The Rankin File: #21

Kim Hill's interview with Richard Douthwaite

(shortcut to comments on the world sharemarket crash)

Richard Douthwaite is a green economist who has resided in the west of Ireland for the last 25 years. His best known book is The Growth Illusion, and his most recent book is Short Circuit (available from One World Books, tel. Auckland 377-1367). He visited New Zealand this month, and gave a public address in Auckland on 23 October.

Like Immanuel Wallerstein who spoke in Auckland on the previous two days (see Immanuel Wallerstein on the Crisis of the World System), Douthwaite sees the world­system as being in a state of immanent collapse. Unlike Wallerstein who looks to the political mobilisation of the unprivileged, he sees local responses as the key to a better life next century. He is very much a "green cosmopolitan protectionist" (see Why "Cosmopolitan Protection" is not an Oxymoron), who looks to protectionism at the local and national levels in order to stabilise and strengthen the world economy, as well as a means of escape from a highly unstable global marketplace.

Douthwaite sees a major collapse of the world system coming in about two years time, as Japan's protected capital market fully integrates into the world financial system (much as New Zealand's did in 1985). Ironically, on the very day of Douthwaite's Auckland address, a crash of the Hong Kong sharemarket was precipitating a global event which is revealing just how unstable the world system is.

(The international consequences of the world equity plunge that is taking place as I write - a crash which really began with the flight of capital from South East Asia around May this year - may prove to be greater than those arising from the 'correction' of 1987. 1987, a date now embedded in New Zealand's folklore [see The 1987 Crash; What Really Happened?], was not a global crash at all. It was a New Zealand financial collapse that was triggered by a hiccup in the international equity market; a collapse which would have happened before the end of 1987 even if there had been no international event; a collapse that began in January 1987 and was put on hold for the sake of the election. 1987, as a crash, was a national crash; on the other hand, 1997 looks like being a global crash, and, for New Zealand, an 'incorrection'. The impact of this global crash on New Zealand will not come through the New Zealand sharemarket. It will come on the capital account of the balance of payments. Losers in the global crash will seek to repatriate their investments from places like New Zealand. That will force the New Zealand balance of payments current account to move into surplus, given the way that exogenous changes to a country's capital account cause opposite changes to the current account [see The Balance of Payments Deficit]. Suddenly finding ourselves having to pay our pay in the world could be a positive experience for the New Zealand economy; ie if the adjustment to the new world situation is well managed. But it will be a very painful experience for New Zealand if our policymakers pursue a traditional deflationary strategy of adjustment.)

For Douthwaite, the global market system is both unstable and inefficient. By unstable, he means that the 'action' - eg exporting and investment - has a few favoured locations that change abruptly as other locations become marginally more attractive to international capital. To illustrate the point, he gave the example of milk churn. The churn would become unstable if all the milk gravitated to one side or the other. Perhaps a more graphic example of the instability of liquid in a container relates to the sinking of the Herald of Free Enterprise car ferry in Zeebrugge Harbour a few years ago. All the water entering the front car doors flowed into the same part of the ship's hold, sinking it almost instantly. The proper safety solution was for ships to have compartmentalised holds.

Economic protection on the part of each nation - import and exchange controls - is the economic equivalent to such compartmentalisation. It defuses the tendency in an unfettered global economy for massive consequences to follow from marginal changes in a nation's competitiveness in any particular market. The global economy - under free trade conditions - is a "bidding down process", whereby each state seeks to marginally undercut each other state in order to secure unstable flows of export demand and capital. Together all states are losers in this process, and international capital is the winner.

Effective compartmentalisation begins at the local level, especially when national governments have the ear of international capital and not an ear for the basic economic needs of their regions. Most peripheral communities - such as those in the west of Ireland - export capital to the world system, and get little back from those investments. Thus the resources of the regions which are not the 'flavour of the month' become underutilised. Hence, Douthwaite argues, the global system is inefficient. Many sustainable resources go unused, while a narrow range of non-renewable resources and monocultured commodities are used with great intensity.

