Fekadu Bekele, PhD — On the 2nd April, major leaders from the industrialized west and other newly industrialized countries from Asia, now called the G-20 met in London to discuss about the current financial and economic crisis which has now encompassed the entire globe, and cope with the crisis before it is too late. The conference which is seen as a mile stone not only in tackling the crisis but also to take drastic measures to control the financial market so that global players do not twist the market as they wish is a measure step forward. As the meeting was nearing, there are controversies whether the Americans and the English are this time willing to take drastic measures against hedge funds and other speculators, or continue with their old policies of leaving everything to global players in the belief that the market could adjust itself at the end, and everything comes to an equilibrium position. If the situation remains business as usual this time, both Mrs. Merkel of Germany and President Nicolas Sarkozy of France are not ready to go ahead with the Anglo-American plan, and especially Mr. Sarkozy protested from the outset that he will leave the conference if there is no substantial result which is not considering strong financial control mechanisms. The two leaders which represent two strong EU member countries, feel this time that they have full confidence that history is no more on the side of the Anglo-Americans, and especially the new American administration which is lead by President Barack Obama will not frustrate the European vision of bringing a workable solution to cope with the present financial and economic crisis. It is not secret that President Barack Obama is attracted by the welfare state model of the European type which is until now proved to be a workable model which could keep social harmony within the western capitalist model. It is believed that the laissez fair model of the Anglo-American type, which is especially accentuated in the 1980s, and propagated world wide as the only viable solution which could bring economic growth to all countries which apply it, become disastrous. The Popes of the free market ideology are now on the defensive; and they are crying that the state must intervene to curve the economic down turn before it is resulted into major depression.
This type of meeting was first organized in 1975 when that time the industrialized west was hit by economic crisis, which was manifested in high unemployment rate, inflation and high oil prices. Almost after three decades of more or less continues economic growth, with mini recessions in the 1960s, there comes visible economic down turns, beginning the 1970s. The unilateral action of the Nixon administration not to be abiding any more by the Bretton Woods agreements and the introduction of a flexible exchanger rate system in 1973 had deepened the economic crisis, which were needed concerted actions to slow down the recession. Hence, President Valery Giscard d’Estaing of France initiated an informal meeting of the G-6 countries, which has slowly grown to G-7 and G-8. The inclusion of Russia and now other 12 countries shows that the world economy cannot be dominated by few groups. The rise of China as a major economic and political power with high growth rate over the last 30 years, and strong currency reserves of 2 trillion dollars, and favourable trade balances, proves that there is a growing shift of political and economic power in favour of Asia which cannot be undermined any more. In order to assert her power, China has this time spoken out what other nations have never challenged before. The dollar must be replaced by other forms of reserves which cannot reflect any more the economy of a single nation. The Chinese as the main lender to America are not pleased with the way how the American government is pouring money into the economy. The Chinese fear is justifiable for two reasons. The permanent printing of dollars will devalue their reserves, and the debts they have borrowed to America. Secondly, the Chinese believe that America cannot easily come out of this deep financial and economic crisis and restore her trade balances deficits, and build again a strong economy from within. That means the dollar has only a military and political backbone and is not any more supported by any physical economic activities which strengths the entire economy. Brazil and India too have shown over the last 5 years in other major economic meetings like the WTO meeting, that they are major forces to be reckoned, and can hinder any suggestions which cannot favour their interests and the interests of other developing nations which are the member of the WTO. Especially, Third World Countries should be delighted that the world economy cannot be dictated any more by few countries as the last 5 decades which has completely marginalized them and blocked their economies from within.
