http://www.pambazuka.org/images/articles/383/48974oilrig.jpgWe could be on the threshold of a new phase of globalisation, one where there will be a new protectionism, more regional trade and regional economic activism and where governments will be forced to address the problems of the vulnerable middle class and poor, argues John Samuel.
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Oil is back in the centre of economic and political discourse, at the international, national and local level. What does this mean for the future of the economy and geo-politics?

The roots of this phase of economic globalisation lie in the economics and politics of the 1970s. The protagonist was oil. There was a food crisis too. This perpetuated the new cycle of debt and highly indebted poor countries. The economic turmoil of the 1970s (due to the oil shock, saturation of the role of the State and consequent inefficient and ineffective public expenditure, food crisis, and consequent new indebtedness of poor and developing countries) paved the way for the new mix of neo-conservatism, neo-liberalism and the third way. The indebtedness and balance of payment crisis in many countries gave unprecedented power to the International Monetary Fund and the World Bank -- and the consequent economic and policy conditionalities they imposed. That is how the story of the new phase of economic globalisation, a mix of neo-conservatism and neo-liberalism – the Reagan-Thatcher prescription -- commenced, sometime in the early-'80s.

While there are similarities between the oil shock, food crisis and economic conditions of the '70s and the one we are beginning to face now, the political and economic context are not the same. The first 25 years after the Second World War saw unprecedented and sustained economic growth in Europe and America. In fact, the demand created by reconstruction activities after the war, the aid system in the '50s, and the capabilities in Europe without the burden of maintaining the colonies, helped to a significant extent to propel this economic growth. In other words, there was a significant demand within western countries and internal market competence to deliver the supplies.

By the '70s, the market got saturated in terms of demand, and the State got saturated in terms of the sustainability of public sector spending and effective social welfare. As a result, there was a real compulsion to find new markets elsewhere and to restructure the tax and public expenditure pattern. The rise of Japan and the competitive edge of Japanese products in Asia, the oil rich Gulf countries and the United States also created a sense of urgency to create new markets. To a certain extent the European Union was a sort of political solution to enable market integration to address the issue of market saturation.

The oil shock, and the consequent debt trap and balance of payment crisis, was a great opportunity for OECD countries to develop a combined strategy of trade, aid and debt and the conditionality approach to open up the markets of developing countries and less developed countries in Latin America, Asia and Africa. The economic and political implosion of the USSR in the late-'80s also created a crisis of the centralised policy planning mode and a non-dollar-based trade framework (there was almost a barter system between the USSR and many other countries). In fact, more than the ideological threat of communism, the West was worried about trade (in oil, arms and other commodities); such a system was a global road block for the western capitalist mode of trade. After the fall of the USSR, it was a free ride for finance capitalism and the neo-liberal mode of policy and trade framework.

The present situation is very different. The growth of the last 15 years is propelled by the growth of Asian economies, of Latin America, and parts of Africa. For the first time, the population of China and India tend to become an economic asset, instead of a liability, in terms of productive capability and domestic market expansion. Such a growth is partly due to new infrastructure development in different parts of Asia (in fact, much bigger in scale than the one in Europe in the '60s), and also due to the competitive edge in terms of cheap labour and skills. The finance capital market too played a key role in propelling new investments in the stock market that, in turn, propelled the economy. Asian countries are beginning to play a competitive game and are also using the finance capital market to acquire market share, productive capacities and big multinational corporations. Many of the takeovers (by Tata, Mittal and others) are of immense symbolic importance.

Due to the flight of jobs and due to the crisis of social development, there is a fast emerging, vulnerable, middle class and poor across Europe and the US. There is the added shade of identity politics (dramatically different from the old communist “threat”). The migrant communities which provided the crucial labour inputs during Europe's growth period have become a political liability now. This means there is more political and economic insecurity among a large number of the working class, vulnerable middle class, and the poor. All European countries are facing a new internal crisis of politics and economics (particularly in the context of the alienation of Muslim communities born and brought up in Europe).

