable and competent of working proactively to improve the lives of its citizens. Ironically India is less dependent upon foreign governments in an era of rising globalization than it was in the era of relative economic autonomy and autarky that existed for much of the Cold War era.

Distribution of the Benefits of Globalization

[41:57]

Still India's experience is just one experience and we should not presume that India's experience after 1991 is typical of the larger developing world. In fact if we pose the question who has benefited from globalization then we see sort of a quite different picture depending upon where we cast our gaze.

[42:18]

What this chart shows you is the percentage increase in GDP per capita adjusted for purchasing power parity↗, which is to say the cost of you know consumer things, in the particular context where they're purchased, between 1980 and 2009.

[42:34]

So how much better off are ordinary people in 2009 in relation to where they were in 1980? This is what this chart shows you on a region by region basis.

[42:46]

The OECD↗ countries -- the countries that are members of the Organization for Economic Cooperation and Development -- the rich country club -- experience an increase of about 175% in GDP per capita adjusted on a PPP basis between 1980 and 2009.

[43:04]

And this is sort of a fairly respectable rate of growth. It means that I guess I'm better off today than I was when I was born, or my parents were when I was born. Our expectations in the West have increased over that span of time.

[43:18]

In East Asia the transformations have been far more revolutionary than that. The average East Asian is seven times better off today than he or she was in 1980. This is a really dramatic, really stunning, increase in GDP per capita adjusted on a PPP basis.

[43:36]

East Asia's story is clearly exemplary. Eastern Europe has a impressive trajectory of growth, one of course related to the opportunities for growth that occur after the dissolution of East Europe's Communist regimes, regimes that had held back or retarded growth throughout Soviet dominated Eastern Europe in the decades after the Second World War.

[43:59]

Elsewhere the story is somewhat more mixed. South Asia probably constitutes a success story -- at least by the standards of the larger developing world. In Latin America the Middle East and Africa it's a somewhat different story. In these countries there is much less growth on a per capita basis than there is in the -- even in the OECD bloc of developed economies.

[44:23]

We should expect after all developing economies to grow faster than developed economies. Once a country is developed than it reaches a sort of position of affluence in which the returns on sort of technological investment have been accomplished and in which the opportunities for growth become harder and harder to realize.

[44:42]

As you sort of move up the food chain, as you make the transition from extensive to intensive growth, it becomes harder and harder to sustain a constant rate of growth. Growth is easier to achieve for less developed economies than it is for more highly developed economies.

[44:57]

Thus the sort of underperformance of Latin America and Africa by comparison with the OECD bloc over this period is really striking. And it's indicative of something you know quite wrong in these developing world contexts.

Economic Growth in the World's Five Most Populous Countries

[45:12]

Still this is one perspective -- it's a perspective that looks at the world as a whole divided on a regional basis. We might get a different kind of perspective if we were to look the the experiences of individual countries. And that's what we're going to turn to now.

[45:27]

What this chart shows you is the average annual growth rates in GDP over five decades of five countries: China, India, the United States, Indonesia and Brazil. Can anybody tell me what's significant about these countries? Why have I chosen these five?

[45:44]

(student response)

[45:50]

That's right. These are the five most populous countries in the world. So we could call them the P5 as opposed to the G5. (laughter from the class). Okay, that wasn't funny. (laughter from the class).

[46:01]

Well, we're going to look at the five most populous countries. How do they fare over the entire postwar era? Well, what this chart shows you is...average annual growth sort of averaged over, over entire decades, which makes the data a little bit more legible. And here you see a story which is you know in some ways more encouraging. If you look at GDP as a whole than the developing world does better as the postwar era progresses.

[46:31]

Take the example of China for example. In the 1960s China's average annual growth is a little bit over 3%. It goes up in the 1970s. In the 1980s China hits almost a 7.5% average annual growth rate.

[46:47]

This is impressively rapid growth. It's sustained through the 1990s and it accelerates in the first decade of the 21st century. So China does very, very well. It's the world's most populous country and it's clearly the outstanding economic success story of the past thirty years.

