On Tuesday 16/12/2008,
the Banking and Finance Trade Group of Kaduna Chamber of Commerce,
Industry, Mines and Agriculture (KADCCIMA) held its annual year end
dinner at Hamdala Hotel Kaduna, Nigeria. During the event, a
thought-provoking paper was presented by an erudite scholar, former CBN
Deputy Governor and current Chairman Centre for Policy and Economic
Research (CEPER) Dr. Obadiah Mailafia. In view of the relevance of the
well-researched-paper to the ongoing global financial crisis, I wish to
share it with friends of this blog.
Enjoy it!
 |
| Dr. Obadiah Mailafia (far right) with ACP Secretariat Staff & Guests |
Our Distinguished Chairman,
Your Excellency, Deputy Governor Patrick Ibrahim Yakowa
The President of Kaduna Chamber of Commerce & Industry, Hajiya Saratu Aliyu
Members of the Kaduna Chamber of Commerce and Industry
Distinguished guests;
Ladies and Gentlemen:
Permit me to begin by expressing how honoured I am to have been invited to speak on this topical issue of global financial turmoil which has gripped our world with such a fearful frenzy. I am particularly delighted to be here among friends and fellow compatriots.
I have been asked to speak on the topic “Implications of the Global Financial Meltdown on the Nigerian Economy”. If you have been following the ongoing debate on the current global economic situation, as I am sure you all have, you would notice that all the devotees of high finance have been groping for the most appropriate words to capture the reality and spirit of the present upheaval. Some call it a ‘meltdown’; others describe it as ‘turmoil’. The clichéd word ‘crisis’ has been much used and abused. Others speak of a creeping world recession. The extreme Cassandras among us are already drawing analogies to the 1929 Wall Street crash and the ensuing depression that engulfed the entire world economy.
Someone once said that when scientists make experiments, only a few rats or monkeys might perish when things do go wrong. However, when the experiments of economists go wrong, they can cost millions of lives and affect entire societies. Responsible economists must therefore not only experiment with judgement and ethical responsibility; they must also deploy utmost care in choosing their words. It was the German philosopher Martin Heidegger who once noted that “words are the abode of being”. The words we choose are capable of shaping our lives and indeed our future.
For my part, I will stick with the word “meltdown” which the organizers of this event, in their wisdom, have given to me. Not only does it appropriately capture the reality of the present situation; I find it to be a rather neutral term and somewhat less emotive and indeed less suggestive of the most pessimistic of scenarios that many seem to be alluding to.
Nature and Origins of the Crisis
Financial
booms and busts are not a new phenomenon. In fact, they have been an
inherent feature of the world capitalist economy since the industrial
revolution that began in England in the nineteenth century. The first
major global depression occurred in the 1870s. then there followed the
1907 Bankers’ Panic, a financial crisis that saw the US stock market
collapse by nearly 50 percent, with numerous runs on banks and trust
companies and widespread foreclosures across the country. Then there
was the famous – or rather, infamous – 1929 Wall Street crash, which
proved to be the most devastating crisis of all. It was to lead to a
world-wide depression and the cataclysmic upheavals of fascism and world
war.
If the Bretton Woods international order had not existed, it would have been necessary to invent it. A stepchild of crisis and it has been a factor in the world-wide expansion and prosperity that we have known since 1945. Whilst the Bretton Woods order has served the world well – to echo former Secretary of State Henry Kissinger, it could not be said to be without its inequities and imperfections. For one thing, most of the colonial dependencies in African and Asia were not at the negotiating table. The new order that emerged was neither their creation nor was it reflective of the world as they would have wished it to be.
Whilst IMF and the World Bank have provided a modicum of order in a world of potential chaos, the international economy has not been immune to turbulence. In response to the so-called ‘dollar crisis’, President Richard Nixon pulled out the United States from the Bretton Woods regime of fixed exchange rates in the summer of 1971. There followed an entire decade of monetary instability in the context of rising inflation, unemployment and reduced growth.
For leaders such as Ronald Reagan and Margaret Thatcher the solution rested in the neoliberal ideology of free markets, privatization and deregulation. While the release of markets unleashed a new era of growth and prosperity, it did not completely eliminate the tendencies of financial instability. In the United States, the savings and loan crisis of the 1980s and 1990s and 1990s witnessed the collapse of some 747 savings and loan associations, with estimated losses of some US$160.1 billion. It was a factor in precipitating the 1990-1991 economic recession.
One of the biggest banking failures in the 1980s was Drexel Burnham Lambert, a major Wall Street player which had made astronomical profits in junk bonds before driving into the quicksand of bankruptcy via the fraudulent agency of Michael Milken. There was also the spectacular collapse of Long Term Capital Management (LTCM), a hedge fund whose principals included two Nobel economists, Myron Scholes and Robert C. Merton. The firm went under after taking a miscalculated position on the Russian bond market.
In all these cases, US monetary authorities proved more than equal to the task. The ill-winds of financial contagion were kept under check and the economy rebounded without so much as a few glitches.
Then there was the Japanese asset bubble of the 1990s, following the heady rise in asset prices. Linked to a declining population and a rising fiscal deficit, the downturn was to last for a decade, leading to a severe crisis of stagflation in Japan. Then there was the Asian financial crisis that began in 1997, spurred by the combined ills of ‘crony capitalism’, bad loans and ineffective regulatory institutions. The crisis started in Thailand with the financial collapse of the Thai baht caused by the decision of the Thai government to float the baht and cutting its peg to the US dollar. Much of Southeast Asia and Japan experienced currency slumps, massive stock devaluations and sharp increases in private debt.
According to available data, between 1980 and 1994, some 1,295 banks and thrift societies with assets valued at US$621 billion sued for bankruptcy in the United States. Because the US has nearly 3,000 banks spread throughout the country, their rise and fall rarely causes more than a few bleeps on the radar screens. Indeed, the country’s entrepreneurial spirit admires the small guy who falls down and gets up again.
