Global Trends by Martin Khor
Monday 3 May 2010
In the past developing counties including in
The global economy is slipping into a new crisis,
It is quite surprising that
The developing countries affected had always been accused of causing their own problems, with the faults variously attributed corruption, mismanagement, bad governance and crony capitalism.
But it is increasingly difficult to ignore structural factors that contributed to the financial crises through the years.
If the lessons had been learnt from the Asian
crisis that started in 1997, perhaps this European crisis would not
have happened. On the other hand, it is also vital to learn from Europe's
crisis so that
In Africa and Latin America, governments had taken too much foreign loans, crises developed when they did not have enough foreign exchange to service the debts. In many cases this was due to the fall in the countries' commodity export prices, the rise in their oil import prices, increased trade deficits or economically unfeasible projects.
These crises exploded the myth that foreign loans to governments were safe as they could not default. The pendulum then swung and it was thought to be safe to lend to the private sector as it would use the loans for profitable ventures.
The Asian crisis arose when too much foreign funds
went to local companies. This was made possible by financial liberalisation
The relaxation of rules also enabled foreign funds
and firms to engage in currency speculation and manipulation. The resulting
collapse of the Thai baht had contagion effects on
The Asian crisis exploded the myth that foreign loans to companies were safe because the private sector will make correct loan calculations and invest in profitable projects.
Now the European crisis is exploding the myths that European countries are well governed economically, that there is no or little risk in loans to their governments, and that countries within the Eurozone are especially safe as any nation in trouble will be helped by the others.
Many European governments have built up large debts and the loans have to be rolled over or new bonds have to be issued to service old loans and fund new budget deficits.
Speculators have been blamed, including by some European governments, for making the situation worse by accentuating the increase in risk premium on Greek debt and the decline in the Euro.
Last week the credit rating agency Standard and Poor downgraded Greek government debt (to junk status) as well as the debt of Portugal and Spain This triggered panic until moves for a final Eurozone-IMF package calmed the situation at the week's end.
The package is now expected to be Euro 120 billion
to cover three years' needs. Even then a number of economists have concluded
The fallout of a Greek default can be serious
as European banks have $189 billion exposure to Greek loans. They also
have claims of $240 billion on
There are concerns that the crisis may spread
to other countries through contagion. According to OECD data, in 2010
the public debt to GDP ratios are 95% for
Meanwhile these countries are preparing austerity
measures that are bound to cause a lot of pain. In return for the loan
The angry reaction to this news in violent street
demonstrations over the weekend shows how difficult it will be for
Governments have to be disciplined in managing public finances and in limiting deficits and debts. There also has to be the re-regulation of finance to avoid excessive leverage, speculation and unethical practices.