In the case of Ireland, capital flows from west to east. The effect is to magnify the difference between east and west, thereby accelerating the flow of resources out of the west, thereby further magnifying the difference, and so on. This is a simple destabilising positive feedback process. While the example given is on a national scale, the global economy works much the same on a global scale. Douthwaite prefers a stabilising negative feedback economy, in which exogenous changes are buffered rather than exaggerated; an economy which requires firewalls at the local as well as the national level. "Localisation, or building a national economy, is an alternative to globalisation." And local economies are better able to internalise environmental costs. We are less inclined to foul our own local nests than to unknowingly contribute to the fouling of nests in other corners of the world.

As means to facilitate local economic development, Douthwaite is a persuasive advocate for the development of local financial systems, not to replace but to complement national and international finance. In essence, he is seeking a reawakening of local non­profit cooperatives, which use local credit systems to ensure that capital accumulated is reinvested locally. The emphasis of community enterprise is to concentrate on selling into local markets - ensuring a "secure" local circular flow of goods, services, payments and credit - rather than selling to the distant markets that pay higher prices today but which may pay much less tomorrow. This philosophy includes supporting local credit unions over the banks - which play the central role in globalising local capital - in spite of the fact that the banks will typically pay more interest.

Douthwaite gave examples of local currency systems in Switzerland and in Scotland. To be successful, such currencies must constitute a form of local credit, and not simply be a medium of local exchange, such as most examples of 'green dollars'. (I published an article in 1992 which suggests the possibility of a Universal Basic Income at a local level, funded by "community credits", which amount to a local currency of the form suggested by Douthwaite. The reference is: "Universal Benefits: Can We Afford Not to Have Them?" In Alan Marston (ed.), The Other Economy: Economics Nature Can Live With, Auckland: LBD Books, 1992; Proceedings of "The Other Economic Summit" (TOES), Auckland 1992.)

Douthwaite's theme of "short­circuiting" is one in which local "circular flows" generate local activity while maintaining a constructive two­way relationship with the larger national and international flows. This short­circuiting maximises the efficiency and stability of the world economy, by ensuring that local economies are not submerged by national economies and that national economies are not submerged by the global economic flows. Compartmentalisation of local and national economies ensures that the economic energy of the world's peoples remains in balance, thereby "delinking communities from the world system", or at least from the excesses of the world system.

Short­circuiting draws energy from the larger economic flows, giving energy to local economies, which are then able to return energy into the larger flows. One example given by Douthwaite was that of the Danish wind turbine industry. A few local families gained permission to operate a small wind turbine so that it took power from the grid when the wind was not blowing, and added surplus power to the national grid when the wind was blowing. By selling as much electricity as they bought, the families had created a local asset. Others followed, to the extent that many small communities effectively generated their own electricity. In the process the technology improved to the point that Denmark became world leaders in wind turbine technology, thereby contributing massively to both the Danish economy and the world's economic welfare.

A final interesting idea that Richard Douthwaite floated related to the stable management of national exchange rates. The idea is that a country (or regional bloc) should separate its capital account from its current account by insisting that both remain in balance. This is achieved by having a separate exchange rate for capital transactions from that used for current transactions. Apparently, in the 1960s (when he lived in Jamaica which was, like New Zealand, in the 'Sterling Area' of currencies), this was exactly what did happen. Transactions within the sterling area were treated as internal transactions, whereas transactions between say Jamaica and the United States incurred exchange surcharges so as to ensure that capital flows in and out of the sterling group would be balanced.

Certainly - and especially in the light of the sudden changes in world capital flows that will follow from the events on the world's sharemarkets this week - this is an approach that New Zealand could adopt to limit the impact of unstable capital flows on our national and local economies. The two exchange rates could be allowed to float independently. The exchange rate for capital transactions would fluctuate massively unless the flows moderated and balanced. Capital flight would be significantly moderated.

While there are some parts of Douthwaite's analysis that I would question (eg the idea that cleaning up an environmental mess such as an oil slick is an economic bad that should not be counted as a part of a country's national income, and the idea that profit­making enterprises are less efficient than non­profit enterprises), I think that his basic thesis has much to offer us today. The idea of buffering - of economic security, stability and efficiency through compartmentalisation of national and local economies - is a sound idea. For those who disagree, just think of the British car ferry that tipped over in Zeebrugge Harbour; in that case, the flows were so disruptive that the host could not survive. The thesis - a variation of 'think globally, act locally' - makes good strategic sense whether or not the 'world system' is fatally ill.