If the Bretton Woods international order had not existed, it would have been necessary to invent it. A stepchild of crisis and it has been a factor in the world-wide expansion and prosperity that we have known since 1945. Whilst the Bretton Woods order has served the world well – to echo former Secretary of State Henry Kissinger, it could not be said to be without its inequities and imperfections. For one thing, most of the colonial dependencies in African and Asia were not at the negotiating table. The new order that emerged was neither their creation nor was it reflective of the world as they would have wished it to be.
Whilst IMF and the World Bank have provided a modicum of order in a world of potential chaos, the international economy has not been immune to turbulence. In response to the so-called ‘dollar crisis’, President Richard Nixon pulled out the United States from the Bretton Woods regime of fixed exchange rates in the summer of 1971. There followed an entire decade of monetary instability in the context of rising inflation, unemployment and reduced growth.
For leaders such as Ronald Reagan and Margaret Thatcher the solution rested in the neoliberal ideology of free markets, privatization and deregulation. While the release of markets unleashed a new era of growth and prosperity, it did not completely eliminate the tendencies of financial instability. In the United States, the savings and loan crisis of the 1980s and 1990s and 1990s witnessed the collapse of some 747 savings and loan associations, with estimated losses of some US$160.1 billion. It was a factor in precipitating the 1990-1991 economic recession.
One of the biggest banking failures in the 1980s was Drexel Burnham Lambert, a major Wall Street player which had made astronomical profits in junk bonds before driving into the quicksand of bankruptcy via the fraudulent agency of Michael Milken. There was also the spectacular collapse of Long Term Capital Management (LTCM), a hedge fund whose principals included two Nobel economists, Myron Scholes and Robert C. Merton. The firm went under after taking a miscalculated position on the Russian bond market.
In all these cases, US monetary authorities proved more than equal to the task. The ill-winds of financial contagion were kept under check and the economy rebounded without so much as a few glitches.
Then there was the Japanese asset bubble of the 1990s, following the heady rise in asset prices. Linked to a declining population and a rising fiscal deficit, the downturn was to last for a decade, leading to a severe crisis of stagflation in Japan. Then there was the Asian financial crisis that began in 1997, spurred by the combined ills of ‘crony capitalism’, bad loans and ineffective regulatory institutions. The crisis started in Thailand with the financial collapse of the Thai baht caused by the decision of the Thai government to float the baht and cutting its peg to the US dollar. Much of Southeast Asia and Japan experienced currency slumps, massive stock devaluations and sharp increases in private debt.
According to available data, between 1980 and 1994, some 1,295 banks and thrift societies with assets valued at US$621 billion sued for bankruptcy in the United States. Because the US has nearly 3,000 banks spread throughout the country, their rise and fall rarely causes more than a few bleeps on the radar screens. Indeed, the country’s entrepreneurial spirit admires the small guy who falls down and gets up again.
The Current American-Originated Drama
What is alarming about the current situation is that it is in the
nature of a seismic tremor – a financial Tsunami of earth-shaking
proportions. Within the space of a few weeks some of the biggest
financial giants have run into trouble. The opening salvo was
investment bankers Bear Stearns. Then there was AIG and the nation’s
two biggest insurance firms, Fannie Mae and Freddie Mac. Last week, it
was Lehman Brothers, until then, the fourth biggest investment bank in
the country, trailing Goldman Sachs, Merril Lynch and Morgan Stanley.
Merril narrowly escaped a similar fate only because it was bought over
by Barclays. Even as I write, Goldman and Morgan Stanley – the only two
titans still standing – are said to be tottering on the brink. It has
been a week of upheavals such as has never been seen since the Great
Depression.
For the non initiates, investment banks are institutions that raise finance for firms and governments by underwriting securities such stocks and bonds. They also provide strategic financial advisory services on mergers and acquisitions while managing financial assets and trading in commodities, foreign exchange and complex financial instruments known as derivatives. Investment bankers are traditionally the blue-blooded princes of international high finance, often referring to themselves as the “Masters of the Universe”. It is not uncommon to find 25-year old traders taking home US$10 million per annum in salary and bonus. It’s a rarefied world of gilded chambers, with an embarrassment of riches that would have impressed the Medicis of Renaissance Florence.
Founded as far back as 1844, Lehman had survived civil war and the Great Depression to establish itself as a highly respected global investment bank. By 2007, it was posting record revenues for the fourth consecutive year and was well known on Wall Street as one of the biggest dealers in bond trading. By June this year, however, its shares were already heading south. In the past quarter alone, it has to revise downwards its assets by a staggering $7.8 billion as a result of heavy exposures to dubious mortgage-backed securities. Its stocks suddenly plummeted by more than 95% from $82 to less than $4, sending alarm bells to all its shareholders.
Equally alarming is the fact that the regulatory authorities appear increasingly helpless. Having already committed massive tax payer’s funds in underwriting loss from AIG and the big insurance firms, the authorities were unwilling to bail out Lehman. The Federal Deposit Insurance Corporation (FDIC) is said to be strapped of cash while the mighty Federal Reserve appears to be already stretched to its limits. Treasury Secretary Henry Paulson has continued to signal that authorities would not habituate banks into believing that everyone who is in trouble can automatically expect some forbearance. Central banks across the world – from the Bank of England to the Bank of Japan and European Central Bank – have pooled together in excess of US$247 billion in support. Unfortunately, we are yet to see the end of the tunnel, not to talk of any light in it.
For the non initiates, investment banks are institutions that raise finance for firms and governments by underwriting securities such stocks and bonds. They also provide strategic financial advisory services on mergers and acquisitions while managing financial assets and trading in commodities, foreign exchange and complex financial instruments known as derivatives. Investment bankers are traditionally the blue-blooded princes of international high finance, often referring to themselves as the “Masters of the Universe”. It is not uncommon to find 25-year old traders taking home US$10 million per annum in salary and bonus. It’s a rarefied world of gilded chambers, with an embarrassment of riches that would have impressed the Medicis of Renaissance Florence.
