Reboot for a new economy

We are in the second phase of an economic crisis which is global in its scale and reach, affecting all our major institutions and established ways of thinking. How did we get here? And what can we do now to prevent worldwide economic meltdown?

Globalist Bankers Are Jumping Ship

Phase 1: The financial crisis of 2008

The current economic meltdown is a continuation of the financial crisis of 2008, when the bankruptcy of Lehman Brothers (then the world’s third-largest investment bank) threatened the whole financial system with collapse.

Banks had spent the previous decade fuelling a credit boom with increasingly risky loans. They believed that they could manage these risks, which encouraged further risk-taking. The result was that bad debts became stacked up on more bad debts inside bank balance sheets, hidden by increasingly complex financial products.

Confidence in the whole system stumbled when those at the bottom of the debt pile – the US subprime mortgage holders – began to default. Lehman Brothers collapsed, and because it was so large, its failure threatened the rest of the financial system. The response of governments was to use their own powers of borrowing to support the banks. The Bank of England estimates that the total cost of bailing out the UK financial system was £1.3 trillion, more than ten times the entire British National Health System budget.

Phase 2: The crisis of state debt

The immediate crisis was paused but not resolved. Private financial institutions were saved from collapse. The cost of preventing their collapse has increased public debt. Increased public indebtedness has nothing to do with excess public spending. It is the direct result of the 2008 financial crisis.

But states, too, can default on their debts. The risk of this increases when economies are weak, since they cannot find the funds needed to repay debt through taxation. And across the old developed world, in North America and Europe, economies are weak.

National debts are held inside the banking system. Sovereign default therefore threatens banks. This is the phase of the crisis we have now entered. A financial crisis was transformed into a crisis of sovereign debt through bailouts and a recession that cut tax receipts and raised the benefits bill. That sovereign debt crisis is now leaking back into the financial system. Financial collapse threatens further bailouts. Public and private debt crises are intertwined.

The crisis of sovereign debt is most acute inside the Eurozone because of the way the single currency works. The euro, since it was created in 1999, has suffered chronic imbalances. Each country, on entry, fixed its exchange relative to other euro members. Over the decade, northern Europe and Germany in particular squeezed real incomes, cutting costs for its exporters. But fixed exchange rates meant other countries could not devalue to compete. Exports from the north became cheap for the south. Large trade surpluses (where a country exports more than it imports) developed in the north, especially in Germany. These were matched by large trade deficits (where imports exceed exports) in the south. And export earnings were recycled, through European banks, as debt which flowed straight back to the south. This enabled them to keep on buying from the north. Surplus and savings on one side were matched by deficits and debts on the other.

This imbalanced system was shattered by the events of 2008. Countries already indebted in the south were suddenly saddled with further debts. Greece could not bear the strain. Its sovereign debt is now unpayable, with interest payments alone forecast to reach 15 per cent of GDP next year. It will have to default.

European banks hold European sovereign debt. French and German banks have about 69 per cent of Greek debt held abroad. A messy default threatens financial calamity, but Greece’s creditors cannot yet agree on how to manage the process. And yet default is inevitable for Greece, and a credible threat elsewhere. This threat is freezing up financial markets. The system is deadlocked.

The result: austerity and stagnation

Governments across the developed world have not been able to break the deadlock. Instead they have opted for austerity, cutting public spending and hoping debts can be repaid quickly. But austerity cripples economic growth. As spending cuts bite, firms sell fewer goods and services. They cut salaries and make redundancies. Economic activity freezes up, as Ireland, Greece and now the UK are discovering. Austerity privileges financial assets at the expense of real economic activity. It is selfdefeating, but governments are driven towards it.

The slow decay of the developed economies is now menacing fast-growing new centres. China, which had sailed through the previous financial crisis, is now threatening recession, with orders declining as its major export markets stagnate. As Japanese experience shows, stagnation, compelled by debt, can last for decades. A genuinely global recession is possible.

Restart the economy

The old system is broken beyond repair. A new economic model is needed. There can be no return to the old economy, fuelled by debt – and by carbon. New ways of thinking about the economy are urgently needed, that challenge the primacy of financial markets and debt-fuelled growth. It’s time to:

• Radically transform the financial system. From democratising the banking system to writing off bad debts and stamping out speculation and tax avoidance.
• Reboot productive economic activity. That means ending austerity, ensuring banks lend to businesses and using public investment to create new, low-carbon infrastructure and affordable housing.
• Refocus and rebalance our economy with a plan for jobs that regenerates localeconomies, reduces inequalities and establishes a 21^st  century industrial strategy.

• Refurbish the tax system to shift the burden off jobs and incomes and onto assets and pollution.

Even if growth returns, we cannot go back to the old ways. A sustainable new economy must be built without the chronic dependence on either debt or carbon.

The corporate capture of governments

The G20 — the most powerful summit of world governments — meets tomorrow to discuss the global economic crisis, and who is sponsoring the meeting? Banks and corporations.

No wonder the site of the meeting — the French city of Cannes — is completely locked down to any ordinary citizens, while banks and large corporate CEOs have all access passes to tell our governments what to do.

Corporations and banks have captured our governments, winning vast bailouts after helping to create the crisis. Now they are buying their way into the very meeting that could decide the world’s financial future.

The line between corporate power and responsible government has steadily blurred, undermining our democracies and our economy. Politicians take money from corporations for their campaigns, make policies that reward them when in office, and then take high-paid jobs with them after they leave. It’s venality, plain and simple.

Now Société Générale, a French bank that received a public bailout and has a vested interest in Europe’s financial policy, is an official sponsor of the summit. This bank and 20 other corporations have paid large sums of money in sponsorship for a seat at the table of our governments.

The only way to get policies that protect jobs, tackle speculators and guarantee a fair future for us all is to kick back against the lobbies and prise our leaders away from corporate interests.  The global economic crisis resulted in large part from reckless banks that were no longer regulated effectively by governments because of the control banks stress over our leaders. This corporate capture of government is the major threat today, both to democracy, and to an efficient and fair economy.

The Need for Radical Change

THE FUTURE OF MONEY (4/4)

Proposed solutions to the financial crisis tend to involve more regulation and the break up or separation of banking activities, but these merely scratch the surface. The financial sector is not only too big; it embodies massive contradictions. In particular, the social role of finance makes it impossible for monetary authorities to let the system fail. This creates moral hazard on an epic scale, ‘Wall Street socialism’ with massive benefits for the financial elite and costs and liability for the many.

Given that the public nature of money makes the financial system a public liability, there is no case for its private ownership and control. As bank credit issue is the main engine of money creation in modern societies, how that money is issued and circulated is a crucial question. The allocation of that credit determines economic priorities.

Under free enterprise system the only priority is private profit. On this basis global speculative ventures are supported while local, particularly social, businesses are marginalised.

The allocation of credit is only part of the problem, however. The main question must be why the private banking system should have control of the monetary system at all. Historically this was developed through the link between trading money, promissory notes and bills of exchange, which were exchanged for bank credit notes designated in the national currency (legal tender). More recently the system has shifted to ‘sight accounts’, money records rather than cash in hand. The question that needs to be asked is: why is the private issue of notes and coin (counterfeiting) punished by law while the private creation of sight accounts is seen as a natural function of banking?

Capitalistic control of the financial system has played a major trick on the public. Given that bank credit is created out of fresh air, like fresh air it should be a public resource, not a private horn of plenty. Decisions about the allocation of that credit should be made democratically. Private profit should not be the only criterion for money issue.

Nor should all money be issued as debt with the interest charged accruing to the issuing financial institution. Debt-based money builds in a growth dynamic that prevents the emergence of a more socially and ecologically sustainable economic system. Instead money could be issued without debt as grants or interest-free loans. The only reason this is not done is that capitalism has ideologically captured economic reasoning. The right of banks to issue money for profit is not challenged.

If people demand to issue money themselves or demand that social and ecological priorities come first they will be told that ‘this cannot be afforded’. The trick is that the market puts some kind of brake on money creation and allocates it most efficiently. The recent crisis shows that neither of these claims is true. Any money creation by the public is decried as inflationary, while massive inflation of the capitalist financial system was given the euphemism ‘capital growth’. The public were to be grateful for the few portions of taxes that were reluctantly extracted from the financial sector.

In fact, there is no reason why money should be issued through the private banking system. It may be that with money under democratic control the public would vote to give financial resources back to the private sector, but it is more likely that social expenditure would be prioritized. The private sector would then have to re-orient its activities to serving public needs. This could form the basis of an economy in which growth would occur in response to social need, rather than the demand for ever expanding profits. Money circulation would return to the production of goods and services and not the never never land of perpetual financial growth. The idea that the whole of society could secure itself on constantly inflating financial assets is a total illusion.

The financial crisis has revealed the financial system’s enormous power and lack of democratic control. Money and finance, nationally and internationally, must be socially and politically re-embedded to enable socially just and ecologically sustainable economies to emerge. Rather than asking ‘can the financial crisis be the basis of radical change?’ the crisis must be the basis of radical change if we are not to continue on the capitalist financial merry-go-round until we all fall off.

The Contradictions of Privatised Finance

THE FUTURE OF MONEY (3/4)

Financialised capitalism rests on its capacity to create credit to lend to itself to inflate its speculative profits and financial assets. But financial asset inflation is always a pyramid scheme, whose value will collapse as soon as there are no new investors.

Traditionally states had a concentration of financial power through their ability to issue money as currency and tax it back. Capitalism has similar power through its control of financial resources. It creates money and calls it back with interest. This puts a growth dynamic into the economy. More money must come back than has been issued; this in turn demands that more money be created.

The neoliberal rationale for private control of money issue is that the market is more ‘efficient’. This is despite the endemic tendency to crisis in financialised capitalism. People have been encouraged to trust their future security in terms of pensions and savings to the financial markets, which in itself creates the conditions for a boom.

While hedge speculators can make money on rising or falling assets, for most people money can only be made on inflating financial assets such as housing or equities. This requires constant creation of credit to fuel the new buyers, a phenomenon that was clearly seen in the mortgage market. When the market has peaked and no one is willing to take on more credit, or the borrowers can no longer pay, the value of the financial assets must fall. Even in the case of hedge speculators, winners will be balanced by losers.

Why were the banks so desperate to lend money recklessly to homebuyers and to develop such complex financial packages? The answer lies in the demand for increased profits to raise dividends and share prices. The bonus strategy of payment in shares also drove this. In such a situation banks engaged in the most profitable aspect of banking, which was also the most risky. It is not without irony that financialised capitalism fell because of its exploitation of the very poor. As capitalism runs out of a market for its goods, services or investments, all that is left is the poor. In the case of financialised capital this was the subprime householder. However, the subprime borrowers did not cause financialised capitalism to fail; the cause was its own contradictions.

Profit-driven banks must always be tempted towards speculation, no matter how many firewalls are put up between deposits and investments. For this reason the calls for narrow banking or smaller banks will not work. As long as the companies running the banks are driven by capitalist values they must be driven by the drive for profit, and therefore risk. This would not be so important if the activities of the privatised banking sector were not a liability on the public. But the financial system is interconnected and the only way to save some parts is to save the whole. The speculative sector can only be separated if the deposit-based sector is not part of the capitalist system and if its credit creation capacity is brought under democratic control.

The private control of banking and finance is fundamentally flawed in that its neoliberal claim to financial freedom is in contradiction to the social foundation of money systems. The crisis has also undermined the claim that through global financialisation a substantial portion of national populations can sustain their economic future through appreciating financial assets. Far from ‘rolling back’ the state, the implosion of deregulated finance has directly contradicted the neoliberal case that the market and its money system is a self-regulating process that would be distorted by state intervention.

Under the illusion that money was a neutral representation of the wealth of the market, financial institutions operated far and wide. Financial traders speculated on currencies and borrowed from low-interest countries to invest in higher-interest ones. Claiming that their industry was global they played off countries against each other, demanding favourable tax status or lodging themselves in tax havens. In doing so they undermined the conditions of their own existence, the public authority of money.

A major problem for countries such as Greece or Argentina is that they have considerable problems in raising tax with substantial informal economies and high levels of tax avoidance. Finance may have escaped regulation but it has also separated itself from the legitimisation of money through public authority. This led the sector to expand to such an extent that the amounts of money at risk threatened the solvency of countries that had residual responsibility for their activities.

Playing to financial crisis with Lego minifigures

The latest report from JP Morgan astonishes by sharp analysis of the financial crisis provided by Peter Cembalest, aged 9. JP Morgan ensures that Peter’s interpretation cannot be more unreasonable than the results of stress tests conducted by European banks. A real blow to the chin in the theater of the absurd, ridden by the EU / ECB / IMF troika – themselves overtaken by events they were unable to anticipate in modern economies they were supposed to manage.

© JP Morgan

With the figures of a well-known toy manufacturer, the child assembles a chart that the European bosses would be well advised to review, as a ripple to their actions. The following is an echo on Peter’s composition. Lines and arrows interacting with minifigurines should be noted.

[1] The bullfighter and the pilot of Formula 1: Spain, Italy and the rest of the Euro Periphery believe the ECB should buy bonds, prevent spreads from rising and give them time to implement austerity plans.   Italy is the flash point, with sovereign debt equal to 25%of GDP rolling in the next year,.  Italy has undergone austerity before (1990’s), but that was when the promise of EMU integration was the carrot.

[2] The three little men with helmets, shields and medieval weapons, are the CDU, CSU and FDP, the 3 German parties which control the Bundestag and are against doing more than what Germany has already committed to.  They are strongly opposed to premature introduction of Eurobonds.

[3] By requiring collateral for its share of EFSF exposure to Greece, Finland (the sailor in blue and white) raised the ante on France and Germany, whose banks have much more exposure to the Periphery.  Finland wants the bailout to reflect actual exposure, rather than ECB capital weights.  The Dutch now want the same treatment.

[4] The Social Democrats and Greens (the woman with the carrot and her friend with a spade) are opposition parties in the Bundestag, but if an early election were held today, polls suggest they would be in control.  Both parties support expanding the EFSF.

[5] The Wotan Bundesbank is the ultimate protector of German monetary and fiscal interests, and is very concerned with steps already taken to deal with the crisis.  Their strong preference would be for EMU countries looking for aid to first implement austerity and pension and labor market reforms (i.e., German Reunification steps).  Bondholder losses (“creditor participation”) should take place before shareholders are subsidized by taxpayers.

[6] The IMF piggy bank has taken a mostly passive role, lending money and overseeing austerity plans in Greece that are failing miserably.

[7] The European Central Bank is purchasing Spanish and Italian bonds in the secondary market to bring yields down with the intention of facilitating better primary auctions.  This not work in Ireland, Greece or Portugal.  Spain and Italy yields declined by 1% once the ECB began buying, but have since drifted higher. The ECB does not like its current role as fiscal agent, and believes that EU taxpayers should bear the cost of solving the crisis.

[8] Poland (the barber), after a long period of wanting to enter the EMU, is waiting for a clearer picture of who will bear the costs of the sovereign debt crisis.   The Polish Finance Minister is calling for more ECB buying of sovereign debt, a much larger EFSF, and warned that Poland will not want to join the EMU until the Euro is earthquake-proof.  “The fundamental problem of the Eurozone is not an economic but a political one,” he explained.

[9] Artists from France are relying on the ECB to handle what the EFSF cannot.  While France supports greater fiscal federalization, if this were done via further EFSF enlargement, it could risk France’s AAA rating.

[10] EU taxpayers – the outraged — in Core countries would be affected by various efforts to federalize costs of the EMU sovereign debt crisis, either through EFSF expansion, or introduction of Eurobonds.  Lots of arrows point in this general direction.

[11] The assault troops at the bottom of the chart: the EU Commission and Euro Group Finance Ministers, chaired by Jose Manuel Barroso and JeanClaude Juncker, support ECB bond buying and fiscal federalization in a variety of forms.   They oppose Franco-German incrementalism, but may not have enough power to change it.

[12] The great white-collar theft. So far, EU bondholders and shareholders have been subsidized by the ECB and EU taxpayers.  The latest EU bank stress tests called for an additional Eur 2.5 billion of capital.  This is not a misprint.

We must recognize Peter’s acuity of visual synthesis, who at  9 has accomplished to  scaffold what is perhaps the best map of the financial crisis – with very likely characters, actions and intentions.

Public Foundations of the Financial System

THE FUTURE OF MONEY (2/4)

The financial system is concerned with the issue and circulation of money. Within capitalism the purpose is to direct money to the most profitable use.

Money is a peculiar phenomenon, real and not real so far. In essence it is a promise. Holding money is a claim on any resources, goods or services that are categorised in money terms. However, for these claims to be realised, the sellers of resources, goods or services must trust in the persistent value of that money.

Historically, money has been made of a commodity that can itself be resold, such as gold, but today it mostly consists of base metal, paper, or merely electronic records. People trust it because convention and experience tells them it will be honored. It is also backed by a public monetary authority as legal tender that has a stated value.

This is critical to public responsibility for money. For example, all monetary activities designated in pounds are collectable from the British banking system (or its international agents). Underlying the whole banking system is the Bank of England. Despite it having been made independent in policy terms, the Bank’s authority rests on the financial viability of the nation in terms of its productivity (GDP) and its ability to collectively assemble money through taxes.

As has been shown in Iceland, the people, through the state, are forced to take on financial liabilities created by the private sector. If a company produces a car that ceases to function, the owner does not go to the state asking for a new one. With money, however, this is exactly what the holder of that money will do. People invested in Icesave, the Icelandic online bank, because it offered higher interest. Despite the fact that the bank was linked to a small country of only 300,000 people, investors did not see it as a risky investment.

When the parent bank failed, depositors turned all together to the British government and demanded payment in full. In order to secure the safety of its own banks, the UK lent Iceland the money to repay deposits – a huge debt on the Icelandic people against which they are now protesting.

How could Iceland’s banks have financial commitments several times larger than its economy? Partly this was because the banks took in deposits from around the world, but mainly it was because banks can themselves create money. They do this by issuing bank credit – loans.

Free market has been built on bank credit. Traders and companies have borrowed bank money to set up their businesses. Recently most credit issue has been related to consumption or financial investments such as housing. The illusion is that banks act as intermediaries between savers and borrowers, but that is not so. Banks take in deposits, some paying interest. They also issue loans and charge interest. There is no direct relationship between savers and borrowers.

All deposits are returnable, regardless of what loans are still outstanding. Banks can also lend much more than they have in deposits, traditionally up to ten times more and even more in recent years. This is how financial sectors can explode in total value, eclipsing the productive economy and inflating financial assets.

Recently bank lending has contributed to the vast use of ‘leverage’ to enable the investments of the rich to go even further. Hedge funds, private equity investments and the investment arms of banks use borrowed money to inflate their speculative gambles. Some of these may even be gambles against the banks themselves or the national currency. As more money is issued it floods into the financial system and becomes part of the waves of money looking for a profitable home. As it is impossible to separate the interests of bank depositors or pension holders from financial speculators, in a crisis the whole system must be secured.

In such a crisis, the public groundwork of the money and banking system becomes clear. As all bank-created credit is designated in the national currency, this becomes a liability on the state. The logic would be that such a public liability should also be seen as a public resource. If the people are to be made ultimately responsible for whatever money is issued in their name, should they not have a say about how this money is used?

Far from having democratically controlled access to the process of credit issue, the public, as represented by the state, has itself to borrow from the capitalist owners and controllers of the nation’s money supply or tax money for public expenditure as it circulates. Today more than 95 per cent of money issue is through bank credit. Historically states controlled much higher levels of money issue as coinage. As expenditure on social or public needs are seen as secondary to privatised economic forces, the private sector determines how much public expenditure can, or cannot, be ‘afforded’.

Privatised control of money issue creates the impression that it is the private market that is creating wealth. Certainly it is making money, quite literally, largely through issuing it to itself as leverage to swell speculative trading. Private ownership and control of money issue has created huge differences of wealth. The mass of the people can only hope for a trickle down of economic activity through the consumption of the champagne-swigging traders and increasing numbers of billionaires. On the illusion that the manipulators of money have actually generated the wealth they gamble with, those playing the money markets demand a huge percentage of the product. The levels of pay and bonuses have become so obscenely puffed that they have become an economic ‘gated community’ set apart from ordinary mortals by their wealth. In fact they have stolen what should be a public resource and harnessed it for private benefit.

Finance Is Not Private

THE FUTURE OF MONEY (1/4)

The global economic crisis in progress has naked the contradictions of privatised finance. If taxpayers have to bolster the system when it fails, why should they not also have control over the supply and allocation of money in the first place?

The UN's Economic and Social Commission for Asia and the Pacific (UNESCAP) painted a grim picture for the region overall in the wake of the global financial crisis

At the height of the financial crisis, the total public financial exposure in rescuing the world’s financial systems was around $15 trillion – a quarter of world GDP. Most of this was not operated, but the existence of public aid prevented a worldwide collapse of financial institutions. This vital role of the public sector has in practice been ignored, as the surviving banks return to the bonus culture, benefiting from reduced competition and additional state support through, for example, quantitative easing/ facilitation (increased money supply).

Not all states could support their bloated financial sectors. Iceland collapsed with financial commitments up to ten times its GDP. Britain, with a financial sector worth around five times GDP, could have faced similar problems. Globally the financial sector eclipses world GDP by at least ten times.

Why do governments feel compelled to spend uncountable billions rescuing the banks and financial sector when other businesses are often left to fail? The answer is that the financial sector is not a private sector at all. It embraces a public function, the issue and circulation of money – something that has been appropriated by private capital.

The contemporary banking and financial system has appropriated this public doings for its own benefit. However, when the financial system goes into crisis, the need to retain this public function means that it becomes a liability on the public, as represented by the state or equivalent monetary authority. As John McFall, chair of the UK Treasury select committee, wrote (Guardian, 9 January 2009):

 ‘After the extraordinary self-induced implosion of the financial system, the future of the market system now rests in the hands of governments. The politicians are the only show in town.’

The financial crisis and the public response have revealed both the instability of the global financial system and the importance of a public monetary authority of last resort.

