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Ring the Bell and tell the working poor, the consumer and the unemployed: The recession is over!

Sunday, September 6th, 2009

Introduction
After all the fears of economic Armageddon, the Great Depression Mark II and no recovery until after mid-2010, the economies of the world have bounced back, and for the economists at least, the recession is over. So is it safe to pop the champagne and celebrate? That may be just a bit premature. As Newsweek, the US weekly notes, when economists proclaim a recession over, they’re celebrating a technicality: they mean economic output has stopped contracting. Readers who have been following Professor Clive Thomas would know the globally accepted definition of recession is the “two quarter” decline in economic output, but this definition is not accepted by all economists as it ignores key economic variables such as unemployment rates, consumer confidence and spending. In the US the agency that is officially in charge of declaring a recession in the United States is known as the National Bureau of Economic Research, or NBER. The NBER defines a recession as a “significant decline in economic activity lasting more than a few months.”

So how exactly are the world’s economies faring and how did the world avoid the worst fear – the collapse of capitalism – and why did the Great Recession not turn into the second Great Depression? The two persons who have been credited with the economic miracle and hailed as the ‘Man Who Saved the World’ are Gordon Brown, the embattled Prime Minister of the Britain, and Mr Ben Bernanke, the Chairman of the US Federal Reserve Board. Brown of course was Chancellor to Tony Blair and presided over one of the longest periods of sustained growth in the UK while in the case of Bernanke, as providence would have it, his doctoral studies and expertise were coincidentally on the 1929-1934 Great Depression. That allowed him to exude the quiet but commanding and reassuring performance before the US Congress and Senate and guaranteed his nomination by President Obama for another five years when his current term ends early next year.

Across continents, Keynesian economics ruled the day, as governments primed their economies with newly printed money to prevent their collapse. It seems that the action taken produced results that exceeded the expectations of the politicians and economists, although not everyone is convinced that the recovery is permanent. For that we will have to wait and see. For now, however, the evidence of a recovery is strong, and while the economies and countries have grown at vastly different rates, everyone is impressed by their resilience. In today’s Business Page we look at the performance of the major economies and their prospects in the near and medium term.

The US
The bursting of the housing market bubble in the US had a domino effect, not only on the rest of the US economy, but across the world as a result of the investments by overseas investors in derivatives based on the housing market. Well, home sales have now risen for three straight months, and while this may be due to speculators cashing in on the bargains available on foreclosed properties, it is the first time since 2004 that the US experienced such a sales trend.

From its disastrous decline over a year, the stock market grew by 44 per cent since March, and many of the troubled banks which received bail-out money from Uncle Sam have reported a dramatic turnaround. In June, seven of the 10 indicators in the Conference Board Leading Economic Index pointed upward, including manufacturing hours worked and unemployment claims. But the US economy lost 6.5 million jobs since December 2007 and current unemployment now stands at 9.7 per cent and climbing. Compounding the problems for the US economy is the national debt which has risen dramatically and is projected to reach 77% of GDP in 2019 – up from 41% in 2008. This poses a huge challenge to President Obama who is losing political capital on health care reform and who needs the private sector to create millions of new jobs even as they face potential tax increases.

Asia
Once again the region astounds and confounds the critics, observers and the pundits. When the region experienced a financial crisis in 1997-98, the literature and conventional wisdom was that Asia was falling. The story of the region following the dot.com bubble was no different. Now we have the amazing story of how the region not only survived but has prospered during the most recent crisis. Conventional wisdom was that since the countries of the region were export-dependent, their recovery had to follow that of the rich world that bought its imports. Look at what happened – while the economies of the countries of Asia have galloped at close to 10% annually, those of the rich countries have contracted by close to 4%.

China’s economy – give and take some fudging of figures – grew at about 10%, the same as South Korea, while Taiwan’s industrial output grew by an annualised rate of a whopping 89% in the second quarter, and India’s industrial production was an impressive 14% growth in the second quarter. The Economist attributes the remarkable performance as arising from cyclical factors, the unfreezing of global finance, the comparatively more effective fiscal packages and the strength of the economies as the countries entered the recession. Other factors would of course include the work ethic of the Asians and their propensity to save.

Japan, the world’s second largest economy officially came out of recession in the second quarter of the year with a growth of 0.9%, after four consecutive quarters of contraction. The rebound was attributed to one of the largest and aggressive fiscal stimulus packages in the rich world, and so there is some concern among analysts whether the momentum can be sustained. Ever since the early nineties when its economy suffered a bursting of a land bubble the government has been grappling with how to rebalance the country’s economy. It has been less than successful, and a country known for Toyota, high tech and Buddhism has seen a boom in the brothel business and Toyota recording losses for the first time in its history. Yet, if Japan’s latest quarterly rate were maintained for a full year, the economy would grow 3.7%, slightly less than the 3.9% which the stock market was hoping for.