Founded as far back as 1844, Lehman had survived civil war and the Great Depression to establish itself as a highly respected global investment bank. By 2007, it was posting record revenues for the fourth consecutive year and was well known on Wall Street as one of the biggest dealers in bond trading. By June this year, however, its shares were already heading south. In the past quarter alone, it has to revise downwards its assets by a staggering $7.8 billion as a result of heavy exposures to dubious mortgage-backed securities. Its stocks suddenly plummeted by more than 95% from $82 to less than $4, sending alarm bells to all its shareholders.
Equally alarming is the fact that the regulatory authorities appear increasingly helpless. Having already committed massive tax payer’s funds in underwriting loss from AIG and the big insurance firms, the authorities were unwilling to bail out Lehman. The Federal Deposit Insurance Corporation (FDIC) is said to be strapped of cash while the mighty Federal Reserve appears to be already stretched to its limits. Treasury Secretary Henry Paulson has continued to signal that authorities would not habituate banks into believing that everyone who is in trouble can automatically expect some forbearance. Central banks across the world – from the Bank of England to the Bank of Japan and European Central Bank – have pooled together in excess of US$247 billion in support. Unfortunately, we are yet to see the end of the tunnel, not to talk of any light in it.
Understanding the Roots of the ProblemAny
explanation of the current financial meltdown must begin with the
housing bubble that began in the mid-2000s. While this was evident in
the US and UK markets, it was not confined to those economies. Many
countries experienced sharp increases in house prices, from 2002 to
2006, that far exceeded the growth in household income. This book,
especially in the US, was fueled by low interest rates, increased global
liquidity, aggressive and innovative marketing of credit facilities, a
belief that house prices would continue to move higher forever, the
incorrect pricing risk, and a global search for higher yielding
financial assets. Low levels of financial regulation fuelled a boom in
sub-prime mortgage financing. The annual issuance of US sub-prime
mortgage backed securities increased from a mere $56 billion in 2000 to a
massive $508 billion in 2005, comprising something of the order of 20
percent of total US mortgages.
By 2006, the housing bubble was beginning to unravel, as higher interest rates and rising oil and food prices - and a generalized decline in consumer confidence – were starting to take their toll. The collapse in house prices led to widespread disclosures beginning from the first quarter of 2008. The weakness in the US housing market led to a dramatic fall-off in the prices of mortgage backed securities since ultimately the value of these assets are derived from mortgage payments. This started to become evident from August 2007, although the extent of the problem was not known at that time. The loss in value of mortgage backed securities and other related instruments has left many financial institutions with too little capital. Since the beginning of 2007 banks in the US have written off $334 billion, while European banks have lost $229 billion and Asian banks $24 billion.
In response to the ensuing credit crisis, financial institutions began to desparately seek means of reducing their debt by selling assets, including those mortgage-backed securities. This became a vicious cycle, given that selling off assets, enmasse leads to a further reduction in the inherent values of those assets, thereby making the situation worse. This vicious cycle is what some key financial market participants and economists have called the “paradox of deleveraging”. Furthermore, since financial institutions have too little capital relative to their debt, they haven’t been able or willing to provide the level of credit the economy needs. This is leading to sharp downward revision to global economic growth, with some analysts now forecasting a global recession in 2009.
Economists and financial historians would continue to debate the factors accounting for the current crisis. Former Labour Secretary Robert Reich underlines greed as the key factor. For billionaire investor George Soros, it is the end of a 25-year ‘super-bubble’ for which he blames former Fed Chairman Alan Greenspan with his policies that encouraged speculative exuberance even as interest rates were at an all-time low and asset prices were spiraling out of control. Democratic Presidential candidate Barack Obama predictably heaps the blame on the misguided policies of the Bush administration, describing the situation as “the most serious financial crisis since the Great Depression”.
Capital market economists had long predicted that something would have to give, especially at the wake of the sub-prime crisis of the last couple of years. The big ratings agencies may also bear some of the blame for failing to be more rigorous in their risk assessments. There are others who blame the situation on the repeal of the Glass Steagall Act 1933 which made a clear demarcation between general commercial banking and investment banking activities. The absence of such a demarcation was underlined as one of the factors accounting for the speculative exuberance that led to the 1929 Wall Street crash.
While there is some truth in all of the above, the current situation must be seen in the context of a combination of factors which have been long in the making. The reality is that the world of high finance has become so complex in our digital age, with several instruments structured using the arcane language of quantum physics – not the sort of thing that your traditional central banker could understand, let alone track down and regulate. It has become a nightmare for regulators even in the most advanced societies.
What is also evident is that for the past few years, the US economy has exhibited all the symptoms of structural fragility. Until recently, the dollar had continued to slide against major currencies while the sub-prime crisis continued to take its toll on public confidence, with inevitable fears of a creeping recession. What we face today is a volcanic eruption on an unprecedented scale. What it portends for America and the world may be truly portentous.
By 2006, the housing bubble was beginning to unravel, as higher interest rates and rising oil and food prices - and a generalized decline in consumer confidence – were starting to take their toll. The collapse in house prices led to widespread disclosures beginning from the first quarter of 2008. The weakness in the US housing market led to a dramatic fall-off in the prices of mortgage backed securities since ultimately the value of these assets are derived from mortgage payments. This started to become evident from August 2007, although the extent of the problem was not known at that time. The loss in value of mortgage backed securities and other related instruments has left many financial institutions with too little capital. Since the beginning of 2007 banks in the US have written off $334 billion, while European banks have lost $229 billion and Asian banks $24 billion.