[47:03]

India's trajectory is also impressive. By the first decade of the 21st century India's economy is growing at about 7.5% on average per year. This is a rate of growth that far eclipses the rate of growth of the United States which is growing at about less than 2.5% per year.

[47:23]

Indonesia and Brazil are somewhere in between on the spectrum. Indonesia has a sort of tumultuous ride. It suffers very badly in the 1970s and the 1980s, but begins to pick up in the first decade of the 21st century.

[47:39]

Similarly Brazil's slump in the 1970s and the 1980s is a very striking one. Brazil's transition from an ISI dominated growth model, an autarkic growth model, to a growth model that is more integrated with the larger global economy, is a sort of dramatic bump. It's represented here by this sort of downturn in the rate of growth on the slide.

[48:02]

Only sort of in recent years has Brazilian growth began to pick up once again. If we look at this data on a per capita basis rather than looking at the economy as a whole then we see a very similar pattern.

[48:17]

China and India have begun to takeoff in the past couple of decades. The United States has experienced slowing growth in relation to these four developing countries. Indonesia and Brazil have lagged behind China and India but are beginning now to grow a little bit faster.

[48:35]

So this is more or less the story of globalization as it can be told from the perspectives of the world's five most populous countries.

[48:45]

Of course what is encouraging about this, if you care about things like international inequality, is that so long as US rates in growth remain lower than do rates of economic growth in the other economies presented on the slide, then at some point a convergence will occur.

[49:03]

This is kind of logical enough. The question of how soon that convergence will occur depends of course upon the differential in the rates of growth.

Perspectives on Globalization Within the Five Most Populous Countries

[49:12]

Still...these divergent national experiences have led ordinary people to come away with quite different conclusions about globalization.

[49:21]

When you pose the question is globalization a good thing or a bad thing? You'll get quite different responses depending upon who you ask. And asking this question is a sort of useful way for us to gauge what ordinary people in different countries think about globalization. Their opinions at some level are presumably reflective of their particular experiences.

[49:43]

The Pew Global Attitudes Survey which is taken on a annual basis poses questions that allow us to get some traction as to sort of ordinary people's opinions on globalization. The question, "is trade a good thing?" has obvious sort of significance for the politics of globalization.

[50:02]

And how do the citizens of these five big countries, the five most populous countries in the world, answer it? Here I would suggest the data is actually kind of striking. If you look at China and India you see overwhelming enthusiasm for free trade.

[50:17]

Over 90% of Chinese people will respond, "yes", when asked, "is free trade a good thing?". In Indonesia and Brazil there is somewhat less enthusiasm for free trade than there is in China and India. This may well reflect the fact that these two countries have not grown as fast as China and India have in the context of an integrating global economy.

[50:38]

The really interesting data points though I think have to do with the United States. It is striking but there is less enthusiasm for free trade in the United States in 2010 than there is in China, India, Indonesia and Brazil.

[50:51]

Americans, you might infer, are more hostile to globalization than are citizens of the developing world. This...may seem surprising if you think about the politics of the Washington Consensus. If we presume globalization to be a design that is imposed on the world by the United States than we should presume Americans to be in favor of this.

[51:11]

Do they not derive some selfish benefit from the integration of the world economy? So goes the logic of the sort of critical perspective. If on the other hand we see globalization as an organic process of global economic leveling driven by technological change that reduces transportation costs over the long term -- then we may expect somewhat different results.

[51:31]

If globalization...has an integrating effect it may well have a leveling effect. It may well provide opportunities for developing countries to catch up with the United States -- by trading on the comparative advantage that abundant cheap labor provides for example in the case of China.

[51:48]

From this perspective convergence is likely to be more popular in the countries that are catching up, than it is in the United States, the country that is being caught up with. Insofar as Americans sort of experience relative economic decline as their jobs are outsourced, as their domestic manufacturers become subject to ever more intense foreign competition, it's logical to sort of see, to presume, that Americans would view globalization less charitably than citizens of successful developing countries like China and India would do.