Europe
The United Kingdom: The end of the recession was pronounced by the prestigious Institute of Chartered Accountants in England and Wales (ICAEW) following a recent study which showed the biggest rise in business confidence in two years. The Labour government which once appeared unbeatable is now heading for almost certain defeat next year, while the resurgent Conservatives dub the country as ‘Broken Britain.’ But the upbeat mood in the financial centre of the City and the emergence from the recession have been confirmed by detailed forecasts published by the Bank of England showing that gross domestic product (GDP) will rise by 0.2 per cent between July and September, marking the first economic expansion since the first three months of last year. The bank expects the economy to continue to expand in the fourth quarter, by 0.4 per cent, and sustain the recovery throughout next year.

Contributing to the recovery were huge stimulus packages particularly in the financial sector, interest rate cuts by the Bank of England and a temporary reduction in the VAT from 17.5 per cent to 15 per cent in December, all designed to boost consumer spending. The reduction in the VAT rate has however led to a huge budget deficit and has now come to an end.

The rest: France and Germany have posted surprising growth of 0.3 per cent in the second quarter, a big turnaround fuelled by massive stimulus spending and Asian demand for exports. The exit from the recession was fuelled by massive government spending, strong social safety nets and a crucial boost from Asia and China in particular, causing one economist to describe the rebound as “made in China” as exports to that country particularly from France have surged.

Germany is Europe’s biggest economy and the world’s biggest exporter of manufactured goods. Not surprisingly then the German performance sets the pace and direction for the rest of the euro zone, whose members share a common currency. Those countries saw their economies shrink by only 0.1 per cent in the second quarter – far less than expected – after dropping 2.5 per cent in the first quarter.

Brazil: This South American giant and neighbour, more famous for its football and the Rio Carnival dubbed the greatest show on earth, has been one of the world’s great success stories and has chalked up some impressive successes in the midst of the global recession. Its President, Mr Luiz Inacio Lula da Silva, trade unionist and one of the most popular and inspirational leaders in the world has presided over an economic boom with rising Foreign Direct Investment, stable consumption and near zero inflation. We in Guyana have such opportunities right over the bridge!

Caricom: The economies of the Caribbean, other than Trinidad and Tobago and Guyana, dependant as they are on tourists from the countries of Europe and North America have all been struggling with some turning to the IMF to shore up their weak economies, and one must wonder whether there is a positive relationship between the state of West Indian cricket and the performance of their economies. Like our cricket administrators, our politicians seem to be in a different world, and only last month T&T Energy Minister Conrad Enill denied that the country was ever in a recession, despite a decline in economic performance by more than four per cent between October 2008 and March 2009. To boost his argument, Mr Enill sought to give his own definition of recession.

With respect to Guyana, the Statistical Bureau simply refuses to publish any data, no doubt waiting on their political bosses for direction. I understand that figures must first be “cleared” by the Minister of Finance and until he gets around to providing the country with his mid-year report we will have to wait to see where and how we are. Let us hope however that our few outstanding exporters will move rapidly to take advantage of the new opportunities that the end of the recession offers.

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Stanford 20/20 smoke and mirrors and an update on Clico

Sunday, February 22nd, 2009

Introduction
The columns of Business Page have reported on far more financial scandals than it would have liked. Although it was soon overtaken as the biggest corporate scandal ever, Enron was covered in a series in February 2002 and remembered in a piece one year later to mark its anniversary. Parmalat too with a hole of billions on its balance sheet and Nick Leeson who brought down the 233-year-old Barings Bank, the Queen’s bank, were accorded their fair share of space. More recently it was Bernard Madoff of the US and B. Ramalinga Raju of Satyam Computer Ltd of India to add to the list of corporate fraudsters. Each fraud has had its own consequences, with Enron taking down with it Arthur Andersen, one of the world’s most respected accounting firms, as well as the investments of its employees’ pension scheme.

For the most part however the direct consequences have been felt by employees, creditors and shareholders, including pension schemes. And they have all had some common ingredients − a tale of lies, deception, smoke and mirrors, sleeping accountants and poor governance and weak regulators, all fed by frenzied greed in the name of capitalism. Each, however, took place in larger economies that could absorb a moderate level of stress and setbacks.

