When the economic downturn hit the west in 2008, there was amazement at the scale of paralysis it had caused and was threatening to cause further. Financial institutions of America that were heretofore considered as impregnable fortresses of capitalism tottered. They were so critical to the functioning of the rest of the economic system, not only to Europe and America, but to the rest of the world as well, that governments started pouring hundreds of billions of dollars in them to salvage them. Yet, the end in view was not clear.
The shock was so immense across all walks of life that the Queen of England, attending a function hosted by the luminaries of the economics profession at the prestigious London School of Economics, could not help asking her hosts whether they had not seen the catastrophe coming.
The answer was that while it was foreseeable that something had been going terribly wrong in the western financial and economic system for quite some time, which did not bode well for the future, it was not clear to economic thinkers as to when a catastrophe and one of this scale would hit the system. This simply means that a lot of the goings-on in diverse countries’ economic systems could not be gauged with any amount of precision as to when “the bubble would burst” despite the admittedly vast expertise of “economic science” in those places.
When it burst actually, the instinctive response initially was for each one of the affected countries to seek shelter for itself, even if that meant in some cases, a beggar-thy-neighbour policy. Coordination of policies towards a more concerted action by all the affected countries came only in a second round. Facts and figures about the factors having contributed to the build-up of the economic catastrophe started trickling down in public at that point only.
Had every one acted in isolation to defend its own interests, the crisis could have amplified and loss of public confidence gone even deeper, thus feeding into the crisis to make it even more difficult to disentangle. Had you, like Alan Greenspan, then chairman of the US Fed, believed that market forces would rectify by themselves the tendency for the market to over blow itself, and thus not need official intervention to stop the bubble on asset markets, you would, like him and other policy-makers, have judged that things work out best left to themselves. Greenspan regretted the faith he had put in market forces to self rectify.
The ensuing concerted action following the deep economic crisis that was ushered in has so far managed to stay the wave of destruction threatening to unfurl over the world economy although we are not out of the woods yet. A lot of those hazy factors have now become easier to comprehend however.
While the world will take time yet to get back to the high cruising speed it was basking in at the time, it must be acknowledged that the situation has become more manageable now after stimulus packages and sizing up excessive government debts of all sorts.
With luck, the G20 and others will reverse the bad tide which swept in and raise a stronger assurance of a less catastrophic future than first it was made out to be. This episode illustrates several facts about the shortcomings of the economics profession. Even though the market economy has come to dominate global exchanges, the economic profession does not have the analytical tools to grasp the inter-country implications of all those highly liberalised exchanges. Moreover, to protect trade volumes and profits, many practices have been resorted to by private institutions that could have deleterious effects on every other country in an interconnected world, quite apart from undermining the very countries in which they are centred.
Economists could have got the general sense of direction taken by macroeconomic flows, as they admitted to the Queen, but they still do not have the tools to address adverse developments that can have catastrophic consequences of this type, taking into account all the facts and figures which matter. The basic flaw underlying the global economic crisis of 2008 was that regulation was absent where it should have been. Yet, the countries in which this major flaw manifested itself were the very same which had kept teaching lessons on governance and regulation to the rest of the world.
But why should we go so far? We have so often heard of the one-size-fits-all policy prescriptions of the World Bank and the International Monetary Fund for decades. This may not be entirely true because those international institutions do make some changes in their universal recipes to suit the circumstances of each country when prescribing economic policies. They are happy overall provided a member country sticks to what are referred to as “market principles”.
Many would not be aware of it but these financial institutions have actually been full of praise for countries like Tunisia, Egypt, Bahrain and others for abiding by those market principles. Those countries are currently facing revolts from their populations despite their uptake of market principles, for the past 30 or more years. Why? Most of the resource revenues derived by them have gone to enrich a few only around the countries’ top leaderships vested with absolute powers. In some of them, skewed distribution of resources has led to rampant unemployment (up to 50%) among the youth and general destitution of wide swathes of the populations.
There are similarly other resource-rich countries in mainland continental Africa prospering due to high prices of commodities and materials on global markets. These countries also abide so-to-say by the same market principles but the concentration of power is in few hands, as in the Middle East hotspots. The countries are equally not able to ensure a better distribution of revenues and economic opportunities so that the danger of poor economic planning is lurking in the background. It seems that it is outside the perimeters of economic analysis to look at such disparities, the very same disparities which broke down the cruising western economies on the back of financial sector exaggeration and loose tax policies like those of the Bush era. That should not be the case and it would be safer if the extreme situation was managed before it became too late.
Economic management failures of this sort associated with liberalism, ultra-liberalism in some cases, deserve to be carefully watched. This is because there is more than one policy option that is available in a given economic situation. The monopoly of wisdom does not lie with either private or public sector economic thinkers. Sensible opinions can come from any quarters and it is in the country’s superior interest to listen to all views before things get out of hand. In countries like Mauritius, most of the economic thinking has been done by the public sector. The first economic plan of 1971-1975 was driven into action against a sceptical private sector, mindful about not getting entangled into a situation of losing its “commanding heights”. Budget policies have since those days drawn more fully on private sector contributions, seen through the official spectrum. But the thrust of it all has been public-sector driven.
There are economists today like Eric Ng who want to emit views that do not go along with the mainstream. We should welcome differences of opinion in a country that is like a barren desert when it comes to emitting practical courses of action when it comes to diversifying our products and markets, for example. Of course, policy differences need to be weighed carefully for their applicability and practicalness.
If we remain content however with laudatory statements of outside organisations – that will drop you down like a sack of stone just like they elevate you when the going is good – we will not progress the thinking part.
It is thinking the right policies that have moved this country so far; it is right thinking that will also make it cross more thresholds of progress. Consequently, it is time we put a premium on anyone who can help advance it to where it matters practically even if some sacred cows had to be abandoned in the process. As experience has proved, it is not worth it to run the economy by proxy, i.e., on the advice of international institutions.
They are never in charge when revolts like those we are seeing in the Middle East break out. Independent minds can make a contribution to get out of the beaten track and the more we have of them the better.
By Anil Gujadhur
The author was First Deputy Governor of the Bank of Mauritius.