Buffering makes good sense to big companies as well as to local and national communities. Stephanie Strom, in the New York Times of 25 October ("Japanese Companies Buffer Themselves Against Currency Swings") notes that "Sony Corp., the consumer electronics and media giant, has the same practice of scattering its production, which it calls global localization, to cushion itself against currency jolts". Localisation is becoming mainstream business practice if not mainstream economics; and it is commonsense.

Free flows of goods and capital are 'bad' to the extent that they inhibit the local short­circuiting that ultimately strengthens the global market economy. Douthwaite's approach could do more than enabling communities to survive the collapse of the world system; it could prevent the collapse, or at least facilitate global recovery. After all, following the collapse of the world system in the 1930s, it was national short­circuiting that made possible the revival of the international economy.

KH:   Richard Douthwaite is a former economic advisor to the Government of Monserrat in the Caribbean but he has lived in the west of Ireland for the past 22 years and his thinking has correspondingly changed in response to the declining local economies and population loss there. His most recent book is called "Short Circuit - Strengthening Local Economies for Security in an Unstable World" and it looks at ways in which communities can build thriving local economies which are independent of what he sees as an increasingly unstable and exclusive world system. His previous book was called "The Growth Illusion" and it showed that allowing the market to determine the direction of economic growth was impoverishing large numbers of people and damaging society and the environment. Richard Douthwaite joins me now. Good morning.
RD:   Good morning

KH:   How small can an economy be in order to be sustainable?

RD:   I think we can't .... each area needs to aim for its own sustainability in the key things of life. It needs to be sure that it can provide its own food and its own energy from sources under its own control but I'm not looking for it to be able to do everything. I'm not looking for complete autarchy within any given area. We are part of a world economy, we're always going to be part of a world economy. All I’m asking is that people consider getting a better balance between those things that they do in their areas for themselves and have some choices over, and those things that they do for the outside world.

KH:   When you talk about an exclusive .... an increasingly exclusive world system what do you mean?

RD:   Well all sorts of people, countries and regions are being excluded from full participation in the world's system. We're in a money system. You can only participate in the world system if you have adequate supplies of money - of international currency as things stand, yet the 1996 Human Development Report showed that 100 countries had in fact moved backwards over the previous 15 years. They had got poorer on a per capita income basis. As you will know only too well, gaps between rich and poor are widening in NZ as everywhere else. The poor are being excluded. They can't fully participate in the international economy. Unemployment is generally growing around the world and the conventional system has no answers for this.

KH:   You don't think that the conventional system which encourages world trade and free trade offers the best chance of this rather than retreating to what some ..

RD:   Not at all. It is in fact grinding people down. New Zealanders along with people in other countries are being asked to make themselves more internationally competitive which means cutting wages, cutting social welfare, sacrificing the environment in order to compete. Meanwhile every other country is being asked to make the same sacrifices. The world is being ground down by worshipping this altar of competitiveness. Competitiveness is thought to be the greatest goal, its thought to be efficient. But you can only say what is efficient in relation to your needs. It may be efficient in terms of yield on your capital but we're about more than that. We're trying to create a society not just an economy.

KH:   So when the argument is put that for example, we need free trade because we can't survive without overseas investment - a third of our jobs come from the overseas investment so we've got to buy into the overseas standards, you're saying we don't have to buy into that.

RD:   I'm saying exactly that. In India there is a system of indentured labour that people take out debts and then spend their lives working them off at very low standards. Their children may have to take over that debt and work it off too. New Zealand by selling out internationally, by pretending that it needs this international capital has in fact taken on a huge burden which has done it no good. There's been no good when the capital has been coming in. What it's done has made the New Zealand dollar higher than it would otherwise be which means the New Zealand exporters say the farmers have been getting less for their produce than would otherwise be the case and those New Zealand manufacturers that are competing with international imports have been experiencing more competition and so its been bad having the money come in the first place. In the future this country is going to have to earn large amounts of foreign exchange purely to pay the interest on the debt that it’s acquired. It’s acquired something that will burden the country for years and years to come.