The latter half of the 20th century saw a rapid growth in the financial sector as people became entangled in debts (particularly consumer debts and mortgages), as collective and public financial security was abandoned in favour of personal investments (particularly pensions), and because there was benefit to be had from inflated financial assets (particularly housing). Even institutional investors were tempted by the promise of higher profits in the most speculative areas, such as hedge funds.

With such a large proportion of the population entangled in the financial system, a demand for public rescue became more likely. A collapse in the financial system is much more threatening to social order than failures in the productive sector. If one factory fails it does not automatically close the rest (they may even benefit from less competition). But if a bank fails the panic threatens to become systemic as people lose confidence in the banking system. This alone was a major reason why states had to get involved.

The need for state intervention has exposed the contradictions of financialised capitalism and its reliance on ‘Wall Street socialism’. A pivotal point was the rescue of the US investment bank Bear Stearns. The US monetary authorities were not only bailing out the retail banks, but finance capital as well. When the US Treasury later tried to isolate the investment sector by letting Lehman’s fail, there were nearly fatal consequences for the banking sector. The financial sector was so interconnected that a crisis of default in the US subprime sector could bring down a relatively small bank in the UK, France or Spain via the functioning of the global money market and the drying up of credit.

High Food Prices Endanger Food Security

Along with officers from the Food and Agriculture Organization, mankind is only two bad seasons away from a disaster on a global scale.

This spring already, the previous year’s deficient harvests contributed to the social unrest in North Africa. Even though the World Bank asserts that rising food prices have not initiated the protest movement in the Arab world, the price ramble however contributed to an intensification of tensions. Exploding prices are a main headache for political and economic decision-makers across the globe. One thing is clear: A search for solutions needs to be made a top priority.

The developments in the markets over the past year certainly give full reason for concern: Within the past decade, prices for agricultural goods rose by 83 percent. In 2010, inclement weather proved a major challenge for food security: In the spring, heavy rainfall in Canada destroyed a quarter of the wheat harvest. During the summer drought and bushfires in Russia, the Ukraine and Kazakhstan lowered yields. In China drought and sandstorms have made life difficult for farmers ever since last spring and significantly decreased their income from wheat sales. In early 2011, strong snowstorms threatened winter wheat plants in the leading export nation, the United States. In the southern hemisphere in 2010, La Nina led to drought and losses for soya beans and maize plantations. Floods in Australia made half of the planted wheat there unfit for human consumption. The wheat price has doubled since last summer. Lower wheat supplies led consumers to switch to maize. The maize price shot up by 73 percent as a result in the second half of the year. Meanwhile numerous Mediterranean countries like Egypt, Algeria, Morocco, Lebanon, Jordan, Libya, and Turkey have engaged in panic-buying and hoarding large stocks of wheat. China is expected to follow suit sometime later in 2011. This will further push up prices in the world markets. It is not only climate change and the bad weather that is responsible for the increasing shortage of food stuffs. In many emerging countries, changing consumption patterns – especially increased reliance on meat as a dietary source – encourage prices escalate. Moreover, additional agricultural land is lost to planting crops for biofuel instead of food stuff. According to the International Food Policy Research Institute, one third of the price rise needs to be attributed to the increasing use of grain as a biofuel.

Despite these disquieting numbers, it is not predictable that the United States, the European Union, or Brazil will in the short-term abandon their biofuel projects. Neither can consumption patterns worldwide easily be changed. The developments observed therefore point that supply shocks caused by bad harvest today can more easily upset the delicate balance in the increasingly globalized food chain. Structural changes render it difficult for the system to deal with such shocks at the present time. In order to prevent further upset on the supply side, much more investment in agriculture is needed today. It is necessary to be better prepared for the challenges posed by climate change. It is high time to coordinate on a global level in order to stabilize agricultural markets in such a manner that external supply shocks will not automatically lead to systemic consequences and social unrest.

Economic anemia and financial crisis (I)

First released in ‘Segunda Naturaleza‘ on 28 March 2009. Updated March 16, 2011

Prior to the financial crisis and as a prelude to the one we behold, we are witnessing a gradual but determined economic anemia. Since 2006.

The history of capitalism is marked by crisis. Definitely, since the 70′s we are witnessing a dip every 5 or 6 years. Systematically. Yet, the current one we endure, we ignore its internal mechanics: this is neither a cyclical crisis we ensue periodically nor a predictable structural collapse – so not analyzable in conventional terms.

Since capitalism exists per se in the dawn of the nineteenth century, the housing issue became a matter of essential focus. The issue is whether or not granting a mortgage to someone who has no assets, but offers reasonable assurance to invest the equivalent of 5 – 7 years earnings, which is the average housing cost. The loan is granted through a mortgage atop the object by itself, provided that the financial institution truthfully assesses the applicant’s income – say provided holder’s solvency. The financial institution does not usually covers further than 70 to 80% overall. The mechanism relies therefore on the holder’s complementary efforts.

However, in practice, since the late 90′s, the tendency in the United States has been encouraging a majority of citizens to become capitalist (whether they were solvents or not) and beginning with the house. The Bush administration pushed this ahead, banks operated with lax « after all, they said, why not lending to anyone. » Often, the assessment on the client’s financial coverage capacity depended if his face fitted, when not in practice, he was supposedly solvent. The bank saved itself because its solvency position no longer depended on the borrower’s sole creditworthy but especially on the intrinsic value of the property: so, if the holder failed to pay, the bank expropriated (sometimes people speak wrongly of seizure) and sold the house to redeem the debt. This system generalized up to December 2008. U.S. banks and European to a lesser extent, granted credit indiscriminately, especially low-income families and active minorities (Hispanics and African Americans), bestowing 100, 110 and even 120% of the property value with the reason that there is always some home remodeling to perform or new furniture to buy when you get settled in a new place. And in order to get a more tempting technique when possible, financial engineering used to propose a financial gimmick: namely, there was no capital refund thru the first 2 or 3 years, other than interests. The uncut gadget was escorted by variable interest rates, i.e. fluctuating, under the pretext that with time, « you’ll see your earnings will go up. » This is what has come to be called the doctrine of constant expansion.

Throughout the summer of 2007 roughly 1,700,000 American families loosed their homes, seized, evicted and their children threw out the street, frequently evicted from the school system. In fact expropriation measures were targeted at around 4,000,000 households, but the authorities responsible for executing the judgments of eviction – judges and police –refused regularly to enforce such unpopular measures. This impelled serious cash flow problems for a lot of credit institutions –to say bankruptcy as they were holding massive amounts of toxic loans (150 to 300,000 million dollars). The multiplier effect soon arose and the entire U.S. banking system realized it was holding failed, flawed, toxic mortgages: the so called subprime lending involved an extra interest rate, a bonus on the event of the loan holder was insolvent.

Yet we cannot talk of robbery; let us rather point to a cynical « brutalization » of the banking system inasmuch as the system decided not to deal with individuals (families, children and their risks), but with objects (the value of their risks). In an ethical and regular system, their loss statements should have been assessed, compulsory provision of funds required and finally the security authorities (central bank and stock exchange authorities) would have taken the necessary steps. Not so. Most financial institutions disguised toxic  loans with others who were not, creating packages, the perverted packages. These, in turn, were subject to new transactions targeted to other entities (which obviously did not warn the gambit). With it, banks got rid of noxious loans on their balance sheets while new (surreptitious) assets appeared healthy. This technique, called « securitization of credit », is perfectly legal but it has been denatured in those circumstances. In theory it happens to convert assets (loans, for example) in securities or bank values. In practice, the conversion was made ​​based on personal loans, thus giving rise to corrupted assets because the failed effects remained hidden behind the creditworthy assets. The hoax is unquestionable as long as the U.S. banks have accepted the situation and many Western banks assumed the subprimes without question. Since then the new titles became « marketable securities » throughout the world, ie they were admissible to official stock exchange quoting and were therefore transferable in the stock market. Titles invaded Western markets and, little by little, the deposit banks collapsed: some were aware of it and others suspected insolvent loans in their portfolio, but they were incapable to determine how many and how important they were. The perversion led to extreme fraud:  there were cases where the mortgage ownership on a home was split throughout several titles so as to detach and include them throughout different packages. Who bids higher?

Very few banks were clever enough to assess their risk or that of their neighbor whom, so far, traded cash daily. Mistrust among banks generalized and interbank credit was finished off.

As for Q4 2008, the real (productive) economy suffered strongly the bias effect of the increasing blockade of credit lines to businesses and small firms. From then on, banks do not guarantee their fundamental duty, i.e. the necessary cash « irrigation » in order to keep in force the levels of trade.

Next post: The imbalances in the spotlight

The social economy, an antidote to the crisis

ECONOMICS AND UTOPIA (4/4)

Between SOEs and private sector, there is space enough for respect for human and environment

The Industrial Revolution in the nineteenth century changed the world. But it also produced rural exodus, crowding of workers in impoverished and poorly organized suburbs. It generated as well long working hours in noisy and polluting factories and workshops, and exploitation of children and women assigned to ungrateful tasks. The concept of social and solidarity economy (SSE) was born in response to this vulnerable and unprotected new working class.

Britain, where the textile industry was booming thanks to the cotton supplied by the colonies, became the first laboratory of social economy. On top of a spinning factory in New Lanark, Scotland, Robert Owen (1771-1858) made his fortune thanks to the cotton trade. At the same time, he was not insensitive to his workers’ plight. He implemented a schooling system for them and their children, financing and establishing nurseries, dairy care and stores where customers were also owners. Thereby the cooperative movement was born, and Robert Owen went on to become one of the founders of SSE.

The Social and Solidarity Economy Network
In France, Charles Fournier (1772-1837), inventor of the phalansteries, communities where many families were sharing housing, work and leisure; Louis Blanc (1811-1882), creator of the social workshops as spot of workers’ protection; and Pierre-Joseph Proudhon (1809-1865), initiator of mutual societies, were the forerunners. After the First World War, cooperatives are institutionalized and are characterized by a great utopia: the cooperative movement can establish a cooperative republic. But even before the Second World War, it seems clear that the cooperative movement will not be skilled in overthrowing the capitalist economy. Since that time, the cooperative movement lost its unique alternative purpose.
In line with it, the European cooperative movement grows economically while it goes gradually downplaying the original values. First of all cooperatives try to survive in a world marked by large organizations and the growing influence of management and administration. Democratic participation weakens whilst the power of managers increases. Together, access to the independence of the southern hemisphere countries causes an unprecedented deployment of cooperative organizations, particularly in agriculture, savings and credit.

In France, the State has tried to appropriate most of the independent action of the cooperative movement. The Délégation Interministérielle à l’Innovation Sociale et à l’Economie Sociale and the Conseil Supérieur de Coopération, promote ‘from above’ a skewed view of the cooperative area. Meanwhile, in 1968, federations and confederations of cooperatives agglutinated in an association, Groupement National de la Coopération (National Association for Cooperation) with the mission to defend and promote the fundamental principles of cooperation, ensure exchange of information and experiences between different national organizations, organizing and promoting the development activities undertaken by their members. In France, one in two people is a member of one or more cooperatives. The cooperative sector includes there companies such as ACDLEC – E. Leclerc, Crédit Agricole, Système U, Crédit Mutuel, Caisse d’Epargne Groupe, Banque Populaire, Vivo, Terrena, Tereos and Astera.

In Switzerland, the retail networks Migros and Coop, several housing cooperatives and the Raiffeisen Bank are based on the cooperative movement. More recently the Swiss Alternative Bank (BAS) and all fair trade firms joined the SSE.

Although at first utopian, SSE has continued bringing new supporters. The recession in industrialized countries in 2008-2009 where thousands of people were tossed out, has pushed them to seek alternatives to the dominant economic system. In 2010 the 37 European members of Cooperatives Europe have 160 000 organizations, employing about 5,400,000 employees. Italy, Spain and France are the top three countries in terms of number of cooperatives. French cooperative movement is a leader in terms of number of cooperatives with more than 23 million members, followed by Germany (20,509,973) and Italy (13,063,419). As workers, Italy has more than one million employees, nearly a million France and Germany over 830,000.

Drifts of free trade
As an alternative to state-owned enterprises and private sector, the SSE follows number of fundamental values. It is nonprofit or for-profit limited. Commercial or industrial units are handled democratically and owners, whatever the size of their investment, have only one vote – unlike the practice in private companies, where the number of votes depends on the number of shares. The wage differences are minimal.

Besides in its modern way, the other economy intends as an antidote to the excesses of mercantilism and free trade. Thus, the respect for human beings and the environment is a main concern. The SSE is firmly positioned against speculation or profits maximization at any cost.

Related Posts:
· Economics & Utopia (1/4) – Do we need central banks?
· Economics & Utopia (2/4) – The regression of workers’ self-management
· Economics & Utopia (3/4) – The resurgence of mercantilism

The resurgence of mercantilism

ECONOMICS AND UTOPIA (3/4)

Buried by Adam Smith, mercantilism recurs.

The temptation recurs elsewhere.
In the seventeenth century, France was trying to get rich at the expense of its neighbors. When the European partners accuse Germany to promote its exports and curb imports, they do not just throw spears against a country unwilling to assume its pivotal role in the euro area in crisis. They accuse it of consciously practicing a policy that has left bad memories when it was applied for the last time on a large scale between the two world wars: mercantilism.

Sometimes known as « beg thy neighbor », this policy consists for a country to boost exports and cut back imports in order to accumulate as much wealth as possible. Emerged since the Renaissance, developed over the seventeenth and eighteenth centuries, particularly in France of absolute monarchy, the theory was to allow the king to assert his economic and military power. The main architect was the Minister of Economy and Finance of Louis XIV, Jean-Baptiste Colbert, who tried to stimulate exports by expanding the luxury industry in the kingdom. Denounced by liberal economists including Adam Smith at the end of the Enlightenment, mercantilism gave way to free trade during the industrial revolution of the next century.

Increased disorganization
The theory re-appeared in the inter-war years, when the major Western countries have tried to emerge from the crisis through competitive devaluations and protectionist measures. The result was a greater disruption of economic networks on the eve of the Second World War. The implementations of the Common Market after the conflict, and globalization of trade, have seemed to definitely place mercantilism in the cemetery of outdated ideas.

This is not a mere utopia. Germany is not the only in being accused of reviving a ghost – the United States and China as well. The first, as a result of its uncontrolled money supply resulting in a constant devaluation of the dollar and curbing imports. The latter, because of its refusal to let the yuan rising – thus stimulating exports. In the case of these three countries, protectionism does not take place via the customs office, in contrast to the 1930s. In Germany, the standard is a concerted policy of wage moderation. In United States and China, the chosen instrument is the exchange rate policy.

The problem with the mercantilist policies is that they evade large parts of their domestic economy to international competition, leading ultimately to a lack of competitiveness. India, which has practiced it over forty years since its independence in 1947, had to adapt its industrial sector after the gradual opening of its borders by 1991. The classical theorists have denounced, in addition, an inflationary effect: If you earn gold in your economy without allowing the market to grow up, you cause price rises ultimately.

Mercantilism, however, is not devoid of supporters. It holds a social value because it confers on the State the responsibility for determining the goods and services that must escape from Liberalism – whose limits have been demonstrated by the crisis. In the 1930s, John Maynard Keynes himself equally complimented the mercantilism due to job protection in times of crisis.

Related Posts:
· Economics & Utopia (1/4) – Do we need central banks?
· Economics & Utopia (2/4) – The regression of workers’ self-management

The regression of workers’ self-management

ECONOMICS AND UTOPIA (2/4)

100 years ago, the first kibbutz was founded. Today, the traditional ideal of a collectivist society and community model is disappearing.

On 28 October 1910, two women and eight men went across the Jordan towards the east. They settled on the shores of Lake Tiberias and founded Degania – the one still identified today as “the mother of all kibbutzes.” These pioneers from the second aliyah – literally “ascent” or emigration to Israel – had fled the pogroms in Russia and Eastern Europe to settle in Palestine. Imbued with utopian and revolutionary mainstream of the late nineteenth century, they landed onto the “Promised Land” with the one and only dream of building a new life.

Neither exploiter nor exploited

New migrants will then benefit from the Yishuv – the Jewish community present in Palestine before the creation of the State of Israel – as a “laboratory” for building a new form of ideal society where all people live free and equal. With the help of the Jewish National Fund, they will buy land to Arabs on a regular basis and will conduct experiments of communal villages.

It was not until the founding of Degania that a real settlement adopts a structure and a collectivist organization. The reason is simple: people no longer want to work on behalf of others but want to live off the fruits of their labor. Following this example, many communities organized around the principle of common ownership of production means and consumer goods, will then bloom all over Palestine.

The ideal of a new society is not the only reason for this success. Community life also responds to practical issues. Faced with the hostility of the land on which they arrive — malaria, swamps in the north, desert in the south and Bedouins who do not necessarily look kindly the inception of new residents– migrants are well advised to joint their forces if they intend to build the Jewish homeland as hoped. Conversely, a village where everyone would live separately in its own corner would not be viable. The kibbutz will thus become one of the pillars of Zionism and actively participate in the construction of the State of Israel and the design of its future borders.

End of individualism

When moving to a kibbutz, newcomers abandon all forms of personal property. All their personal belongings are now owned by the community. Collaborative decisions are made democratically and horizontally at regular meetings. As for individualism, it gives way to a community life assembled around social, economic and cultural shared activities. The refectory is usually the kibbutz hub. Housing, schools and treatment rooms are available to residents here and there. Beyond in the periphery, we find the fields and factories where rotations are organized among the members to sustain the community economically.

The kibbutz does not live in autarky. As members are not self-sufficient, they engage trade and even employ staff from outside. By contrast, money does not exist as such inside the kibbutz. Resources – be it fruit or clothes – are not bought but are always distributed equally among all residents.

End of an era

This ideal did not survive globalization and economic and demographic crisis of the 1980s. Although in 2010 – the centenary year – there is always more than 120 000 people living in some 270 kibbutzim in Israel and the West Bank, the traditional model has become a minority. Most members now work outside the kibbutz. They always give a percentage of their earnings to cover common expenses but the distribution of resources is more often based on each person revenues. Some critics of workers’ self-management from the left, such as Gilles Dauvé and Jacques Camatte, do not admonish the model as reactionary but simply as not progressive in the context of developed Capitalism. For other detractors this attests that the kibbutz as a social project no longer exists.

Related Posts:
· Economics & Utopia (1/4) -Do we need central banks?

Do we need central banks?

ECONOMICS AND UTOPIA (1/4)

A trend of thought, increasingly listened within liberal theory, wants to end the monopoly of issuing institutions

Bankers put their feet down

A Bloomberg survey from early December shows that 16% of Americans support abolishing the Federal Reserve. Malaise is real in the public. Central banks are mostly accused of manipulating currency and rates to soften the economic cycles and subsequently generate false and perverse incentives that result in generalized crisis. The explosion of their balance sheet, the massive purchases by the ECB of government bonds of peripheral European countries are finger-pointed. Fears of loss of independence over the policies are logically strengthened.

The emergence of a movement calling for the abolition of central banks is not extraordinary. The Tea Party and one of its leaders, Ron Paul, who has just published “End the Fed”, reassert the idea today. In Switzerland, the banker Karl Reichmuth, laureate of Röpke Price 2010 (from the “Liberales Institut”), has long argued for a system of competition in the production of currency. “Doing economy is having a choice. This is true everywhere except for the currency”, he said early December in Zurich.

The thesis is not new. The Austrian school of liberalism, led by Ludwig von Mises, in his book on currency (1912), wanted to “privatize the production of currency.” In 1977, Hayek assumed that “if we want a change worthy of the name, it will not come from the statesmen.” Hayek and von Mises want to give back the central role to interest rate as main indicator of money value in economy.

By artificially lowering rates, central banks are pushing companies to invest. “The end result is that producers have used up resources in order to produce future goods for which there is not a sustainable demand,” writes Gary Wolfram in the National Review.

The current monetary system is based on institutions – as the monopoly of central banks and paper money – which have been set up by governments for over a century. It is they who are the primary beneficiaries, according to Jörg Guido Hülsmann (The ethics of money production, 2010). This criticism to central banks has been widely documented, from Pierre Leconte (The Counterfeiters, 2008), to Pascal Salin (Return to capitalism to avoid crises, 2010).

Return to a gold standard

The Austrian solution is free banking. The term was coined in 1984 with Lawrence White’s homonymous opus (Free Banking and the Gold Standard). Free banking means primarily the end of central banks monopoly on issuing currency. They could issue money but in a competitive situation. The idea is intellectually attractive, but it is not at no cost. It requires an acceleration of loans repayment and debt reduction.

The cost of the process would be “undeniably costly in terms of a loss in output and employment” (i.e. in terms of growth), says Thorsten Polleit, chief economist at Barclays Capital and recognized author of the Austrian school. This debt reduction also prevents governments to continue to live on credit. Free banking therefore leads to a reduction in the size of the State, which means necessarily an outcry among politicians.

A large majority of supporters to such reform favors a return to a gold standard. This system would eliminate the problem of systemic risk, according to Thorsten Polleit. Bank collapses will not lead to further reduction in money supply. In addition, taxpayers would not be called to come to the rescue.

No question, free banking does not require a return to gold utterly. Of course, the argument is somewhat marginal. Three years ago, however, no newspaper would do public speaking on it. Besides George Selgin, professor at the University of Georgia, gave an interview on this topic on the Richmond Fed website…

Related Posts:
· Economics & Utopia (2/4) -The regression of workers’ self-management

More than 70 cities sign pact in Mexico to fight against global warming

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Over a thousand local and regional representatives from 114 countries get together, from November 17 to 20, in Mexico, during the third World Congress of Cities and Governments (UCLG) that will go on Sunday 21 with the first World Summit of Mayors on climate in which will be signed the first International Register of sustainable initiatives in cities. The document will be presented to the UN Conference on climate, from November 29 to December 10 in Cancun, Mexico.

The mayor of Mexico City, Marcelo Ebrard, said that the “Pact of Mexico” would be signed November 21, during the first World Summit of Mayors on climate, by which cities around the world undertake to adopt figured and tangible targets on reduction of their CO2 emissions to fight against global warming. Hence, Los Angeles, Dakar, Mexico, Amsterdam, Jakarta, Sao Paulo, Paris want to commit to carry out ambitious climate policies – hoping that many other cities will join them.