In response to the ensuing credit crisis, financial institutions began to desparately seek means of reducing their debt by selling assets, including those mortgage-backed securities. This became a vicious cycle, given that selling off assets, enmasse leads to a further reduction in the inherent values of those assets, thereby making the situation worse. This vicious cycle is what some key financial market participants and economists have called the “paradox of deleveraging”. Furthermore, since financial institutions have too little capital relative to their debt, they haven’t been able or willing to provide the level of credit the economy needs. This is leading to sharp downward revision to global economic growth, with some analysts now forecasting a global recession in 2009.
Economists and financial historians would continue to debate the factors accounting for the current crisis. Former Labour Secretary Robert Reich underlines greed as the key factor. For billionaire investor George Soros, it is the end of a 25-year ‘super-bubble’ for which he blames former Fed Chairman Alan Greenspan with his policies that encouraged speculative exuberance even as interest rates were at an all-time low and asset prices were spiraling out of control. Democratic Presidential candidate Barack Obama predictably heaps the blame on the misguided policies of the Bush administration, describing the situation as “the most serious financial crisis since the Great Depression”.
Capital market economists had long predicted that something would have to give, especially at the wake of the sub-prime crisis of the last couple of years. The big ratings agencies may also bear some of the blame for failing to be more rigorous in their risk assessments. There are others who blame the situation on the repeal of the Glass Steagall Act 1933 which made a clear demarcation between general commercial banking and investment banking activities. The absence of such a demarcation was underlined as one of the factors accounting for the speculative exuberance that led to the 1929 Wall Street crash.
While there is some truth in all of the above, the current situation must be seen in the context of a combination of factors which have been long in the making. The reality is that the world of high finance has become so complex in our digital age, with several instruments structured using the arcane language of quantum physics – not the sort of thing that your traditional central banker could understand, let alone track down and regulate. It has become a nightmare for regulators even in the most advanced societies.
What is also evident is that for the past few years, the US economy has exhibited all the symptoms of structural fragility. Until recently, the dollar had continued to slide against major currencies while the sub-prime crisis continued to take its toll on public confidence, with inevitable fears of a creeping recession. What we face today is a volcanic eruption on an unprecedented scale. What it portends for America and the world may be truly portentous.
The Crisis of American LeadershipA
deep understanding of the current situation would require a close
examination of the crisis of American leadership in the 21st century.
It was the great publicist Walter Lipmann who proclaimed the twentieth
century as ‘the American Century’. For better or worse our generation
has lived under the shadows of the American hegemony. The nineteenth
century French aristocrat and jurist Alexis de Tocqueville had eulogized
the young Republic as one of the greatest experiments in civilized
government. It is a truth universally acknowledge that these United
States have defined the character and physiognomy of our twentieth
century, its fortunes and its debacles.
But perhaps all this is about to change. Philosophers of history from Ibn Khaldun to Oswald Spengler and Arnold Toynbee have taught that empires and civilizations move in cycles; from to adulthood, senescence and eventual decay. In spite of her historic grandeur, we may be facing what could only be described as the symptoms of a profound crisis – the end of American exceptionalism as we have always known it. With the ongoing financial crisis, we may be witnessing the unfolding drama of a Shakespearean tragedy on the world scale; a tragedy spurred by the fatal cocktail of greed, hubris, and the folly of imperial overstretch.
September 11 of the year 2001 remains deeply etched in the collective memory of the American people. The financial turmoil which broke out in the middle of September 2008 may be said to be more destructive in financial terms that the madness which brought down the Twin Towers. Future historians may look back to it as the tipping point in America’s downward spiral.
During a visit to China, former Secretary of State Henry Kissinger once asked Premier Chou-Enlai what he thought was the effect of the eighteenth century French revolution. The infinitely wise Chou replied: ‘It is too early to tell’. It may be too early to tell what the long term impact of the current crisis would entail. Within the short-term, we should expect a massive slowdown in global output, with likely contagion effects spreading to world markets. For countries such as ours that are not yet fully hooked on to the global digital econom, we may have the paradoxical advantage of not suffering the worst effects. But we are not insulated. A slowdown in the American economy and in the rest of the industrialized world would mean a reduction in net capital flows. The consequent reduction in world demand would translate into falling oil and raw material prices, with the attendant pressures on export earnings and national budget revenues.
For America it may not be the end of the world, but it certainly signals the end of an era. Strategic thinkers from Michael Howard to Paul Kennedy have warned that empires often self-destruct through the folly of imperial overstretch. In over-extending herself beyond her means and her material capabilities, America has ended up alienating her allies, pursuing a unilateralist course that wise men from Franklin Roosevelt to Harry Truman and Ronald Reagan would never have dared to contemplate. In so doing, George Bush and the neocons who govern America have exhausted the moral capital that the United State has accumulated since Woodrow Wilson’s Atlantic Charter. In pursuing such misguided policies, they are threatening to also bring down the engine room of international capitalism by a combination of myopia, greed and folly. More than at any time in her illustrious history, America stands isolated and bereft of moral authority – and on the verge of bankruptcy.
In 1945, the US economy accounted for 48% of world output. American leadership was central to the success of the construction of the Bretton Woods international financial architecture. Through the Marshall Plan, America saved Europe from crumbling under the ashes left by the war against the Nazis. Without American help, the development trajectories of Japan, South Korea, Taiwan and the Philippines would have been quite different from what they are today. For more than six decades, the US has been the de facto global banker of last resort, with the dollar being the de facto world reserve currency. With her open economy and impregnable fortress of rules-based markets, the country has been the destination of choice for international investment capital.
