Question:
The G20 economic summit in St. Petersburg concluded on Friday, September 6, 2013, with the adoption of a final communiqué. As reported by Reuters on September 6, 2013, the statement declared "that the global economy is improving..." The agency also quoted Andrei Bokarev, Director of the Finance Department at the Russian Ministry of Finance, who participated in drafting the final communiqué: "The most difficult and longest discussions were regarding the assessment of the state of the global economy." Additionally, data has recently emerged indicating this improvement; the European Union published that its economy has begun to grow, albeit by a small percentage, the United States stated its economy grew by 1% in 2013, and China published that its economy grew by more than 7% this year up to July 2013.
Has the global economy truly improved, and has the economic crisis—which began in America more than six years ago in 2007—subsided? If the economy has not improved, why were these data and figures announced? Please clarify this, and may Allah reward you with good.
Answer:
We will review the economic reality of the most influential countries in the global economy: the United States, the European Union, and China. The economies of these three entities represent more than 50% of the global economy. Because the economic crisis is closely linked to the capitalist system adopted by America and the EU, their impact on the crisis is proactive. As for China, as we will explain later, its role in creating or overcoming the crisis is reactive rather than proactive. For information, the US economy alone is close to the combined economies of China, Japan, and Germany, which are the three largest economic powers following the US. The size of the US economy in 2012 reached $15.7 trillion, representing 22% of the global economy, while the Chinese economy reached $8.2 trillion. The Japanese and German economies reached $5.9 trillion and $3.4 trillion respectively, according to data from the World Bank and the OECD. Due to the massive scale of the US economy, the American economic crisis—resulting from the collapse of the mortgage market—spread throughout the world. Accordingly, we will focus the research on the economies of these three most influential entities. The most prominent factors indicating the reality of improvement or lack thereof are: the unemployment rate, municipal/service debt, social expenditures, and government debt. These three indicators show the movement of the labor market, the circulation of currency, and the movement of government and private projects. Therefore, we will focus our research on them to discern the truth about the global economic improvement:
First: The United States of America:
Unemployment Rate: Since late 2008, the Central Bank has lowered interest rates on loans to near zero. It has tripled its balance sheet to approximately $3 trillion since then through the bond-buying program, maintaining it at a monthly rate of $85 billion in its last meeting. All this was done to lower long-term borrowing costs and facilitate loans for entrepreneurs to stimulate the labor market. Despite this, the unemployment rate remained high last month at 7.9%, which is not much different from five years ago when it was 8.9%. Although the US passed the stimulus law—pumping money into companies by buying their shares—and began implementing it in 2009, the economy has not recovered, and the unemployment rate has not significantly decreased. This indicates that the crisis is deep and ongoing, and that the economy has not improved.
Debt of Service Sectors (Municipalities): The Sky News Arabia page reported on August 11, 2013, that "the debt burdens in US cities and municipalities and their inability to repay led to the bankruptcy of 41 cities within two years." This means many American cities have failed to overcome the repercussions of the global financial crisis to this day. The specter of bankruptcy returned to haunt American cities after Detroit officially filed for bankruptcy last July due to its inability to pay its debts of approximately $18 billion. Bankruptcy represents the last resort for municipalities and cities for protection from creditors—in other words, escaping reality and resorting to the easiest solution. According to data from the American Bankruptcy Institute, the period between 2007 and 2011 saw more than 40 cases of municipal bankruptcies, an average of 8 cases per year. This report shows that city bankruptcies in the last two years (2011–2013) are more frequent than they were at the height of the crisis or immediately before and after it. This raises doubts about the claim of an improving US economy.
Government Debt: US Treasury Secretary Jacob Lew warned in his August 26, 2013, letter to Congress that "extraordinary measures put in place in May to avoid a government default will expire in mid-October, and he urged Congress to extend the government's borrowing authority" (Al-Quds page, August 27, 2013). Secretary Lew indicated that the US government would lose the resources required to meet its obligations by October 15 if the total national debt ceiling—currently capped at $16.7 trillion—is not raised. He warned: "Market functioning could be disrupted and the economy could collapse if the national debt ceiling remains at its current level." He added: "The task of Congress is to protect the confidence in the United States because no other body has the authority to raise the national debt ceiling" (Russia Today page, August 28, 2013). This means US debt has reached the maximum allowed limit of $16.7 trillion, yet it is demanding a ceiling increase to meet its obligations!
This is the picture of the US situation: debt is very high, and the state resorts to increasing the debt ceiling to pay its expenses, address the deficit, and prevent economic collapse. This picture does not indicate that the US economy has improved or emerged from the crisis.