KH:   Are you an advocate of the conspiracy theory behind this?

RD:   No. There’s an approach which regards it as a framing thing that if the system is set up in a particular way then this is the answer that comes out. I’ve no doubt that the politicians believed what they were doing, that they haven’t been unduly influenced by pressures from outside. They have thought that what they were doing was in the interests of the country because most economist say so. What I’m saying is that New Zealand as a country should be doing very much more for itself. If the politicians now no longer have the powers to take back control which they don’t have I think because if they attempted to do so there would be a mass movement of funds out of this country and there would be a crisis.

KH:   So we’re stuck then?

RD:   We’re stuck. There is a technique that I mentioned to the Alliance caucus the other day that could get around this

KH:   And that is?

RD:   Ah I’m not going to tell you. That could reveal the hand, but it is a system that New Zealand had at one stage. The whole sterling area was run on that basis. But I don’t think that will happen. The Alliance parties are a long way from power. So what can be done in the interim? I’ve been getting a very receptive response. I’ve been quite overwhelmed at the number of people who have been coming to the meetings. I’m not in fact telling them anything they didn’t know. But I’m confirming them and suggesting a line that they take. And that is that each community, each town should be looking at ways in which it can do more for itself and this involves things like having a local banking system, strengthening the credit union system which you have here already so that local savings can be channelled without going into the international banking system first and having them take a rake-off into our neighbours hands. We need something like a super green dollar system and its interesting that within the EU, the European Commission realises these things are going to be necessary because there will be the common currency there shortly and that means that areas of Europe might find themselves without adequate levels of cash for people to be able to interact among themselves.

KH:   So you’re talking about physically setting up local banks.

RD:   Yes definitely.

KH:   How many in a country like New Zealand?

RD:   Well I think each town should have at least one.

KH:   And able to offer what kind of interest rates do you anticipate?

RD:   Well the important thing is that the interest rate can vary from those that are offered in the outside world. The outside world is behaving totally unsustainably. That means that very high interest rates can be offered. I don’t think necessarily that projects in our communities can offer such a high rate of return but there are other ways we can benefit from having projects go ahead in our communities that can’t be measured in terms of cash.

KH:   But what you’re asking for is a kind of a wave of economic martyrs to start this thing off.

RD:   No not at all. We can get benefits that can’t be measured in cash terms if we are investing locally. For example if a company is set up in a town then that will provide jobs so we might get the jobs ourselves, our sons might get the jobs, our neighbour’s children might get the jobs and this might cut the crime rate.

KH:   I suppose my point is that you may have some people in that community who prefer to keep their money in the high return banks which you say are non-sustainable and, you will have other people in that community investing their money at much lower rates for the sake of the community and there will be people benefiting from something they haven’t contributed to.

RD:   I think that’s inevitable. I don’t think there’s anything you can do about that. The whole basis of ethical investment involves people taking responsibility for what is done with their money. But the people who are investing outside are taking an increasing risk. There’s been a lot of discussion within the last week here in New Zealand about the 1987 crash and the likelihood of something like it recurring. The world system is getting increasingly risky. The Hongkong stock market fell drastically yesterday. There is the risk of a credit implosion in the world and the people who are investing outside their communities may see their funds largely lost. We may see our pension savings going. There could be a world-wide collapse in the price of things like city-centre office blocks, shopping centres and hotels, the prime properties in which a high proportion of our savings are invested.

KH:   You’re involved in a Scottish currency aren’t you?

RD:   That’s right. I’ve been an advisor to an organisation in Scotland called rural forum which is an umbrella body for County Councils and urban Councils also voluntary organisations particularly those providing social services in rural Scotland and even big companies like Shell are members of this organisation as well as private individuals and this currency system which is being launched at the end of this month will enable rural Scotland to trade a lot amongst itself. In particular it will enable companies there to get access to capital at very much less than would be the case if they relied on the international banking system to provide it.

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( viewings since 28 Dec.'97: )