It is an open secret that America is today the world’s number one debtor-nation. One of the greatest achievements of the Clinton Presidency was to have eliminated the budget deficit. When the Republicans took over, the notion of balanced budgets was cast out through the window. It was further aggravated by military adventures in Afghanistan and Iraq that cost an astonishing US$1 billion daily in tax-payers money. And we all know that those adventures have more to do with advancing the interests of oil sharks and the military industrial complex than about fighting terrorism or spreading the ideals of democratic government. The Bush administration has cornered itself into a classic quandary: if they remain in Iraq they would continue to attract the hatred of the Arabs and the Islamic world while continuing to waste their national resources; if they leave, they would lose face and Iraq would most likely descend into chaos. In thus, overstretching herself, the American Imperium has squandered its international goodwill whilst impoverishing its people at the same time.
To be sure, America still leads the world in high technology and innovation. It is rated Numero Uno in terms of international competiveness. Its universities are the best in the world and it is largely unequalled in sheer entrepreneurial energy. But it is also a nation of spendthrifts, with a consumerist prodigality that inspires no one. Today Asian countries hold US treasury bills in excess of the magnitude of US$1 trillion. If those countries were suddenly to seek redemption of those assets, the United States economy would automatically be bankrupted. Indeed, super-investor Warren Buffet has predicted that the net ownership of American assets by foreigners would reach a staggering US$11 trillion in 2015, by which time according to him the country would become a ‘nation of sharecroppers’.
One would have to agree with IMF Managing Director Dominque Strauss-Khan’s warning that the financial crisis is likely to portend a major slowdown in the world economy for much of the coming year. On his part, OECD Secretary General Angel Gurria believes there is a likelihood of a contagion effect, with the prospects of more banks collapsing and many more falling into ‘intensive care’. The collapse of financial institutions will spread collateral damage to related industrial sectors with the prospects of reduced output and the loss of millions of jobs.
But perhaps all this is about to change. Philosophers of history from Ibn Khaldun to Oswald Spengler and Arnold Toynbee have taught that empires and civilizations move in cycles; from to adulthood, senescence and eventual decay. In spite of her historic grandeur, we may be facing what could only be described as the symptoms of a profound crisis – the end of American exceptionalism as we have always known it. With the ongoing financial crisis, we may be witnessing the unfolding drama of a Shakespearean tragedy on the world scale; a tragedy spurred by the fatal cocktail of greed, hubris, and the folly of imperial overstretch.
September 11 of the year 2001 remains deeply etched in the collective memory of the American people. The financial turmoil which broke out in the middle of September 2008 may be said to be more destructive in financial terms that the madness which brought down the Twin Towers. Future historians may look back to it as the tipping point in America’s downward spiral.
During a visit to China, former Secretary of State Henry Kissinger once asked Premier Chou-Enlai what he thought was the effect of the eighteenth century French revolution. The infinitely wise Chou replied: ‘It is too early to tell’. It may be too early to tell what the long term impact of the current crisis would entail. Within the short-term, we should expect a massive slowdown in global output, with likely contagion effects spreading to world markets. For countries such as ours that are not yet fully hooked on to the global digital econom, we may have the paradoxical advantage of not suffering the worst effects. But we are not insulated. A slowdown in the American economy and in the rest of the industrialized world would mean a reduction in net capital flows. The consequent reduction in world demand would translate into falling oil and raw material prices, with the attendant pressures on export earnings and national budget revenues.
For America it may not be the end of the world, but it certainly signals the end of an era. Strategic thinkers from Michael Howard to Paul Kennedy have warned that empires often self-destruct through the folly of imperial overstretch. In over-extending herself beyond her means and her material capabilities, America has ended up alienating her allies, pursuing a unilateralist course that wise men from Franklin Roosevelt to Harry Truman and Ronald Reagan would never have dared to contemplate. In so doing, George Bush and the neocons who govern America have exhausted the moral capital that the United State has accumulated since Woodrow Wilson’s Atlantic Charter. In pursuing such misguided policies, they are threatening to also bring down the engine room of international capitalism by a combination of myopia, greed and folly. More than at any time in her illustrious history, America stands isolated and bereft of moral authority – and on the verge of bankruptcy.
In 1945, the US economy accounted for 48% of world output. American leadership was central to the success of the construction of the Bretton Woods international financial architecture. Through the Marshall Plan, America saved Europe from crumbling under the ashes left by the war against the Nazis. Without American help, the development trajectories of Japan, South Korea, Taiwan and the Philippines would have been quite different from what they are today. For more than six decades, the US has been the de facto global banker of last resort, with the dollar being the de facto world reserve currency. With her open economy and impregnable fortress of rules-based markets, the country has been the destination of choice for international investment capital.
It is an open secret that America is today the world’s number one debtor-nation. One of the greatest achievements of the Clinton Presidency was to have eliminated the budget deficit. When the Republicans took over, the notion of balanced budgets was cast out through the window. It was further aggravated by military adventures in Afghanistan and Iraq that cost an astonishing US$1 billion daily in tax-payers money. And we all know that those adventures have more to do with advancing the interests of oil sharks and the military industrial complex than about fighting terrorism or spreading the ideals of democratic government. The Bush administration has cornered itself into a classic quandary: if they remain in Iraq they would continue to attract the hatred of the Arabs and the Islamic world while continuing to waste their national resources; if they leave, they would lose face and Iraq would most likely descend into chaos. In thus, overstretching herself, the American Imperium has squandered its international goodwill whilst impoverishing its people at the same time.
To be sure, America still leads the world in high technology and innovation. It is rated Numero Uno in terms of international competiveness. Its universities are the best in the world and it is largely unequalled in sheer entrepreneurial energy. But it is also a nation of spendthrifts, with a consumerist prodigality that inspires no one. Today Asian countries hold US treasury bills in excess of the magnitude of US$1 trillion. If those countries were suddenly to seek redemption of those assets, the United States economy would automatically be bankrupted. Indeed, super-investor Warren Buffet has predicted that the net ownership of American assets by foreigners would reach a staggering US$11 trillion in 2015, by which time according to him the country would become a ‘nation of sharecroppers’.