Second: The European Union:
- Unemployment Rate: IMF Managing Director Christine Lagarde stated that "the unemployment rate is 27% in Spain and the same in Greece" (Euronews page, April 26, 2013). It was reported on May 3, 2013, that "unemployment rates in the 17-nation Eurozone are expected to reach an average of 12.2% in 2013, up from 11.4% in 2012." The report quoted European Commissioner Olli Rehn saying: "In light of the ongoing recession, we must do everything we can to overcome the unemployment catastrophe."
Raymond Torres, Director of the International Labour Organization (ILO), said: "In the absence of clear policies, there are risks of a recession crisis in the European labor market, with more people facing long-term unemployment that could lead to their exit from the labor market. It is also important to follow a growth-stimulating policy, especially in the Eurozone; if small companies are not granted low-interest loans, a recovery in the labor market is not expected" (Euronews, June 3, 2013). Euronews added that "the organization indicated that in the past five years, long-term unemployment has recorded a two-thirds increase, and clarified that 30 million new jobs are needed to return the employment rate to 56%, the rate before the crisis."
Social Expenditures: The Euronews page published on August 30, 2013, that "the economies of the weakest Scandinavian countries are no longer able to afford the benefits citizens demand, according to Danish Finance Minister Bjarne Corydon. The OECD said that France is the highest social spender at 33%, followed by Denmark and Belgium at 30.8%, then Finland at 30.6%, and Sweden at 28.6%." These are all low percentages that do not fully meet the needs of the people of those countries... except for Germany, where social spending is somewhat acceptable. This is for the strongest spending countries, so what about the others?!
Indebtedness: The Euronews page reported on July 22, 2013, that "statistical data revealed that the Eurozone debt burden reached its highest levels at the end of the first quarter of this year despite the austerity measures adopted to correct government budgets. Greece, Italy, and Portugal topped the list of the worst, while Estonia and Luxembourg recorded the lowest debt rates." It added: "Many countries of the single European currency are mired in recession, and shrinking economies would make the debt-to-GDP ratio less favorable. Austerity measures have contributed to slowing the economy, which depends on government spending, while tax increases can lead to stifling consumption and investment."
It is worth noting that many EU countries borrowed money when they joined the union, to the point that borrowing exceeded the size of their economies. When the crisis reached Europe, many EU countries were in no position to pay their pre-crisis debts. For information, the most influential country in the European economy is Germany. It has managed to impose austerity policies by reducing government spending and debt in other countries, and worked to impose this on the Eurozone, unlike America, which followed a policy of pumping money and increasing debt.
Thus, these statements and reports indicate that the economy in Europe is still suffering from the repercussions of the crisis, has not been able to emerge from it, and remains in a state of recession; therefore, it has not significantly improved.
Third: China:
The situation of the Chinese economy is different. Chinese economic analysts mention that "the increase in its growth depends largely on the export and investment sectors and does not depend on domestic consumption. Thus, the general public does not deeply feel the extent of the rise in their living standards." Its internal market remains very weak. It is not a benchmark and does not affect the economies of other countries in its own right. It depends primarily on exporting to American markets alongside mutual investments with America—whether by China buying shares in American companies worth hundreds of billions or buying US Treasury bonds exceeding $1 trillion, as well as American companies investing inside China, and making its cash reserves in dollars, exceeding $33 trillion. China is not a leader of the capitalist world; rather, it is a follower by adopting the capitalist approach and its economic link to America. It follows American economic policies and quickly implements economic decisions led by international capitalist institutions under American influence. It cannot declare itself a capitalist state and lead the capitalist economy because it officially and traditionally declares itself a socialist-communist state, maintaining this official image for fear of losing its independent entity and for fear that those in charge of the state—who adopt communist thought—might lose their privileges. The communists and their party work shyly to apply capitalist systems and maintain the link to the economy of America, the leader of capitalism. Therefore, it is not expected in the near future that China will abandon this policy and take over the leadership of the capitalist world to become the influencer of the global economy. Hence, when we address the capitalist financial crisis that affected the world, we focus on America primarily and then on Europe secondarily; the world currently dominated by the capitalist system is economically affected by these two: first America and second Europe.
Fourth: The Economies of Other Countries:
The economies of other countries have little impact on controlling the international economy:
Japan: Its debt has reached 245% of GDP according to IMF figures, which has again demanded it establish a credible medium-term budget plan to reduce this massive debt. Its impact is not lessened by the fact that more than 90% of it is owed to Japanese creditors. On August 8, 2013, the Japanese government announced its intention to cut about $85 billion from public spending over two years—the opposite of what Japanese stimulus policy requires.
Russia: It applies capitalist systems internally and works to imitate the West in their application and in establishing economic organizations with other countries without the capacity for innovation. Therefore, it established economic organizations with its subordinate countries, such as the Customs Union established with Belarus and Kazakhstan in 2010, imitating the European Customs Union. In any case, the Russian economy is a follower of the capitalist system led by the West, moving within it, implementing its decisions, and imitating capitalist countries in creating economic organizations. Therefore, Russia from this perspective does not drive the global economy; rather, it is affected by Western capitalist economics more than it effectively influences it.