The G-20 meeting of this time which took place in London, hosted by prime minister Gordon Brown, is confronted with economic and financial crisis which was never seen like this after the major depression of the 1929. As such, finding real solution to the crisis and control the entire global financial and economic order could no be easy. It seems that many governments are confused by the ideological blasts of experts who still believe in pure market philosophy, and who are beating around to block any fundamental solution. The economic and political elite seems that it is still in a position to regain its power of manipulating governments, and as such the G-20 meeting will be simply a photo-shoot gathering without substantial effects on the economic setup which is messing the entire globe. As is seen from the conference, the leaders are still swearing that free trade is the only solution to tackle the problem; and any action which blocks free trade will be confronted with punitive action. Especially Prime Minister Gordon Brown has warned nations not to take protectionist measures which hinder the free movements of capital and goods. That means the real problem of the present crisis is not jet recognized, or even if there is any, the belief that one can go ahead business as usual by giving lip services rotates in the heads of many leaders. It is not well recognized that free market needs to be regulated not only at home but also on global scale. Each nation wants to be sovereign in all aspects, and wants to see a harmonious society. Free trade cannot guarantee this.
The real problem is not detected- many theories that confuse
It is now widely believed that the financial bubble and with that the subprime crisis in America is the major immediate cause for the present financial crisis which has encompassed the entire globe. The different financial instruments which are developed in America, and the debt mechanism which is the main engine of the American economic growth, especially during the Clinton era, and which is continued during the Bush administration, brought imbalances between the real economic sector and the financial market. As more and more Americans are not any more relying on their own incomes to buy houses and other durable goods, they are compelled to take credit, and consume more and more to keep high standard of living. The financial alchemists began to realize that such kinds of credit mechanism will bring high provisions and ensure them high standard of living. The development of sophisticated financial instruments and the high gain out of such kinds of artificial mathematical models, which have nothing in common with the real sector blinded those players that they can indefinitely enrich themselves by fooling innocent people who do not have reliable income. Hence, with no or few income, millions become house owners, with credits, mounting debts and compound interest. This kinds of subprime credit which are given to innocent people, again packed and divided in many parts., and thrown on the world financial markets in order to spread the risks of the few banks. Many state owned and private European banks believed that this kind of game brings higher returns, and shifted their major activities to the global market which is created in America. The American investment banks which could not generate enough money from the borrowers as usual to forward enough returns as is promised to investors from Europe, created a situation so that the entire financial system could collapse easily as a house which is built out of cartons. The break up of Lehman brothers one of the major American investment banks has shaken the entire global financial system, and many new economies of the 90s began to lose their entire assets which they have developed in few decades. Ireland and Iceland are the few which become bankrupt from such kinds of financial melt down, which has its beginning in America. In major European banking systems, the inter banking lending mechanism become halted, and this in turn blocks the flow of credits to consumers and investors.
Many critical economists see in such kinds of financial bubble and uncontrolled credit mechanism one of the main causes of the entire present financial crisis which has slowly, but surely encompassed the real sector. Some go a little bit further and attach the problem with the breaking up of the Bretton Woods system, which paved the way for the emergence of a new financial market system, and enabled many to participate in currency and stock speculation. The delinking of the dollar from gold, and the introduction of a flexible exchange rate system has shifted the economic setup of the four decades from the real sector to the financial sector. It is believed that participating in currency speculation and in secondary market activities brings higher returns than investing in long term economic activities, whose returns can be realized after a long time. This kind of money making mentality and the loosening of financial and banking control mechanisms have developed a new financial class which it believes that it could outsmart governments across the globe. The globalization of the 90s has strengthened this process of money making; and the shifting of wealth from the real sector to the financial market in order to gain higher returns become a normal process which is widely believed that without producing real wealth one could enrich easily himself if he shifts his money here and there. In this kind of money making process and development of new and ever sophisticated instruments, the petro dollar and non-investible dollar reserves from China, Russia and India have swollen the financial market and opened the door for those speculators to continue with their gambling.
Though this is the immediate cause for the present financial and economic crisis, other critical economists see the present crisis within the construction of the capitalist system itself. In their beliefs that the capitalist economy is characterized by ups and downs; and as the system is based on commodity production, the billions of products must be sold permanently in order to close the cycle. As there are many actors which participate on the market, all could not be competitive, and others are compelled to introduce new technologies in the belief that they could reduce costs. The reduction of costs and production of goods with the aid of few workers and ever intensive technologies could solve the problem for a while, but in the long run the market will be saturated. Millions of goods are produced above what the market needs. That effective demand which is available on the market could no absorb the products which will be supplied to the market. There is an over production, which is a huge burden to the producer. The solution for this is to sell the products on foreign market.