This means there is a shift in the political sociology at the grassroots level in the USA, the EU and other parts of Western Europe. Many European countries such as Italy, Spain and France are facing a serious economic crisis. This also means that there can be a shift in the macro-political economy and geo-politics. Hence, the context is dramatically different from that of the economic crisis of the '70s. Today, there is no crisis of balance of payment (so far) and there is lots of foreign exchange reserves. There are vibrant domestic markets in India and China. In fact, the growth is sustained by the economic growth in Asia.

It seems the ongoing economic troubles, oil price hike, and food crisis, will be the springboard for another key political and economic shift in the world. The price of oil climbed from $10 a barrel in 1999 to $135 in the second week of June 2008. Goldman Sachs says it will hit $200 within the next 24 months! This means that the price of oil has risen by 900% in the last one decade. Oil spending as a share of global economy may cross 7% (more than the peak in 1979). Oil drives the engine of the present global economy. The US consumes 25% of the world output. Though demand in China and India increased, China consumes 9% and India consumes only 3% of the total oil demand.

As the price of oil climbs, commodity prices will go up. This also means that food prices will be relatively higher in the international market. The oil price increase is bringing about new political tension and turmoil. But if the price goes up, at least in some segments there will be a decrease in demand. The SUV market in the US and elsewhere was already in a slump and will face a crisis. This will also have consequences in countries like China and India which sustain the global economic growth (and demand for commodities) to a large extent. It will be difficult to sustain subsidy levels for oil in India and governments will be forced to increase the price (there is no other way). A mix of inflation, increasing oil price and deceleration of the economy (for example in real estate) can create new political tensions and equations in many countries, including India.

The increasing price of oil will make the oil-producing countries very cash rich. So the prominence of Russia, Iran, Venezuela, Saudi Arabia and the Gulf countries will significantly increase. This may also induce a new arms race -- led by Russia. On the one hand it will give rise to a multi-polar world, and on the other hand it can propel a war. It is also interesting to note that most of the oil-producing countries are run by autocratic or authoritarian regimes, many of them in the Arab world.

The role of National Sovereign Funds of Gulf countries will increase dramatically. It is estimated that if the price of oil price climbs, six Gulf countries will have a value of $95 trillion dollars (the American economy is around $13 trillion) -- about twice the size of the public equity market. Already Sovereign Wealth Funds of the Gulf countries are buying up the major and controlling stakes of big western banks and this will create new protectionism. A possible inflation (if it crosses 15%) in Asia can cause serious economic trouble. There will be a devaluation of currencies in these countries -- with potential trouble for the finance capital market. There is a real trend of inflation in most countries in Asia (Vietnam is the highest, Thailand is almost 10%, and India, China and others too face it) and the oil price hike will further accentuate the problem. Persistent inflation and stagnant economic growth may result in stagflation in different parts of Asia, including India.

All this means that (a) this phase of economic globalisation will not be sustainable and it will be a transit to the next phase, (b) there will be a new protectionism (particularly in terms of commodity markets, food etc), and (c) There will be more regional trade and regional economic activism.

So, there will possibly be a tendency to regulate finance flow and there will be more restriction for commodity markets. The elections and politics of Europe and the USA will be forced to address the issue of the vulnerable middle class and the poor. Look at the election promises in the USA – it's about jobs. The health system and social security are also top of the agenda. There will be political pressure to increase the allocation for the social sector and for creating new jobs and a reduction of foreign aid (this is what happened in Japan from 1999 onwards).

The next US President will be forced to initiate new protectionism and new social welfare measures. This will have an impact on global trade. The oil price hike may affect travel as well as trade (due to higher freight charges). All this does not mean a “reversal of globalistion”. It means a new phase of globalisation along with a new protectionism in many countries. There will be scope for a New Deal and a new kind of social democratic politics in Europe and elsewhere.

The world is on the threshold of a new phase. The present economic slowdown is likely to persist for another four years. It will influence the shape of the economy, political dynamics and geo-politics in the years to come.

*John Samuel is a social activist and the International Director of Actionaid.

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