‘Sticky Wicket’
On the other hand, the fall from grace of cricket icon Sir Allen Stanford is in a different ballpark altogether. After the government, the Stanford group is/was the largest employer in its home base Antigua. It has its own cricket ground – named appropriately Sticky Wicket − with swimming pool, lighting and facilities that rival the government-owned stadium and the record-making Antigua Recreation Ground. It operates the Bank of Antigua which has a significant share of the retail banking in that country. It owns some of the choicest pieces of real estate on the island. It was, prior to its fall, planning to develop an area called Shell Beach and nearby Maiden Island, towards the end of the airport runway, with a marina, shopping and entertainment complex.

Stanford’s towering image, cosy relationship, influence and hold over Antigua simply cannot be under-estimated. The island’s Prime Minister, Baldwin Spencer, never a friend of Stanford, admitted that the charges brought by the SEC against Mr Stanford and two of his associates could have “catastrophic” consequences. He urged the public not to panic. It was like telling persons in a rainstorm not to take protective action – and such advice was quietly ignored by depositors who queued up to withdraw their money from the Stanford-owned Bank of Antigua. Seizing the political opportunity to crush Lester Bird, he has called general elections which he is certain to win.

Threat
There is also a wider, regional threat to the Eastern Caribbean Dollar – one of the most stable currencies in the world and which is managed by the Eastern Caribbean Central Bank, the monetary authority for eight OECS island economies including Antigua. The bank in a statement reportedly handed to people queuing to get their money said its “liquidity position is sound.” It was careful to note however that that the bank’s ability to meet customer requirements applied “under normal circumstances” and that if individuals persisted in rushing to the bank in a panic, they would precipitate a collapse. The consequences of massive withdrawals and conversion into and flight of foreign currency is going to test the stability of the EC dollar over the coming weeks.

But the image Mr Stanford cultivated was even bigger than the assets or his plans. For example, the helicopter in which he landed at Lord’s to announce his “20/20 for 20 million” deal with the England and Wales Cricket Board was not, as the gold-plated Stanford name and logo emblem on its body indicated, corporate property but one rented for the day. Nor was the $20 million jackpot in the treasure chest shown to the world at the launch real money – it was at most about US$100,000 standing atop wads and wads of paper. It was one big con. The press, fascinated by the Texan billionaire, was too dazzled by the dollars to see the game at work and to ask questions.

Dazzled by wealth and….
Stanford was flamboyant, ambitious and most importantly for the gullible, including most of the region, fabulously rich. But contrary to his tale of a family heritage and inheritance associated with Stanford University, Stanford’s real wealth had its source in the early 1980s when he and his father James Stanford bought distressed properties in Texas during the oil industry bust and the S&L crisis, rehabilitated them and sold them at huge profits when the market got better.

But Texas was too big for the man who had visions of grandeur and royalty. He wanted to be king and chose first Montserrat to base his operations before moving to Antigua where he became a real force during the rule of the Bird family, the father-and-son dynasty that held power for more than 40 years. It was during that period that Stanford helped the Birds turn Antigua into a tax haven and soon made him into a billionaire. With his personal wealth estimated at more than US$2 billion, he was bigger than the economy of Antigua and so Stanford could get whatever Stanford wanted. He demanded and received the trappings of royalty that Texas could not give him – a knighthood without the need to bow in front of the Queen. In fact that knighthood was granted to him by the Birds. He ran his financial empire from the island’s airport office park which was the most iconic landmark to greet any visitor to the island. While his empire extended to Latin America his colossal status derived from his tryst with West Indian cricket of which he was seen as the saviour following years of the most pathetic management by a succession of the most pathetic Board of Directors ever to have ruled the game anywhere in the world. With the glitter of millions, he redefined West Indian cricket into a game of fast paced entertainment, money and image, particularly appealing to the lucrative television market.

Criminal charges likely
The details of Stanford’s fall are still unfolding but what seems to have emerged so far is that the company was selling investors high-yielding certificates of deposit on the basis they were safe and liquid investments. According to the US Securities and Exchange Commission (SEC) Stanford’s investment portfolio was an opaque “black box,” including holdings in illiquid real estate and private equity. Following investigations that had been going on since last summer, the SEC has filed charges against three entities, Antigua-based Stanford International Bank, and its affiliated Houston-based investment advisers, Stanford Group Company and Stanford Capital Management.

Unlike Kenneth Lay or Madoff or Raju, Stanford has not been charged with any criminal offence – at least not yet. The action brought against Stanford is a civil action although the word fraud has been used by the SEC involving somewhere between $8 and $9.2 billion. It has been reported that the FBI is carrying out its own investigations but that it does not want to lay charges until it has been able to find sufficient evidence to secure a conviction. Should it move too early it will have set in train a schedule that would force criminal investigators to charge, indict and construct a trial within a tight time-frame. Whether it is criminal or civil fraud is the kind of fine distinction that does not interest depositors and investors who have been rushing to all locations where Stanford operates demanding the return of their money.

