By Ermias Haile
From the 21st Dec. 2008 edition of the Ethiopian Reporter.
The world economy has undergone substantial upheaval since September 2008. The crisis which began as a reversal of the real estate market in the United States has taken global proportions today and spread far and wide now. According to the UN Secretary General, “the current financial crisis is rapidly being transformed into economic crisis and could lead to a social crisis in many countries”.
The social implication of the crisis has been best explained by Journalist Tina Brown, a sharp tracker of social trends, who held that the financial crisis could produce many single-parent homes. Read the following: “I think the financial crisis is going to put a lot of marriages under great stress. There really isn’t enough to go around, and there are choices to be made, and particularly husbands, many of them who are in jobs where they pride themselves, their whole ego is invested in the job. When men lose their job they frequently feel a great loss of manly self-confidence, and that has great impact on a marriage. So I think we’ll see quite a lot of divorces and separations and very difficult marriage stuff happening.”
The U.S. now finds itself at the heart of a widespread economic debacle with its stock market plummeting, half-frozen banking system, record number of home foreclosure, sinking consumer confidence, and rising unemployment rate. All this after the U.S. congress approved a whopping $700 billion bailout in an attempt to reverse the crisis. The effect of this unprecedented remedy on the ailing economy is yet to be seen, if any. Although there is no unanimous agreement among economists as to what exactly constitutes a recession, many would definitely agree that the U.S. is currently in a state of economic recession – a recession predicted by many analysts to stay there for a long time.
There is no doubt that capitalism has always engendered crises, the Great Depression of 1929-33 being the worst in the annals of modern history. Although, there are some who argue that the current crisis is solely confined to the financial sector and suggest a more focused supervision of this sector, the recent financial meltdown has, more or less, afflicted all areas of the US economy and, in my view, dealt a mortal blow to and tarnished the capitalism Adam Smith and others once hailed.
Following the financial crisis in the US and other parts of the world, economic liberty is now under attack and capitalism, the system which embodies it, is at bay. A Chinese leader very recently said, “the teachers have some problems;” while Nicolas Sarkozy of France claims, “self-regulation is finished.” It is to be remembered that Sarkozy and Angela Merkel of Germany had proposed in the G-8 summit for more regulation of the financial sector but to no avail as their proposal was rejected by the other members.
In his recent Newsweek article entitled The Fall of America, Inc. Francis Fukuyama (a staunch advocate of liberal democracy best known for his book The End of History and the Last Man – 1992) acknowledged that “a certain vision of capitalism has collapsed”. He wondered why the two signature features of the American brand (capitalism and liberal democracy) have been discredited badly the world over. He had also this to say regarding the severity of the crisis and the growing consensus for a degree of control over the economy:
“…the American economy has gone off the rails and threatens to drag the rest of the world with it. Worse, the culprit is the American Model itself: under the mantra of less government, Washington failed to adequately regulate the financial sector and allowed it to do tremendous harm to the rest of the society…A huge amount of populist anger is brewing as the Wall Street meltdown spreads to Main Street. Already there is a growing consensus on the need to reregulate many parts of the economy…Since the world as a whole is likely to suffer an economic downturn, it is not clear that the Chinese or Russian models will fare appreciably better than the American version.”
Nothing but more deregulation and speculative financial sector is to be blamed for the failures of modern finance in general and the current US crisis in particular. This financial meltdown has forced many governments to re-assess their economic policies while some of them have already embarked on a ‘project’ toward a larger role for the state and more constrained private sector. While Britain, for example, nationalized much of its banking industry other governments are re-regulating their financial systems. Barack Obama’s plan to put financial regulation at the center of his economic recovery package is also a case in point.
The 1997-98 Asian financial crisis witnessed in countries like Thailand and South Korea can largely be attributed to the liberalization of their capital markets following American advice and pressure. In contrast, countries like China and Malaysia that didn’t follow American advice and kept their financial markets closed or strictly regulated found themselves much less vulnerable. Fukuyama predicts that American ideas, advice and even aid will be less welcome than they are now.
In the face of this entire crisis, there are those who still are naïve in reiterating the “self-correcting market” rhetoric. This reminds me of John Maynard Keynes’ response to the liberal economists who, following the American Great Depression of 1929-1933, held that the government must keep its hands off the economy reasoning that “it will correct itself in the long run”. How long is the long-run? Keynes, who sought to formulate the means by which governments could stabilize and fine-tune free markets, believed the long-run was misleading and is quoted as saying “in the long run we are all dead.” The fundamentalist ideology that “the market is always right” has been disproved time and again by a number renowned economists the world over.
As the whole situation has to do with recession, the global credit crunch may have negative ramifications on the Ethiopian economy, especially in terms of reduced Overseas Development Aid (ODA), financial remittances, and investment flows but its effects have not yet been felt severely. In his recent deliberation to parliament, Prime Minister Meles Zenawi underscored that he doesn’t expect drastic effects on the economy as “the country’s financial structure is not as liberalized as those of the affected countries and that the economy is not intertwined to Western economies.”
As we all know, the Ethiopian government has remained reluctant to allow foreign banks to operate in the country. The advantage: we have been shielded from the turmoil in global markets to some extent. In the first place, our banks would not compete effectively with those technologically sophisticated foreign banks; and second, the country-to-country free movement of these banks (in search of a higher interest rate) would certainly produce financial crisis in this country.
In spite of the pressure on the government to liberalize the financial sector and allow the entry of foreign banks, I believe the country would benefit from doing so only when it is done at the right time, such as when domestic banks and the regulatory capacity of the national bank are first strengthened. But as the whole economy cannot function smoothly without the financial sector, it requires close supervision of the government to avoid possible crisis. Please allow me to quote Francis Fukuyama once again on the issue of constraining the financial sector:
“Financial institutions are based on trust, which can only flourish if governments ensure they are transparent and constrained in the risks they can take with other people’s money. The sector is also different because the collapse of a financial institution harms not just its shareholders and employees, but a host of innocent bystanders as well (what economists soberly call negative externalities’).”
Fed up with the recurrent crises capitalism produced, people now wonder if there is a viable alternative to the capitalism we see in the world today. Owing to its inherent flaws, capitalism is probably at an inflection point and increasingly losing its appeal; and the future seems to usher the emergence of more closely watched, if not tightly regulated, economies.
Ed.’s Note: Ermias Haile is a lecturer at the College of Business and Economics of Mekelle University. He can be reached at email@example.com