Re-thinking Capitalism

Ermias Haile

Mekelle University (FBE)

Nov. 20 2008

The crisis that afflicted the world’s economic super house (the US) is now spreading to countries such as China, Britain, Spain, India, Brazil, etc at an alarming rate manifesting itself especially in the form of rising unemployment rate. In Britain alone, the number of unemployed labor which now stood at 1.2 million is expected to reach 2 million by the turn of the year. Although there is no agreement among economists as to what constitutes a recession, many would definitely agree that the US is currently in a state of recession. Capitalism has loosened the connection between employers and their employees which, according to journalist Tina Brown, a sharp tracker of social trends, is amazingly expected to produce single-parent homes. Read the following:

I think the financial crisis is going to put a lot of marriages under great stress. There really isn’t enough to go around, and there are choices to be made, and particularly husbands, many of them who are in jobs where they pride themselves, their whole ego is invested in the job. When men lose their job they frequently feel a great loss of manly self-confidence, and that has great impact on a marriage. So I think we’ll see quite a lot of divorces and separations and very difficult marriage stuff happening.

There is no doubt that capitalism has always engendered crises, the Great Depression of 1929-33 being the worst in the annals of history. Although, there are some who argue that the current crisis is solely confined to financial sector and suggest a more focused supervision of this sector, the recent financial meltdown has, more or less, afflicted all areas of the US economy and, in my view, dealt a mortal blow and tarnished the capitalism Adam Smith and others once hailed.

Following the financial crisis in the US and other parts of the world, economic liberty is under attack and capitalism, the system which embodies it, is at bay. A Chinese leader very recently said “the teachers have some problems;” while France’s Nicolas Sarkozy of France claims “self-regulation is finished.” It is to be remembered that Sarkozy and Angela Merkel of Germany had proposed in the G-8 summit for more regulation of the financial sector but to no avail as their proposal was rejected by the other members.

In his recent Newsweek article entitled The Fall of America, Inc. Francis Fukuyama (best known for his book - The End of History and the Last Man - 1992) acknowledged that “a certain vision of capitalism has collapsed”. He wondered why the two signature features of the American brand (capitalism and liberal democracy) have been discredited badly the world over. He had also this to say regarding the severity of the crisis:

The American economy has gone off the rails and threatens to drag the rest of the world with it. Worse, the culprit is the American Model itself: under the mantra of less government, Washington failed to adequately regulate the financial sector and allowed it to do tremendous harm to the rest of the society.

Nothing but more deregulation and speculative financial sector is to be blamed for the failures of modern finance in general and the current US crisis in particular. This financial meltdown has forced many governments to re-assess their economic policies while some of them have already embarked on a ‘project’ toward a larger role for the state and more constrained private sector. While Britain, for example, nationalized much of its banking industry other governments are re-regulating their financial systems.

In the face of this entire crisis, there are those who still are naďve in reiterating the “self-correcting market” rhetoric. This reminds me of John Maynard Keynes’ response to the liberal economists who, following the American Great Depression of 1929-1933, held that the government must keep its hands off the economy reasoning that "it will correct itself in the long run”. Keynes, who sought to formulate the means by which governments could stabilize and fine-tune free markets, believed the long run was misleading and is quoted as saying “in the long run we are all dead.” The fundamentalist ideology that “the market is always right” has been disproved time and again by different renowned economists the world over.

The 1997-98 Asian financial crisis witnessed in countries like Thailand and South Korea can largely be attributed to the liberalization of their capital markets following American advice and pressure. In contrast, countries like China and Malaysia that didn’t follow American advice and kept their financial markets closed or strictly regulated found themselves much less vulnerable. Fukuyama predicts that American ideas, advice and even aid will be less welcome than they are now.

Fed up of the recurrent crises capitalism produced, people now wonder if there is a viable alternative to the capitalism visible in the world today. Owing to its inherent flaws, capitalism is probably at an inflection point and increasingly losing its appeal.

Though Africa seems spared from the effects of the global credit crunch, the flow of money from rich countries is expected to slow down due to its heavy reliance on remittances and aid from developed countries.

As the whole situation has to do with recession, the global credit crunch may have negative ramifications on the Ethiopian economy, especially in terms of reduced Overseas Development Aid (ODA), financial remittances, and investment flows but owing to the prudent policy adopted by the FDRE government, its effects have not been felt severely. In his recent deliberation to parliament PM Meles Zenawi underscored that he doesn’t expect drastic effects on the economy as “the country’s financial structure is not as liberalized as those of the affected countries and that the economy is not interwined to Western economies.”

As we all know, the Ethiopian government has remained reluctant to allow foreign banks to operate in the country. The advantage: we have been shielded from the turmoil in global markets to some extent. In the first place, our banks would not compete effectively with those technologically sophisticated foreign banks; and second, the country-to-country free movement of these banks (in search of a higher interest rate) would certainly produce financial crisis in this country. In spite of the pressure on the government to liberalize the financial sector and allow the entry of foreign banks, the country would benefit from doing so only when it is done at the right time, such as when domestic banks are first strengthened. But as the whole economy cannot function smoothly without the financial sector, it requires close supervision of the government to avoid possible crisis.

Finally, I would like to voice my support for the sound economic policies the Federal Democratic Republic of Ethiopia (FDRE) government has been pursuing and the different measures it has taken to alleviate the impact of the inflationary pressure once it occurred in the country.