Global financial crisis and international division of labour

While the most optimistic economists and media commentators are rushing to declare that the worst of the world economic crisis is over, those declarations not only may be premature but also overshadow the fundamental reasons and possible lasting consequences of the current global downturn. In contrast to the prevailing line of arguments of the current orthodoxy on the reasons for the crises, this paper provides an explanation for the current crisis in simple real, rather than financial market, terms. First, we show theoretically the relationship between financial bubbles with both consumption and deindustrialization. Then, by estimating models, based on cross-country panel data, we derive a worldwide trend linking industrialisation to an improving balance of payments and foreign debt position, while, deindustrialisation is found to be correlated with balance of payments deficit and foreign debt. This might be an indication that post-industrial economic development, as it has been evolving so far, is “no-through road”, for Western nations, reducing opportunities for employment and ultimately leading to decreases in standard of living.