Impact
It has been reported that some of our cricketers have invested money in Stanford while the Ministry of Finance has confirmed that one major institutional investor, which Business Page suspects is either a commercial bank or an insurance company, has placed funds with the Stanford group. The Ministry has told the press that it is “monitoring the situation” although quite what this means in the light of its handling of the Clico issue is hardly reassuring. We must not forget that there are thousands of Guyanese living in Antigua and it is a fair guess that many of them would have had their savings in Stanford’s bank. If the government is truly monitoring the situation it should immediately send a high-level representative to Antigua to represent the interest of those persons.

At some time we will have to confront the threats to small countries by rich investors and oligarchs who can bribe, cajole and threaten to get what they want. The view that these people are here to save us must by now be surely mistaken. So too is the view that we are insulated from the world economic crisis. Our own politicians need to stop feeding us with their own form of garbage.

Clico update
Chairman of the National Insurance Scheme has told the press, more than a month after the news of the failure of Clico Investment Bank in Trinidad and Tobago that he is uncertain about the extent of the exposure of the NIS to the local Clico company. That is amazing and dangerous when in the same breath he estimates that the exposure can be as much as $6 billion.

Business Page has for two weeks been trying to obtain confirmation from various members of the NIS Investment Committee of the value of the exposure and has written to the acting General Manager of the Scheme seeking confirmation. By arrangement the Commissioner of Insurance has also been written to with a list of several questions the answers to which would form the basis of next week’s Business Page. If Dr Luncheon is right and the exposure is around $6 billion, then potentially we could have some really serious problems since the Scheme’s viability will depend on the continued success of Clico Guyana. The consequences of a failure are simply too frightening to contemplate.

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Truth Made-off leaving trail of cooked books

Sunday, January 11th, 2009

Introduction
Over the years this column has reported on its fair share of scandals in the financial world, often in the biggest this and biggest that. Today we report on two such biggest – one from, you would have guessed, New York and the other India. The ingredients that make up these frauds are the usual suspects – persons too clever for their own good; greed; an unsuspecting public; poor oversight and accountants sleeping on the job. The historical economist and author Charles Kindleberger expressed it in slightly more elegant language, writing that “swindling is demand-determined, following Keynes’s law that demand determines its own supply, rather than Say’s law that supply creates its own demand. In a boom, fortunes are made, individuals wax greedy, and swindlers come forward to exploit that greed.”

Whatever it is, the vehicle used in the Madoff scandal is one that came to be known as a Ponzi scheme, a swindle offering unusually high returns, with early investors paid off with money from later investors. The scheme got its name from the Italian-born American resident who promised clients a 50% profit within 45 days, or 100% profit within 90 days.

Madoff
While Ponzi was a known itinerant crook who served time on more than one occasion, Bernard Madoff, was a star of Wall Street, former chairman of the Nasdaq Stock Market and founder of Bernard L Madoff Investment Securities LLC, which had operated successfully for over four decades. And to support Kindleberger’s theory, the victims of what may turn out to be a US$50 billion swindle were not the small-town residents buying postal coupons, but top names in banking, show business, the intellectual class and many on the list of the wealthy. HSBC said its losses were about one billion US dollars while the Royal Bank of Scotland estimates its losses at US$600 million.

Investigators estimate that it will take more than two years to complete their work, but it is unlikely that they will ever come up with even reasonably precise figures. It is the nature of a Ponzi scheme that early investors do benefit, quickly receiving their initial capital from subsequent investors.

What must surely annoy is that once again there is failure of regulatory oversight. Last month, SEC Chairman Christopher Cox expressed grave concern at the “multiple failures over at least a decade to thoroughly investigate these allegations [at Madoff] or at any point to seek formal authority to pursue them,” ordering belatedly an internal review into the agency’s failure. And it is the same SEC that facilitated a three-employee accounting firm to audit Madoff on an annual basis. Brokerage firms like Madoff Securities are required to be audited by firms that were registered with the Public Company Accounting Oversight Board created after Enron to help prevent frauds.

Amazingly, the SEC allowed a waiver, which it extended on numerous occasions, to the audit requirement in respect of privately held brokerage firms. It is not surprising therefore that the auditors Friehling & Horowitz failed to detect the large Ponzi scheme run by Mr Madoff. Ironically, in its latest extension of the rule, issued December 12, 2006, the SEC said it had determined that allowing such firms not to register was “consistent with the public interest and the protection of investors.” Well, well, well.