The emerging of new actors in the 1970s which could build their economies by borrowing money from the capital market, and have problems for decades to pay back their debts, have learned in the mean time to reorganize their economies and become competitive in certain areas. Other emerging economies like that of China become importers and exporters at the same time which have helped to a certain extent to revitalize the world Economy. On the other side the export from China begins threatening many countries, and as a result of open door policies of the West it is no more possible to compete with the low quality of Chinese products. Especially, those textile and shoo producing companies are hit by Chinese products. Such kinds of imbalance and on a global scale, and the eroding of the industrial bases of certain countries, like that of the United States which still propagates the free trade doctrine has undoubtedly brought new economic frictions. As few countries still dictates the world economy and control the production potential of the world economy, they could not sell their products as they have planned. That means, though it seems that many countries are integrated into the global economy, still billions of people in many countries are peripheral to the system. They cannot buy and consume what other countries produce due to their very low buying powers. The uneven development of capitalism on a world wide scale, the growing pauperization of billions of people, and the blind exploitation of their resources, inevitably narrows the home market in those undeveloped economies. One observes that in the last 30 years, millions of people in Africa and Asia could only consume second hand products of all types. The Markets of many African countries are filled with second hand cars, refrigerators and other house hold materials and clothes. Very few people, who could profit from the free market of the IMF and the World Bank type, could afford to buy new cars and other luxury goods. This new class become simply consumer of new products which are produced some where rather than engaging himself in investment activities, which could create jobs, real income through that develop and expand the home market. I am not saying that this will entirely solve the inherent contradiction of the system, however, still broadens its markets across the globe. As we see today, the Chinese export market is collapsing, and they are not importing machines and cars like in the 90s. The Chinese are shifting their activities to develop their neglected home market. It is believed that 2/3 of the population is still poor and not fully integrated into the market activities. Cities, market centres and production activities are concentrated in few selected major cities and areas.
From this analyses one come to the conclusion that decreasing interest rate in order to widen the money supply, or any stimulus plan could not help the economy to regain its old strength. It could only postpone the crisis. On the other hand, the gap between those who are rich and poor is widening, as the richer class absorbs the wealth of the society, millions of people in the industrial west lose their buying power. With this, the growing power of the banking sector and other financial intermediaries is absorbing wealth and canalising somewhere to accumulate more fictive wealth. This and other complicated mechanism of tax payments which ruins especially the hard working middle class and those small producers is eroding the economic power of the system. Thousands of middle and small class people, even though they work 12 and 14 hours a day, they could not afford decent lives. After 40 years of work many are compelled to live with minimum rents which cannot guarantee them the old way of living style.
It is not as such as many believe that it is simply a financial crisis which is widespread to the real sector; it is a systemic crisis which is inherent in the system itself. The G-20 meeting could not discuss all the hundreds issues that erode the entire system. It simply believes that by regulating the financial sector, which is doubtable, because those who have created the problem are assigned to solve the problem, will solve the complex problem that the entire political and economic setup has created. Especially, the mechanisms that are created over the last 30 years which is eroding the system from within cannot be tackled easily. In addition to this, unless the wealth gap which is widening at alarming rate is not curved, and the political power of those economically dominating class is not diminished, the system will have difficulties to get out of the complex contradiction that are produced and overlapped.
Different solutions and many contradictions
It is amazing to observe and hear that those who were opposing government intervention in the economy are now crying that governments should pour money into the economy in order to stimulate production and create income. These economists who are now shouting have never expected that such a deep crisis will occur and encompasses the entire system. Over the last 30 years they have been preaching that a market economy has its own inner mechanism, and moves always to an equilibrium position. What is generated as income finds its ways to buy goods. As such the market works without any major disturbances. If crisis occurs, this happens due to the irrational nature of trade unions who want to have the greater share of the profit, which ultimately reduces the investing capacity of the individual capitalists. In all no-liberal economic books there is no room for a crisis theory, because it is believed that everything functions harmoniously. Due to this belief they have only solutions, which are econometrically sophisticated but never solve the real economic problems.