The Mexico agreement will be presented at the 16th UN Conference on climate Nov. 29 in Cancun (Mexico). “This agreement is a way of pressuring governments that have not listened to the cities at the Copenhagen conference, ended in total failure”, said M. Delanoë, the mayor of Paris.

The claim of the presence of cities in climate negotiations is more than justified: more than half the world population lives in urban areas, which generate between 60% and 80% of CO2 emissions. Moreover, many cities have already committed more ambitious approaches than their countries’: “It is in the cities that the battle to curb global warming will be won. Yet we have not even been invited to Cancun”, Ebrard said.

Beyond this symbolic recognition, direct access from the cities to financial instruments to fight against climate change is at stake – future “green fund” and clean development mechanisms. At the end of the deal: billions of dollars that local officials hope to capture in a significant split – while in Copenhagen, states had decided to create an aid fund for the South without stating how money will be provided nor who will be granted to get hold of it!

It is with this objective that the Pact of Mexico wants to make local climate policies “measurable, reportable and verifiable”, according to UN criteria. Then the Pact must list them in a climate inventory of cities, called “Carbonn”, located in Bonn, Germany.

To set an example, the mayor of Mexico City has agreed a 14% reduction of greenhouse gases in the city by 2012. The “Green Plan” of the Mexican capital – launched in 2007 – plans to fall CO2 emissions by 7 million tons in 2012. This program has already helped cut greenhouse gas emissions by 4% (2,000,000 tons). Car traffic was limited, water pipes refurbished, bike paths and bus lanes built. Next step: to double the recycling of garbage, replace 45,000 polluting taxis, inaugurate a twelfth subway line and extending to 30,000 m2 area of rooftop gardens.

However, not all the signatory cities to the (not compulsory) pact will lead to similar commitments: most of them lack access to technologies to assess their reductions of greenhouse gas emissions. Yet, these cities need adequate training and technology to grow without polluting. The initiative, in short, is complicated because of the heterogeneity of urban areas in terms of size and richness. Its success will depend on transparency and decentralized cooperation between the cities of South and North.

Millennium Development Goals: Fragile states claim summit outcome off-target

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From September 20 to the 22nd, world leaders gathered at the United Nations Headquarters in New York to assess progress and challenges in achieving the Millennium Development Goals (MDGs). Adopted at the Millennium Summit in 2000, the eight goals represent a global commitment to reducing poverty and improving the lives of citizens in poor countries including through improved education and health.

What are the Millennium Development Goals?

* Goal 1: Eradicate extreme poverty and hunger
* Goal 2: Achieve universal primary education
* Goal 3: Promote gender equality and empower women
* Goal 4: Reduce child mortality
* Goal 5: Improve maternal health
* Goal 6: Combat HIV/AIDS, malaria and other diseases
* Goal 7: Ensure environmental sustainability
* Goal 8: Develop a Global Partnership for Development

The eight MDGs break down into 21 quantifiable targets that are measured by 60 indicators.

These goals are unique – unlike many summits and partnerships, they committed governments to specific and clear targets to be achieved by 2015. However, in the lead-up to the Summit it became clear that many of the identified targets would not be met in the next five years, despite real progress in several areas. Of particular concern is the group furthest from achieving the MDGs, fragile and post-conflict countries.

What distinguishes so-called fragile states from other low-income countries? These are the countries struggling with the legacy of conflict, and hampered by weak government legitimacy in addition to chronic poverty, particularly persistent in fragile states. According to the World Bank, 54 percent of the population in fragile countries lives in poverty, compared to an average of 22 percent for all low-income countries. A recent report by the Center on Global Development identifies the ‘MDG laggards,’ those furthest from achieving the goals. As the report notes, “Not surprisingly, the list of MDG laggards consists mainly of post-conflict countries or fragile states.” Eight of the twelve currently have UN peacekeeping operations, one of the clearest signs of fragility.

This is no surprise. Shaken by customary cyclical violence, the institutions of government and their ability to deliver services are often severely weakened or shattered. Limited infrastructure and, frequently, corruption and poor governance breed significant obstacles to the realization of the MDGs, as the basic foundations for development are missing.

In fact, the preeminence of the MDGs as a guide for aid to fragile and post-conflict countries is questionable. In the group of fragile states, not one has achieved even a single MDG. The emphasis by international aid and development institutions on achievement of the MDGs has also shifted attention – and financing – away from other, urgent needs in fragile states. This reality challenges long-held assumption about development, raising the question of whether these are the right – or the only – global goals for this set of particularly vulnerable countries.

Recognition of this incongruence has led to efforts to enhance the MDGs with specific goals for post-conflict countries. In Afghanistan, a ninth goal – security – was adopted after Afghan citizens identified insecurity as their greatest challenge, emphasizing that basic security is a prerequisite for achieving the MDGs. In 2010, the International Dialogue on Peacebuilding and Statebuilding, which brings together representatives from fragile states, donors, and international aid and development organizations, identified a set of goals for post-conflict countries “as stepping stones to achieve progress on development” that could serve as the foundation for further articulation of peacebuilding and statebuilding goals. As the Minister of Finance in Timor-Leste, Emilia Pires, recently noted at a side event to the MDG Summit on fragile states, “Aid is given based on MDG criteria, and from our experience we have found out that before we can get the MDGs, we have to do a few things first. We have to have peace and stability.”

Debates in the overture of Summit saw a split between those advocating for a particular focus on the least developed countries and those in favor of additional focus on middle-income countries that have demonstrated progress towards the MDG. Institutional support has either sought to focus on those areas that have demonstrated results, or those that are most in need. However, these distinctions fail to depict the specific needs of fragile states, identified in the Outcome Document of the Summit, which recognizes “the specific development challenges related to peacebuilding and early recovery in countries affected by conflict and the effect of these challenges on their efforts to achieve the Millennium Development Goals.”

As leaders return from the Summit, reflecting on progress made and challenges ahead, it is critical that they stop to assess current efforts in fragile and post-conflict states. These countries are furthest from achieving the MDGs, the most in need, and those most at risk of setback to conflict or failing – presenting real security challenges both regionally and globally. Any action plan moving forward requires a specific focus on the MDG ‘laggards’ to ensure that they are not left out of any ‘big push’ for the achievement of the MDGs over the next five years.

Related posts:

· The African Governance Crisis (1/4) · A sift inventory of Africa’s development problems
· The African Governance Crisis (2/4) · The Consequences of Reforms on the African Civil Service
· The African Governance Crisis (3/4) · Rehabilitating the African Civil Service
· The African Governance Crisis (4/4) · Do Reforms Inhibit or Support African Development?

Sources:

· Together for a Better Peace
· Center for Global Development
· UNDP
· Eurostep
· Sustainable Public Financial Management
· IPS
· Guardian Development Network

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Shadow banking: still big, still dangerous (3)

A lot of attention has been focused on the work of traditional banks amongst the recession. But according to some measurements traditional banks lent only 40% of the money in the economy prior to the credit crisis. Shadow banks were responsible for the other 60% of lending and securitized a large portion of those loans.

The part of the financial system that lends the most money to Americans remains
almost untouched by regulation. It’s shadow banking, as Paddy Hirsch explains.

There is a strong consensus that the main fault which led to the current crisis was the total deregulation of the banking system. A banking system which in recent decades created a parallel clone to conventional banking, fully interconnected to global financial system, but disconnected from real economic activity. That parallel universe that found the financial industry to carry out the traditional role of linking savers with borrowers, had a huge increase in recent decades, as shown by the blue line on the graph. That is what is known as the “shadow banking system.”

This system is in the heart of the current financial turmoil and, according to the latest report of the New York Fed, is still larger than the traditional banking system. According to Fed data, there are still U.S. $ 16.000.000.000.000 (16 billion) sloshing around the financial system of the U.S. banks, polluting the world banking. The figure is greater than the entire GDP of the United States and it is remarkable to note its powerful boost since the 80s.

The shadow banking system gave rise to many of the issues that triggered the current crisis, and the report offers a detailed look at how the system did its job. First, the volume of credit grew bigger on the shadow banks than in retail. Before the crisis outbreak the shadow banking system had a $ 20 million liabilities compared to $ 10 billion of retail bank. Securitized loans, CDOs, CDS, the market for mutual funds, stock bubbles, are at the heart of this great legal fraud that allowed the existing self-regulation, as it provided huge inflows of money to keep the system moving.

The fragility of the system was demonstrated when its brutal collapse arose. But while the housing market crash was only the catalyst of the financial crisis, the sharp phase of the crisis was defined as a bank run on the shadow banking system in late 2007 and early 2008. Anticipating the crisis, all investors and lenders tried to recover their money at the same time. This is because on the shadow banking system – in contrast to retail banks – money is only paper – i.e. not backed by any real assets. Hence the strong bank run that sank Bear Stearns and Lehman Brothers before the monetary authorities were aware on what was happening in the market, despite Fannie Mae and Freddie Mac were knock down already. The fall of Lehman, in any case was the warning sign that the whole system collapsing and that the breakdown was imminent.

Fed specialists realized overdue this great market failure and the dangers that most of the system operates without any regulation. The bottom line is that if shadow banking is vulnerable too to financial runs that can produce a collapse of equal or greater magnitude than the retail bank runs, then it is reasonable to consider that shadow banks should also be regulated. Their failure has provoked a colossal damage to the entire world economy.

Related Posts:
Part 1 – Financial turmoil and global unemployment.
Part 2 – Ponzi Scheme and Global Finance.

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Ponzi Scheme and Global Finance (2)

For decades the whole U.S. economy has been structured as a pyramidal fraud under the “Ponzi scheme”.

Haga click aquí para la versión en Castellano.

Since the U.S. is the dollars printer, it generated a huge bubble which in turn ramified into a huge debt that cripples the world today. The financial mess that we now live, whether it is a tsunami or a perfect economic storm, is the result of unsuitable monetary and fiscal policies of the dominant reserve currency. As a blogger assesses in connection with a talk by Robert Solow: “The lesson that should be drawn is therefore that the real economy should be somehow shielded from the instabilities of the financial system.”

There is little hope on a quick return to fiscal and monetary discipline everywhere. At present, each and every one is in the midst of the storm without a compass or rudder. And we should not expect to keep banging with the oars. Nobody has accurate answers on the future action plans. What is known is that in January there were 550 000 unemployed again in the U.S., and that the rate will go on rising until year end. The Obama administration would give rise to 250,000 jobs per month – this figure is lower than job destruction – so employment will get higher, with the impact this has on the demand and consumption.

The Ponzi scheme developed in the financial markets have collapsed. And the culprits are still handing out awards such as the $37 billion that were distributed to top executives in December 2009. That’s why we lost faith in the financial system. And the famous phrase that comes on every dollar “In God We Trust” is now the subject of derision when for every dollar you give many people a few cents.

More than 40 years ago the economist Jacques Rueff, anticipated that an “uncontrolled U.S. deficit could destabilize the entire global economy.” Rueff ‘s vision was that issuing the U.S. reserve currency could incur in massive and unlimited deficits, forcing as well the creation of money in other countries to accumulate dollar reserves that, once entrenched, would come back to the U.S. in order to earn interests and give extra occupation to the greenbacks printer.

Now, the only clear way to stabilize the world’s economy and control social over-running is the creation of a world central bank and the return to a single reserve currency. For centuries gold was this reserve currency, allowing internal reckoning and external deficit control without losing real resources. It is not a matter of coming back to gold standard but to prove an anchor currency satisfying the requirement to provide a secure and stable environment – while allowing countries with the real concern of full employment. A reserve currency that can help bringing stability to a system that has collapsed and which repair will take a lot of time. If you do not believe it, look at this interactive graphic.

The Ponzi scheme collapse plunges dollar and the US economy

During the last decades, one of the main driving forces of global economic prosperity was the increase in debt and in financial design of the Ponzi scheme. Much of the growth occurred since the 80s but mainly from the 90s, was driven by the generous credit lines to governments, businesses and consumers used along this support. Well, no doubt, the crush of Ponzi scheme and the subsequent shadow banking system, have set in motion the collapse of the United States.

With the Ponzi scheme, a large number of people stretched to such limits debt choking the burst. For many, debt allowed the biggest party on earth – as through the “crazy years”, that period of loose waste in the 20s, which ended abruptly with the Great Depression in 1929. In those roaring years, the optimism of inventions like the airplane and the radio generated a huge level of debt aimed rather at waste than at investment. Hence, one of the causes of that crisis is endorsed by slam on brakes to credit and by the strong increase in the interest rates propelled by the Fed as a way to contain the waste. We already know how that ended: the entire economy collapsed and it took ten years and a World War to recover.

Today, things are awfully similar. The economic system based on debt was greatly dependent on it to create a parallel economic system, which from the shadows, swallowed us all. Except that the New York Fed was slow to take seriously the problem of parallel banking system, discovering that, before the crisis broken in July 2007, the shadow banking liabilities were twice the real banking charges –  70% of world’s GDP.

That is why this crisis is severe enough and will be here a while. So do not be surprised if dollar continues to slide down. That’s what’s coming. Fixing the Yuan to the dollar was the sole breadwinner in the last two years. However, a dose of that poison named indebtedness, may help resolve things if applied rigorously in generating employment. No way to do it however even though employment is the only variable that can boost demand and begin to move ahead the real economy machinery.

The collapse of the shadow banking system has paralyzed the first economy in the world: the U.S. certified unemployment is 10% (the real climbs to 17%), retail sales plummeted, and property sales have fallen to their lowest level in 50 years. United States faces a deficit of $ 1.6 trillion, a debt of $ 16 trillion and a total debt of $ 60 trillion.

With these data, there is no system that works, mainly if it has been for massive bad habits and waste. United States is in the early stages of a financial implosion that will make history. Since late last year, Europe saw the markets were obsessed with the sovereign debt crisis of the European countries. Well, we now enter a new phase: the alarm bells of the global economy big ship just starting to sink.

Related Posts:
Part 1 -  Financial turmoil and global unemployment.

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even though

Financial turmoil and global unemployment (1)

This August marks another anniversary of the origin of financial chaos that swept the world in overall unemployment drift.

Haga click aquí para la versión en Castellano.

Unemployment rate 2009 © Publico.es

Abandoning the gold standard on August 15, 1971 is closely linked to the mass unemployment experienced by industrialized countries. Until then, the dollar was as close as possible to gold, and all nations were trying to maintain a constant balance between exports and imports. Most countries devised ways to export more than they imported, so as to accumulate gold reserves or, otherwise, U.S. dollars – according to the treaty of Bretton Woods in 1944 – could be exchanged for gold.

Unlike the rest of the world, America was not particularly concerned about maintaining a balance between exports and imports since, as under the Bretton Woods Agreement, the US would pay export deficit sending more dollars to creditors. As it was the sole source of international currency, the U.S. had a clear advantage over the rest of the world: it was the only country that could pay its debts by printing money. Something that the rest of the world did not matter a little: the dollars were a seductive line of credit that allowed access to the key casino in the market. No one took into account that the gadget also had limits.

So it was when, at the end of the Second World War, more than 20,000 tons of gold that the U.S. owned dwindled year by year while many countries (especially France) insisted convert dollars for gold. This situation came to an end in 1970 when two unexpected phenomena put the U.S. government on the wrong foot: the upcoming oil crash (a situation that forced the U.S. to import oil instead of export until then) and the adverse outcomes of war in Vietnam. Both events brushed away the US gold reserves and pushed the country to bankruptcy. The benefit it had to hide its bankruptcy was clear: being the owner of the dollars printing press.

In the early months of 1971, Henry Hazlitt and Paul Samuelson urged the Richard Nixon administration to devaluate the dollar sharply as it would need to increase the amount of dollars it would take to get an ounce of gold from the U.S. Treasury. But Nixon did not take their advice into consideration and followed the suggestion of Milton Friedman who advocated the idea to let floating freely the dollar and eliminate the dollar-gold convertibility into  – as the international currency was worth at the very back offered by the U.S. government, the global economic locomotive. Thus Sunday morning August 15, 1971, Richard Nixon declared the dollar-gold inconvertibility, so he unilaterally broke the Bretton Woods agreement.

Since then, the whole world trade has been accomplished using the dollars printed by the U.S. Treasury, which is nothing more than fiat money, i.e. easy papers. Up until then, international trade was valid as it was backed by gold; from that moment onwards, trade depends on a fiat money produced by the major press in the world. The consequence of that fateful day was that all countries (that could do so) began to accumulate dollars as an unrestrained U.S credit expansion – without the restrictions imposed by Bretton Woods. The rest of the world had to accumulate dollar reserves and these reserves had to be ever increasing, since the slightest sign that a country’s reserves fell, woke currency speculators who could attack that country’s currency and destroy it with a sharp devaluation.

The increasing flow of dollars throughout the world prompted the global credit expansion, which only stopped the speed in August 2007, after exhausting all instances of what is called the ponzi scheme (1). The international banking elite always strove to devise mechanisms for higher profits and to extend credit. A provision that was released from the restriction of having to pay international accounts in gold, and that scored the U.S. trade boom.

Until the ’70s, a poor country like China had no interference with world trade: it sold low and bought little. The globalization of the 80s, provided by this extension of counterfeit money, offered great facilities to companies in search of cheap labor, they set up their factories in China. This was the beginning of the industrialization process that began in the U.S. and went on with Europe. A process which destroyed jobs in the industrialized countries as never seen before. A no return pathway.
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(1) A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity.

Related Posts:
Part 2 -  Ponzi Scheme and Global Finance.

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Economic trends ‘After the Empire’ age

A change of economic model for the next decade is possible

Pulse aquí para la versión en Castellano.

Without having to draw on awful – but sometimes accurate – predictions of Emmanuel Todd’s After the Empire, it must be admitted that the influence and power of the U.S. will no longer be what they were. American political, economic and military supremacy of the last century is coming to an end. The 120-page report of the National Intelligence Council (NIC) on Global Trends 2025, (November 2008) remains up to date when considering the end of the unipolar world and the emergence of multilateralism. A multilateralism in which China, India and Russia weaken the U.S. dominance. It is expected that by 2025 the relative strength of the U.S. will decline and its levers of influence will be more limited, being only one among the global players, with a minor role and not decisive as it was in the past.

End of U.S. hegemony

The financial crisis and the collapse of the superpower at the end of 2008 were a clear sign of how intense the global economic crisis  would be (a crisis that began in August 2007). In this aspect it will be very difficult not to question the basics of the economic model applied in most countries and the weakness of regulatory mechanisms. Since the 80s, the Reagan, Bush Sr., Clinton and Bush jr. administrations, got used to admonish and reproach to the world about keeping finances in order, via the IMF and Washington Consensus (1). Meanwhile, Washington completely neglected own’s at a level of irresponsibility and exuberance completely irrational.

A key issue of ‘Global Trends 2025: A Transformed World (Global Trends 2025: a world transformed)’, is the gradual abandon of the dollar as standard of exchange and the growing strength of Asian currencies. Asia as a whole is the continent that will emerge with strength in a growing shift of wealth from West to East in terms of technological and cultural development. Latin America, with Brazil at the top – and Mexico, Argentina and Chile to a lesser extent, if the political will and the economic powers do not fail – has a golden opportunity to gain their own lever to progress. Hollywood productions will cede ground to Asia which mass culture will popularize widely. The positive predictive value of the report is the weakening of al Qaeda and terrorism in general and the low risk of using nuclear weapons – but it seems to ignore the unknown Russian factor.

The report confirms that Brazil (and not Mexico) will be the Latin American country to gain considerable influence on the global stage, as – with Russia, India and South Africa – it will help define the new challenges and game rules of humanity. Climate change will be the biggest problem and the shortage of drinking water and reduced harvests in some parts of the globe (for every degree the temperature rises the agricultural production decreases by 10%) will bring troubles and hunger. But this increase in temperature will benefit Canada and Russia by increasing their agricultural capacity and better and easier access to oil reserves in the north: these are elements that will powerfully reinforce their economies.

The U.S. will remain trapped and will live a lost decade as a result of the huge deficit left by the Bush administration. Its debt (2) now exceeds 13 billion dollars and it is growing by one million per minute (U.S. $ 1,400 million a day). Hence the importance of what Barack Obama can do to reverse a potentially adverse scenario across the line. It remains to be seen whether he will be a new Franklin D. Roosevelt to lead the country into the stormy waters of the current decay and collapse.

Overall trends for the next decade

Some of the projections of the Global Trends report, and that at the time were not taken into account, are:

• The leading economies are, from most to least, the United States, China, India, Japan, Germany, UK, France and Russia. (Note that Japan lower second to fourth place ranking in and Italy and Canada go out)

• The growth of the BRIC countries (Brazil, Russia, India and China) would exceed the GDP of the G-7 in 2040.

• Brazil, and not Mexico, will be the Latin American country that gain more influence in the international arena.

• The economic axis will move from west to east as China and India are the countries with greater economic progress.

• The U.S. weakness will not take away its economic supremacy (its GDP is three times higher the following country) but its influence and domination will be undermined.

• This will allow the emergence of multipolarity, which will allow overcrowding and the use of different currencies.

• While terrorism will not disappear it is difficult it ever meet the preponderance as in the past, especially when the relevance of Al Qaeda is increasingly diluted. The real danger may lie in the opportunism of groups that want to exploit the rise of multipolarity: gangs, criminal networks, religious organizations, tribes, companies and insurgent groups.

• As a result of the crisis, and at global level, there will be a resurgence of public enterprises which will increase the “state capitalism”, a phenomenon that may promote corruption and the consequent emergence of criminal groups.

The authors’report point that the survey “only” reflects the opinion of some specialists. Never mind, almost over two years after its publication, we can see its accuracy in several points. What should we do then, to avoid falling into the hands of corrupt governments and criminal gangs, according to what the report delivers?

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(1) See the contrasting views of John Williamson, the originator of the concept in A Short History of the Washington Consensus and the critical approach of the program of the Center for International Development at Harvard University.

(2) A meter of the U.S. debt at the U.S. National Debt Clock : Real Time.

German households are more indebted than Greeks

Pulse aquí para la versión en Castellano.

The plan to destabilize the euro area starting with Greece, had well known origins.