Now to India
India was not too long ago held up as the country where the Beatles would go to seek spiritual renewal. The country lost its innocence with the Indira Gandhi emergency of 1975, but still the myth of innocence prevails with former Australian cricket captain writing in the aftermath of the Mumbai bombing in November that India had been “robbed of its innocence.”

Now in a twist of irony, one of its top information technology companies that have led the way in the in-sourcing credited with the country’s economic boom, Satyam Computer Services Ltd, has found itself embroiled in a scandal dubbed by commentators as “India’s Enron.” The word ‘Satyam’ in Sanskrit means ‘truth.’ Last week the company’s founder and chairman, B. Ramalinga Raju, resigned amid revelations of widespread accounting fraud in the company.

Mera Naam Raju
The resignation came in a five-page letter to the company’s board in which Mr Raju apologised to the shareholders, taking personal and sole responsibility for the fraud involving bogus accounting over several years, including inflating profits by more than tenfold between July and September of last year. As if making a concession the soft-spoken Raju with trademark paternal charisma, said he was prepared to face the law.

Raju was like a corporate deity in India, not only for having built a $2 billion IT empire bringing in foreign currency, but also for launching the Emergency Management and Research Institute, a national, not-for-profit 911-like emergency-response service funded by $50 million of his and his family’s money. Three months ago his company received the Golden Peacock award from a group of Indian directors for excellence in corporate governance.

PricewaterhouseCoopers
Juxtaposed against Satyam or Mr Raju’s personal accounting misdeeds, such benevolence raises doubts about human nature and the philanthropy with which we associate businesspersons. In his letter Mr Raju disclosed that Satyam had inflated its operating profit for the three months ended September 30, 2008 to 6.49 billion rupees ($136 million) from 610 million rupees reported previously, while revenue was inflated to $565 million from $443 million. It had reported an operating margin of 24 per cent which was actually 3 per cent. On the asset side, Satyam’s balance sheet as of September 30 had a non-existent cash balance of over $1 billion (remember Parmalat?); nonexistent accrued interest of $79 million; an understated liability of $258 million and an overstated debtor position of $103 million.

Several investors in Satyam were considering suing PricewaterhouseCoopers LLC, the company’s auditors, which like all the top auditing firms benefited from the fall of Enron’s auditors, Arthur Andersen. The investors say the auditors are supposed to check on the accounts and that they rely on the auditor’s report. In a careful meaningless statement PWC said that they had worked “in accordance with applicable auditing standards and were supported by appropriate audit evidence.” That statement really says nothing since it is no more than a repetition of the standard words used in any audit report.

Creative explanation
While the firm was right to explain that their obligations for client confidentiality precluded the possibility of commenting on the alleged irregularities, how do they expect the public to have any confidence in a profession where top auditing firms repeatedly fail to detect massive frauds year after year? Like Raju, Pricewaterhouse’s assurance that it “will fully meet its obligations to cooperate with the regulators and others,” seems neither a concession nor an option.

Raju’s explanation was a bit more interesting and philosophical, even if far too defensive. His letter which will go down as one of history’s most creative and longest resignations states in part that what had begun as a small gap between real and reported profits continued to grow over the years, like “riding a tiger, not knowing how to get off without being eaten.”

It is probably too early to assess the impact of the scandal described by PC Gupta, the federal minister for company affairs as a “shameful act” while Jagdish Malkani, country head at TAIB Capital Corp described it as “a monumental scandal [that] is terrible for the Indian IT industry.”

Some things, however, are fairly certain. There will be calls for more oversight and regulation of public companies, which happened in the aftermath of Enron and the other Dotcom failures. Indeed Mr Gupta has already said that government would take coordinated action with the Securities and Exchange Board of India. Meanwhile and more immediately, there are two major risks making India very uncomfortable – the likelihood that the Satyam is not unique in creative accounting and the same thing is happening in other public companies. That would scare away foreign investors. Equally serious is the potential disruption of services to the lucrative US outsourcing market. The timing could not be worse. As the Obama administration responds to the highest unemployment rate in the US for decades, tempted by protectionist instincts, outsourcing must be high on the agenda.

Satyam was already facing a World Bank ban for improper financial dealings with a top bank official. Along with the World Bank, Satyam’s clients include General Electric Co, General Motors Corp, Nissan Motor Co, Applied Materials Inc, Caterpillar Inc, Cisco Systems Inc. and Sony Corp. Will the other Indian IT firms be chosen to take up any slack or will these customers go elsewhere?