[52:23]

Intriguingly these same results hold more or less true when you ask the respondents of this poll, "are people better off in a free market economy or not?".

[52:33]

This is a sort of referendum on economic liberalism↗. Call it neoliberalism↗ if you will. Strikingly we see more support for free market policies in China and in India than we do in the United States.

[52:46]

Here the differences are somewhat marginal but the results should remind us once again that our perspectives on globalization, our perspectives on sort of the structural economic change that have accompanied with globalization, will depend very greatly, will vary very greatly, depending upon where we sit: from which perspective we observe these changes.

[53:07]

It's difficult to globalize about economic transformations that unfold upon a world scale. We can only approach these changes from particular vantage points, and what we think about them I would suggest will sort of vary depending upon where we look.

The Global Financial Crisis of 2008

[53:22]

Finally, let's talk for a little bit about the global economic and financial crisis that began in 2008.

[53:32]

How do we explain the global financial crisis out of which we were -- are now slowly emerging. What caused it? What are its consequences for globalization? For the world economy as a whole?

[53:45]

What are its consequences for geopolitics too? Well, we'll talk about geopolitics on Thursday, today's lecture is intended to focus on economics, Thursday's lecture on sort of the politics of the present.

[53:57]

How do we explain the global financial crisis? Is it a crisis that we can explain if our frame of analysis is restricted to Wall Street? Or do we need to look more broadly than that?

Sino-American Relations and the Financial Crisis of 2008

[54:09]

I would argue that we need to look broadly. We need to think not only about what happens in the United States but also about the changing relationships between the United States and the larger world economy.

[54:19]

This is a good opportunity for me to test your Chinese language skills. Can anybody translate this for me?

[52:27]

(student response)

[54:28]

(laughter from the class)

[54:30]

Okay.

(student response)

[54:33]

That's right. It's -- in Chinese this literally translates as Sino-America. The -- what you have is the Chinese symbol for China and the Chinese symbol for America.

[54:46]

This...is the key relationship when we think about the international relations that define the world economy in the first decade of the 21st century none are more important than the relationship between China and the United States.

[55:02]

So important did Sino-American relations become in the first decade of the 21st century that a couple of Western economic historians, Niall Ferguson↗ and Moritz Schularick coined in 2006 the neologism Chimerica↗ as a way of describing what they argued had for all practical purposes become a single interdependent economic unit.

[55:25]

This of course was too simple. Chimerica never existed in isolation from the larger world. Both China and the United States conducted and still conduct extensive multilateral trade and financial transactions.

[55:41]

So it's difficult I think to take the Chinese-American relationship out of context and to...analyze it on its own terms, but doing so may sort of nonetheless help us to think about the ways in which new relationships of economic and financial interdependence would be productive in the last years of the twenty-hundreds of a major global financial crisis the dimensions of which would be truly international in reach.

[56:08]

Okay, China after Deng Xiaoping continues upon the reform trajectory on which Deng Xiaoping set it. I'm actually not going to talk about the politics of anti-reformism in the early 1990s because I want to get out of here by 11:45. So let's talk only about the relationship between the United States and China.

[56:30]

As China continues upon Deng's reformist path the United States becomes increasingly important as a foreign investor in China's economy. Bill Clinton...,pictured here in the slide, waves in 1994, sort of US concerns about human rights. He lifts legislatively mandated restrictions on foreign investment in China that have to do with human rights considerations, and sort of opens up the gateway for expanded US-China trade.

[57:02]

China, with the encouragement of the Clinton administration, joins the World Trade Organization↗ in 1999, a move that sort of symbolizes China's accession to the sort of integrating heart of the liberal world economy.

[57:17]

In the context of sort of close Sino ... or converging Sino-American relations US-China trade grows fast. Let's look at how US imports to and exports from China develop after 1985.