German households are more indebted than Greek citizens, according to this chart with data from Eurostat and the European Central Bank published 16 May by Bloomberg.

This was one of the main points discussed during the marathon hours to rescue the European single currency. Until then, a rumor went around that the Greeks were always a country of “wasteful” and “lazy” citizens. Data show however that things are not as some claim to see them. And while Greece is one of the countries with higher debt as a GDP share (white), household debt is highest in Germany (red). And much more in the United Kingdom, Portugal and Spain.

As a percentage of GDP, the overall Greek debt is greater than the debt of Germany, but lower than the debt of Ireland, Portugal, Spain and Italy. The following chart shows the levels of public, private and firms debt for the major euro area countries. As Ciaran O’Hagan, a fixed-income strategist at Societe Generale SA in Paris said in an interview:

“Greece is a relatively rich country but with an impoverished state.” (However), “Greece does have the means to repay its external debts, especially when you add in the private sector”

The rescue package which Chancellor Angela Merkel had to be pressed by France, Italy and Spain for approval, comes to € 928 000 million and guarantees payment of sovereign debt of countries in trouble over the next three years. In exchange for aid, governments are pushing through budget cuts that Greece’s labor unions have called “savage” and “unjust.” These wage cuts correspond to the second myth created around Greece: the laziness of its people.

A survey conducted by the OECD, from 1995 through 2008 (the most recent year for which such data is available) shows that the Greeks are far from being the most lazy. They are among the hardest-working (they are above the average of OECD countries and are only under Korea). In this regard, I suggest seeing this interactive OECD graphic, — which can be reviewed for the last fifteen years. This belies the Greek myth of laziness, while demonstrating the steep slopes of competitiveness within the EU. These large gaps in productivity demonstrate the absence of an overall EU plan.

According to Bloomberg, the delay of Germany to support the bailout of the European currency was the product of the myth of laziness and waste of the Greeks. Against that, the Germans were unwilling to support a country of slackers and wastrels. The figures, however, say something very different and this accounts for the real big problem for the EU: the lack of a sense of integration and the ignorance of the realities of the neighboring countries. Greece work more than average (2,120 hours per year, versus 1430 hours for the Germans), but it is one of the poorest countries, and it is in addition sentenced to further impoverishment because of the rescue plan. This shows the great breaking point and inequality edge  in the valuation of work in European countries. Monetary union, like any monetarist plan, has been more artificial than real and has not allowed a real economic integration. This is one of the key elements that the EU should settle if it is still looking for a common future.

The Art of Waste Management (2)

Visual pollution, illegal dumping, wild beach Oceania · © South Images

Key Benchmarks for Assessment

There are a number of concepts about waste management which vary in their usage between countries or regions. Some of the most general, widely-used concepts include:

1. Waste Hierarchy: The waste hierarchy refers to the “3 Rs” reduce, reuse and recycle, which classify waste management strategies according to their desirability in terms of waste minimization. The waste hierarchy remains the cornerstone of most waste minimization strategies. The aim of the waste hierarchy is to extract the maximum practical benefits from products and to generate the minimum amount of waste (Wikipedia 2008).

2. Extended Producer Responsibility (EPR): This is a strategy designed to promote the integration of environmental costs associated with products throughout their life cycles into the market price of the products (Organisation for Economic Co-operation and Development 1999).Extended producer responsibility imposes accountability over the entire life cycle of products and packaging introduced on the market. This means that firms, which manufacture, import and/or sell products and packaging, are required to be financially or physically responsible for such products after their useful life. They must either take back spent products and manage them through reuse, recycling or in energy production, or delegate this responsibility to a third party, a so-called Producer Responsibility Organization (PRO), which is paid by the producer for spent-product management. In this way, EPR shifts responsibility for waste from government to private industry, obliging producers, importers and/or sellers to internalise waste management costs in their product prices (Hanisch 2000). A life-cycle perspective is also taken in Extended Producer Responsibility (EPR) frameworks: “Producers of products should bear a significant degree of responsibility (physical and/or financial) not only for the environmental impacts of their products downstream from the treatment and disposal of their product, but also for their upstream activities inherent in the selection of materials and in the design of products” (Organisation for Economic Co-operation and Development 2001). “The major impetus for EPR came from northern European countries in the late 1980s and early 1990s, as they were facing severe landfill shortages. EPR is generally applied to post-consumer wastes which place increasing physical and financial demands on municipal waste management” (Environment Protection Authority New South Wales 2003).

3. Polluter Pays Principle:  In environmental law, the polluter pays principle is the principle that the party responsible for producing pollution should also be responsible for paying for the damage done to the natural environment. With respect to waste management, this generally refers to the requirement for a waste generator to pay for appropriate disposal of the waste. Polluter pays is also known as extended polluter responsibility (EPR). This is a concept that was probably first described by the Swedish government in 1975. EPR seeks to shift the responsibility dealing with waste from governments (and thus, taxpayers and society at large) to the entities producing it. In effect, it internalises the cost of waste disposal into the cost of the product, theoretically meaning that the producers will improve the waste profile of their products, thus decreasing waste and increasing possibilities for reuse and recycling (Wikepedia 2008). Organisation for Economic Cooperation and Development defines extended polluter responsibility as:
A concept where manufacturers and importers of products should bear a significant
degree of responsibility for the environmental impacts of their products throughout the product life-cycle, including upstream impacts inherent in the selection of materials for the products, impacts from manufacturers’ production process itself, and downstream impacts from the use and disposal of the products. Producers accept their responsibility when designing their products to minimise life-cycle environmental impacts, and when accepting legal, physical or socio-economic responsibility for environmental impacts that cannot be eliminated by design (Organisation for Economic Co-operation and Development 2001).

4. Zero Waste: This is a philosophy that aims to guide people in the redesign of their resourceuse system with the aim of reducing waste to zero. Put simply, zero waste is an idea to extend the current ideas of recycling to form a circular system where as much waste as possible is reused, similar to the way it is in nature (Wikepedia 2008). Zero waste requires that we maximize our existing recycling and reuse efforts, while ensuring that products are designed for the environment and having the potential to be repaired, reused, or recycled (“What is Zero Waste? 2004). The zero-waste strategy is to turn the outputs from every resource-use into the input for another use, or in other words outputs become inputs. An example of this might be the cycle of a glass milk bottle. The primary input (or resource) is silica-sand, which is formed into glass and formed into a bottle. The bottle is filled with milk and distributed to the consumer. At this point normal waste methods would see the bottle disposed in a landfill or similar, but with a zerowaste method the bottle can be saddled with a deposit, at the time of sale, which is redeemed to the bearer upon return. The bottle is then washed, refilled, and re-sold. The only material waste is the wash-water, and energy loss has been minimized. Zero Waste is a goal, a process, a way of thinking that profoundly changes our approach to resources and production. Not only is Zero Waste about recycling and diversion from landfills, it also restructures production and distribution systems to prevent waste from being manufactured in the first place. In addition, the materials that are still required in these re-designed, resource-efficient systems will be recycled back into production (Roper 2006: p. 326).
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References

· Ackerman F 1997. Why Do We Recycle?: Markets, Values, and Public Policy. Washington: Island Press.
· Alan B 2007. The Self-Sufficiency Handbook: A Complete Guide to Greener Living. New York: Skyhorse Publishing Inc.
· Castell A, Clift R, Francae C 2004. Extended Producer Responsibility Policy in the European Union: A Horse or a Camel? Journal of Industrial Ecology, 8: 4 – 7.
· Hanisch C 2000. Is Extended Producer Responsibility Effective? Environ Sci. Technol, 34: 170 -175.
· Organisation for Economic Co-operation and Development 2001. Extended Producer Responsibility: A Guidance Manual for Governments. Paris, France. From Organisation for Economic Cooperation and Development fact sheet about EPR:<http://www.oecd.org/document>
· Roper W 2006. Strategies for building material reuses and recycle. International Journal of Environmental Technology and Management, 6: 313 – 345.
· The Economist, Weekly, June 7, 2007 “The truth about recycling” <http://www.economist.com>
· The League of Women Voters 1993. The Garbage Primer. New York: Lyons & Burford, pp. 35-72.
· Tierney J 1996. Recycling Is Garbage. New York Times, Daily, June 30, 1996, P. 3.
· Tong X., Lifset R, Lindhqvist T 2004. Extended Producer Responsibility in China: Where is Best Practice? Journal of Industrial Ecology, 8: 6-9.
· Wikipedia 2008. Recycling. Website 2008 <http:// www.wikipedia.org>
· Winter J 2007. A world without waste-The ‘zero waste’ movement imagines a future where everything is a renewable resource. The Boston Globe, pp. 1-3. From LexisNexis database: Website 2008 <https:// www.lexisnexis.com>
· Zero Waste California Fact Sheet 2004. What is Zero Waste California?  From Website 2008 <http:// www.zerowaste.ca. gov/WhatIs.htm>

The Art of Waste Management (1)

Pigou, the economist who wanted to tax the smog

Cecil Arthur Pigou (1877-1959)

Founder of the Polluter Pays Principle, the English economist Arthur Cecil Pigou comes out of the shadows.

British Petroleum has assumed responsibility for the oil disaster occurred April 21 in the Gulf of Mexico. The explosion of the floating platform releases tons of oil and threatens the entire U.S. Gulf Coast. BP noted that the Polluter Pays Principle (PPP) does not suffer further discussion. This principle is based on measures adopted since forty years to prevent the damage inflicted on nature by the producers, repair them in case of accident or punish them for violations.

This principle of polluter pays appeared as such in the work of an English liberal economist Arthur Cecil Pigou (1877-1959). As a supporter of regulation by the markets, the founder of the Economic School of Cambridge noted that, left to themselves, these markets suffer from imperfections. For example, they do not take into account the “external” costs of products, such as pollution. In The Economics of Welfare (1920), he developed the idea that an economic agent whose activities generate negative externalities makes the community to support a cost higher than it supports as a private agent. Rather than banning the activity, it was necessary to discourage putting a price on its negative effects. This was to be paid in the form of taxes that would eliminate the gap between the private cost and social cost of this activity. Pigou proposed e.g. to introduce such a tax on emissions from London smokestacks to fight against smog.

This same reasoning led him to advocate a compulsory health insurance: what one pays to stay healthy, for example, by vaccinating, has positive externalities on the environment which yet does not participate in the expenses. This positive externality therefore deserved to be distributed equitably.

By the time they were issued, these ideas have not been successful. A proposed tax could frighten the economic establishment, yet close to Pigou for his views on the flexibility of labor markets and hostility to regulation of wages. Regarding left-winger economists and thinkers, they excluded that pollution — considered a crime — could be any bargain, as if a polluter stopped being left when becoming a payer. Having also objected to John Maynard Keynes, whom he was professor, Pigou found himself in the shadow of the glory ousted by his prestigious student and friend.

The increase of environmental risks and environmental accidents in the second half of the twentieth century, however, brought his reflections on the front of the stage. Faced with threats to ban their dangerous activities, or a highly restrictive state control, farmers have gradually agreed to take responsibility in this area and consider the management of adverse consequences of their productions. In 1972, the OECD erected the polluter-pays basis for the protection of the environment. In 2003, the European Parliament did the same, following what several countries did before — Denmark and Switzerland.

Meanwhile, a derived concept, the Extended Producer Responsibility (EPR), stated that

“producers of products should bear a significant degree of responsibility (physical and/or financial) not only for the environmental impacts of their products downstream from the treatment and disposal of their product, but also for their upstream activities inherent in the selection of materials and in the design of products”.

These words, which seem commonplace today, took almost sixty years to be heard.

The CO2 tax introduced in countries as Sweden and Switzerland in 2008 and 2009 is the quintessential example of a “Pigouvian” tax. It is not about an income tax because the entire collection is redistributed to citizens (through medical insurance) but it is save incentive as it rises fuel prices. Without ideological opponent confessed, the carbon tax has many practical issues however: as it makes consumer to bear the responsibility for pollution, it faces strong political obstacles. Many countries prefer CO2 emission quotas instead, allowing trading on an international market for quotas established by the Kyoto Protocol in 1997 — signed and ratified by 187 states to date.

If the concept of responsibility was installed in people’s minds, and if the economic explanatory of externalities proposed by Pigou found an echo within the political left, there is yet no international system that institutionalizes the application form as to guarantee the neutrality and impartiality. The concept occupies many researchers — as many skeptics who are ready to set off the alarms at the slightest attempt.

A Pigou Club, founded in 2006 by the American Republican economist Gregory Mankiw, ensure the sustainability of pigouvisme in its various interpretations. It includes among its sixty members well-known economists like Paul Krugman, Nouriel Roubini, Ralph Nader or Jeffrey Sachs, politicians like Michael Bloomberg and Al Gore and even the actor William Baldwin. Them all support the principle of a gas tax or CO2, and any form of eco-tax to internalize the same social and environmental costs of energy. Some of them, not all, call for offsetting tax cuts on income or sales.

From where he is, Arthur Cecil Pigou watches his new friends with an ironic satisfaction. We guess, behind his mustache, the pleasure of victory.

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References:

· Cecil Arthur Pigou, The Economics of Welfare, Library of Congress (U.S.), 2009
· Organisation for Economic Co-operation and Development 2001. Extended Producer Responsibility: A Guidance Manual for Governments. Paris, France. From Organisation for Economic Cooperation and Development fact sheet about EPR:<http://www.oecd.org/document> (Retrieved February 2010).

The speculators’ ploy and the win-win gambit

Time Magazine lends itself to confusion ceremony ...

The romantic concept of the speculator who may lose or gain from betting does not apply in any case to the current situation. Let us dot the i’s and cross the t’s .

If you consider yourself a speculator because you’re betting that the Inter Milan will win the Champions League on next 22 May, it is up to you. But you may lose money or may worsen it. In this case, no matter you sit well/bad the coach José Mourinho, the actual chances are 50/50 (obviously everything changes if the other team, i.e. Bayern München, has half staff injured, but even so…) Well, this can be applied to any bet in real life. But this is not speculation and, at least, it has nothing to do with the attacks on Greece, Spain, Portugal and – if God cannot help – on Italy. Under present conditions the speculator earns when the market goes up, and he also earns when the market goes down. It’s an everlasting win-win gambit, while the rest of us – you, me or the owner of a company, that’s 99.5% of the world – we lose. So the economy is taking a nose-dive: we are in the hands of Stuka (1) speculators.

To this point, it seems crucial to pull out the smokescreen that let many of us consider that anyone who cooks up a business, who creates and produces a little is a speculator. The word even sounds bad and many associate it with the “parasite” living at the expense of others. But it has nothing to do with it. Speculators are now true professionals, an armed militia who earns when the dollar or the euro go lower, and earns as well when the dollar or the euro are getting higher. One will easily understand that this has nothing to do with the speculator prevailing in the collective imagination. King Arthur’s or Napoleon’s romantic hand-to-hand battles are not still on. Now the attacks are done with drones and occur in Wall Street. Operators do not bet on a particular product, but on a particular result regardless of what happens to the product, which may be a country, your city, your home or your health insurance.

In the U.S., the five largest banks hold assets for 60% of GDP. Government is not even so powerful (bankers who finance elections and war campaigns to both Democrats and Republicans are definitely more powerful). 20 years ago (1990), bank assets accounted for 20% of GDP while 30 years ago (1980), less than 5%. Keep in mind the increasing power of banking for the loans granted. Banks (not governments) are the owners of the world economy. And if the side effect of the crisis led to decreased liquidity, it is logical that banks are now in trouble. That’s why they bet on whole countries as they do with horse racing. With the difference being, in these bets, banks will always win because of benefits offered by the CDS (2).

So do not be surprised if these five banks are who most gain from crisis. At this tempo they will stop being 60% owners to become owners of 100%: the building where you live, the street where you walk. Before long, you will have to cancel these charges to banks, not to governments.

The lords of the photo: Robert Rubin, Alan Greenspan and Lawrence Summers who concocted the formula to make that possible. And governments, sheltered by the idea that consumption makes happiness, bought the idea that plunged us into the global chaos we live today. Greece, Portugal, Spain and Italy top their list of attacks, and you are part of the 99.5% who did not reap any benefit from it.

Now you know a little about speculators.

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(1) Sturzkampfflugzeug, kamikaze, ‘suicidal’, opt in step with your preferred sensitivity.

(2) Credit Default Swap (CDS). The buyer of a credit swap receives credit protection, whereas the seller of the swap guarantees the credit worthiness of the product. By doing this, the risk of default is transferred from the holder of the fixed income security to the seller of the swap. For example, the buyer of a credit swap will be entitled to the par value of the bond by the seller of the swap, should the bond default in its coupon payments.

The Ideology of Economic Growth

The end of the continuous economic expansion

The never ending economic growth within a finite planet is basically impossible. A child can understand that. But the belief in economic growth bringing peace and prosperity to everyone is tough enough.

How is this mystification possible? How political and economic elites can maintain the deceit? What is the interest of everyone to consider or pretend to accept the assertion as true?

Economic growth involves extra consumption of energy, natural resources – water, oil, mineral substances … – constantly further waste, pollution, and aggravation of global warming, loss of biodiversity in sum, and poses ultimately the question of the mankind survival.

The persisting and tiring arguments put forward by the “green skeptics” to give support to economic growth, despite the obvious damage, is that of technical progress, the use of renewable energies or that we are entering a new economic era on information, digital and services supposed to have no impact on the biosphere.

Technological progress has improved (and will go on improving) the energy and resources outflow consumed to produce an object (former televisions and cars did consume more energy and resources than today’s). But this theoretical efficiency gain does not compensate for practical and concrete bulimia of consumer populations – and the most technologically advanced countries make ample evidence since their citizens exercise the biggest environmental pressure so far.

What’s more, renewable energy handled on the margin can not solve the problem of the finiteness of fossil resources and of ecological disaster under way.

Finally the different adjectives joined to the so-called new economy do not change the assumption of more and more physical resources: everyone wants a car, a television, a computer, a mobile phone … and to renew it all as quickly and as often as possible! The new economy, whatever its name, has not diminish at all the environmental impact of industry, agriculture or chemical engineering. Quod erat demonstrandum.

Why are we growth addicted?

The ideology of growth points to the quasi biblical reign of plenty. Everyone expects to get more, and the widespread accumulation of material resources would supposedly stop the social violence. Traditional societies, however, had not lost sight that the accumulation is quite a factor of social tension and violence. Facts and reality clearly show it, but the belief in a society of growth bringing abundance and peace is constantly pushy.

Takis Fotopoulos explains well enough the dynamic of the growth economy:

“The growth economy can only survive through its continual reproduction and extension to new areas of economic activity.” And doing this, the growth economy opens to new action scopes introducing “new discoveries, improvements in efficiency, possibilities for substitution, and technological innovations” in the mature growth economies – or through a destructive approach of geographic expansion of most self-reliant economies in the world. (1)

Economic growth is measured by the number of dollars per head. Everyone runs under this benchmark, being understood that the logic that prevails is to climb the highest and fastest possible in the income pyramid.

International institutions, such as the World Bank, are concerned about the fate of that billion of human beings whose regular earning is less than $ 1 per day, thus representing the stage of absolute poverty. These billion human beings located primarily in rural areas therefore benefits from the attention and interest of institutions to help them out of their extreme conditions, and tools such as micro-credit are highlighted.

Armatya Sen, Nobel Laureate, demonstrated in the late 1990s that one could live in the heart of the richest state in the world, in New York, at Harlem, and have a life much more miserable that within the poorest state of the planet, in the state of Kerala in India – measured on criteria as simple as that compelling example of life expectancy.

The facts show abundantly that many peasants, who abandoned their land in return for income in the city, live in subhuman conditions. The difference between this real city misery and that of peasants living autonomous on their land is that the former are involved in the growth of the economic pyramid (including miserable income not allowing to live with dignity), unlike the latter who do not give further support to the consumer society.

Hence the interest of the institutions to worry for the rural population who do not receive income.

Economic growth requires everyone’s participation as the system does not leave aside several billion people representing potential consumers, and thus substantial growth.

The terrible conclusion is that economic growth creates more miserable individuals than people who could reach a decent revenue.

And regarding those luckier people whose revenue allow them to live in dignity, the mechanical construction of their earnings is disastrous both for the environment and social issues.

Economic growth does not lead us to abundance and peace, but to war and continuing shortage, i.e. insufficiency of absolute vital assets such as land or water.

Our blindness on this reality, our unwavering support to the tyranny of the growth economy, derives from our relative and provisional material well-being, and from our indiscriminate faith in the saving science.

As Marie-Dominique Perrot (2 )says:

“We confuse the quantity and quality and we consider the accumulation of anything as a synonym for progress”.

__________

(1)  In Takis Fotopoulos, Development Or Democracy? SOCIETY & NATURE,  Vol. 3, No. 1 (issue 7), 1995

(2)  From the Graduate Institute of International and Development Studies, Geneva

The myth of GDP (2)

II. Measuring progress

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Behind every accounting system of indicators there are not only social conventions but mostly social choices.

GDP cartogram © Worldmapper · Click on image for a larger version

How to measure progress?
The introduction of the concept of GDP was first developed in the nineteenth century when Adam Smith highlighted the need to assess the exchange.
For over 200 years the concept of progress has been identified with economic growth – to the point of being confused with it. That is inaccurate since one can not assimilate under the same umbrella such disparate concepts as progress of customs background, human capacity to improve control of its own destiny, progress of science and technology or the spread of knowledge.
The term progress in the nineteenth century identified the role of transforming human nature radically to almost deny it (Hegel): while I transform the world I transform myself. The idealistic Hegel’s vision contrasts with other economists such as Jean-Baptiste Say who identified consumption and progress. Through consumption man sharpens his faculties and moves away from the raw state.
There is therefore a theoretical and bibliographic production, which still weighs on our shoulders, and according to which production and consumption are quintessential civilizing acts. Say it’s true. Yet they are not the only.

Who the progress is intended for?
Since the dawn of capitalism, back in the early nineteenth century, every generation has embraced the concept of progress without caring much what future generations would dare.
A more current assessment should now be opposed: Our collective wealth is the durable sum of individual utilities. What matters is the permanence of our societies over time, their sustainability, their sustainable development: each generation owes a heritage of culture, social relations, a natural heritage. Hence, the need to encourage the development of this heritage and carry out the inventory in order to transmit to the next generation a heritage as much extensive.
But what inventory? And starting from what unit of measure?