One would have to agree with IMF Managing Director Dominque Strauss-Khan’s warning that the financial crisis is likely to portend a major slowdown in the world economy for much of the coming year. On his part, OECD Secretary General Angel Gurria believes there is a likelihood of a contagion effect, with the prospects of more banks collapsing and many more falling into ‘intensive care’. The collapse of financial institutions will spread collateral damage to related industrial sectors with the prospects of reduced output and the loss of millions of jobs.
Implications for Nigeria
For us in Nigeria, the current crisis could not have come at a worse time, especially when we have been facing a capital market meltdown of our own for some months now. There are several implications of the current meltdown on the Nigerian economy.
First, as an immediate consequence, it is likely to aggravate the ongoing stock market crisis. As of last week, it was reported that foreign portfolio investors have withdrawn some US$15 billion from our capital markets. Such massive withdrawals compound the crisis of confidence which will further complicate the capital market recovery process.
Secondly, dwindling petroleum prices mean a severe reduction in foreign exchange earnings, which, in our case, derive overwhelmingly from the petroleum sector. Some experts are predicting that petroleum prices may come down to as low as US$30 per barrel over the coming years. Others believe we are approaching a stabilization point where the price may hold for sometime. Hardly anyone imagines that prices may recover to the levels exceeding the US$100 that we witnessed about a year ago.
Thirdly, and deriving from the above, it is likely to affect our budget plans in a major way. Already, the 2009 federal budget proposals have an inbuilt deficit of 1.09 trillion naira, a figure that many consider to be unsustainable. While government is optimistic it would be able to finance it through taxation and accruals from signature bonuses from the sale of certain privatized companies, the skeptics seem to be carrying the day.
Fourthly, lower revenue expectations through all tiers of government mean reduction of funds from much-needed investment in infrastructure development. This would not only deepen the infrastructure finance gap, it would also bedim our prospects for our much-vaunted Vision 2020 project.
Fifthly, we would have to reckon with reduction in net capital flows, both in terms of investment flows and in terms of concessional resources. Our country has not been a major recipient of official development assistance (ODA). Nonetheless, we do benefit from aid resources, which pundits are often the soft target when developed countries face a major financial crisis. Linked to this are earning sent home by the Nigerian Diaspora, which, according to some calculations exceed US$s billion annually. With the financial crunch biting harder, remittances from our people abroad are likely to diminish.
Sixthly, the lowering of growth in the OECD countries will translate into lower growth in Africa as indeed in our country. Earlier estimates about growth exceeding 10 percent would clearly have to be revised downwards. We may have to be content with something in the region of 7-8 percent growth for 2008.
Seventh, lower growth would also mean a slowdown in the fight against poverty. It has been estimated that 50 percent of our citizens fall within the internationally defined measure of absolute poverty. Linked to this is the worsening gini co-efficient – a measure which defines the gap between the rich and the poor.
All these point to reduced development prospects for the vast majority of our people. It goes without saying that the current crisis calls for the highest qualities of prudence and economic statecraft. While I welcome the effort by my former colleagues in the Central Bank in responding so robustly through Monetary Policy Committee, it is important to point out that our own stock market crisis has more to do with internal institutional defects than from the turmoil that has erupted across the Atlantic.
Perhaps we also need to carefully consider the pros and cons of leaving our foreign reserves in dollar accounts. Part of the likely effects of the current crisis may be a massive shift of capital from North America into Euroland area, a prospect that would further weaken the value of the dollar against the other world currencies. Leading investment experts such as Warren Buffet have long predicted that the almighty dollar will continue in its secular trend of decline over the coming decade. Keeping all our reserves in dollars may be a great risk, as we may already have lost some 20% of our national wealth by sheer virtue of the dollar’s decline over the last three years. For geopolitical reasons, countries such as Iran long ago took a decision to move their reserves into the Euro area. Any precipitate action in this regard would, of course, be untoward. But our monetary authorities must keep clear this possibility as an option in case the current turbulence transmutes into a cataclysm.
For us in Nigeria, the current crisis could not have come at a worse time, especially when we have been facing a capital market meltdown of our own for some months now. There are several implications of the current meltdown on the Nigerian economy.
First, as an immediate consequence, it is likely to aggravate the ongoing stock market crisis. As of last week, it was reported that foreign portfolio investors have withdrawn some US$15 billion from our capital markets. Such massive withdrawals compound the crisis of confidence which will further complicate the capital market recovery process.
Secondly, dwindling petroleum prices mean a severe reduction in foreign exchange earnings, which, in our case, derive overwhelmingly from the petroleum sector. Some experts are predicting that petroleum prices may come down to as low as US$30 per barrel over the coming years. Others believe we are approaching a stabilization point where the price may hold for sometime. Hardly anyone imagines that prices may recover to the levels exceeding the US$100 that we witnessed about a year ago.
Thirdly, and deriving from the above, it is likely to affect our budget plans in a major way. Already, the 2009 federal budget proposals have an inbuilt deficit of 1.09 trillion naira, a figure that many consider to be unsustainable. While government is optimistic it would be able to finance it through taxation and accruals from signature bonuses from the sale of certain privatized companies, the skeptics seem to be carrying the day.
Fourthly, lower revenue expectations through all tiers of government mean reduction of funds from much-needed investment in infrastructure development. This would not only deepen the infrastructure finance gap, it would also bedim our prospects for our much-vaunted Vision 2020 project.
Fifthly, we would have to reckon with reduction in net capital flows, both in terms of investment flows and in terms of concessional resources. Our country has not been a major recipient of official development assistance (ODA). Nonetheless, we do benefit from aid resources, which pundits are often the soft target when developed countries face a major financial crisis. Linked to this are earning sent home by the Nigerian Diaspora, which, according to some calculations exceed US$s billion annually. With the financial crunch biting harder, remittances from our people abroad are likely to diminish.