[57:36]

As you can see the United States does export substantially more to China in 2008 than it had done in 1985, but the rise in American exports to China is far eclipsed by the growth of American imports from China.

[57:52]

This is a narrative with which you are all basically familiar. The United States runs major trade deficits with China. These are just one of the deficits that the United States runs in the late decades of the 20th century and the first decades of the 21st century.

Debt in the United States

[58:09]

More relevant to the question of where the financial crisis comes from is the question of how these deficits are paid for. How does the United States pay for its trade deficit with China?

[58:20]

(student response)

[58:21]

Is the United States exporting services? Like the British Empire was in the last decades of the 19th century?

[58:28]

No, the United States is borrowing in order to sustain its trade deficit. It's borrowing from China to sustain its trade deficit in part.

[58:37]

And trade deficits are not all that the United States borrows to sustain. The United States borrows to sustain federal spending deficits. It borrows to sustain household consumption. It borrows to sustain deficits in the financial sector. The United States after the 1990s in particular runs bigger and bigger deficits.

[59:00]

And nobody in particular is responsible for these deficits. Well, in the sense that nobody and everybody is responsible. Government deficits grow marked here in sort of pink. Financial sector deficits grow marked in brown. Business deficits grow marked in purple. Household deficits grow marked in blue.

[59:22]

Everybody in the United States is borrowing more and more, virtually, everybody during the first decade of the 20th century. Where does the money go? As Americans borrow what are they spending on?

[59:33]

Americans are borrowing in the first decade of the 21st century to spend money on new SUVs. The federal government is borrowing money. It's borrowing money to balance its budget. The federal government runs systemic deficits through this era. That is to say on an annual basis federal revenues, monies collected through taxation, do not pay for federal expenditures.

[59:56]

Year in, year out, the federal government is spending more money than it earns. Well, what do you do if you spend more money than you earn? You have to pay for the difference somehow, so you borrow it.

[1:00:05]

So the federal government is running up a credit card bill in effect. This is the federal debt marked in blue on the slide. As a percentage of GDP, as you can see, the federal government increases its debt, fairly dramatically from the early 1980s onwards. In 1980 the federal deficit had been about 25% of US GDP.

[1:00:27]

It in fact declines during the 1970s. Jimmy Carter is a good example of a President who put into place fairly prudent economic policies -- tried to shrink the deficit. Well, that all changes in 1980 when Ronald Reagan gets elected President.

[1:00:42]

Ronald Reagan borrows extensively. What does Reagan want to finance? Why is he borrowing?

[1:00:48]

(student response)

[1:00:48]

I'm sorry.

[1:00:50]

(student response)

[1:00:50]

Yeah, military spending is part of it. Reagan certainly increases military spending. But tax cuts are the major part of it. You know tax cuts, regardless of what you might hear on Fox News↗, are a form of expenditure.

[1:01:02]

And Reagan borrows to spend. Reagan borrows to finance tax cuts. The consequence will be a deficit that gets bigger, and bigger. This deficit does come down in the 1990s. Why does the deficit come down in the 1990s?

[1:01:17]

(student response)

[1:01:20]

That's right. Bill Clinton raises taxes and cuts spending. Bill Clinton does things that conservatives don't like. He raised taxes. He does things that liberals don't like. He cuts spending.

[1:01:29]

And what was the consequence? The deficit for a few you know brief shining years in the late 1990s began to shrink. After Bill Clinton the United States had a different President. A President who reverted to the Reagan era policy -- a policy of tax cuts, and increased government spending.

[1:01:50]

It wasn't true that Bush was just spending on the rich. Bush actually expanded welfare provisions for ordinary Americans. Bush created new medical programs -- the Medicare prescription drugs coverage program↗. Bush established programs to incentivize home purchasing amongst minority communities in the United States.

[1:02:08]

So it was not the case that Bush was only borrowing in order to provide for the affluent. Americans across the board benefited from the Bush administration deficits. Whether all Americans benefited equally is a different question.