Progress and quality of life
The report from the Stigkitz-Sen-Fitoussi commission (International Commission on the Measurement of Economic Performance and Social Progress) proposed the concept of income or net income (and even global income) that integrates i.e. household tasks and leisure time activities. The problem is to monetize them, because how to quantify the quality of life? Or if you prefer, how measuring happiness?
Given these constraints it becomes increasingly necessary to target more objective indicators that tend toward a goal of social development – the goal of social health from Jany-Catrice and Miringoff – as decent housing, durable health, which would cover the progress of this wealth

Two explanations to consider: Primo, there is no economic basis that does not come preceded by ecological and anthropological foundations, or both at once. Any situation that endangers this heritage is handicapping the potential for future economic progress. Thus, the main information we can expect from an indicator is that it alerts us of any significant fraud on the asset. Secundo: quantification is a tool for the qualification and not vice versa. What characterizes a democratic society is its ability to discuss their possible options and values – which is true for a political community endowed with a motto like “liberty – equality – fraternity”, as for other subsystems. By subordinating quantification to qualification we are pointing towards a double right: scoring in another way or otherwise not scoring at all — as well as the odds of discussing the qualifications without regard to the reductionist optics of quantification.

Even though being limited, GDP is an indicator that has allowed access to a multilateral dialogue which is embodied into international relations: in this sense, the rationale of the GDP is to recognize the specific weight of countries like India, Brazil, China or Russia which will be more fairly represented in the IMF, the World Bank or WTO. This indicator allows therefore enriching the politically very intricate geostrategic debate.

Thus, the Stigkitz-Sen-Fitoussi commission anticipates power ratios to evolve within a comparative logic. That was the genesis of GDP in the postwar period. And the big issues that postwar societies face are indeed industrial reconstruction – but they neglect other more fundamental questions, namely: how could it be that the worst atrocities has been able to birth within a cultured and educated civilization?

The myth of GDP (1)

I. GDP questioned

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How to go beyond the gross domestic product?
Pursue a modern reflection of wealth means finding tools to move away from an excessively quantitative, restrictive and accounting outlook to assess the collective performance. Changing indicators of wealth while we amend our way of production and thinking involves rethinking the limits of national accounts.

The Satisfaction with Life Index. Blue through red represent most to least happy respectively; grey areas have no reliable data available.

Thirty years to date, GDP per capita has tripled in our developed societies. Why, then, according to all surveys, the welfare of the average Joe has not known same dynamic? How can we move beyond GDP? How to measure progress and the wealth of a nation?

New indicators of wealth: a dispute that goes way back.
The first time the indicator of gross wealth was challenged academically came about the 1970s when the Club of Rome casted doubt on the goodness of the concept of growth. Also in 1972-1973 the first Tobin-Nordhaus report — Measure of Economic Welfare — tried to correct the GDP by eliminating what they called defensive expenditures, ie those costs that do not meet net investment: for example costs repair, recycling costs, etc.

It goes without saying that such initiatives aroused the indignation of the national accounts of the moment — criticism that reappeared in the 1990s, since GDP is a taboo indicator, a fetish indicator of human behavior, a structuring myth as a result of the War World; a myth displayed as the guidebook of postwar reconstruction from a Keynesian perspective of budgetary programming. Somehow it took so long to implement that one understands well the current reluctance not to put into question: GDP is the monetary indicator of excellence, the result of the added values, a convenient indicator that lets you add units from various sources. It is universal and widespread as it shows the supremacy of production and consumption into our advanced societies.

GDP, a growth model of industrial production after WW-II, becoming now obsolete.
Currently, the prevalence of environmental concerns and the primacy of issues related to the culture of services and the economy of knowledge are critical – mostly when foreseeing a change in the assessment criteria of the global accounting aggregate.

The GDP has significant limitations. Primo: It only takes certain activities into consideration and always around paid work. It neglects significant activities: care of children, housework, voluntary work, political activity: non-monetary activities that allow our civilization to last over time and which count for nothing in the overall aggregate assessment.
Second key limitation: the GDP is little or no sensitive to inequalities in consumption and production sharing.
Third limitation: it is a cash flow indicator, a flow and stock accounting that does not outcome into a balance: you can not produce added value and simultaneously destroy part of natural capital — human and social. Its principle of action is to “create assets primarily, and then redistribution will follow.”

That is why it is essential to review the wealth concept while we change our way of thinking. Another accounting logic is possible.

Changing or completely replacing GDP?
There are other indicators in our day. Starting on the human development index till the ecological footprint — not to mention Osberg and Sharpe’s index of economic welfare, Ruut Veenhoven’s ranking of quality of life and happiness or the Catrice Jany’s social health index.

Other indicators are concomitant, such as the administration of physical resources, the aggregate indicator of the ecological footprint and the adjusted net savings – though the latter, simply monetary, suggests a poor vision of sustainability: roughly speaking, a country can pursue a sustainable development path even when its natural capital is deeply exhausted.

America does not understand the crisis

Fall of Quotations ©Miscellaneous

Being concerned about the new American plan for banking supervision, many have welcomed with great emphasis the real revolution in the regulation proposed by Timothy Geithner, the US Treasury Secretary.
If you look a little closer, the collective enthusiasm is shocking. Certainly, the powers of the Federal Reserve have been increased –even if subject to congressional approval, which is not completely negligible. Certainly the FED will turn into an agency aimed at consumers protection – and it is not too early indeed. But on the merits, one has the feeling that the U.S. administration has made its own the Lampedusa’s motto in The Leopard, « Everything must change so that everything remains the same », since in a country where the derivatives are still supervised by the Ministry of Agriculture, the general household yet called for by Barack Obama during his campaign will wait a few months or a few decades. The idea of a single supervisor has been permanently abandoned; the adoption of the rule where one sole supervision should apply to all financial institutions taking the same kind of risks, has been shelved. One may ask if this reform is yet another demonstration, since the start of the crisis, of the Anglo-Saxons willingness — United States but also England — to evade any new rules that would jeopardize their financial imperium? Examples do flourish which allows me to reinforce that point of view. The United States are self protected – because this is protectionism – against the thread of accounting and prudential rules that Europe keeps on applying with a rigor bordering on mysticism. Similarly, nothing has been done on the rating agencies. It is significant that CRAs are two-thirds American for the whole world market. In the same way, control of insurance companies, nothing has been done while the virtual collapse of AIG could be considered a pure product of U.S. regulatory deficiencies. What is valid for the United States is also applicable for the United Kingdom. The FSC — which is the equivalent of the Financial Market Authority in Britain — has not yet made any proposal on the way of a steady reform. Also, UK remains a vast tax haven. During that time, the European Commission and the governments of continental Europe have stated unrelenting rules even more stringent and in many cases still too inadequate to manage this crisis of unprecedented proportions. I think we should really ask the question: on one side, aren’t we witnessing an Anglo-Saxon world which has decided not to reform, and on the other, a European world — Continental Europe – which, seized by debauch to try reforming, monitoring and supervising, risks masses weakening the financial industry in this part of the world?

Africa Underrepresented

Beyond Africa, Developing World should have more say in key forums. African officials dismayed not to have a bigger voice in key global economic forums.

When world leaders meet to tackle the global financial crisis, Africa is represented only by South Africa. African officials argue that the continent need better representation, given the effects that the turmoil is having in Africa as well as the continent’s growing financial importance. The complaint could apply equally to other developing countries.

The global crisis has come just as many African economies were turning a corner, carrying on  improvements in governance, technological change, debt relief, higher prices for their exports as well as inflows of funds from Asia and from Western investors seeking higher yields. Many African countries have spent decades gearing economic policies to attract more private capital and chase away a reputation as unreliable investment destinations.

But turmoil on world markets has cut the supply of money as the world’s biggest banks shift funds from new projects to shoring up balance sheets, leaving African governments wondering how their infrastructure will get built.

But should Africa be better represented?
Compared to its own recent history, African economies have been doing extremely well, but they are still small in global terms. As Africa’s biggest economy, South Africa will be attending, together with representatives of the main developed and developing countries. Is that enough? What advantage might Africa gain from having a bigger voice at the key summits? What about the world’s other poorer regions? Should they have more say too?

Current Crisis,  Cure or Croak

The real economic situation is constantly in a state of fluctuation and the ready made solutions in the classical or neoclassical patterns avoid an enduring and secure solution to the current crisis. Over the years the very concept of ‘economy’ has undergone a sea change. The models that concentrate on national economies of olden years have become redundant and they don’t go beyond a transitory solution suppressing the real economic forces, side tracking the long term perspectives. The durable solution needs a fresh debate among the political economists to come out with an integrated co-operative model, keeping in mind the linkages of the so called developed and the developing economies, in which the monetary and the fiscal policies play a incidental role.

Simon Kuznets was a far sighted development economist who could foresee more than half a century ago that “poverty anywhere is a threat to development everywhere”. The ‘national economy’ is a misconception today and an attempt to resolve the existing depression at the national levels will always contradict the expectations, specially of the developed countries, and they are likely to slip from devil to the deep sea.

I look at the present crisis as a consequence of too much monetarism of the developed countries for maintaining their growth rates overlooking the potential development of South Asia, Africa, Latin America and the Middle East. This might lead to persistent speculative tendencies, playing down the primary role of money and ultimate crash down of core economies of the world creating a worldwide economic chaos.

The retrieval from it might take a century.

Obama Lays Siege to the Financial Casino

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The tragedy that hit Haiti last week meant a welcome sigh of relief to the four Wall Street emperors. That sad day — Wednesday 13 to be exact – wherein more than 111,000 people were killed in one of the poorest countries in the world, Lloyd Blankfein, Goldman Sachs CEO; James Dimon, JP Morgan Chase CEO; John J . Mack, Morgan Stanley CEO and Brian T. Moynihan, Bank of America CEO, responded to questioning by the Financial Crisis Inquiry Commission (FCIC), a commission created by President Obama last year to investigate and discover the perpetrators of the worst financial crisis of the past 70 years.

The catastrophe in Haiti prevented these four glorious characters to get the front pages and the information came buried in the back pages the next day. Parts of the final reports are here. They worth a look for a clearer understanding of recent events and from which the press has turned a blind eye, such as articles published today by El Pais, one of Sandro Pozzi and another by Peter Larsen. None’s aware of the reasons for President Obama to besiege bankers — “If they want war, we will give them,” he said Friday — as well as the requirement to divide the largest banks into smaller entities, or the application of $ 120,000 million tax expected to recover some of the rescue plans. This is a direct comeback to the results of last week and which the press did not report.

Wall Street bankers admit mistakes by the financial crisis. In their view, they already assumed an attitude of apology – but they did not actually account for their acts. As when Lloyd Blankfein said: “What we did, didn’t worked well. We regret that people have lost so much money. ” But what “not worked well” for the people, worked well for them, they who shared out hundreds of billions of dollars in bonuses.

As of Wednesday and Thursday last week, bankers totally downplayed the consequences of the crisis: “It was the perfect storm of the year”, Blankfein said, while James Dimon trivialized “This happens every five or six years”, as if we were into a normal slowdown business cycle and not into a systemic failure founded on financial basis generated by fraud. And although they were cautious not to blame the government, the government caught them and wouldn’t let go of the piece. Furthermore when the bank has continued speculating and creating the seeds of the next crisis.

The investigation led by Sheila Bair, of the FDIC (Federal Deposit Insurance Corporation) helped to illustrate that the trouble is structural and that government and consumers have long been hostage of Wall Street. The frantic struggle to eliminate the Glass-Steagall Act was one of their results. Now you understand Obama’s saying “We will never again be held hostage to banks too big to fail”. And this is just the beginning.

The investigation detected that commercial and investment banks, in collusion with political world, managed to completely disable the security mechanisms and take full control of the system while cheating the government. No public institution was relevant to their view, all public boards were pawn agencies like the SEC — that despite having warned of repeated fraud cases as Bernie Madoff, failed authorizations to investigate and arrest, and so the unscrupulous swindlers could commit crimes with the gentle complicity of the banks. Financial capital formed its own internal guerrilla and finished devouring the industrial capital, the one producing and creating jobs.

Much of this is because the leading figures of finance (Henry Paulson, Timothy Geithner, Lawrence Summers and Robert Rubin) have held positions in banking, government and Wall Street: what must be considered a real incest. You can not serve two masters, being Secretary of the Treasury (that is, a high state official servant) and hold such visible ties with commercial banks, more so when the Fed, is since 1914 a fully private body which lends money to the state, and whose interests are paid by all taxpayers. It would not be surprising that once the whole truth is done Fed decides to return to the Treasury. Maybe Paul Volcker’s plan has already thought about it.

A New Definition of Misery

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A lesson from the history of a new “misery index,” created by Pierre Cailleteau, an economist and sovereign risk analyst at Moody’s.

The unfortunate leader in that misery index is Spain

The international ratings agency has ranked Spain as top of its Misery Index — a metric which adds a country’s fiscal deficit and the unemployment rate — meanwhile UK gets a sixth ranking.

Spain, is followed by Latvia, Lithuania, Ireland, Greece and the UK. The US is eighth — just after Iceland. France, is badly coming back to the mid 70s and 90s funest period.

Czech Republic, Italy and Germany were forecast to be the least miserable.

In fact, Moody’s has compiled a 1970s-style ‘Misery’ index. But instead of showing inflation and unemployment rates, it shows the fiscal deficit and the unemployment rate. The original “misery index”  was invented by the economist Arthur Okun in the 1970’s. Okun had served as a member of President Lyndon Johnson’s Council of Economic Advisers and a professor at Yale. That index came to symbolize stagflation, a significant problem of the 1970s, when consumer prices continued to rise even as economies stagnated and unemployment rose.

And now it makes no sense to talk about inflation as much of the world in which we live is suffering deflation, the new misery index incorporates the public deficit as an indicator of collective misery.

This fact shows that one of the biggest errors of the current economic model over the past thirty years, was taking the dogma of inflation as the central focus of economic policy. Financial circles just looked at the current inflation rate (goods and services), but did not see the creeping inflation of properties and real estate that created the bubble.  Now, high unemployment and high debt levels are putting the economic policy makers faced with the dilemma of an emergency stimulus plan but budgetary realities that cannot afford it.

The Impact of Economic Crisis on Poverty in Latin America

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The report “Social Panorama of Latin America 2009″, presented by the Economic Commission for Latin America (ECLAC), projected that about 9 million people fall into poverty, the 2009 product of the economic crisis, which means an increase of 1.1% over the 2008. This figure marks a reversal in the trend shown in the period 2002 to 2008, representing 25% of the total population that had escaped poverty.

The current global crisis will cause nine million people in the region to fall in poverty this year, according to the ECLAC report Social Panorama of Latin America 2009, released November 19.

Source: Economic Commission for Latin America and the Caribbean (ECLAC), based on special tabulations of national household surveys.

a/ Estimates for 18 countries in the region plus Haiti. The numbers on the top part of the bars represent the percentage and total number of people living in poverty (poor and indigent).

In the study, the Economic Commission for Latin America and the Caribbean estimates that poverty in the region will increase by 1.1% and indigence by 0.8% with regard to 2008. Thus, people living in poverty will reach 189 million by the end of 2009 (34.1% of the population), compared to 180 million in 2008. Also, indigence will reach 76 million (13.7% of the population), up from the 71 million last year.

These numbers depart from the trend towards poverty reduction until now prevalent in the region. The nine million poor and indigent represent almost a fourth of the population that had already overcome poverty between 2002 and 2008 (41 million people), due to greater economic growth, the expansion of social spending, the demographic bonus and better income distribution.

The study was presented today by ECLAC Executive Secretary Alicia Bárcena, who stressed the urgency that the region develop a new long-term social protection system.

“We can’t say that all that was attained between 2002 and 2008 has been lost. It is not a lost period. However, the rise in poverty calls us to action: we need to rethink social protection programmes with a long-term, strategic perspective and measures that make the most of human capital and protect the income of vulnerable families and groups,” she said.

The projected increase in poverty for 2009 will delay the compliance of the first Millennium Development Goal of eradicating extreme poverty and hunger by 2015: the 85% of progress on this goal in the region in 2008 will drop to 78% by the end of 2009.

Some countries may experiment a greater increase in poverty than the regional average, such as Mexico, due to lower GDP and deteriorating employment and salaries.

The current crisis will nevertheless have less impact on regional poverty than prior crises, such as the “Mexican crisis” in 1995, the “Asian crisis” in 1998-2000 and the Argentinean and “dot.com crisis” in 2001 and 2002. For now, the region has been able to maintain the purchasing power of salaries and low inflation.

Income distribution in the region improved significantly from 2002 to 2008. During that period, inequality improved in seven of the 18 countries included in the study and worsened in only three.

Governments in the region have made great efforts to increase social spending. Between 1990 and 2007, public social expenditures per capita rose from 43% to 60% of average total public expenditures in Latin America.

“This shows that it is possible to grow and redistribute, expand social spending and be fiscally prudent to significantly improve living conditions of the population. Latin America is not condemned to be poor or unjust,” stated Bárcena.

For the future, ECLAC suggests reforming social protection systems and adopting both urgent short-term measures as well as strategic long-term ones. In doing so, governments should avoid fiscal irresponsibility and rigid labour markets, increase taxes progressively, redistribute social spending and extend coverage of social services.

Likewise, ECLAC recommends strengthening government assistance transfer programmes, among them conditional transfer programmes (CTPs). There are CTPs in place in 17 countries in the region, encompassing over 100 million people; that is equivalent to more than half the population living in poverty in Latin America.

ECLAC proposes a set of measures as a guide for countries to offset these results:

The Financial Bubble is Ready

Stanley Kubrick’s Dr. Strangelove [ The music is We'll Meet Again by Vera Lynn]

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Dubai’s House of Cards
Dubai is the leading exponent of housing bubbles that have occurred worldwide.  Eccentricity of management has turned a city in the middle of the desert in a field full of hotels and skyscrapers. It was a time – the golden era – when anything was little for the Emirate.

But the crisis has beaten hard Dubai. Works have stopped and credit flow is dead blocked. Up to the point that, yesterday the state holding announced a moratorium on payment of $ 4 billion debt – the same holding that built the famous Jumeira Palm Island. This did not sit well with international markets.

The problem is that the Emirate owes $ 80 billion and markets begin to have doubts about its solvency. As soon as the moratorium on debt payment was announced markets felt down. The worst financial crisis could recur. But instead of banks’ cessation of payments we may now witness States’ suspension of payments.

Speculative Bubble Emerging
Meanwhile, in another part of the planet – the United States – the policy of the Federal Reserve to keep interest rates near zero is fuelling a wave of speculative capital that can initiate the next crisis. Many warn that a new bubble is brewing, and several specialists see in this quantitative easing an equivalent outcome Japan had for its crisis of the early 90s. Low Japanese interest rates did contribute definitely to the outbreak of the Asian crisis in 1997.

Ben Bernanke, an academic on the Great Depression, monitored the most massive injection of liquidity into the world’s largest economy, committing himself not to make the mistake of the 30s when the Fed officials pursued a strict and rigorous monetary policy that only aggravate the crisis further enough. The lack of available money in 1930 is regularly considered the reason why the crisis lengthened for a decade. The little response to current liquidity injections shows that the situation is all but comforting and that new limits of monetary policy may further alter the global imbalances that the crisis left uncovered.

One of these speculation operations is the so-called carry trade; investors borrow in $ (0%) headed for invest in other currencies that offer higher interest rates such as Australia, Brazil and New Zealand. Much of the flow in the capital markets moves ahead that direction. Hence the importance that Asian and Oceania assets are acquiring versus Europe and US assets. Korea, Taiwan, Hong Kong and Singapore assets are rising to levels that are incompatible with the reality that replicates the real estate bubble of US in the 90s and Japan in the 80s – when the Imperial Palace Gardens in Tokyo came to cost more than the entire US state of Washington.

Despite this, former Fed Governor Frederick Mishkin assumed that there is no evidence that a speculative bubble is emerging, since not all bubbles present risks to the economy. Mishkin split good from bad bubbles. The former are instigate by a credit boom, whereas expectations lead to increased demand, generating a rise in asset prices, encouraging lending against those assets and positive feedbacks cycle until it explodes.

The second category of bubbles what Mishkin calls “pure irrational exuberance bubble” is less harmful because there is no credit boom, and if no credit boom occurs the bursting of the bubble can not damage the system – e.g. the bubble in technology in the ’90s and the dotcom’s of 2000, had no global impact. For Myshkin the rise of the credit stirs the bubbles. Now, there is no credit boom in small scale. But bubble is building on the macro scale of speculative capitals, those who move billions of dollars of pension funds, the very same that play in the stock market or speculate on the gold and oil at the expense of the dollar. And at macro levels, everything where bubbles get involved presage awful signs for the economy. Otherwise, it’s like thinking that a bomb may have some positive effect.

Bank Secrecy: the Key to International Transparency

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Bank secrecy and tax havens have now become a key factor for international transparency. Their linking to corruption and money-laundering has been uncovered by the financial crisis. This is one of the reasons why developed countries must tackle corruption internationally, a curse that uses secrecy to screen dirty money transfers. In this interactive map you can have a look on the transparency level in 180 countries surveyed and here is the index.

While New Zealand, Denmark and Singapore top the list of the most transparent countries in the world according to this survey of « perception of corruption », Spain lost four places in the ranking (28^th to 32^nd), France gets back from 23^rd to 24^th position, UK move back one place, same as US – demonstrating that the perception of corruption has risen. In the presentation at its headquarters in Berlin, the organization has emphasized the fight against tax havens noting that « there must be no safe haven for corrupt money ». Like every year, countries at war are perceived as the most corrupt, with Afghanistan and Somalia as the worst two.

In Latin America, Venezuela is one of the world’s most corrupt countries, ranking 162, while Chile and Uruguay are located as the least corrupt sharing 25^th place, followed by Costa Rica (43) and Cuba (61). Brazil shares with Colombia and Peru where 75, Mexico shares the 89 with Rwanda and Argentina is 106. China is located in 79^th.