Sixthly, the lowering of growth in the OECD countries will translate into lower growth in Africa as indeed in our country. Earlier estimates about growth exceeding 10 percent would clearly have to be revised downwards. We may have to be content with something in the region of 7-8 percent growth for 2008.
Seventh, lower growth would also mean a slowdown in the fight against poverty. It has been estimated that 50 percent of our citizens fall within the internationally defined measure of absolute poverty. Linked to this is the worsening gini co-efficient – a measure which defines the gap between the rich and the poor.
All these point to reduced development prospects for the vast majority of our people. It goes without saying that the current crisis calls for the highest qualities of prudence and economic statecraft. While I welcome the effort by my former colleagues in the Central Bank in responding so robustly through Monetary Policy Committee, it is important to point out that our own stock market crisis has more to do with internal institutional defects than from the turmoil that has erupted across the Atlantic.
Perhaps we also need to carefully consider the pros and cons of leaving our foreign reserves in dollar accounts. Part of the likely effects of the current crisis may be a massive shift of capital from North America into Euroland area, a prospect that would further weaken the value of the dollar against the other world currencies. Leading investment experts such as Warren Buffet have long predicted that the almighty dollar will continue in its secular trend of decline over the coming decade. Keeping all our reserves in dollars may be a great risk, as we may already have lost some 20% of our national wealth by sheer virtue of the dollar’s decline over the last three years. For geopolitical reasons, countries such as Iran long ago took a decision to move their reserves into the Euro area. Any precipitate action in this regard would, of course, be untoward. But our monetary authorities must keep clear this possibility as an option in case the current turbulence transmutes into a cataclysm.
Towards a Brave New WorldThe
months ahead will be difficult for the American people and indeed the
world at large. Some have suggested that the current crisis literally
gave Barack Obama the US Presidency on a platter. Whilst this may be
so, I believe that what America faces today transcends mere partisan
politics. There is need for a new historic consensus to rebuild the
country and to restore hope in a time of upheaval. We need no less than
“a world restored”, as the young Kissinger once wrote as a doctoral
student at Harvard. But such restoration will not be possible without
America retracing its moral bearings and forging a new coalition for the
reconstruction of international economic order. Part of the greatness
of American civilization, if we could still so call it, is its infinite
capacity to reinvent itself and to adapt to new realities. In the new
world that is upon us, America must eschew the arrogance of power and
accept to share the responsibility for global leadership with the EU,
China and India, and, shall we say, Nigeria, Brazil and regional
hegemons.
Francis Fakuyama’s End of History thesis has turned out to be a rather premature verdict on the fate of the human condition in our time. The Promethean forces unleashed by technology and globalization have created new dangers and tumults. In our age of complex inter-dependence, new fears and insecurities may resurrect the long-forgotten cloven hoofs of history. One of the leading figures in world economics has suggested that we may have to rewrite out textbooks. From a neo-liberal orthodoxy which touted the market as the solution to all problems, we would have to bring back the state in all its glory, albeit without the follies of the past.
We in Nigeria have to relaunch our development on new and more robust foundations. I fear to say that as we speak, we are yet to see a clear economic strategy around which to anchor rational expectations and to mobilize the vast resources and energies of our people.
The Nigerian economy still suffers from severe distortions. The severe infrastructure constraints need no re-emphasizing. Another missing link, in my view, is the absence of an effective anti-monopolies regime. Our economy has a fearful symmetry of cartels that are feeding fat on our country and defrauding customers by charging exorbitantly for poor services and products. I have always believed that a free market economy without effective regulation is like playing Hamlet without the Prince. I am not, of course, referring to regulations that hamstring the market and frustrate entrepreneurial energy. Rather, I am referring to the creation of a healthy competitive environment; a level playing field that ensures fair prices and quality products and services to consumers. The Nigerian people expect nothing less.
We also need to re-visit the imperatives of economic and industrial competitiveness. Nigeria currently ranks 94th according to 2008 Global Competitiveness Index. We fare even worse, at 114th out of 181 countries, according to the World Bank report on the ease of doing business. To achieve this, we have to deepen the reforms which were begun in 2003 within a coordinated strategy anchored on structural transformation and the creation of nothing less than a new Nigeria.
I am not one of those who are easily misled by the report, recently attributed to Merrill Lynch, that our country is the safest in the world. As far as I know, ours is safety derived from the paradox of marginality. Because we are not deeply hooked into the global digital economy, we adjudged to be ‘safe’. While this may be flattering, it is not, in reality, necessarily an impressive position to be in.
Reforming the International Financial ArchitectureThe current turmoil points to the existence of a major paradox in global society: it is expressed in the emergence of an integrated world economy without the requisite multilateral governance institutions. A new Bretton Woods is needed to address the challenges of global economic and political governance. More than ever before, we stand in need of vision and statesmanship; the kind of leadership that would effectively confront systemic challenges such as financial turbulence, global warming, the spread of infectious diseases and the nightmare of poverty which condemns half of the world’s peoples to conditions akin to those of the dark Middle Ages.
Several prominent development thinkers have pointed to the need for a new financial architecture, among them Jose Antonio Ocampo, former UN undersecretary general for economic and social affairs. He recently declared that the “current financial crisis has made the need for reform of the international financial architecture patently clear”. Jeffrey Garten, a professor at Yale has noted that the current global institutional apparatus “is woefully incapable of overseeing the financial system that is evolving”.
Several proposals are already under discussion. They range from the proposed Global Monetary Authority (GMA) to replace the IMF; and organization that would act as a reinsurer for certain obligations held by central banks as well as overseeing regulatory activities of national authorities in addition to managing global risks. Other proposals include creation of a regulatory regime for derivatives, stopping speculation on staple food commodities, application of stricter international capital reserve requirements, introduction of the so-called ‘Tobin tax’ on forex international transactions, closing down tax havens and imposition of stronger transparency rules.