BRICS and Emerging Countries: As for the rest of the BRICS group (Brazil, India, South Africa) and other emerging countries (Mexico, Turkey, etc.), they have no significant impact on the global economy. Rather, they are directly subordinate to the Western economy and linked to American and European financial markets. Some of them rely mainly on debt to increase growth, such as Turkey, which is not a real economy; thus, consumption increases based on people's borrowing, as well as state, private, and corporate institutions. In others, corruption is widespread, such as India, with most money being smuggled abroad. The economies of these countries are not stable and do not depend on real economic resources. Brazil and South Africa have economic influence in their regions—South America and Africa—but not in the global economic movement.
These economies, in general, are not focused on much regarding the emergence or resolution of crises.
Fifth: Regarding the figures and data announced, they are presented as the economic institutions in the issuing country desire:
The growth in 2013 mentioned officially by the United States was actually due to the US government changing the way it measures the economy. It changed the method of measuring growth by including intellectual property in the economy, such as music production and pharmaceutical patents. This change caused an addition of $370 billion to the economy, representing an artificial increase of 2.5%. Despite this, the US economy is still struggling to grow at a time when its citizens have reduced their spending. Therefore, reports stating that the recession has ended are due to the way statistics are published; they are artificial and not real.
The data issued by European officials was also not about sustainable growth. The announced data was merely a preliminary estimate and did not include all of Europe. Countries suffering economically, such as Ireland and Greece, were not included. The data issued were just estimates collected by the European data agency—Eurostat—which relies on data provided by national statistical offices, which collect data differently and rely heavily on surveys in their preliminary growth estimates. These estimates are usually revised many times. The German Federal Statistical Office indicates that revisions can be made even four years after preliminary estimates because additional data is taken into account. Therefore, given the statistical flaws, it cannot truly be said that conditions in Europe have improved.
Regarding China, there have always been many questions and doubts about the data it issues regarding its economy. China is a large country, the largest in terms of land and population. Collecting information on its economic performance is a very large process. What raises doubts among observers is that China issues annual GDP figures in the third week of January for the previous year. It is extremely difficult for the Chinese government to finalize the results for an entire year in just three weeks! This has led to the view that China's data is, in reality, what it wants the world to know about its economy.
Sixth: Conclusion:
The global financial crisis has not ended yet. Its repercussions still exist and are still being treated by pumping money, as America does, or by austerity, as Germany does in Europe. America pumps $85 billion into the market—giving this money to companies to keep them alive—while Europe follows an austerity policy. This is evidence that the crisis still exists and that the economy is not moving naturally without state intervention and assistance; it is as if it is on "life support." Note that state intervention contradicts the capitalist system itself. This system dictates freeing the market from the grip of authority; it does not allow the state to intervene in the market to save companies and other financial institutions or to limit market movement. It mandates complete freedom, and that the market must correct itself. Intervention, according to the capitalist principle, hinders progress because survival is for the fittest. Companies unable to function should fail so others can take their place, so only competitive companies remain in the market. Thus, the economy progresses and works freely according to the capitalist theory, which is contradicted by reality and refuted by the practices of capitalist states.
The causes of the crisis and the source of the problems have not been treated; they are inherent in the capitalist system. At any moment, a setback might occur, like a patient suffering from chronic diseases for whom reports are given indicating health improvement by such and such a percentage, only for other reports to quickly say the opposite. He is given sedatives and injections to keep him alive, but he suffers from endless aches and pains.
Thus, the global economy has not improved, the crisis remains, and the problems persist. They will remain as long as the capitalist system exists. It results in poverty and deprivation for billions of people and the loss of vast amounts of money without it reaching the people for their benefit through proper distribution. Thus, misery and unhappiness spread among many people, while a few capitalists monopolize most of the wealth. For this reason, the crisis remains like a volcano; it erupts sometimes and calms down at others, but the volcano is boiling from within. From here, we can say that there is no true remedy except in Islam, which sees that the economic problem lies in the correct distribution of wealth, enabling every single individual to benefit from it and obtain their share, and preventing the accumulation of money in specific pockets. It does not look at society with a general view—that there are funds and wealth worth such an amount, so the individual's share is such—when in reality, it is not the individual's share but the share of a very small group!
We ask Allah (swt) for the return of the rule of Islam, the Rightly Guided Khilafah, so that prosperity, happiness, and a sound economic life may return, not only to the Islamic Ummah but so that goodness may also encompass all corners of the world. Indeed, Allah is Almighty, All-Wise.