Keynes had the opportunity to revolutionize economics theory because of the great depression in 1930s and, much more importantly, strong political support from Roosevelt, the then president of the US. It is natural that another revolution in economics theory will not be possible unless there is a strong political support. In the present situation, because of the world wide dominance of mainstream economics, taught in almost all universities, world wide political support is needed.
Interestingly, the present global crisis seems to have gathered some world political leaders to propose for a reform in the world economic structure. Leading economists have also been working reforming development paradigms.
By now, everybody knows that the rising defaults on sub-prime mortgage in the US in 2007 is just a trigger for the current global financial and economic crises. Many financial crises have occurred all over the world, mostly in emerging markets. All crises, including the current global crisis, are preceded with large inflow of foreign capital, very strong credit growth, too much leverage , and asset (mostly property) price bubbles. Then, asset prices collapse and financial crisis occurs.
The difference is that this current crisis did not start in an emerging market, but in the US, which had not experienced such a crisis since 1930s. Furthermore, unlike its predecessors, it is not only a regional crisis, but a global crisis.
Furthermore, the problem is not simply financial, but has spread to the (real) economy. In some economies, it already has some social and political implications. Simon Johnson (2009), a former chief economist of the International Monetary Fund (2007-2008), even argued that the interest of elite in financial market has contributed importantly to the crisis—even with the backing of governments. Therefore, political weight of the crisis was also great.
At the symposium “New World, New Capitalism”, hosted by French President Nicolas Sarkozy and former British Prime Minister Tony Blair in Paris in January 2009, financial-based capitalism has been attacked as “an immoral system”. Sarkozy argued that this kind of system has been diametrical to basic ideas of capitalism itself. Therefore, he argued, capitalism needs different values and accepts stronger role of governments. Blair recommended a search for a new financial architecture that is not based on maximum short-term profit. German Chancellor Angela Merkel proposed to look at the old German idea of “social market economy” and used it as a new international order.
The food crisis has also been given an alarming warning from some world leading politicians. A report for ministers of G-8 (Groups of Eight Nations), prepared in April 2009, mentioned a possible global permanent food crisis. Prices of agricultural products in many developing countries remained very high, not far from 2008 peak. The rising number of world population will also necessitate the fast increase of world food production, especially in developing countries. Otherwise, the world will face a structural food crisis, which will bring insecurity and instability in world politics. (Blas, 2009)
Will the world really come to prolonged depression, worsened by food crisis, which result in global insecurity and instability? Will the world be able to find the “exits” from the current crisis? If yes, will the recovery and, hopefully, boom be sustainable and there will be no repeat or even more severe crises in the future?
The “reality” was, however, better than expected. Government policies all over the word to avoid the worst scenario might have been fruitful. In June 2009, some “green shoots” had been observed and people started talking about recovery and post crisis economic policies. In August 2009, world recession might have been over with the positive second quarter growth rates in Hong Kong, Singapore, Japan, French, and Germany. As reported in the Asia Pacific Times (August 2009), business as usual had been seen again in Wall Street with “no regret”. Speculation with structured bonds, huge executive salaries and extraordinarily large bonuses had been back in Wall Street.
Yet, have we solved the fundamental issues resulting in the frequent but wider and deeper crises? If not, the usual pattern will be repeated: recovery, boom, large inflow of foreign capital, rising credit growth and so on—the usual boom-bust asset price cycle– before finally we face another and deeper crisis.
The “recovery” can be simply an harbinger for a deeper, wider, and longer financial, economic, and even social and political crises. Indeed, even during the month of August 2009, Asian markets went down again. Financial market investors may not have been confident on the sustainability of the rising global stock market. After the crash in 1929, stock market initially rose before another, and longer, collapse of the stock market. Therefore, more fundamentals issues underlying this business cycle should be found out. Or, should we just surrender to the “fact” that this cycle is normal and we cannot do anything about it?
Barack Obama, the president of the US was irked by the sense of no regret among the business in the Wall Street. He said to the actors in the Wall Street “You do not get the impression that the culture of behaviour has changed as a result of what has happened.”
Therefore, despite the “promising” signs, the need to reform financial sector remained strong. Ben Bernanke, the chairman of the US Federal Reserved urged on 21 August 2009 that the financial system needs a a structural reform, particularly in its regulatory framework. Otherwise, the lost in 2007-2009 will occur again.
In 14 August 2009 Nicolas Sarkozy, president of France, launched a report “Measurement of Economic Performance and Social Progress” produced by a panel of economists created by Sarkozy and Joseph Stiglitz, a Nobel Prize winner from Columbia University. The report urged the world to overhaul the standard measures of economic performance. Wrong statistics such as GDP may have made the society worse. An increase in GDP could be a mis-leading index of quality of life. For example, traffic jam, with its resulted pollution, may reflect the rise in sales of cars, which is an indication of a growing economy.
The panel recommends three things: adjustment of the measurement of GDP, creation of new statistics on well-being and happiness as well as on environmental and financial sustainability. Emphasis should also be given to the distribution of income and wealth as well as education and health. Angel Guria, the secretary general of the Organization for Economic Co-operation and Development, welcome the report and said that OECD was ready to help creating the new statistics.
Will there be more politicians joining hands in revolutionizing development paradigms? Will there be more economists brave enough to devote their time to revolutionize development paradigm, like what Keynes did in 1930s?
Unlike in 1930s, the solution for the current situation need an interdisciplinary approach. Will there be a sufficiently large number of non-economists joining the economists to produce an interdisciplinary development paradigm and will there be a significant number of economists willing to re-examine the mainstream development paradigms?
I hope this short note can “mletik” (spark) you to contemplate on this exiting, and important, endeavour.
Singapore, 19 September 2009