Conclusion
The almost co-incidental revelations of Madoff and Satyam have no doubt come about because a bear market drives the chickens home to roost while no one cares about corporate governance in a bull market. In Guyana here in the nether world – neither bull nor bear – we never seem to care. The scandals show that those who appear as good guys may be putting on a front. Madoff is described on his company’s website as having “a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm’s hallmark.” Raju was the personification of piety and generosity.

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Our World in 2009

Sunday, December 28th, 2008

Introduction
Certainly the most authoritative publication which predicts the grand occasions and developments of the following year is the widely circulated Economist, published in the UK. Even by its own admission many of its predictions for 2008 were way off target. That of course is true of all other publications that engage in this annual crystal ball-gazing. But then the Economist is no ordinary weekly – it is the weekly on economics and political issues of the day. Yet it got the US presidential elections wrong and like everyone else did not foresee the financial meltdown which started in the US and saw the nationalisation of nine banks across the US and Europe and the injection of more than a trillion US dollars. Incidentally, economists by a margin of 2 to 1 supported Barack Obama for the presidency of the US.

The US, therefore, is as good a place to start any prediction for 2009 when come January 20, Barack Obama will be sworn in as the first black President of the USA, the world’s only superpower. That is an occasion of historic proportions in a world that has for centuries been defined by colour and class. The world has changed dramatically since Obama began his campaign for the White House on the winning slogan, ‘Yes, We Can.’ The problem for him is how he can persuade the Americans that that statement comes with the unstated qualification, “but not now.” The truth is not even Superman could right the wrongs of US economy in one year.

America’s hope
Yet there are positives from an Obama presidency. He is one reason why the world will start looking at the US through changed lenses. The other is why they should. America accounts for some 20% of global GDP, ie one out of every five dollars spent. It is the willingness of the American consumer to spend – often money it does not have, on goods it does not produce – which has driven China and India, two of the most populous nations of the world to record growth lifting hundreds of millions out of poverty.

But then there are some contradictions. Some economists are troubled that a President Obama, committed to righting the US economy will adopt protectionist measures. He has signalled as much with the promise to give tax breaks to American firms that stay at home. He is also on record as describing NAFTA as “devastating” and “a big mistake,” although he later back-peddled and indicated he would not unilaterally reopen negotiations on NAFTA as he had earlier threatened to do. As increasing number of jobs are perceived to be lost to Mexico, Canada, India and China, the unanimous support which Obama has received from US labour may start to unravel. Already faced with the worst economy ever to have been inherited by an incoming US President, Obama will find that he has one of the shortest honeymoons on record with a zero margin for error.

Obama has also indicated that he would go full steam in a stimulus package designed to slow and then reverse the rate at which the economy is contracting. Estimates of the decline are anywhere between 3-5%, a catastrophic rate indeed, that would spell trouble for the rest of the world. If not the US, can the BRIC countries − Brazil, Russia, India and China − prevent the world economy nose-diving?

The elephant and the dragon
Not too long ago conventional wisdom was that the Chinese and Indian economies could do just that. But more recently, the pessimists have been in the ascendancy. The close of 2008 finds India sabre-rattling with its long-term rival Pakistan following the Mumbai bombing last month. Suddenly the Indian star is losing its brightness with the ever-present political uncertainties resurfacing. Elections predicted to be held in the first half of the year will almost certainly see the governing party paying a huge political price for its failure to respond quickly and decisively to the attack which India blames on Pakistan. The country that has had an average annual growth rate in the past five years in excess of 8% with the major share coming from services is almost certain to slow. The most direct impact will be on the poor, with tens of millions falling back into poverty.

This columnist for one has never been comfortable with an economic philosophy in which economic growth must necessarily be accompanied by a widening of the income and wealth gap. And that is what has been taking place in India. The World Bank reckons that in 2005 the number of persons living below the poverty line was 456 million compared with 420 million in 1981, although when measured as a percentage of the population there was a drop of some 18%. India’s infrastructure is poor, foreign investment is declining and the value of business on which the country’s hugely successful outsourcing information technology sector has been built has also declined.

China too will have its own problems. Its economy and rapid growth have been driven by exports which for seven years until November 2008 kept rising at rates so phenomenal that they astounded economists around the world. Then in November the Chinese reported the first year on year decline in exports of 2.6%. That is as bad for the economy as for the psyche which had started to entertain dreams of a Chinese century. But China’s fortunes in 2009 are bleak only by its own stratospheric standards.

The safest bet to weather an economic storm is to have lots and lots of money. China certainly does. It has re-invested upward of $1 trillion, mostly earnings from manufacturing exports, into American government bonds and government-backed mortgage debt. Its challenge is on choosing between further lending to finance American consumption of China goods or risk a further slowdown of exports on which it has built a modern economy that is the envy of the rest of the world. Its greatest challenge in 2009, however, is not the meltdown itself but how it responds to it. And there the signs for the Year of the Ox in the Chinese calendar are not good. Its instinctive response was a return to censorship.

