Two years ago the global financial sector imploded. Economists, as well as finance experts, have suffered a crisis of their own. Many had predicted a new era of stability but now they have to explain how the worst financial crisis since the Great Depression in 1929 happened despite their optimism.
I would recommend everyone to read the tribute to macroeconomist, Hyman Minsky, by journalist Stephen Mihm of The Boston Globe in his article ‘Why capitalism fails’. Minsky, who died over a decade ago, worked his whole career as an economist, one of the few who saw the current financial crisis coming. ‘Success breeds a disregard of the possibility of failure’, he so rightly observed.
Nobel Price-laureate, Economist and columnist, Paul Krugman, points the finger at some of his colleagues in his New York Times article, ‘How Did Economists Get It So Wrong?’ (September 2, 2009) In the real world, Krugman writes, economists believed they had things under control. But we know better now: the ‘romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong.’
Krugman continues: ‘They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets — especially financial markets — that can cause the economy’s operating system to undergo sudden, unpredictable crashes; and to the dangers created when regulators don’t believe in regulation.’
The basics of economics that even I can remember from my first lessons in high school is scarcity, a term which many economists abandoned for years. Scarcity is one of the most important economic values because it shows us the limitation of economic prosperity. It states that society has insufficient productive resources to fulfil all human wants and needs. Alternatively, scarcity implies that not all of society’s goals can be pursued at the same time: trade-offs are made exchanging one advantage for another. So we need to decide and prioritise how we want to use our scarce resources.
Let’s focus on the future. At the G20 meetings in London in April 2009, UK Prime Minister, Gordon Brown, announced the end of the Washington Consensus. If we really break with the financial and economic practises of the last three decades, what are the alternatives? Isn’t it time for an alternative approach to scarcity, sustainability and justice? And isn’t it right that developing countries should be part of the solution? A fall in export volume growth, a negative shock in investments, high interest rates, reduced remittances and the fall in commodity prices have already had their toll in many countries in the South – all caused by the financial crisis, in which they played no part whatsoever.
The G20 promises developing countries a lot: new resources, a reaffirmation of existing aid pledges, US$50 billion to support social protection, boost trade and safeguard development in low-income countries. Is this simply rhetoric or can the G20 fulfil their promises? At the heart of the G20 plan is a central role for the International Monetary Fund and the World Bank. But are they, and other global aid institutions, properly equipped to deal with the crisis?
Ngaire Woods, Professor of International Political Economy at Oxford University, wrote in her study for the European Union Parliament in September 2009, that the IMF has worked fast to lend to countries in crisis. However, while 82 percent of recent IMF loans went to EU countries, just 1.6 percent went to Africa. Woods wants to see far more effort go into engaging with major emerging and developing countries to achieve the G20 aspirations of an IMF which is better informed and more effective and responsive to the needs of the poorest countries.
The current economic context provides new openings for activism, social pacts, policy exchange and debate. That’s why The Broker is giving a platform to alternative views on global finance and how developing countries can be part of the solution. World leaders are now preparing to make important decisions which will affect the development agenda of the future. This is the perfect time to discuss what the post-Washington Consensus era should look like. Have your say and make a contribution to this weblog.