Clearly, what we face is no longer an American drama; it is a global challenge requiring global solutions within the framework of coordinated international policy action. The United States, Europe, Japan and China would have a major role to play in all this. But new members would have to be welcome to the club, including regional leaders such as Brazil, India, Nigeria, Saudi Arabia. At this juncture, it was a matter of regret that Nigeria was not invited to the last G20 summit, in spite of the fact that our leadership status in Africa is unassailable. According to Dani Rodrik, Professor of Political Economy at Harvard, the current turmoil calls for a more central role for emerging powers in multilateral financial institutions, more so that man of the Western institutions and firms will be at the mercy of China and Gulf states for the necessary liquidity that would restore them on the path to growth.
In concluding these thoughts, permit to allude to the observation once made by the late Hedley Bull Montague Burton Professor of International Relations at Oxford, to the effect that we need a new ethic of ‘cosmopolitan enlightenment’ as the moral foundation of a new international order. As an idealist without illusions, Bull was prescient enough to know that, in an age of post-ideological politics, civilization itself may be imperiled unless the nations come together to forge a new compact based on solidarity and hope. In my humble opinion, this is the shape destiny assumes on the earth.
Francis Fakuyama’s End of History thesis has turned out to be a rather premature verdict on the fate of the human condition in our time. The Promethean forces unleashed by technology and globalization have created new dangers and tumults. In our age of complex inter-dependence, new fears and insecurities may resurrect the long-forgotten cloven hoofs of history. One of the leading figures in world economics has suggested that we may have to rewrite out textbooks. From a neo-liberal orthodoxy which touted the market as the solution to all problems, we would have to bring back the state in all its glory, albeit without the follies of the past.
We in Nigeria have to relaunch our development on new and more robust foundations. I fear to say that as we speak, we are yet to see a clear economic strategy around which to anchor rational expectations and to mobilize the vast resources and energies of our people.
The Nigerian economy still suffers from severe distortions. The severe infrastructure constraints need no re-emphasizing. Another missing link, in my view, is the absence of an effective anti-monopolies regime. Our economy has a fearful symmetry of cartels that are feeding fat on our country and defrauding customers by charging exorbitantly for poor services and products. I have always believed that a free market economy without effective regulation is like playing Hamlet without the Prince. I am not, of course, referring to regulations that hamstring the market and frustrate entrepreneurial energy. Rather, I am referring to the creation of a healthy competitive environment; a level playing field that ensures fair prices and quality products and services to consumers. The Nigerian people expect nothing less.
We also need to re-visit the imperatives of economic and industrial competitiveness. Nigeria currently ranks 94th according to 2008 Global Competitiveness Index. We fare even worse, at 114th out of 181 countries, according to the World Bank report on the ease of doing business. To achieve this, we have to deepen the reforms which were begun in 2003 within a coordinated strategy anchored on structural transformation and the creation of nothing less than a new Nigeria.
I am not one of those who are easily misled by the report, recently attributed to Merrill Lynch, that our country is the safest in the world. As far as I know, ours is safety derived from the paradox of marginality. Because we are not deeply hooked into the global digital economy, we adjudged to be ‘safe’. While this may be flattering, it is not, in reality, necessarily an impressive position to be in.
Reforming the International Financial ArchitectureThe current turmoil points to the existence of a major paradox in global society: it is expressed in the emergence of an integrated world economy without the requisite multilateral governance institutions. A new Bretton Woods is needed to address the challenges of global economic and political governance. More than ever before, we stand in need of vision and statesmanship; the kind of leadership that would effectively confront systemic challenges such as financial turbulence, global warming, the spread of infectious diseases and the nightmare of poverty which condemns half of the world’s peoples to conditions akin to those of the dark Middle Ages.
Several prominent development thinkers have pointed to the need for a new financial architecture, among them Jose Antonio Ocampo, former UN undersecretary general for economic and social affairs. He recently declared that the “current financial crisis has made the need for reform of the international financial architecture patently clear”. Jeffrey Garten, a professor at Yale has noted that the current global institutional apparatus “is woefully incapable of overseeing the financial system that is evolving”.
Several proposals are already under discussion. They range from the proposed Global Monetary Authority (GMA) to replace the IMF; and organization that would act as a reinsurer for certain obligations held by central banks as well as overseeing regulatory activities of national authorities in addition to managing global risks. Other proposals include creation of a regulatory regime for derivatives, stopping speculation on staple food commodities, application of stricter international capital reserve requirements, introduction of the so-called ‘Tobin tax’ on forex international transactions, closing down tax havens and imposition of stronger transparency rules.
Clearly, what we face is no longer an American drama; it is a global challenge requiring global solutions within the framework of coordinated international policy action. The United States, Europe, Japan and China would have a major role to play in all this. But new members would have to be welcome to the club, including regional leaders such as Brazil, India, Nigeria, Saudi Arabia. At this juncture, it was a matter of regret that Nigeria was not invited to the last G20 summit, in spite of the fact that our leadership status in Africa is unassailable. According to Dani Rodrik, Professor of Political Economy at Harvard, the current turmoil calls for a more central role for emerging powers in multilateral financial institutions, more so that man of the Western institutions and firms will be at the mercy of China and Gulf states for the necessary liquidity that would restore them on the path to growth.
In concluding these thoughts, permit to allude to the observation once made by the late Hedley Bull Montague Burton Professor of International Relations at Oxford, to the effect that we need a new ethic of ‘cosmopolitan enlightenment’ as the moral foundation of a new international order. As an idealist without illusions, Bull was prescient enough to know that, in an age of post-ideological politics, civilization itself may be imperiled unless the nations come together to forge a new compact based on solidarity and hope. In my humble opinion, this is the shape destiny assumes on the earth.
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