The G-20 Summit
Promises that cannot be translated easily!
06 April, 2009 | 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 milestone 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
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
This kinds of subprime credit which are given to innocent people, again packed
and divided in many parts., and thrown on the world financial market 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 not 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 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 shoes producing companies are hit by Chinese
products. Such kind of imbalances 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 mechanisms of tax payments which
ruin 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 is simply believed 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 instruments that are created over the last 30
years, and are partly responsible for the crisis, will aggravate the problem if they
are applied again. 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 contradictions 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 way 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 neo-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 problem.
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 capitalists are strengthened and
have sufficient money they can 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 market,
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 the 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 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 too, 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 been 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 into
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.
Fekadu Bekele, Ph D
Promises that cannot be translated easily!
06 April, 2009 | 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 milestone 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.
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 little,
income, millions become
house owners with
credits, which they could
not pay back as the debt
progressively grew.
This kinds of subprime credit which are given to innocent people, again packed
and divided in many parts., and thrown on the world financial market 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 not 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 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 shoes producing companies are hit by Chinese
products. Such kind of imbalances 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 mechanisms of tax payments which
ruin 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 is simply believed 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 instruments that are created over the last 30
years, and are partly responsible for the crisis, will aggravate the problem if they
are applied again. 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 contradictions 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 way 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 neo-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 problem.
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 capitalists are strengthened and
have sufficient money they can 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 market,
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 the 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 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 too, 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 been 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 into
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.
Fekadu Bekele, Ph D
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