Since 1955, the organization publishes annually an index of perceptions of corruption ranging from a score of ‘10’ for a country perceived as « transparent » to ‘0’ for one seen as « corrupt. » Transparency International does not spare criticism of industrialized countries in a time when governments attempt to revive the economy by injecting a huge mass of public capital on growth aid programs.

The first defendant is bank secrecy « affecting efforts to fight corruption and recover stolen assets”. In that sense, IT downplays its own index, indicating that the problem of banking secrecy concerns « many countries that lead the classification », such as Switzerland in fifth place and Luxembourg on the 14th. So, the report points that

« The money derived from corruption should not be able to find refuge areas. It’s time to end the excuses.»

As for the great revival plans launched by the industrialized countries, Transparency International warns its perverse effects.

« When you spend a lot of public money very quickly and the authorities that control programs are being overwhelmed, the risk of corruption increases. It is a major risk factor », said the president of Transparency in Germany, Sylvia Schenck.

One thing is clear under current circumstances: the existence of tax havens made easier the crisis to strengthen; hence, the obligation to besiege these sources of corruption.

The US economic revival just (provisionally) around the corner

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The US economy yesterday offered a robust data that, at least temporarily, allowed closing the world’s largest economic downturn since the Second World War.

Budget deficits, 2001-2010, by EU region · Déficit presupuestario 2001-2010 por región UE (Source: Ronan Lyons Economic Analysis, Oct. 16, 2009)

American GDP growth in the third quarter was 3.5% after four consecutive quarters’ drops. The positive data was expected by analysts, but the strength of the US economy stunned – and pleased – the world stock markets and particularly the Dow Jones index, which rose above 2%. The turnaround from the Q2 (-0.4%) suggests that the incentive plans of the U.S. government, an interest rate of 0% practice, the takeoff of the upturn in private consumption and housing are sufficiently solids to undertake corrections in a few months which would put the economy outside the ICU. If so, we would not be far from a very modest increase in interest rates by the Federal Reserve, an assessment that, sooner or later, should be followed by the European Central Bank, especially if consolidating the growth in Germany and France. In the case of Spain, data also released yesterday show the fifth consecutive quarter of economic decline, although it is true that the deterioration has been moderating in the last three quarters we have moved from -1.9% (Q1) and -1.1% (Q2) to -0.4% in Q3. We are, according to the Bank of Spain, in an “incipient recovery” that entails a great deal of risks: the worst unemployment rates, intolerably increasing next to18.2%, deficit escalating close to 10% of GDP and an upward  lack of credit to businesses and individuals.According to the latest figures in relation to countries under the Excessive Deficit Procedure (EDP) of the European Commission, the general government deficit of the euro area lay at 6.1% of GDP in 2009.As a result, the EU-15 public debt the will increase as of 69.3% GDP in 2008 to 78.4% in 2009. By 2010, however, it is expected to further increase on average 6.6% of GDP.At disaggregated level, most euro area countries in 2009 recorded a deficit exceeding the 3% of GDP, while all euro zone countries will infringe the maximum allowable deficit in 2010, according to latest IMF estimates.

Thus deficit cuts jump out over 0.5% per year, mostly in countries with higher deficits.

And what are these countries? Ireland, Greece and Spain showed the highest euro area’s gap budget, both in 2009 and 2010. In particular, Ireland’s public deficit will reach a rate close to 13% of GDP, according to recent estimates. Greece exceeds 12%, while Spain recorded a deficit of 9.5%, along with the IMF.

In 2010, these three countries will continue to be leaders in fiscal imbalance: Ireland (13.3%), Spain (12.5%), while Greece will approach 10%, given its public accounts inaccuracy, only just admonished by the Eurogroup Chairman Jean-Claude Juncker.

A pedagogy on carbon tax

Carbon tax on the way back to Welfare Economics

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Designing a tax for everything that contaminates incites people to preserve environment, the atmosphere in particular, which is in serious danger. The idea is to penalize polluting energy in transport, housing and personal consumption. Every time we consume less fuel but this is not enough to achieve the goals set at the last conference on climate change: hence the idea to programme a compulsory tax (to be paid per tonne of fossil fuel issued). This in order that the world decrease to half the emissions of greenhouse gas (2050) and limit Earth warming to 2 degrees – which causes climate change.

Global warming due to greenhouse gases from the combustion of carbon dioxide is 49,000 million tons of CO2 emissions. Enough is enough, this must be punishable. Its effects could lead to an overall increase of 3% of the temperature within approximately 100 years. The cost of global warming is estimated at 5,500,000 million (Nicholas Stern) [1]. While the concept of a tax on CO2 emissions comes from Arthur Pigou (Economics of Welfare) [2] who, in 1920, first established the polluter pays principle.

Now …

• Should we tax the product itself or the energy consumed?
• What about taxing imported products?
• How do we avoid the risks of inequality?
• What can we do with the tax revenue?

The solutions adopted by each country are different.
France, with about 50,000 million of environmental taxation laid up, shows a certain delay. The structure of French environmental taxation is so unwise by voluntarism emphasis that it will not generate benefits in the sense of net contribution or revenue – but only more taxes on water, on garbage, on the consumption of hydrocarbons (TIPP) which are not reversed in any improvements (infrastructure, citizen responsibilization); on the contrary, it is the umpteenth patch covering the phenomenal public deficit hole. The pedagogy turns into a demagogic fatalistic verbiage as to mislead the common man – because it ignores the virtues of consensus that in all the surrounding countries is originated in the parliamentary debate, which is where popular sovereignty revives up and where such taxation should be decided, not in the halls of the presidential palace – a very usual symptom in the French Republic whose skin politicians refuse to change. These rates represent 3% of GDP … thrown away. Unless considering France as the cleanest country in Europe thanks to its huge nuclear program, which on the contrary converts this country in less safe by the obvious potential for nuclear incidents due to its atomic central park and may involve in quantity of radioactive wastes concerned – the highest per capita in the world. The rhetoric continues, forward flight, too. The only positive point is that hydroelectricity accounts for 93% of energy resources … with the aggravated disadvantage that the driving force’s the nuclear cell. Who do we kidding? If the decrease in CO2 emissions must involve the breakneck growth of the nuclear beast, then where do we go? Stripped from one mouth to feed another.

Moreover, the tax on CO2 emissions in a country is not really quantifiable to impact CO2 emissions at the global level. Global policies are needed to internalize environmental costs and act on the behaviour of firms and households. That is the healthier principle. France is wrong in the way of carrying it out: confusion over the extent rate itself (cheerfully going from 20 to 32 for up to 100 euros / TN emitted by 2030, then left who can say where?) over the exemptions, over its operation. The increased cost of living is set: estimated at 10% the additional costs of household heating in French homes by 2010, from 5 to 10 cts. for a liter of fuel at the pump now. Another consequence is that the tax, as is, will ruin the remaining local industry (current bleeding is the largest ever seen in France) and as usual,  only a few (large) groups will afford to face such additional costs in the midst of an industrial desert. Who will invest in a country that overtaxes 100 euros each emitted CO2 TN? As for the wicked 35h law, nor study or reflection has been implemented and no effort tryed to coordinate with other European countries. The devil is in the details, French say …

The topic of compensation is often talked about, but what about inequality between consumers? What to do with the € 8,000 million that the government is supposed to enter through the concept (e.g. fatten the coffers of the ministry of finance)?

Swedish pedagogy against French demagogy
Other countries as Sweden have also established a carbon tax, even more substantial, but with a very different modus operandi: e.g. Swedish tax implies a graduated scale for companies that invest more in technological innovation to improve production processes in CO2 emission – now that is pedagogy. It’s bad times in terms of economic crisis situation but action is credible in Sweden and demagogic in France where nobody knows whether the tax will be redistributed or yet another ‘neutral’ tax – that is, outside of Pigouvian incitement, which has the favour of Prime Minister Fillon.
Because the environment policy can not be summarized to raise the level of taxation or implementing new taxes, unless you’re old tricks again and increase unemployment and public debt. Two years back here it was the bonus / malus tax on car CO2 emissions (an onerous  marketing device that ruined much of the automotive industry, with a fall of 40% of French production, forcing car manufacturers to abandon the profitable manufacture of sedans to engage in small cars’ on which the profit margin is zero or nearly zero), last year was the tax on diapers for newborns turn, this year it is the time of a tax on CO2 emissions … a joke (or better yet, a shortsighted policy).
The temptation to tax the super profits of the oil industry (Ségolène Royal) would only have negative repercussions in the pocket of the consumers. Better a tax that changes that behaviour and not simply going to fatten the coffers of the state and its lifestyle. Report and well communicate with citizen, having a little patience not changing everything at a stroke or by decree.
Taxation reforms are essential throughout our countries. We talk about tax incentive and not subsidies e.g. car industries so that they manufacture a kind of cars that they would have made anyway. Let’s face green taxes; it is just and necessary, but mostly to help us getting out from the unending virtual crisis of rampant capitalism, far from the real economy. No green custom duties at European borders, a trend advocated by some, in their eagerness, to lead us into a new protectionism; but rather concentrating on comprehensive policies, at least in Europe, better globally. It is useless to establish national policies not coordinated with the rest of countries, giving way to protectionist policies more or less latent: have a look on the global trade drop of 12%, if you want to add more crisis to crisis just add the perversion of protectionism to all the difficulties we face today. The environment is a global public good. To be honest we do not know how to deal with externalities steadily i.e. when China or Brazil pollute, they do not so in their respective territories only but in the entire world. Enforcing tariffs however is theoretically a nice building, but in practice it is just about regression. Also do not forget that China’s censure is unfair: the PRC is making genuine efforts to drastically reduce pollution in its industries – and it still does not occur in most of developed countries.

One of the biggest questions is to identify what the US attitude will be. So far the US had no concern on the Kyoto Protocol; the position is changing but it all depends on the type of changes that comes about there. Scenarios abroad are in my opinion: the role of the G20, the Doha WTO round re-launch and the climate meeting in Copenhagen. All three turn around the same concern: the need for global economic governance to meet challenges.

Pedagogy missing in the US and UK.
The increasing size of speculative capital flows, mainly in US and UK, is the pending business. I mean speculative capitals and hot money outflows are bigger now than a year ago – in the worst moment of financial-mortgage crisis. Hot money is tossed into the emerging economies as the first symptom relief crops up. Thus, the central bank of China is increasingly doomed to buy huge reserves to support a sick dollar (thus some $ 70,000 million per month, are beyond the circuit of productive investments in order to prevent the US currency to collapse again), deflecting precisely investment in productive economy. That is, in essence, we have not yet altered the global imbalances, and even we are somewhat higher than before the crisis. The issue of executive bonuses and allowances is less significant than the required dismantling of the opacity in the banking investment -something impossible in the most key European financial center, the City of London, since the future PM Cameron opposes to it. This, in US terms, is yet unimaginable. So far the best indicators of the City and NY – queues at the best restaurants – behave well as table reservations vary from 2 to 3 months … bonuses, windfalls, luxury cars, stratospheric contracts are just around the corner again. To pin a button: flows exchanged in the derivatives markets reached a record of vertigo – almost 10 times world’s GDP. So how can David control Goliath?

To be continued …

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[1]  The Stern Review on the Economics of Climate Change is a report on the impact of climate change and global warming on the world economy. Written by economist Sir Nicholas Stern, commissioned by the UK government, the report was published in October 2006. The report represents a milestone by becoming the first government report commissioned by an economist rather than a climatologist.

[2] Arthur Pigou is considered the founder of welfare economics and the main precursor of the environmental movement to make the distinction between social and private marginal expenses and advocate for state intervention through subsidies and taxes to correct market failures and internalize externalities. Welfare Economics is his most emblematic book.

Financial Crisis is Delaying African Development Goals

Education needs to be made available to more African children

Many development analysts assumed in relation to the last G20 summit in Pittsburgh that it might not forget about Africa in its talks on the financial crisis. Developing nations on the continent are being especially hard hit at a time when things were starting to look up.

Africa’s developing countries are suffering even more from the financial crisis: not only are they having to make do with less development aid funding, but the amount of money that emigrants are able to send back to support their families at home is much smaller.

The economic crisis will make it harder to reach development aid goals

The crisis is threatening the hard-won progress made in Africa’s developing countries at a time when the situation was starting to improve. African national economies were showing an average growth of 5 to 6 percent in recent years. Kenya, for example, has seen the development of a middle class that invests in its own economy. Outside money, including from newly industrialized countries such as China, Brazil and India, had considerably upped the level of foreign investment. The International Monetary Fund (IMF) estimates that foreign investment and credit for Africa increased to $53 billion (40 billion Euros) – five times the amount in 2000. But Donald Kaberuka, president of the African Development Bank, warns that the crisis could unravel this progress.

“We have to distinguish between the financial crisis and the economic crisis,” Kaberuka said. “Until now, (the financial crisis) has not hit a single African bank, but it has affected national economies. For 2009, we’re expecting an average maximum economic growth rate of 4 to 4.5 percent, no more. And it could well turn out to be smaller. We have to mobilize inner-African capital. We have very rich and very poor countries in Africa. On the regional level, the African Development Bank has already managed to mobilize capital, but not for the continent as a whole.”

Fears of a setback

Ad Melkert is a UN under secretary-general and an associate administrator of the UN Development Program (UNDP). He also fears that Africa will suffer a setback.

“This is all happening after a considerable number of African countries have, over the past few years, experienced significant economic growth and an increase in jobs and investment,” Melkert said. “Now, there’s a reversal. That means when the international community – the G20 – meets in April in London for its financial summit, they have to work out an international agenda there. They have to ensure that they factor in Africa, because this is an international financial crisis that is having effects worldwide.”

Growth rate of 3.4 % expected for sub-Saharan Africa

International institutions such as the Organization for Economic Cooperation and Development (OECD) are calling for multilateral risk management for the financial markets. In Davos, some major actors called for the creation of global economic council. The inclusion of developing countries in such bodies will be decisive, says Melkert. The UNDP representative is hoping for a clear statement from the G20, as otherwise, the UN’s development goals will be in danger of failure.

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“The crisis has created a totally new starting position,” he said. “It really does mean a setback, even for really successful countries like China, for example. We’ll have to really go the extra mile now if we’re to reach our development goals.”

Despite the crisis, some industrialized countries as Spain and Germany have committed themselves to raising development aid bit by bit to reach 0.7 percent of their gross domestic product. Melkert advises other wealthy nations to also maintain their development aid goals.

“There’s no alternative to investing in development goals,” he said. “I hope that the G20 summit will help, I hope that the new American administration under Obama will support the Millennium goals even more. I hope that the Europeans keep their promises and invest more in development policies each year. And I hope that the growing middle classes in Africa, Brazil or in India pay their taxes and use this tax money to fight poverty.”

Poverty remains a major challenge

Although the global fight against poverty has made progress, the percentage of poor people in Africa hasn’t gone down at all, due to the continent’s fast-growing population. With a poverty rate of around 50 percent, the share of extreme poverty in the total population hasn’t changed, and Melkert fears it could even get worse.

“We have to be really ambitious here and take the problem of poverty really seriously,” he said. “With this financial crisis, more people will be forced into poverty than in years past.”

There are worries that more Africans will slip into poverty

The IMF has revised its growth projection downwards and has forecast an economic growth rate of just 3.4 percent for sub-Saharan Africa. But all African governments have to take political responsibility, says Melkert. He points to examples from Latin America, saying Africa should learn to also create effective social security systems and incentives for development.

“Good systems have been established in Latin America,” he says. “There, families get money if they send their children to school or get them vaccinated. Africa should follow this example. The World Bank, the UN or bilateral donors could financially support such a system. That would help the poorest people to have a minimal income to buy food, send their children to school or care for their health.”

He advises the international community to be patient and take a long-term view when it comes to supporting development goals – despite the global financial crisis.

“You don’t make development progress from one year to the next – it’s a question of 10 or 20 years,” Melkert said.

NGOs and Microfinance in Africa: the Awakening Experience of ‘Rwanda Works’

Interesting interview that Josh Ruxin–founder of the new NGO Rwanda Works, Professor at Columbia University, and Director of the Millennium Global Village Project in Rwanda, just had with BigThink.

In the interview, Ruxin describes his current work in Rwanda helping to promote access to healthcare and sustainability, as well as his profound insights into the policies that actually work to advance international development. Among the many current practices that Ruxin explains are simply not working, include the widely-praised spread of microfinance loans, which Ruxin believes are not nearly the “panacea” many believe them to be, and are not actually creating any significant progress in much of the developing world–particularly not sub-Saharan Africa: http://bigthink.com/joshruxin/the-case-against-microfinance-loans

Ruxin also discusses the urgency of developing sustainable agriculture in the developing world as a way to solve an array of problems, and describes some of the creative new approaches to affordably promoting sustainability in Rwanda and surrounding countries that currently being refined to meet these challenges: http://bigthink.com/joshruxin/the-key-to-developing-rwanda

Ruxin also examines how an increase in women’s reproductive rights is one of the key issues in international development and why government officials investing in foreign aid should provide far more funding for family planning: http://bigthink.com/joshruxin/the-link-between-womens-rights-and-economic-success

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Spanish version here below:

ONGs y microfinanzas en Africa: la experiencia reveladora de ‘Rwanda Works’

Interesante entrevista (en inglés) que Josh Ruxin ha concedido a BigThink.  Josh Ruxin es el fundador de la nueva ONG Rwanda Works, Profesor de la Universidad de Columbia, y director del Proyecto de la Aldea Global del Milenio, en Rwanda.

En la entrevista, Ruxin describe su trabajo actual en Rwanda para ayudar a promover el acceso a la asistencia sanitaria y la sostenibilidad, así como sus reflexiones lúcidas sobre las políticas que funcionan realmente para promover el desarrollo internacional. Entre las muchas prácticas actuales que Ruxin considera simplemente inoperantes, incluye la propagación del muy encumbrado sistema de microcréditos. Ruxin los juzga de tal forma que cree que no son ni la “panacea” que muchos quisieran, y no son, puesto que no representan en realidad un avance significativo en la mayor parte de el mundo en desarrollo – en particular, para África subsahariana: http://bigthink.com/joshruxin/the-case-against-microfinance-loans

Ruxin también razona sobre la urgencia en desarrollar la agricultura sostenible en el mundo en desarrollo como una manera de resolver una serie de problemas, y describe algunos de los enfoques nuevos y creativos para promover la sostenibilidad asequible en Rwanda y países vecinos que actualmente se está perfeccionando para enfrentar estos desafíos: http://bigthink.com/joshruxin/the-key-to-developing-rwanda

Asimismo Ruxin examina cómo un aumento en los derechos reproductivos de las mujeres es una de las cuestiones clave en el desarrollo internacional y por qué los funcionarios de la administración que desean invertir en ayuda al desarrollo han de proporcionar muchos más fondos para la planificación familiar: http://bigthink.com/joshruxin/the-link-between-womens-rights-and-economic-success

The impact of the global financial crisis on African development (& 2)

The potential recovery from the financial crisis is very limited

In light of the potentially weakening effects, it is crucial both for African and world leaders and policy makers to discuss the possible responses to diminish the impact of crises on the continent.

One way of responding successfully to the crisis is to give priority to building African markets. In particular, policies to strengthen the African markets and institutions necessary to promote growth and ensure that African economies are more resistant to external shocks. There is also a need for tighter regulation of African financial markets. Moreover, creating a more conducive business environment to reduce costs and limitations associated with doing business in African economies to raise their profile as a business destination less expensive, less risky and more profitable, helping to attract more Foreign capital flows and investment in the context of a capital market has become considerably more risk averse following the onset of the financial crisis. The reforms that encourage foreign direct investment and portfolio flows and the measures that raise the level of confidence in financial systems in Africa can have an equally positive impact.

Sub-Saharan Africa is dropping behind in infrastructure

Source: Preliminary results AICD 2008. African Perspectives and Recommendations to the G20. Committee of African Finance Ministers and Central Bank Governors. 21/03/09

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The expansion of trade with other developing countries represents another potential means to ease the severity of the negative effects of the crisis on African economies. Global trade statistics suggest that trade between developing countries as percentage of total world trade, and therefore world trade has been increasing for quite some time. In fact, trade in goods among developing countries grew at an average annual rate of 13 % between 1995 and 2007 and in 2007, represented a fifth of total world trade flows. It is vital for Africa to increase their share of this link between South-South trade to offset some effects of the anticipated decline in demand for their commodity exports. Along with this is the need to increase intra-regional trade flows and trade in Africa in order to reduce the dependence of African economies in overseas markets. [3]

Similarly, measures to improve South-South economic cooperation, particularly in terms of investment, financial flows and joint efforts to stabilize foreign exchange rates and debt, should be investigated. In particular, South-South several measures to address potentially available for African countries to tackle the worst effects of the global financial crisis. First, the increased funding of regional development banks could offset the anticipated slowdown in international aid and donor funding for African economies. Secondly, regional stimulus packages could be implemented to help sustain the market and sustain economic growth. Similarly, regional agreements could be used that are specifically designed to mitigate the impact of financial shocks through, for example, the provision of international financial liquidity through swaps. Finally, African countries burdened by high debt levels, measures to diversify foreign exchange reserves could be adopted whereby the purchase of other developing countries “that debt.

Globally, according to the World Trade Organization Director General Pascal Lamy said reaching a global trade deal that represent a relatively simple way to alleviate the effects of the crisis. The promise of such a comprehensive agreement “is particularly attractive to African economies, which are perhaps amongst the most threatened by the prospect of increased protectionism arising from the crisis. Specifically, the new national protectionist measures, mainly in the form benign appearance, the political crisis linked to the encouragement of the government and relief campaigns, the exchange rate devaluations, antidumping and countervailing duties and ‘buy local policies that discriminate against foreign firms and workers can suppress the export sectors in Africa even more. It is therefore essential for African politicians to push for a global agreement that keeps opening up markets and prevent a flood of new crisis linked to protectionist measures.

