Charles Kindleberger (1978), writing on financial crises, said, “For historians each event is unique. Economics, however, maintains that forces in society and nature behave in repetitive ways. History is particular; economics is general.”
By this he meant that financial crises have underlying common patterns. This is true for the current Great Recession and the Great Depression of 1929.
Both recessions followed financial crises caused by recklessness in the unregulated banking sector. Also in both cases the financial crises were preceded by a period of globalization dominated by advances in telecommunications (telephone and internet respectively).
In both cases global inequality rose to unprecedented levels as the top one percent of the rich got richer while the majority got poorer. In both cases majority of the rich made their fortune in the stock markets.
Finally, in both cases the policymakers responded with stimulus packages that were relatively small and removed prematurely. In the case of the Great Depression, economic growth was weak until a large stimulus in 1939 in the form of the Second World War.
While the last globalization was driven through vast armies of the British Empire the current one is driven by the might of developed countries through the IMF, World Bank and WTO’s who forcefully impose wrong policy choices to the gullible. It is interesting to note the different responses to globalization by Botswana then and now. Then Cecil Rhodes was under pressure to keep on increasing the value of his company’s shares, the ‘kaffir’ stocks, in the London stock market.
To maintain this he expanded his mineral exploration beyond Transvaal towards the whole of Southern Africa. He argued that he wanted to annex Bechuanaland to relief the Queen’s government from high administrative costs.
The chiefs Bathoen, Khama III and Sebele had none of it. They decided to go to England to ask for protection. The then Colonial Secretary Joseph Chamberlain asked Rhodes how he hoped to eliminate the costs. Rhodes could not answer (Neil Parsons, 1998).
If it were today he would, in a sophisticated way, have said that it is important to privatize to improve “effectiveness and efficiency” of service delivery. Today the fashionable response to this situation is more privatization. That the system failed in most countries is of no consequence because we are different. The West learnt a lesson from the defiance from such people as Chamberlain and the chiefs.
Meanwhile at the same time the neoclassical economics which underpins neoliberalism was being perfected around the same time as the chiefs’ visit by the likes of William Jevons and J. B. Clark.
While Rhodes used tried and tested colonizers’ tactics to trick Khama into submission the man didn’t budge.
But today softened by the education from the West any minimal pronouncement by the likes of the IMF is enough.
This is why a certain print journalist had the temerity to scold me for simply expressing a point of view that does not necessarily conform to the neoliberal creed.
It is one thing to ask for clarity but it’s another thing to accuse someone of acting in an Idi Aminsque manner! The recent communiqu├® by G20 summit held in June when countries agreed to curtail economic stimuli and the anemic growth by the global economy is reminiscent of the policy choices and economies’ response in the aftermath of the Great Depression.
Our GDP declined 8.4% in the second quarter on the back of 23.5% decline in diamond demand. This had me thinking that the economy may not be out of the woods yet.
The recent improved demand for our products is driven mainly by Chinese and Indian stimuli. What if it peters out? Hence when BTV asked me to comment on the public service wage increases I had these in mind. I was asked how government can raise money to fund the rise in public sector wages. I suggested we should consider printing instead of borrowing or freezing of other projects.
In light of recent heavy borrowing by government further accumulation of debt is unnecessary and costly. More domestic debt will also lead to a rise in interest rates. High interest rates not only lead to decline in national saving by households but it also leads to ballooning household debt.
The rise in household debt from less than a P1 billion in the late nineties to P11 billion today is due to the high interest rates that prevailed during this period. In justifying the high interest rates proponents of the current monetary policy ignore the role of debt. Instead Batswana are accused of consumerism.
Meanwhile commercial banks are milking the economy through the BoBCs. To some we must pursue inflation targeting like the West even though it’s expensive and unsuitable for us (as authorities in the field like Svensson have stated) but we shouldn’t print even though it is cheaper for us.
Only the West can do it, isn’t it hypocritical? We are told the private sector can develop our economy yet none of advanced countries were developed by private sector! Aggregate demand in the economy is low therefore the least that government can do is to further suppress economic activity by freezing projects.
That the government will stop hiring is insensitive to the high unemployment and poverty that grips this country. No one will come from somewhere to create jobs for us without government leading the way. When aggregate demand is low then it means there isn’t enough money to buy goods and services. Printing money is one less disruptive way that can be used in times like these. Indeed that is what several other countries have done.
Critics of this approach usually point out that it is open to abuse and inflationary. Scaremongers remind us of Amin and Mugabe. As a country that prides itself in good governance I find it hard to accept this. Inflation critics miss the point because inflation rises only when the economy is at full capacity.
That inflation is rising at the moment has nothing to do with demand rather it is due to monopolistic behavior of local suppliers especially grocery stores. For instance, since beginning of this month prices of most foods have increased. This has nothing to do with a rise in demand by Batswana. This monopolistic behavior prompted me to call for government to actively regulate businesses. In addition I suggested that the government should seriously consider creating a state bank.
This will allow government to direct credit to where it is needed most. This will also provide competition to commercial banks which charge astronomical fees and commissions. In conclusion, the government needs to orient policy towards actively tackling the problem of unemployment. Government must invest in the productive sector to create employment.
As Taylor and Frenkel (1998) argue the private sector is risk-averse hence participates only when government is leading the way instead of merely creating an enabling environment.
In addition to devaluing the currency to promote exports monetary policy must be tailored to support fiscal policy.
This is done by keeping real interest rates consistently lower than the rate of economic growth. This will prevent government debt from ballooning out of proportion.
I believe that is one better way we can attain Vision 2016!