[1:02:23]

I'm not making the claim that Americans benefited equally; rather, that we should see the Bush administration as a reversion to a pattern of deficit financed expenditure that characterized the experience of the 1980s.

The Rise in Debt and the Rise in Home Prices in the United States

[1:02:38]

So the money went on government spending too. Much of the money also went into housing. As the United States came to borrow more and more from the larger world -- from China in particular -- the price of houses in the United States went up and up and up.

[1:02:51]

This is obvious enough, right. As you increase the supply of available money in an economy then the price of non-tradable goods↗ -- housing is the ultimate non-tradable good -- will go up. The money has to go somewhere so it ends up parked in the housing sector.

Government Deficit Levels Throughout the World

[1:03:08]

The remarkable sort of increase in US home prices in the first decade of the 21st century, the remarkable accumulation of federal debt, cannot be understood in national contexts. It can only be understood in a larger global context.

[1:03:20]

I could have shown you this on a chart but I think that the map does an even better job of presenting the sort of global financial developments that produce the conditions in which the financial crisis occurred.

[1:03:33]

What you see is countries shaded for their deficits. The United States in 2010 is shaded red. It's far, by far, the world's biggest debtor. What is the world's next biggest debtor? The United Kingdom. France, Spain, Italy, and Germany are also more indebted than are most countries in the developing and sort of middle income parts of the world.

[1:04:02]

The countries shaded green are those that are either, you know, deficit neutral, in terms of their international investment positions or in the case of China run financial surpluses with the rest of the world.

[1:04:14]

So we could superimpose some arrows on this chart, and they would show us, you know, more or less in which direction the funds flow. And they flow more or less in this direction. From China to the United States. This is a simplification but the basic, you know, dynamic, is representative of the sort of directions in which money flowed in the first decade of the 21st century.

[1:04:37]

Money flowed from the developing world to the United States. Why was this? Some people argued, Alan Greenspan↗ argued at the time, that it was because the world had an insatiable desire for American treasury bills -- for American investment vehicles.

[1:04:52]

Greenspan's logic was that American investment vehicles were safer than anybody else's and thus as the developing world got richer developing countries needed somewhere to park their money, and US investment vehicles were the most attractive destination.

[1:05:08]

An alternative perspective might sort of emphasize the reluctance of the, of public authorities in the United States, to make policy adjustments that might have tamed and contained a growing financial bubble.

The US Housing Bubble, Subprime Lending, and Mortgage Backed Securities

[1:05:23]

There was a...to a great extent the bubble in the United States became a self-sustaining phenomenon. As property prices went up property looked like a better and better investment.

[1:05:36]

A sort of mood of irrational exuberance↗ set in. Ordinary Americans predicated consumption decisions upon the belief that the value of property was going to continue to rise into the indefinite future.

[1:05:49]

And this is what gave us the subprime crisis, the subprime housing crisis, which is what triggered the larger economic crisis of 2008, and after.

[1:05:59]

The subprime crisis begins with subprime loans. What are subprime loans↗? To put it very succinctly subprime loans are loans that are extended to borrowers who cannot really afford to pay them -- by banks that have very little probability of being paid back. Subprime loans are bad debts. But they can be turned into what looked like good debts through a process of securitization. How does this work?

[1:06:23]

Most of you probably know this. but let me just explain. By bundling bad mortgages together and turning them into CDOs -- Collateralized Debt Obligations↗ -- banks were able to take sort of bad mortgages -- mortgages that were extended to people who weren't really able to pay them -- and to transform them into marketable securities.

[1:06:42]

Securities which could be given good credit ratings -- triple A credit ratings perhaps from Moody's↗ or other rating agencies and then marketed to institutional investors: to pension funds to municipalities to ... you know large banks and so on and so forth

[1:07:01]

The whole process involved taking sort of bad...residential mortgages and transforming them through a process of complex financial engineering into bonds -- bonds that were so sort of -- sort of complex in terms of their underlying -- the underlying -- sources of their value that investors in these bonds had very little idea what it was exactly that they were investing in. The complexity of these financial instruments was in essence the key to their success.