Furthermore, following the emergence of the global financial crisis, it is clear that there is an urgent need to reform the multilateral financial architecture, particularly in terms of ensuring greater representation of African countries in international financial institutions. Despite the financial crisis that originated in Africa, the continent has been excessively exposed to its effects. This has led to strident calls for a more inclusive multilateral governance that provides a greater voice “to African countries in international financial institutions. Countries is important for developing countries, and Africa in particular, to play a role most important of these institutions and the economic crisis management.

Domestic fiscal and monetary policy responses should also be explored by African countries with the capacity to implement them. For example, in African countries with relatively large foreign exchange reserves may be possible to use these reserves to cushion the worst effects of crisis and decline to fund any capital flows. Alternatively, African countries that operate under systems of fixed exchange rate may have some leeway to adopt more flexible exchange rate regimes in order to “allow the nominal exchange rate to absorb some of the impact of external shock and reduce the actual effects in the national economy. “In terms of fiscal stimulus options, the expansionary fiscal policies such as reducing taxes or increasing government spending may help boost demand and employment in African economies. The usual argument against the expansionary fiscal policy – that it crowds out private sector investment – is unlikely to apply, given the climate of reduced appetite for credit and a drastically reduced risk among investors.

Finally, while Africa is certainly feeling the effects of the global economic slowdown, the impact of what is likely to deteriorate further, the credit crunch in the world’s most advanced economies may actually create opportunities in terms movement of capital into emerging economies. For example, sovereign wealth funds before investing in the financial systems of the United States and Europe are now increasingly looking to the developing world to possible locations for investment. However, for this to happen in Africa, the continent’s countries have to implement measures to improve its ratings on investment risk.

Africa is facing a large and growing economic gap

The fact that many African countries are relatively detached from the global financial system has softened the continent from some of the consequences of the global financial crisis. However, the initial view proposed by many commentators that Africa would be “spared” from the effects of the financial crisis that originated in several advanced economies in the world has proven to be unfounded. Prices and demand for African exports of commodities have dropped significantly amid a sharp decline in world industrial output. Moreover, the climate of declining credit arising from the crisis is likely to lead to a substantial decrease in international financial flows to African countries in the form of private investment and capital flows, trade credit, financing donors and remittances from Africans in the diaspora. These factors have led to predictions of sharp fall in growth in sub-Saharan Africa.

It is evident that African countries and their leaders should try to take initiative and economic policy measures and reforms to mitigate the effects of the crisis on African economies. These should include interventions to strengthen the African markets and institutions, expand “South-South trade and economic cooperation, including increase or intra-regional trade to reduce dependence on overseas markets, and implement expansionary monetary and fiscal policies to boost demand and employment. In addition, globally, African leaders must push for reform of global financial architecture to include greater representation of African interests in the forum of the international financial institutions. Furthermore, it is extremely important that the continent supports efforts to conclude a global trade deal that maintains the openness of markets and the safeguards against the proliferation of new crises linked to protectionist measures.

Related Posts: The impact of the financial crisis on African development (Part 1)

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[1] South-South  trade  could  soften  impact  of financial crisis for vulnerable economies. UNCTAD.  2009.

[2] Impact of the crisis on African Economies. Sustaining growth and poverty reduction, African Perspectives and Recommendations to the G20, by The Committee of African Finance Ministers and Central Bank Governors. 21 March 2009

[3] World Bank to Help Mitigate Impact of Global Financial Crisis on Africa’s Development.  19 November 2008

[4] International Monetary Fund. 2009. What the Global Financial Crisis Means for Sub-Saharan Africa. Speech by Takatoshi Kato, Deputy Managing Director, IMF, 12th AU Summt, Addis Ababa, Ethiopia, 3 February 2009.

The impact of the financial crisis on African development (1)

Because of the existing overall crisis, the projected growth for 2009 should move down to the lowest rate of decrease in 60 years. In 2008, the drop in demand resulting from the financial crisis together with synchronized crashes in manufacturing and industrial production, credit problems in traffic finance and consumer reliance caused a fall by 4 % in the growth of global trade.

Initially, many analysts believed that the world’s emerging economies, mainly those in Africa, would rather be protected from the effects of the crisis that came from the advanced industrialized countries. However, in the developing world the impact of financial instability and uncertainty in industrialized countries are beginning to take hold. Access to emerging markets for trade and investment is unlikely to diminish. In fact, UNCTAD estimates that exports of developing countries could decline by 9.2 % in 2009 [1]. The fall in commodity prices that went along with the downturn is particularly troublesome to African economies, many of which are greatly dependent on fresh commodities and raw material exports as the main source of export income. Moreover, the market for trade finance has seriously declined over the past six months; the crisis has aggravated the lack of liquidity to finance trade credit. Emerging economies are also expected to experience ongoing financial contamination, particularly in the form of capital flight and capital flows.

Even though these potentially weakening effects, the G20 predictions suggest that over 80 % of potential world economic growth depends on emerging market countries. In the same way, while the International Monetary Fund (IMF) has predicted that developing countries will increase by 3.3 % in 2009, it is expected that advanced economies will decline by 2 % roughly [2].

GDP Growth by Country Group

In this context, measuring the impact of the crisis on African economies and the accessibility and adequacy of measures to alleviate the effects of crises on the continent, are decisively imperative considerations for prospect growth scenario in Africa.

The Impact

The impact of the global financial crisis is expected to differ among African countries in line with their exposure to international financial system, its production and export structure and its aptitude to employ policy instruments to lessen the adverse effects. Overall, the short term in many African countries can be mitigated by the fact that most countries on the continent are relatively detached from the global financial system. Moreover, emerging banking systems in many African countries are generally characterized by simple structure, conservatism, the rules of prudent financial management, foreign exchange controls and a very limited exposure to subprime loans and the Credit default swaps, has protected the continent’s financial structures of all the effects of the crisis. In fact, Benedicte Christensen, deputy director of IMF’s Africa Department, went so far as to state in late 2008 that “there is no systemic risk that we see in any African country in terms of banking.” [4]

This does not mean that Africa is immune to the effects of the crisis. It is in the medium and long term effects of the crisis on African economies will be realized. The slowdown in global growth linked to the crisis could drive millions of Africans in the line of poverty. This possibility was highlighted in the report of the IMF, World Economic Outlook April 2008, which stated that a fall in world growth of just one % could result in a decrease of 0.5 percentage points of gross domestic product of Africa. Already, the IMF predicts that growth in sub-Saharan Africa will be reduced from about 5.25 % in 2008 to about 3.25 % in 2009. [4]

The slowdown in global growth, together with a sharp drop in world industrial production, has reduced the demand for African exports, reflected especially in the downward spiral of prices and demand for commodity exports. This is alarming given the fact that exports of commodities represent the main source of export earnings of most African countries. Moreover, the fall in export earnings is likely to have negative repercussions in terms of reduced government revenues, thus. Worsening already precarious budgetary situation in many African countries.

Prices of commodities for sub-Saharan Africa

The global credit crunch following the crisis has also caused a huge reduction in the flow of private investment and bank financing, thereby reducing capital inflows and a restriction on the availability of trade finance. This is likely to be reflected in a substantial decrease in international financial flows to African countries, most prominently in the form of reduced foreign direct investment, portfolio flows and remittances from the Diaspora living in the developed world. Regarding the latter, a long-term reduction of remittances from Africans living abroad is likely to be particularly difficult to feel, as these funding streams currently contribute an estimated $ 10 billion annually across the continent .

The effects of reduced foreign investment in Africa to countries that are funding large current account deficits could be especially devastating. For example, South Africa depends to a large extent, at least in the short term, on private capital flows to finance its large current account deficit – equivalent to about 8 % of the country’s total GDP. The projected reduction in capital flows means that South Africa will be responsible for their substantial current account deficit. Other African countries operated relatively large current account deficits, such as Uganda and Tanzania are likely to be similarly affected. These problems may be compounded by the prospect of expanding the deficit caused by the crisis itself. In fact, the IMF has forecast the current account deficit of the entire sub-Saharan African region will expand by more than 4 % of GDP to reach 6.75 % of GDP in 2009.

Saharan Africa: the current versus pre-crisis growth forecasts, 2009

The projected decline in private capital flows can also have a long-term impact on investment in infrastructure projects in African states, many of whom may face funding shortfalls. Since many African capital markets are small, even the relatively limited withdrawal of foreign investment can have a significant potential impact.

Furthermore, African countries may face increased pressure for debt repayment as international institutions and Western banks, not only to strengthen their lending policies, but try to shore up its reserves. Along with this there is the possibility that the global financial crisis will result in a slowdown of foreign aid and development funding to African countries due to the global credit crunch.

Spanish version over here.

Related Posts: The impact of the global financial crisis on African development (Part 2)

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[1] South-South  trade  could  soften  impact  of financial crisis for vulnerable economies. UNCTAD.  2009.

[2] Impact of the crisis on African Economies. Sustaining growth and poverty reduction, African Perspectives and Recommendations to the G20, by The Committee of African Finance Ministers and Central Bank Governors. 21 March 2009

[3] World Bank to Help Mitigate Impact of Global Financial Crisis on Africa’s Development.  19 November 2008

[4] International Monetary Fund. 2009. What the Global Financial Crisis Means for Sub-Saharan Africa. Speech by Takatoshi Kato, Deputy Managing Director, IMF, 12th AU Summt, Addis Ababa, Ethiopia, 3 February 2009.

In France, debt and loans, as usual

In late June 2009, before the French Parliament convened in Congress at Versailles, President Nicolas Sarkozy announced the launch of a government bond issue aimed at individuals and not just at banks. It was “intended for finance investment for future”.

President Sarkozy's take office in May 2007

Here are my personal views on borrowing through French records.

Revenue, resources and bond issues

Initially, it sounds appropriate to consider the key differences between “revenue” and “resources” for a private company or a State, as well:

• The “revenue” is the annual turnover achieved by a company or the overall taxes collected by a state, from which “expenses” or “charges” are deduced to calculate the yearly profits or the balance due, if that event.

• The “resources” are made up of new loans and profits (if positive); they ensure financing the company or State needs, i.e. the refund of loan encountered, investments… and the potential deficit.

This recall of vocabulary may well figure out some evidence often mishandled by a regularly empty and specious political rhetoric:

1. A sound financial management should start from the deficit. Deficit comes from too low revenue or too high expenses, in order to deduct the amount of resources to find with the view to finance this deficit and to meet other needs. Doing otherwise, ie fixing the deficit depending on resources that could be gathered, is a rash fool policy!
2. If the financial markets have enough capacity to lend resources to the company or the State, there is no need to have a bond debt directly from individuals –which is always done in costlier conditions: individuals expect an interest rate higher than which is offered by banks (or they look ahead for a tax benefit). Alternatively, placing the bond debt with hundreds of thousands of people is inevitably more expensive than with a few dozen banks.

It may be decided –for purely reasons of corporate communication or political view– to borrow a modest annual funding requirement from individuals, although it is far more expensive. For instance, Electricité de France-EDF –a public energy supply company– borrowed €2 billion from the French individuals on a yearly overall bond debt of € 10bn roughly. And the State, through the voice of the president himself, plans to borrow round about € 10bn from individuals on an annual basis program loan of € 150bn…140 of which are made by markets, which could easily go up to 150.

Time is gone since the financial markets did not have enough capacity to accommodate the needs of some important EDF or public bonds in the 1980s: the Lepercq’s loans during the post-war years, the Pinay’s in 1958 or Giscard’s in 1965 then in 1973 could still appear justified. On the contrary, the Balladur bond debt in 1993 was no longer acceptable and that of Sarkozy in 2009 will not either: their sole function is political, in spite of the extra financial cost.

Claiming that such borrowing “brings new revenue to invest” [1] is a nonsense: we merely substitute an expensive outline of financing by another costlier. If by this we mean that the state will increase its capital spending proportionately to the amount of resources provided by this particular loan, we have to admit that the State has decided to increase the budget deficit as much –which points to an inveterate laxity again.

Finally, the insistence that the resources of this bond debt will only finance “productive” expenses is simply childish: the remaining loans will finance more widely the unproductive expenses –as it is true how money is “fungible.” Both in private companies as in the state budget, the pre-allocation of resources is a figment of mind.

Rigor, laissez-faire and Euro

After recovering from the late 1990s, which enabled France to qualify for the Euro, the period 2002-2008 has witnessed a creeping deterioration of the fiscal deficit and external accounts, which in total is equivalent to that of early years of François Mitterrand in 1981-1982. Although any turnaround plan equivalent to that of 1983 has come back on course, while public debt has doubled since then and despite the defiant words required in this regard on the campaign trail …

The truth of the matter is that, first, the external obligations linked to the risk of French franc crisis disappeared with the creation of the Euro. Conversely, the French government refused the forced substitution of “Maastricht criteria” (the deficit accounts should not exceed 3% of GDP) as evidenced by the constant postponement of the date of return to balance (in 2010, then 2012, then 2015…) –more often than not since the election of President Sarkozy in 2007…

In 1983, by denouncing the policy of restraint, the Communists and some Socialists in the movement of Jean-Pierre Chevènement, elaborated a scholarly quibbling about the difference between the “chosen” (or “virtuous”) deficit, which “prepares the future” by the investment, and “suffered” deficit that would increase the debt [1].

The same retractions are now ran again in President Nicolas Sarkozy’s preach and his finance minister Christine Lagarde, in an attempt to evade European strain of returning to financial balance by making a scholarly distinction between structural, crisis and activity support deficits.

These quibbles were no more selected in 1983 by the fiscal authorities (President François Mitterrand and his Finance Minister Jacques Delors) than they are today by European leaders, responsible for the accuracy of fiscal policies of each State acceding to the Euro. At the most, the neo-lax of 2009 will try to delay a little the maturity date of austerity policy –such as lax did in 1982 when they delayed it a year. Even though it is pleasant, in the meantime, to spot their discourse converging with those of former radicals as Marchais, Chevènement and so…

The financial reality will retrieve its rights within a year or two –let nature reclaim! Then the economic recovery will allow European authorities to require a reorganization of the French management of public finances. As a result, France would then be punished by an increase of 3 percentage points of VAT orthrough the social tax called CSG. As Germany did in 2005, when its situation deteriorated as that of France, a situation that led Chancellor Schroeder to take corrective measures (that French President Chirac had refused to endorse). Predictable in the short term, this increase would also bridge the gap of current € 30 billion in Social Security; whose mere existence, next to deficit of state budget, should be an intolerable scandal for those who have campaign saying that the debt was unsustainable, and its transfer to future generations unjustifiable.

The future government bond is a substitution “resource”, an undeniably ordinary one. As it does not represent a new “revenue”, which can only come from taxes that will inevitably join to cost savings in order to balance the public budget in the mid term.

French version over here.

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[1] Nicolas Sarkozy veut rassembler autour de l’emprunt, Le Monde, 23 June 2009

Fighting bank recidivism

From Martin Wolf’s analysis in Financial Times.

It would take little for banks to have hands free again. What emerges from the crisis is a system even worse than the one who had caused it. The bank rescue lets the banks free hand to remake the same mistakes. It is urgent to raise prudential ratios.

Henri Cartier-Bresson · Shanghai (Run on Bank)

The panic of autumn 2008 now tends to fade. However, the period during which it is possible to draw lessons and make changes is nearing completion. Without radical changes, another crisis is inevitable. It could even happen much sooner than we think.

Never again? This is probably asking too much. But avoid “it” happening again quickly is crucial. Financially, politically and morally, governments cannot afford repeating this crisis in the short term: the lives of so many people can again be sacrificed to the whims of a few irresponsible.

So far, what emerges from the present crisis is a financial system even worse than that which had provoked. The survivors form an oligopoly of financial monsters too big and too interconnected to fail. And they won. Not because they are necessarily the most healthy institutions, but because they are the ones who received the largest support. One can easily imagine how they will behave when you consider all the devices that encourage risk taking.

What should we do? The most common response recommends tinkering some regulatory safeguards. You’d better worry about aligning the deck chairs on the Titanic: perfectly futile.

The proposals recently put forward by the US Treasury would fall partly into this category. Now the financial system must be protected from its own clumsiness at managing risk. In addition, it will not change it by external control, but only by redefining the system of incentives and bonuses.

The starting point must be the famous “too big to sink”. We need a credible system capable of dismantling huge financial institutions if necessary. The proposals are more attractive to look at the “good banks” in which creditors, in want of warranty, become shareholders. It would be easier if, as proposed by President Barack Obama and as demonstrated Mervyn King, governor of the Bank of England, a regulated institution was obliged to submit a plan for orderly stop its activities.

However, bank failures are like buses: you do not see one for hours and suddenly there came a half-dozen at once. The authorities cannot credibly promise that they would be willing, at a systemic crisis, to accept the failure of all affected establishments. This would lead to a particularly serious panic. The “too big and too interconnected to sink” is indeed a reality. And it is because, as recently remarked Andrew Haldane, from Bank of England – his speech “Rethinking the Financial Network” is available on Bankofengland.co.uk – the financial system is a network increasingly tight.

If institutions are too big and too interconnected to sink, and no satisfactory structural solution can be found, then we must identify alternatives.

The most obvious would be to raise considerably the amount of capital required and to pay greater attention to liquidity. Today, major financial institutions operate virtually with no capital: in the United States, the average debt ratio of commercial banks was 35 to 1 in 2007; in Europe, it was 45 to 1. This allows shareholders to play all out with results that we previously witnessed.

Let financial institutions being managed by the interests of shareholders who provide only 3% of funds intended to be loaned, is pure folly. To align the interests of managers with those of shareholders is even more insane. Given their current capital structure, major financial institutions have a real incentive to play with taxpayers’ money.

How much equity would be reasonable for systemically significant institutions? The answer is: “Much more than today.”

Moreover, the risk that capital needed could be exposed should not be evaluated based on banks models, which are unreliable. Shareholders’ funds should be at least 10% of assets. In the U.S., there was a time when it was much more.

More important capital equities might be a good way to internalize negative externalities – and more precisely the risks – generated by an institution in respect of the rest of the system. Ideally, therefore, the capital requirement might be correlated to the weight of systemic schools, as recommended in the latest annual report of the Bank for International Settlements (BIS). Moreover, these requirements should be calculated based on all the activities derived from fully consolidated accounts.

As part of a financial system much better capitalized, it is also relatively easy to implement a system of macro-prudence, while the required capitals increase during booms and decrease during decline periods.

Again, the higher the proportion of shareholders would be important the less would be worrying to see the bonuses of managers aligned with theirs. Even then, as it is the taxpayers who bear the residual risk, regulators should exercise control over the premiums paid to managers.

Two problems remain. First, transition. Secondly, level of regulation.

Regarding the first point, requiring now more significant capital ratios would jeopardize the recovery of the economy. It is better to imagine a long transition period, stretching perhaps over a decade.

For the second point, it is obvious that we cannot let the so-called “shadow banking system” operating outside any capital constraint if some entities are systemically significant –as we got evidence with funds acting on the money markets.

In addition, capital equity requirements might be imposed in all significant countries. The United States is powerful enough to urge a movement in this direction –by requiring any foreign bank operating in their territory to be properly capitalized.

The conservative method of small steps, not radicalism, is today the most risky option. What must first apply this radicalism? The answer is obvious: the system of premiums and bonuses, of course.

Will the European Union come through crisis ?

Spain has passed from rating ‘AAA’ ‘to rating ‘AA’, after Standard & Poor’s, the 1st international rating agency (IRA), lowered its assessment of long-term debt; so she did with Greece, Ireland and Portugal. This is the first time that the S&P financial rating drops for Spain in 30 years.

What is under consideration?

From the French side, on the one hand, what is at issue is the structural weakness of these economies. Beyond a snide comparison with the food and the stars of the Michelin guide, this decision might have serious consequences for the countries concerned and for the future of the European Union. Because the differences between European states today are so important that each country acts without consulting others, and in addition, the principle of subsidiarity seems more often invoked than solidarity.
However, the shock wave of the financial crisis has reached the credit of the States themselves. To put it clearly, some countries cannot afford to borrow financing their reflation plan.
During the first half of 2009, in addition to the degradation in rating of several countries by the IRA, Ireland has appealed the intervention of the IMF, the Eastern countries have called for help to historical Member States, and the pound sterling fell on the foreign exchange market.

Alternatively, many well-informed specialists consider that the announced downturn due to the financial crisis is greatly exaggerated [1]. Most of banking operators have dealt with serenity and the European Commission forced restructuring of banks that received state aid to encourage further integration of the sector within the EU single market.

A Special Report on the Euro Area [2] published in The Economist pointed how the Euro has brought however, an irrelevant achievement.

“The ECB has fulfilled its remit to maintain the purchasing power of the Euro. Since the currency’s creation, the average inflation rate in the Euro area has been just over 2%. Fears that the Euro would be a “soft” currency have proved unfounded. It is unquestioningly accepted at home and widely used beyond the Euro area’s borders.”

Even if the Euro has not made possible significant gains in productivity or GDP, it has unquestionably engendered greater stability.

What can the Europe Union do to face this?

Despite the bad omens of some analysts, the current crisis shows how the Euro area is not at a critical stage of its existence yet.

Then again and despite of a single currency, there is no economic policy, no budget, no solidarity. Spanish government on top and, to a lesser extent French as well, believe that, to be able to attest its usefulness, the EU might directly help the most vulnerable States by financing reflation plans mutually beneficial.

Oddly, countries that are now complaining of the burden of the Euro are those that once mainly benefited from their membership to it. Thus:

“[The Spanish economy] grew at an average annual rate of 3.9% between 1999 and 2007, almost twice the Euro-zone average and much faster than in any of the currency area’s other big countries…Unemployment fell from close to 20% in the mid-1990s to just 7.9% in 2007.”

Too much at once, as the prosperity met with prices and unit wage costs getting higher, both of which are now particularly painful in the context of recession. Aided by a strong currency, its current account deficit has risen to 10% of GDP. Same for Greece, Italy, Ireland and Portugal. As the report [2] explains

“The main hazard for investors in high-inflation countries—that a steady loss of domestic purchasing power will drag the currency down—is eliminated in a fixed-exchange-rate zone.”

The consolidation of the Euro area needs to move up a gear in terms of political ambition and economic governance. Economic governance, the word is dropped, and it is on everyone’s lips.
Does the 10th anniversary of the European single currency will be marked by the bursting of the Euro area, as some economists fear?
What is involved in crisis management by Europe: politics or money? The lack of economic government, or the absence of a common currency?
In other words, will the EU survive to the crisis?