In the real world the economy works not as is imagined by the neo-liberals. The income which is generated during the production process could not be consumed entirely. Workers as well as capitalists either withhold or save a part of their incomes. At the same time workers and capitalists, could not always rely on what it is directly generated during the production process, either for consumption or investment, but on banking systems to fill the gap what the income from direct employment cannot create. That means in the capitalist economy the banking system plays a major role to serve as an engine for the production and reproduction of the economy. Keynes and the Keynesians who have realised this in case of insufficient demand and lower production activities have suggested that governments should intervene via deficit spending to create jobs by investing on infrastructures, schools and other public sectors. In this way governments not only create new income but through that generate taxes which enable them to pay back the money they have borrowed. In fact all major industrialized countries have followed this path and created also new credit mechanism to develop the broken economy. That means there is no as such a pure market economy which operates on the free play of demand and supply. There have been always government interventions of different types to support the economy. What is missed over the last 30 years is that the shift from this principle and follow dominantly a supply side economy has brought imbalances in the system. Governments and the neo-liberal advisers believed that via tax systems and monetary policies they could strengthen the role of the capitalists. Only when capitalist are strengthened and have sufficient money they will invest and create jobs. This has been proved as a failure if one observes the policy of President Reagan in the 1980s, and the policy of Mrs. Teacher in England, and later on the policy of the Schroeder government at the beginning of 2000. The policy agenda of the Green and the social democrats, which was called Agenda 2010, has expropriated the masses, especially those old people, and has shifted over 45 billions of Euros in few years to the wealthy people. With such kinds of neo-liberal policy the Schroeder government could not create real jobs for those who seek employment.
This policy has been criticized well by those well known economists who were in the same cabinet during the first term of the Schroeder government in 1998. These highly qualified economists propose now that the massive intervention of the state is inevitable and crucial if one wants to avoid mass unemployment which could threaten the entire system if it is left alone for the market. These economists propose farther that a low interest rate is crucial for the system, since capitalists could only borrow and invest when the return is higher than the total cost of production. To curve speculation and hinder capital movements, these economists propose a fixed exchange rate system and strict control of the financial markets, and especially those casinos like financial operations which absorb money from the real sector. Though this is a workable solution, many governments are not willing to go back to the old system of exchange mechanisms. On the other side there is a limit to such kind of proposal, because it does not take into account the inner contradictions of the system, and the problem of wealth accumulation in the hands of the minority, which create great imbalances in the system. When in all major industrialized societies 2-5% of population controls over 80% of the wealth, there is always a social and economic crisis. Above all, most of the people are being indebted to buy cars and other durable goods to keep the system. Unless such kinds of imbalances and the debt burden are reduced, a pure Keynesian policy alone cannot save the system.
The policies of the European and the American government to curve the crisis could not until now bear fruits. The pure pouring of money into the banking systems and other financial intermediaries remain without any positive effects. In Germany alone, the government has poured over 100 billions of Euros to save the major real estate, without bringing any substantial results. Now the government is moving towards nationalization, which is against the market economic principles. In America too, the biggest insurance company, AIG has become over 170 billions of dollars from the government. This has not effected in positive results, and it is assumed that this has become a major failure, and AIG cannot be saved. That is why prominent economists like Professor Stieglitz and Professor Krugman oppose such kinds of money pouring into the failed banking system, which is resulted in nothing. Irrespective of the many suggestions and contradictions, governments are now in great confusion, and are jumping from one policy to the other. In Germany the government supports the car industry by giving a premium of 2500 € for consumers who are ready to crush their cars which are older than 9 years. In France, the government of President Sarkozy is pouring billions of Euros into the car industry to stop the economic down turn. Whether all these suggestions and supports could help regenerate the economy depends on many factors. The growth of the world market plays a decisive role, since the German economy relies heavily on the world market. That means the American and the Chinese economy must grow to a certain level so that demands for German cars and machines will rise. But the realities on the ground show that the economic situation in these and other countries is so bleak that there is no major turn up in the near future.