[1:07:34]

This all seemed to work fairly well at least for a while. Banks would extend home owners -- marginal home owners often -- what were known as you know sort of 2/28 ARM mortgages. What is a 2/28 ARM mortgage?

[1:07:47]

It's a mortgage which you, on which you only pay interest for the first two years. After two years you have to start paying principal too which means that the monthly payments on the mortgage kick up dramatically after two years.

[1:08:00]

But banks were extending these mortgages to people who could barely afford the initial two year payments -- the so-called teaser rate. The banks extended these mortgages according to the logic that the value of property was going up so much that after two years the person who took out the 2/28 mortgage would be able to refinance with a better rate of interest.

[1:08:21]

So the whole thing was predicated upon the belief that the property market was going to continue to go up and up and up in value and that this would permit the stabilization of mortgages that should never have been extended in the first place.

The Fall in the US Housing Market, the Collapse of Lehman Brothers, and the Onset of the Financial Crisis

[1:08:34]

Of course things did not work out that way. In 2006 the US housing market begins to tank. This causes homeowners to begin to default on their loans. Banks that hold CDOs based upon US subprime mortgages as collateral begin to have to write down their balance sheets.

[1:08:51]

The write-downs which begin in early 2008 are indicative that a major financial crisis is underway. By the end of the year banks are beginning to fail. Most notoriously of course Lehman Brothers↗, which is heavily overextended in bad securities, will declare itself insolvent in the fall of 2008, in September, just a couple of months before the election of Barack Obama.

[1:09:15]

So the collapse of Lehman Brothers is the sort of signal event that marks the transformation of the sort of underlying financial crisis into an overt full-blown catastrophe.

[1:09:26]

This catastrophe has global repercussions. It's not just limited to the United States in terms of its impact. Foreign banks are heavily invested in US subprime based securities and they are by consequence heavily affected by the collapse of the US housing market.

Consequences of the Financial Crisis of 2008

[1:09:43]

The crisis triggers a global recession. Real economies tank. Particularly in the West where unemployment increases dramatically and sort of echoes of the 1930s reverberate powerfully.

[1:09:58]

The crisis affects the West much more seriously than it affects the rest. The downturn in real growth, the downturn in employment, the...atmosphere or malaise and crisis are far more serious in the West than they are in the developing world.

[1:10:16]

In the West virtually every leader who is in power at the beginning of the crisis ends up out of power by the end of the crisis. In the United States of course the financial crisis which is still in its very early days -- in November 2008 -- produces or helps to produce a decisive repudiation of the Bush administration.

[1:10:34]

Barack Obama wins election by what I think at the time was the largest electoral margin since Ronald Reagan.

National Governments' Response to the Crisis

[1:10:44]

We'll talk more about sort of the question of whether this represents a transitional or even a terminal crisis for the West on Thursday. But let's conclude today just by talking about the measures that governments orchestrate to respond to the crisis.

[1:10:59]

The G20 Group↗, not just of the developed but also of the most powerful and wealthiest developing countries, reacts fairly quickly to the crisis. A coordinated global stimulus is orchestrated. New measures to promote sort of monetary stimulus through the relaxation of interest rates are implemented in a coordinated global manner.

[1:11:19]

Through the orchestrated rounds of global sort of...of globally coordinated reaction that occur in 2009 and 2010 a crisis as serious as the Great Depression of the 1930s↗ will be averted. But it's a very serious crisis nonetheless. The question of whether this represented a crisis of globalization as a system, or simply a crisis for the West, within a globalizing system that remained otherwise stable, is an important question, and one that we should think about. We'll come to that question on Thursday in the final lecture of the seminar.

Course Evaluation Forms

[1:11:56]

You have just about ten minutes now for the evaluation forms, which I think should be sufficient. So let me invite you to pass these out and fill them in, and if you could return them to the front of the room then Mark you will collect them and take them to the history department.