Brazil and Russia
That takes a huge chunk out of the BRIC countries which some leading thinkers consider as having the potential to challenge the West as the most powerful economies, all within the next few decades. This may seem wishful thinking but those countries cover over twenty-five per cent of the world’s land and forty per cent of the world’s population. But Brazil too is experiencing its own challenges and its Congress recently approved on Thursday a cut of 10.3 billion reals ($4.38 billion) in the government’s 2009 budget to cope with an expected decline in tax revenues as a result of the global economic slowdown.

That leaves Russia. Judging by Putin’s swagger and the short uneven war with Georgia, one gets the impression that Russian power, pride and influence are rising. But with oil prices falling, Russia will have its own economic problems in 2009 with the usual mix of reduced foreign investments, rising imports and declining exports, restrictions on credit and inflation reducing real income.

Here at home
The end of 2008 of course was highlighted by the opening of the bridge across the Berbice River. It was a tremendous Christmas gift not only to Berbicians but to Guyana, and the government should be complimented on the achievement. But as the government looks at the prospects for 2009 it can do so only with at best guarded optimism. Forty years after Independence, Guyana is still mainly a commodity producing country which has only just graduated from being a country subject to the strictures of the IMF.

We are still without any real plan or direction. After more than two decades of allocating the nation’s forestry resources mainly to foreign investors, the country now wakes up to the possibility of carbon credits with President Jagdeo so convinced that he is prepared to make fundamental changes to the use of our forests, all without consultation.  The problem is that so much of our forests have already been allocated that any decision by the President on the use of the forests will require the agreement of the licensees. We could then be in a situation similar to that with GT&T where the government is unable to negotiate out of a lop-sided agreement following years of dithering.

The shelving of any plans for hydropower leaves the consumers at the mercy of the Guyana Power & Light Company which is easily the most inefficient operator of its kind in the region. Perhaps because GPL is state-owned and managed it has escaped the kind of criticism to which GuySuCo has been subjected, sometimes unfairly. It should not escape the attention of the decision-makers that none of the growth sectors of the economy rely on power by GPL for their operations. Until GPL can become an efficient producer and transmitter of electricity, the country’s economic progress will be retarded.

Over the past few years there has been a boom in commodity prices but the national budget has little to show for it. In fact in the midst of the boom, our national sugar company continues to rely on Government for support. National performance like growth in GDP is distorted by the role of international operators in bauxite, rice, gold and forestry. Excessive taxation is imposed on labour while investors enjoy all forms of concessions. There is an obsession with GDP while ignoring people issues like employment and poverty.

The country has so far taken the ostrich’s view of the economic crisis. It is time that we take our heads from the sand if we are to successfully negotiate with the challenges of 2009.

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Response to a Crises

Sunday, November 30th, 2008

Introduction
Today’s column looks at some of the ironies and contradictions in the response to what started as a domestic crisis in the mortgage sector in the US and the prospects for the developing countries arising out of the Obama victory. The effect of the crisis has been wide, deep and pervasive and demanded action.

On November 15, 2008, the Group of Twenty (G20) held an initial meeting in Washington to try and arrive at a common position and to seek solutions to the daunting challenges facing the world as a result of the cataclysmic turmoil that has shaken the belief in the way the capitalist system works. The meeting had been called by US President George W Bush, once considered the most powerful man in the world but whose performance during the entire period has been embarrassingly unconvincing and whose public pronouncements almost invariably coincided with further deterioration of the stock market. Bush’s obvious discomfort and lack of understanding of the problem did not instil any confidence in the US or world markets and his advisers thankfully and sensibly had stopped his effete television appearances which had been a regular occurrence when the crisis unfolded in September.

By contrast, Gordon Brown, the embattled British Prime Minister heading for defeat at the next UK elections, has come out − at the international level at least − smelling like a rose for his decisive response to the situation. On October 8 his government unveiled its plan which saw the first steps in an unprecedented scale of government intervention. The British banks received an injection of funds and government guarantees that are tantamount to nationalization, but it was this action that may have averted at least temporarily, financial Armageddon worldwide. The Brown plan seemed to be the blueprint for other countries which quickly followed suit in recognition of the extreme gravity of the world economic crisis. At the Washington summit, it was evident that everyone realised that coordinated effort was needed and that these economic powerhouses, if they could still be called that, had to work together to reform the financial system which had become inextricably intertwined as a result of globalisation.

