So, despite the apparent explosion of global development finance in the past year, there has actually been no effective transfer of resources for investment to the developing world. Financial liberalisation explicitly designed to increase access to resources for new investment has instead been associated simply with much more circulation of finance around the world, instead of creating a growth-oriented intermediation for developing countries. Citizens of the developing world – apart from the privileged few who can take advantage of the newly liberal regime to transfer their wealth around the world to maximise their own returns – may well ask whether the process of capital account liberalisation has been worth it.

Among the general public in Europe, and even in the more informed sections, there is almost no realisation of how globalisation has adversely affected livelihoods and employment of the majority of the population in the developing world including in fast-growing Asian countries. The agrarian crisis is largely seen to be history, supposedly vanquished by the rising prices of agricultural goods in world trade between 2002 and mid 2008, even though farmers’ incomes continue to stagnate and cultivation is still barely viable in large parts of the developing world. Because of the volumes of manufacturing exports from Asia, there is still widespread perception of shift of manufacturing jobs from North to South - even though manufacturing employment has declined in the developing world as a whole, has barely increased in most countries of Asia and has actually declined since 1997 in what is generally accepted to be the workshop of the world, China.
(...) There is certainly some degree of truth in this – there is no question that current “Northern” standards of life cannot be sustained if they were made accessible to everyone on this planet. This means that future economic growth in the developing world has to involve more equitable and sensible patterns of consumption and production. But that hardly deals with the basic problem. Even if the elite and middle class of the developing world, and particularly China and India, just stopped increasing their consumption, simply bringing the vast majority of the developing world’s population to anything resembling a minimally acceptable standard of living will involve extensive use of global resources. It will necessarily imply more natural resource use and more carbon emissions.
(...) So the stark reality is that the developed world must, on the whole, consume less of the world’s resources and reduce its contribution to global warming absolutely. This in turn has effects on income as well. It is not immediately clear why rich countries with falling populations necessarily need to increase their GDP, and why they should not focus instead on internal redistribution and changing lifestyles, which could in fact improve the quality of life of every citizen.

The IMF plan was for Argentina to go in for further privatisation of public assets and more deregulation, along with maintaining very high real interest rates, in the hope of “restoring investor confidence” and once more attracting foreign capital into Argentina. Instead, the Kirchner government stopped bothering about placating foreign investors and directed its attention to domestic producers. It used a stable and competitive exchange rate regime to ensure that domestic production revived and grew. It focussed on improving the consumption levels of ordinary people and reducing poverty. It sought to provide basic (but privatised) services at more accessible rates, often through renationalisation or through controls on the pricing of utilities. Significantly, the government also took a hard line – which ultimately proved very effective – with Argentina’s external creditors, forcing a majority of them in 2005 to accept a debt write-off agreement that effectively cancelled 65 per cent of the value of the country’s outstanding debt.

Thus, medium term trends point to slowing of growth in the developed countries. One consequence of the process of financial expansion and globalisation is that the policy space available to governments is substantially reduced. If the government in any one country chooses to accelerate employment and output growth by expanding expenditures, any inflation that this might spur would worsen the trade deficit and erode the value of financial assets. This in turn would result in an outflow of capital and trigger a collapse of the currency. As a result, governments learn to limit their expenditures and curtail their deficits, resulting in chronic deflation and slow growth. Whatever growth that does occur, is triggered by private expenditures which are increasingly financed by the excess liquidity that financial deregulation and openness deliver. As noted above, this dependence on debt-financed consumption, investment or housing booms, besides limiting the rate of growth, makes economies prone to crises resulting from speculation. As a result, relatively slower growth is accompanied by greater volatility. The sub-prime crisis and its aftermath is an example of such volatility.

are we heading for global stagflation?:
That is because inflation in modern economies is essentially about two forces: the fight over distributive shares in national income by different groups, and the role of expectations about inflation. Thus, if there is a rise in commodity prices (that would increase the relative income share of commodity producers) then this will only lead to a rise in the general price level if capitalists insist on maintaining their margins over costs at the same level. If they are unable to do so for any reason, then the rise in commodity prices need not translate into a generalised inflation. Similarly, if the initial rise in prices pushes down real wages and workers are not in a position to demand increases in nominal wages that would maintain their real wages, then the inflation is controlled. Tight monetary policies are usually a way of enforcing this by allowing greater unemployment, so they work indirectly rather than directly to control inflation. So inflation reflects a wider fight over income distribution.
(...) Therefore, whether or not there will be stagflation depends ultimately on international political economy and the relative strength of different groups in the world economy. It may be argued that working classes and peasants have been so weakened by the onslaught of neoliberal policies of the past two decades that they are in no position to fight to maintain even their already significantly diminished shares of income. If this is true, then the likelihood for the immediate future is an economic recession with worsened conditions of living and higher unemployment across the world, albeit with lower rates of aggregate inflation.