The Fate of Africa
The G-20 countries have promised to give over 700 billion of dollars to developing countries which are in a dire conditions. Because of the low demand of raw materials and price falls on the international markets, many African countries which are relying on one or few export products are hit heavily and could not finance the existing projects, let alone finance new ones. The world economy has been always operating against Africa, and many governments seem that they could not learn from the past mistakes. During the 1950s and 1960s, when export prices were high many governments believed that the situation will continue like that. When the oil crisis and the economic recession in 1973/74 hit them heavily, they must rely on aid and on IMF interventionist policies which have aggravated their economic systems, and narrowed the home market. Though, beginning the end of the 1990s raw material prices rose up again, many governments still thought that the economic growth in China and India could go indefinitely. As such the money what the African governments have earned could not be allocated in sectors which could expand the economic activities and create strong home market. Due to the weak policies which African governments have pursuing over the last three or more decades, the systems become more fragile, and could not build strong tax base.
During the G-20 summit, the IMF which was once discarded is now accorded with the same mission of helping the African economy. As seen over the last 6 or more months, the IMF intervention in Rumania, Hungary and other east European countries could not improve the situation there. While major Western countries are following active roles and lowering interest rates, the IMF prescribes its old policies for these countries. That means those countries which get the IMF financial aid must reduce state budgets; they must not invest in job creating economic sectors. They do not have to expand their home market by investing in multiple economic activities which have chained and multiplier effects. Most East European countries which have dreamt that the market economy will bring miracles and followed a strict neo-liberal economic policy are now confronted with situations which they cannot master them. Neither the pure integration in the European market economic activities and follow simple open-door economic policies could bring them real wealth. What happened is that as a result of neo-liberal economic policies few become richer and the majority of the people are thrown into abject poverty. The political corruption in many countries has worsened the situation, and many countries are now on the brink of collapse.
As these and other experiences prove that the IMF policies and the reorientation of many African economies to rely heavily on market mechanism by no means solve the deepening social and economic crisis in these countries. As in the past, the political elite benefits from such kinds of economic package, while the majority of the masses will remain poor. The past 6 decades prove that the political elite in Africa has no any concept of nation building, and is not willing to be engaged in wide range economic activities by mobilizing the masses and the resources which are available in abundance. The pure business making mentality which is spread in many African countries, prevent many governments not to see beyond short term gains. The logic of capitalistic production and reproduction system seems, is not well realized in many African countries. Innovation, developing newer technologies and helping small and medium size industries to build a strong home market is not in the interest of the African elite. In light of this indifference the neo-liberal prescription and the open-door policy which major European countries and America want to be followed strictly could not help Africa. Open door policies will destroy the existing industries and ruin the peasants. The result will be mass unemployment and continuous pauperization. Free trade and pure market economic policy could not bring Africa out of the present economic and social crisis. The one trillion aid over the last 60 years did not help Africa. This time too this supposed aid will never help the African masses, and the African governments will enrich themselves rather than developing a coherent economy. If the major industrial countries want that Africa must develop, a new kind of institution which is free from the ideological ballasts’ of neo-liberalism must be set up. What Africa needs is not only the creation of material wealth, but also the continent must spiritually be renewed so that the creative capacities of the people will be improved and decide over their fates. Only major institutional and educational reforms and political as well cultural renaissance set free new energy and bring new dynamism. The African problem is not a monetary problem. It is a cultural and mental problem which could be dealt only through a holistic approach. The main aim of this approach must not be as such to eradicate poverty, but to build a nation-state on the basis of big and small projects which are interconnected with each other. Only by thinking big one can eradicate poverty.