Revival of socialism
But despite the critical and unusual steps that have been taken in various countries to stabilise the situation and provide support to the global economy, much more is needed. The financial markets are in a crisis of confidence and unless some assurance is received that there are matching reforms in addition to the support measures, the wild swings in the stock markets of the world will continue. The G20 leaders in their statement issued after their meeting acknowledged that reform of the financial system is a priority and must be so far reaching as to insulate the world financial system from a recurrence of these calamitous proportions in future. This is no easy task since the coordinated response that these reforms require will necessitate subjugation of self-interest for the common international good. Many critics will decry this as the revival of socialism but that is what seems to be inevitable if the world as we know it is to survive and hopefully achieve some semblance of prosperity going forward.

The alternative of retaining capitalism in the mould of Thatcherite-Reaganite economics in which the market is supreme, is too frightening to consider. Even the right-wing voices in the Republican Party in the US have been muted, perhaps an admission that those who want to hold on to outdated philosophies and beliefs do not truly appreciate the magnitude of what has occurred. One recalls that only days before the implosion in the US market, defeated Republican candidate John McCain had said that the US economy was “fundamentally strong.” Cruelly for him, the speed of the unravelling was as dramatic as it was mind boggling.

The collapse of three of the top financial houses in the US that were the public face of capitalism, adjustments in the European Union that could cost hundreds of billions of euros, the easing of credit arrangements in China all demonstrate a realisation that it is no longer business as usual. Indeed there probably have been more pro-socialism articles published within the past three months than in the past three years. Seventy-five years after his landmark work, renowned economist John Maynard Keynes must be gratified that the policies he recommended to avoid a slump are now accepted wholesale for introduction at the international level.

Questioning the US bail-out plan
Not lost in all this is the irony of the headlining role US Treasury Secretary Henry Paulson and his 35-year-old assistant Neel Kashkari have been playing in crafting the US rescue plan.

Both men are alumni of Goldman Sachs, another one of those once highly regarded US financial institutions that benefited tremendously from the financial engineering that has dominated and perhaps bears responsibility for the crisis, and which itself is now under threat. Paulson is former chairman and Kashkari is his protégé and more irony here, has immigrant roots in one of the emerging world economic powers, India. The latter has significant responsibility for oversight of the much publicized US$700 billion bailout that was supposed to be the silver bullet solution but which has not had even close to the desired effect. With President-elect Obama having taken effective charge of the public debate on crisis resolution and the Bush administration coming to an end in about seven weeks’ time, it is hard to see how much these men can achieve.

Indeed even before its implementation, the US bailout is now being questioned as the typical American approach to a crisis: throw tons of money at it and it will go away. This emphasises the stark reality that traditional prescriptions will no longer be effective and that while the preservation of market principles may be a laudable objective, French President Nicolas “L’Americain” Sarkozy’s assertion that laissez-faire is dead, does not represent irrational pessimism at all. What is clearly evident is that the days of reckless abandon in financial and economic dealings must come to an end and that the requirement for asset values to be based on realistic underlying worth can no longer be panned as antediluvian esoterica.

Obama for change
Obama started his incredible campaign for the presidency of the US perhaps to the left of the liberal wing of the Democratic Party, but he is pragmatic and was quite willing to shift positions in response to changed circumstances. So far he has been concentrating on putting his team together rather than pre-empting and second-guessing the incumbent. He campaigned on a slogan of ‘Change’ but the striking feature of his economic team has been described by the Economist as “centrism,” comprising real economists, many of whom served the Bill Clinton presidency of 1992-2000, another irony of sorts. The team is studded with economics PhDs, such as Larry Summers, Tim Geithner and Peter Orszag, all of whom would be top of any class. Thankfully, Obama is an intellectual heavyweight in his own right and he will certainly be able to arbitrate any competing views these stars may offer.

What will have to wait for clarification is the role Obama and his team will play in helping the developing countries weather the international financial storm that will still be raging on Inauguration Day on January 20, 2009. For decades the countries of the developing world have been led, dragged, coaxed and cajoled by the economic mantra of the IMF and the World Bank. The irony is that following the adjustments and rescue packages proposed by the G20 countries, the economies of those countries will have more direct government intervention than all the developing countries combined.

We will have to wait too, to see whether the Obama team will seek to bring about any change to the free-market capitalism promoted by the IMF and World Bank, who for decades have been forcing countries, in exchange for aid of any kind and value, to liberalise trade barriers, deregulate financial and labour markets, privatize national industries, abolish subsidies, and reduce social and economic spending.

That would be more than a vindication for all the support and good wishes Obama receives from the people of the developing world.

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