Column: Troubled times

The world over, economies are suffering because of poor politics

The linkage between economics and politics is an eternal subject for debate. Engels was left with the job of interpreting Marx as he became an oracle after his death. In Marx?s work, there is a constant interplay of the economic and the political, as his three pamphlets on France will show. But Engels was like a Father of the Church asked to give his imprimatur to all and sundry schemes of revolution. So, he said while economics and politics interplay dynamically, the economic is in the last analysis dominant.

That ?in the last analysis? proved to be the get out clause. But even in these post-Marxist days, there is a temptation to assign political problems an economic rationale. Three examples may suffice.

The logjam in American politics?the Tea Party and the split among the Republicans, the weakness of the Obama Presidency both in domestic and in foreign policy are not just accidents. The American economy has had a deep recession. It got away with a weak welfare state all the years of prosperity but now the inadequacy of the welfare provision is obvious just when the country can least afford to make it more generous.

The longer run dynamic has been the flatlining of wages. The first twenty-five years after the war were the best for American workers when a family could have just one working adult, usually the man. His wage packet could afford the family a car, many durables and a house. This was normally manufacturing job where strong unions made annual real wage increases routine. When the Oil Shock came in 1973, the American economy, like most other Western economies, began to de-industrialise as manufacturing moved to Asia where labour was cheaper. There were jobs in services but for manual unskilled or semi-skilled workers the wage was way below that in manufacturing.

Families adjusted by two adults working but even that was not enough as wages stopped rising. Soon families had to borrow. When credit became cheap in the 1990s, families borrowed to the hilt. After 2008, the credit shrank and families find themselves with mortgage foreclosed and money tight. They resent this. White families believe in the American dream and blame the government for their woes.

The Tea Party reflects this voting bloc but, of course, they are financed by the very-rich who want to dismantle the welfare state and have lower taxes. The black and Hispanic workers have always depended on the welfare state. The divide is sharp and across the two political parties. Neither has enough votes to defeat the other. Stalemate will continue.

Economic stagnation has taken its toll on European politics. Angela Merkel is now locked in what seem to be difficult negotiations with SPD for a coalition. She just fell slightly short of absolute majority and her previous coalition partners the Free Democrats did not win any seats. The Greens and the Far Left have stolen seats from the SPD. The membership of the SPD is wary of joining coalition because they may have to do difficult things to stave off worse crisis in the Eurozone.

Elsewhere, the stagnation is the worst and so is politics. Italy is limping along having put Berlusconi in his place and yet the government is not effective. Greek politics lurches between extreme Right and Left while just holding on to power. But it cannot tackle the economic challenges. Things are no better in Spain or Portugal. Just when effective action is needed, it is not available.

Contrast these woeful tales with the most recent meeting of the Chinese Communist Party. There was a perception that even though the economy is growing at 7.5 %, its continued growth at that pace cannot be taken for granted. The Chinese economy can no longer be driven by exports since its traditional markets are stagnating. It needs to give its citizens a better life and stop financial repression which has led to over-saving and much wastage of capital in its investment choices.

China has not always found it easy to reform. Despite authoritarian rule, it has often chosen the easy way out as Hu Jintao showed. When the new team of Xi Jinping and Li Qekiang came to power, some analysts were predicting a stalemate between the ?princelings? and the apparatchiks. It is early days yet but it would seem that the new team has grasped the nettle and begun a radical reform of the economy. The demographic challenge has been faced and the one-child-policy reversed. Property rights in land have been clarified which will bring the market to the countryside (just as the UPA2 is busy putting huge obstacles in the land markets in India). Enterprise reform has been promised . China?s record of economic success over the last fifteen years has made the new reforms easier though there are still issues of environment such air pollution and water shortage.

India has been failing economically. Will its politics result in reform or regression?

The author is a prominent economist and a Labour peer

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First published on: 25-11-2013 at 02:19 IST