As indicated earlier, prestigious analysts point that the  consequences of the so-called recession are important, but that its context has been exaggerated too. [1].

Alternatively, for The Economist, leaving the Euro zone is inconceivable:

“The costs of backing out of the Euro are hard to calculate but would certainly be heavy. The mere whiff of devaluation would cause a bank run: people would scramble to deposit their euros with foreign banks to avoid forced conversion to the new, weaker currency. Bondholders would shun the debt of the departing country, and funding of budget deficits and maturing debt would be suspended.” [2]

Therefore, borrowing costs would increase considerably, which could induce a wage-price spiral. Inflation and currency stability would be precarious at best. Thus,  it is not surprising that in most European member states, citizens surveyed remain strongly in favor of the euro. Additionally, those who are about to join, remain more convinced to do so:

“As emerging economies they are prone to sudden shifts in foreign-investor sentiment, which makes for volatile currencies, so exchange-rate stability holds considerable appeal for them.” [2]

Romania and most Baltic countries have already ask the EU and the IMF for help to avoid a loss of investor confidence. Poland is also vulnerable to exchange rate because many of its loans are denominated in foreign currency, and it should join the Euro in 2012.

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[1]  ‘EU cross-border banking will survive crisis’, Paul Taylor, The Guardian, July 27 2009.

[2]  ‘Holding together’ – A special report on the Euro area. The Economist, June 11 2009.

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Does protectionism deserve a severe rebuke ?

In late January, workers at the Total Lindsey Oil Refinery, UK, protested against the recruitment of Italian and Portuguese workers. The strikers brandished banners urging to keep back “British jobs for British workers”. On February,  40 hired workers returned to Portugal.

Simultaneously, Argentina has imposed restrictions on importing televisions, Ecuador has increased tariffs on mobile phones, India has banned the admission to Chinese toys for six months, Europe has increased export subsidies for butter and cheese, Russia has increased tariffs on imported cars, the U.S. Congress voted in January the “Buy U.S.” clause when reviewing the president Obama’s plan (once after George Bush announced tripling the tax on Roquefort). And in France, president Sarkozy granted a government  loan to carmakers in exchange for commitments on maintaining home production and employment.

Confronted with the crisis, countries are increasingly working for reflation plans with preferential conditions for their domestic producers, so that at many forums (Davos in late January, G20 meeting in April, EU conference in June), the alarmist statements about an alleged threat of protectionism have amplified.

This reopens the debate on a taboo subject: protectionism. Is protectionism an overall mistake? Is it completely wrong? Does protectionism deserves a severe disapproval?

Wasn’t European protectionism the founding principle of the Common Market?  The goal: bringing countries closer together by geography and culture, but economically disparate. Customs duties on the borders of Europe defined a zone of free trade in the initial model of the CAP (import duties and export aid):  Free Trade and Protection in Europe towards countries outside Europe. Helping less developed countries to catch up is a reasonable and challenging project –without risking the collapse of entire industries because of unfair competition due to the rapid upgrading of the countries concerned.

In addition, if you consider the reasons that led Europe to face global competition (functional sclerosis, and obstacles to free enterprise, continual union arm wrestling…) we may come to a conclusion: the basic necessity in organizing the involvement inside the companies in order to share profits and risks in the form of forced savings (stocks buyout) –thoroughly related to salaries and proportionally linked to the costs of the consolidated turnover. No more, no less.

Negative externalities and taxes: a contribution to the debate on “junk food”

>> Haga clic aquí para la versión en castellano

Alcohol and cigarette products are usually subject to high taxes. This occurs because the economic theory acknowledges that the price of these products does not reflect the true social cost of consumption.

Thus, a Pigovian tax [1] is applied to neutralize the externalities [2] caused by these products in both consumers and society.

Barcelona · Array of fruits and vegetables at La Boqueria Market

In this regard, developed countries have begun to consider the option of raising the tax burden of the food low in nutrients and high in saturated fats and carbohydrates, also called junk food as a way to lighten the deficit and in turn combat obesity [3]. If implemented successfully in the case of tobacco or alcohol, why do not tax the junk food and improve the way consumers make decisions about their diet?

In return, during the first half of 2009, interesting reports have been published focused on discussing the aspects of the issue. Thus, Engelhard, Garson and Dorn (July 2009) [4] put the junk food as a major cause of obesity, with direct consequences for the economy through a decline in productivity per worker and increased costs for medical care. United States estimates that medical costs of obesity are $ 700 higher than the costs of a thin person.

However, Yaniv, Tobol and Rosin [5] argue that the implementation of taxes on junk food has technical shortcomings. For example, there are too many possibilities of interpretation to decide what products should be considered within that tax. A hamburger has high levels of fat, protein and calories but these are also necessary for metabolism. In addition, unlike the case of cigarette or alcohol, consumption of junk food does not produce a direct negative externality on the welfare of someone other than the individual’s. Therefore, we must ponder the results of these surveys further to soon begin the implementation of tax measures that directly affect the purchasing decision of consumers.

[1] A Pigouvian tax is a duty charged on a market activity to correct the market outcome, if there are negative externalities associated with the market activity.
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[2] In economics, an externality or spillover of an economic transaction is an impact on a party that is not directly involved in the transaction. In such a case, prices do not reflect the full costs or benefits in production or consumption of a product or service.  A negative externality occurs when an individual or firm making a decision does not have to pay the full cost of the decision. If a good has a negative externality, then the cost to society is greater than the cost consumer is paying for it. Since consumers make a decision based on where their marginal cost equals their marginal benefit, and since they don’t take into account the cost of the negative externality, negative externalities result in market inefficiencies unless proper action is taken.
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[3] An individual is classified as obese based on his body mass index (BMI), which shows the relationship between weight and height as an indicator of body fat. An adult is classified as “overweight” if his BMI is between 25 and 25.9. If his BMI is greater than 30 he’s classified as obese.
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[4] ENGELHARD, Carolin; GARSON Arthur; DORN Stan “Reducing obesity: Policy strategies from the tobacco wars”, Urban Institute. July 2009.
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[5] YANIV, Gideon; ROSIN Odelia; TOBOL Yossef. “Junk-food, home cooking, physical activity and obesity: The effect of the fat tax and the thin subsidy”. Journal of Public Economics. June 2009.

Economics in the nude

Unempirical hypothesis in economic theory are subverting efforts to work out environmental threats

Economy stark naked

The pattern maker fathers of neoclassical economics –the current core assumption of the global market system–  were supposed to transform their scope into a scientific discipline. But what is not commonly acknowledged is that these now celebrated economists  –Jevons, Walras, Edgeworth and Pareto–  developed their hypothesis by adjusting equations from the 19th century physics that finally became outdated. Unluckily, it is clear that neoclassical economics has also become obsolete. The assumption is based on unscientific statements that are delaying the implementation of workable economic solutions for global warming and other worrisome environmental threats.

The physical theory that the creators of neoclassical economics used as a pattern was formulated in reply to the inability of Newtonian physics to rationalize the experiences of heat, light and electricity. In 1847 German physicist Hermann von Helmholtz framed the conservation of energy rule and assumed the existence of a field of conserved energy that fills all space and merges these observable facts. Later in the century James Maxwell, Ludwig Boltzmann and other physicists developed better explanations for electromagnetism and thermodynamics, but meanwhile, the economists had borrowed and changed Helmholtz’s equations.

The approach that economists employed was effortless and illogical—they replaced economic variables with physical ones. Convenience utility (a measure of economic well-being) took the place of energy; the sum of utility and expenditure replaced potential and kinetic energy. Many eminent scientists warned the economists that there was definitely no basis for making these swaps. But the economists ignored such analysis and carry on claiming that they had transformed their line of work into a strictly mathematical scientific discipline.

Weirdly, the genesis of neoclassical economics in mid-19th century physics was elapsed. Successive generations of conventional economists admitted the assertion that this hypothesis was scientific. These peculiar occurrences make clear why the mathematical theories used by conventional economists are built on the following unscientific assumptions:

• The market structure is a closed circular flow between production and consumption, with no inputs or outputs.

• Natural resources are present in a domain that is separate and distinct from a closed market system, and the economic value of these resources is determined barely by the dynamics that operate within this system.

• The cost of damages to the external natural environment by economic activities must be treated as positioned outer the closed market system or as costs that cannot be built-in in the pricing mechanisms that operate within the system.

• The external resources of nature are largely boundless, and those that are not can be replaced by other resources or by technologies that diminish the exploitation of the limited resources or that depend on other resources.

• There is no biophysical limit to the expansion of market systems.

If the environment preservation crisis did not be there, the fact that neoclassical economic theory grants a consistent base for running economic activities in market systems could be considered as adequate justification for its common purpose. But since the crisis does exist, this speculation can no longer be considered as useful even in pragmatic or utilitarian terms for the reason that it fails to meet what must now be regarded as a deep-seated prerequisite of any economic theory  –the point to which this theory permits economic activities to be harmonized in environmentally responsible conducts on a global extent. Because neoclassical economics does not even recognize the costs of environmental harms and the limits to economic growth, it represents one of the utmost obstacles to fight climate change and other threats to the planet. It is imperative that economists work out new theories that will take all the concepts and realities of our global system into account.

A few number of economists over the past two decades, including such top personalities as Kenneth J. Arrow, have expressed doubts about the effectiveness of neoclassical economic hypothesis. However, the most express challenges to obvious postulations in this theory have been made by the game theorists. Such as, these academics have challenged the supposition that economic actors are absolutely rational, act upon fixed decision-making rules and are unable of making dreadful choices. In conservative neoclassical economic theory, the natural laws of economics supposedly find out the best possible outcome of a cost-effective process and economic actors lack of all evident human characteristics. This theory presupposes as well that the sphere of economy is established and static and that economic actors are completely rational entities who do not talk back. When getting through the box of human bias, the game logicians have been obliged to conjecture a growing number of unplanned variables to justify the decision-making of individual economic actors. And this enlightens why the history of game theory is marked by a recurrent regression into the incredible complexities of language and culture. As the economist R. Sugden states it [1]:

“There was a time, not long ago, when the foundations of rational-choice theory appeared firm, and when the job of the economic theorist seemed to be one of drawing out the often complex implications of a fairly simple and uncontroversial system of axioms. But it is increasingly becoming clear that these foundations are less secure than we thought, and that they need to be examined and perhaps rebuilt. Economic theorists may have to become as much philosophers as mathematicians.”

This explains why the United Nations Framework Convention on Climate Change (1992) failed to protect the climate system, why the Convention on Biological Diversity (1992) did not even begin to reduce losses in biodiversity, and why the U.N. Convention to Combat Desertification (1994) did not slow, much less, reverse this process. However,   the cooperation of the most part of economists and environmental scientists  –that the world needs without delay–  may occur when both recognize the unique opportunity they have to look after the existence of current mankind and the future existence of its descendents by resolving the crisis in the global environment.

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[1] Robert Sugden, “Rational Choice: A Survey of Contributions from Economics and Philosophy,” Economic Journal 101:4 July, 1991, p. 783.

Africa’s Economy at the Crisis Crossroads

The United Nations Conference on Trade and Development (UNCTAD) published on June 25 the “Economic Development in Africa 2009” [1]. It is focused on the promotion of economic integration in the region, which should become a key factor for boosting and diversifying economic growth, expand markets and attract more foreign investment, especially in the context of current global financial crisis.

Regarding the effects of the financial crisis in the African region, it was noted that the main channels are through the fall in exports, reduction of investment flows and lower revenue collected by governments. In this regard, according to the projections of the African Economic Outlook (AEO) in May, it is pointed that the region could grow 2.8% in 2009, much less than the growth rates of 5.1% in 2008 and 6% in 2007.

The impact of the global financial crisis would already be reflected in exports and reduction in prices of raw materials. A study of the organization ActionAid, says that the financial crisis will cause African economies lose up to 49 billion dollars during 2009 due to the drop in international aid since the fall of exports, among others. The report said that countries that liberalized their markets and that were large enough to attract significant investments will be most affected by the financial crisis, starting with South Africa that could see a drop around 20%. However, they also state that Africa is now better prepared to face the crisis than it was 10 years ago.

[1] Economic Development in Africa 2009. Strengthening Regional Economic Integration for Africa’s Development. UN. June 2009.

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[1] Economic Development in Africa 2009. Strengthening Regional Economic Integration for Africa’s Development. UN. June 2009.

Obama Outlines a New Banking System

President Obama presented yesterday the expected reform of the US financial system. It is widely considered as the primary source of the crisis that led global markets to the brink of collapse at the end of 2008. The President basically cleared the key lines, the frame where successive changes in legislation should be built –but whose application is expected to be tough both in the Senate and in the House of Representatives. It is likely that Treasury Secretary Timothy Geirthner, will upgrade details during his appearance scheduled today.

Definitely, the US President did not spare critics to the banks when analyzing the situation. However, he either did not skirt to mention mistakes that -due to insufficient or maladroitly- regulatory bodies did incur. As of now, the Fed will hold additional powers -almost full- to monitor any activity, including the full range of products, services and benefits already included in the system or on the point of being so. Everything to be done in an intricate attempt -in the words of Obama himself- of safeguarding the balance between the free market and state intervention. In other words, ensuring that financial markets regain their momentum, while avoiding that risks just happened recur.

Undoubtedly, this will be the core of controversy in the process of successive parliamentary proposals, but blockages will appear from the financial system itself, where voices have begun to emerge suggesting that given that the worst is past, it would be reasonable to return as much as possible to normal. In fact, after presidential intervention, some appreciate that the original plans become softer -due to pressures on the White House from the sector. Whatever comes, it is likely that, beyond the threat of collapse of the system, there is less willingness to accept greater control now than six months ago.

Nothing different what is happening on this side of the Atlantic. The European Union has not implemented yet its own reform. The reorganization is necessary: if the imperative of globalization made possible the rapid spread of financial creativity –coming from the United States- it originated the dysfunctions that quickly spread out the planet too.

Probably the European regulation will require a different reform, as the starting point is different and the banking profile system, as well. It does not mean that this innovation will represent less difficulty.

So far, the recommendations of the Larosière Report -prepared at the request of the European Commission- seemed to have focused no particular enthusiasm. Hence, there is little disposition in the Euro area to correct the singularity that the ECB-European Central Bank determines the  monetary policy but has no legal command to enforce its banking supervision -unlike the US Fed and the Bank of England. This is not the only impediment that is seriously compromising in parallel, here and there, the implementation of changes (changes that G20 members diagnosed as urgent prerequisites.)

The American vs. French economy

A lot of people on the far left are quite happy claiming that American-style capitalism has failed. They miss out a few facts. First, this is just the flip side of the business cycle. The American economy will be back to normal before you know it. Second, it was a quasi-governmental agency, the Federal Reserve, that is primarily responsible for the housing bubble, and thus the housing bankruptcy. Third, even in this downturn Europe’s economy is doing worse than America’s.

The benefit of the American economic system is that it produces greater economic growth (and thus greater overall wealth) in the long run, but in return you get greater economic disparity.

In the video, she claims that “the American way makes everyone better off.” This overstates the case. The American way makes most people better off. In general, Americans are better off in the middle and top of the economic and social scale, but worse off at the bottom.

I predict however that when all is said and done, and we look at the performance of the French and US economies from, say, 1970-2020, the French will trounce the Americans. The US economy right now is a total sham, and it’s in for a massive depression. While we’ll no doubt drag the rest of the world down temporarily, the issues in the US are structural, and will take a very long time to resolve. Frankly, we’ve yet to even acknowledge what those issues are, much less craft solutions.

France -and Europe to a large extent-  is certainly not without its problems, but unlike the US, it does have a solid industrial base; sound, productive, high-tech, high-value industrial firms; an intelligent, well-educated workforce possessing a wide range of skill-sets; much lower dead-weight in terms of military spending and the cost burdens of an overseas empire; and an assertive, socially-aware working class which makes the ruling class continually justify their position by demanding positive social outcomes.

But France has a severe fondness to decline. And if reforms are required, they are not necessary because of a supposed French lack of adaptation to globalization, but because it is mandatory that their leaders reconsider their abusive lifestyle and the incompetence that follows (from both right and left wings). It was often claimed that social protection was mainly responsible for the endemic unbalanced financial situation, as if social care was a scapegoat. The way political leaders communicate the deficit is used on a regular basis for the purpose of political marketing and in fact it subsidizes further deficits, i.e. at the present time 9 billion deficit, including 5 billion from government vs. social care admin. Is this the only government public spending? Also you never talk about Europe financing and its Mexican army of civil servants, and so …

One wonders if it is not time to leave the ship, because the captain is crazy!

The current recession in context

In France, the ultra-pessimistic are frequently claiming that another Great Depression is right here. Many of the most pessimistic economic commentators have happily been comparing the current recession to the Great Depression. To give readers a sense of how not awful the current recession is, here is the decline in GDP of several major recessions vs. the Great Depression:

By dint of comparing the current recession to the early 1980s recession (1981-1982), I come to the conclusion that the early 1980s recession was worse. The graph above makes the current glance worse. Though, the graph above seems to be a peak-to-trough measurement. The early 1980s recession was the fourth in a series of recessions in which the unemployment rate didn’t fully recover before the next recession hit, resulting in a peak unemployment rate that was significantly higher than the current unemployment rate. (And before the conspiracy theorists out there claim we can’t compare the current unemployment numbers to those of previous decades, you’re wrong.)

So to speak, it seems very probable that the recession in progress will be the longest lasting since the Great Depression. Even supposing the current recession seems to be at the end, the unemployment rate may very likely achieve the second highest level since 1948, and could maybe go higher than that of 1982. It would definitely be the worst recession since the Great Depression —But it would be a far from what our grandparents and great-grandparents experienced during the 1930s.

So to speak, it seems very probable that the recession in progress will be the longest lasting since the Great Depression. Even supposing the current recession seems to be at its end, the unemployment rate may very likely achieve the second highest level since 1948, and could maybe go higher than that of 1993. It would definitely be the worst recession since the Great Depression —But it would be a far from what our grandparents and great-grandparents experienced during the 1930s.

Please note that in economics, the term recession generally describes the reduction of a country’s gross domestic product (GDP) for at least 2 quarters. The usual dictionary definition is “a period of reduced economic activity”, a business cycle contraction.

Article in French can be read over there

Sarkozy’s Basket

… or the French way against economic commonplace topics

French investments might have seemed like a dreadful idea for the first two years of French President Nicolas Sarkozy’s term. After his election in May 2007, Sarkozy looked like a huge disappointment – unless you really enjoy tabloid stories. He divorced his wife, married the dramatically old fashioned ex-model Carla Bruni, and went on an enviable honeymoon in Egypt – but appeared to do nothing useful about France’s economic problems.

But now there’s some good news for French investments. As many good Frenchmen, Sarkozy might prefer first to concentrate on his private life when elected President. Once his private life is now complete, he’s been able to spare some time for France’s economic problems. And the results for France’s future economic performance and French investments are quite positive.

First, Sarkozy got rid of the 35-hour week. This economy destroying measure, by which companies were forced to set up a maximum 35 hour workweek, was brought in by Lionel Jospin, Premier Socialist in 2000, and has embedded itself throughout the French economy, increasing labour costs, dropping productivity and damaging French investments. Removing it will not make much difference for big business – as one union leader said “nobody wants to renegotiate the 35 hours and reopen Pandora’s box,” but it will make a huge difference for medium-sized and smaller businesses, which will be able to match their workforce with the demands of their business, without being forced to get into the rigid models by the state.

Sarkozy has also passed reforms freeing up France’s retail sector to increased competition with longer operating hours, tighter regulation of unemployment benefits, and autonomy for firms to negotiate directly with employees rather than deal with a union.

In addition to these economic reforms, Sarkozy has pushed through constitutional reforms, limiting the president to two five-year terms and giving the legislature more power to introduce legislation. That is not the big reform formerly announced, but just a first step in the way for.

The remarkable feature of Sarkozy’s split of reformism is that the French unions have been unable to connect and rely with the streets of Paris with major demonstrations, as they had done to stand several previous bursts of reformism in the last decade. A Day of Action protest in 19 March had only half the expected audience and the May nationwide strike had only 4% support. Point barre, end of discussion.

But Sarkozy’s tactic has been to move forward with reforms on several fronts at once; this seems to have worked during 2007, and Sarkozy’s opinion poll numbers have recovered from lows hit till late autumn of 2008, when the financial breakdown started. Yet, it is true that his attractiveness has endured since, similar to several of his colleagues in the European neighbourhoods.

Facts and figures to Sarkozy’s advantage

The benefits of these reforms will be seen most clearly in France’s next period of economic expansion, which may not be immediate because of the general global slowdown. France’s gross domestic product [GDP] is expected to decrease by 0.7% in 2009, according to the Economist, a bit better as the average for the 15-nation Eurozone as a whole.

On the bright side, inflation is expected to be only -3.2%, below the Eurozone expected average and well below U.S. inflation rates. The balance of payments deficit is only 1.6% of GDP, well below both the United States and Britain, in spite of the current high valuation of the euro. Euro short-term interest rates are currently 3.55%, above France’s inflation level, and French long-term government bonds yield 2.8%, well above inflation, so there is no danger of an inflationary spiral. A deflationary situation is yet possible in early autumn 2009,

French economy handicaps

It is a mandatory to get out the French companies off public handouts: a sort of usual public allowances run between companies, authentic availability of free / cheap working force, trainees and complete dependant underdogs, lack of competition in many sectors, lack of penalties for corporate officers, abusive tax exemptions / reductions, volunteer lack of judges at labour assessment and safety inspectors. The french are among those of the OECD who work most for a grotesque wage related to the cost of living. It is most necessary to get effective control over the business and tax them only on their real add value and their employment rate. It is time enough of all these banks, estate agent or other telephone vendors that serve no purpose except to increase inflation and delay the French competitiveness. Investing in university research and development instead of distorting the economic market by offering it to a band of idle heirs.
Also, get out of the dichotomy between a left which would defend assistantship (giving out benefits) and a right who supposedly takes on all of the hard work.