The credit crunch has destroyed faith in the free market ideology, which has dominated the Western economy for a generation. But should it be replaced? Over the coming weeks, a wide debate to be conducted over this controversial political issue
Emerging Economic powers
The world’s emerging economic powerhouses will better survive the recession if they further liberalize their economies. The Organization for Economic Cooperation and Development (OECD) focused on tracking the developments of six fast growing economies that it calls the BRIICS, referring to Brazil, Russia, India, Indonesia, China and South Africa. The right strategy to deal with the present crisis was to press on markets reforms. The emerging powers suggested, specifically Russia and China, to replace the U.S dollar as the world’s main reserve currency. Russia announced that its proposal had strong support amid key emerging market economies. When asked if the Chinese currency would replace the U.S dollar, the answer of Chinese officials was clearly NO! This rejection is due to the fact that China has the largest U.S dollar reserves ($1.9 trillion) and already bought U.S treasury stocks with additional $740 billions.
OECD members, BRIICS and others should keep the international markets open to improve their economic prospects. However, some countries like Japan and Australia fear U.S protectionism, where Japan is the fourth biggest exporter to the U.S, after China, Canada and Mexico. Also, Australia is a major iron and steel producer to U.S. Both countries consider U.S protectionism as a trade war. During the G20 Summit, Britain, U.S, South Korea, Canada and India requested more strong commitments to free trade. In practice, many of G20 countries have adopted protectionist measures since the Washington Summit, held last November to defend domestic companies, as the American calls for globalization and free market have gone with the wind when received first shock.
As governments continue to study restrictions to impose on markets, especially financial ones, the destruction of wealth by the recession should be placed in the context of enormous wealth creation and wellbeing improvement. Considering the performance of the world economy since 1980, the growth of domestic products increased by 3.4 percent a year. The so-called capitalist greed that motivated businessmen and ambitious workers helped hundreds of millions to climb out of poverty. The role of capitalism in creating wealth is seen in the sharp rise of Chinese and Indian incomes after they introduced market-based reforms, in 1970s and 1991 respectively.
Outcomes of London Summit
The G20 leaders acknowledged the recommendations of finance ministers, which led to successful outcomes,
– The summit agreed to spend $5 trillion by the end of 2010 in order to push up the global economy, as they possess 90 percent of global economy product.
– France and Germany stressed on the importance of protecting funds and preferred to wait for the outcomes from the already committed funds.
– Australia, Canada and South Africa suggested increasing the International Monetary Fund (IMF) lending resources, which agreed to commit $1,1 trillion, with other institutions, distributed as follows: $500 billion for struggling economies, $250 billion to boost world trade, $250billion for a new IMF overdraft facility, $100 billion for International Development Banks to lend to poorest countries. In addition, IMF will raise $6 billion from selling gold reserves.
Oil industry attitude
As oil companies cut costs, they should consider not repeating the mistakes of the 1980’s oil bust, when mass layoff were released. Few of the largest oil companies, such as ExxonMobil and Chevron have large cash reserves after years of high oil prices, but smaller companies spent heavily during the booming years and are now scrambling to cut back. Some companies have announced layoff, such as Conoco Philips (more than 1000 employees), Schlumberger (5000 employees), while Halliburton is cutting an unspecified number of jobs. Companies have avoided the mass layoff seen in the 1980’s, when a glut of oil drove prices below $12 per barrel and thousands of workers lost their jobs. But, will they continue cutting down jobs, this can be seen after the second quarter; the time of assessments and evaluations.
Mortgage Housing crisis
Most economic analysts consider the U.S housing problem as the core for the recession. The U.S President Barak Obama signed a $787-billion plan, to help a wave of home foreclosures, which would shore up housing prices. It would cost taxpayers as much as $275 billion, including $75 billion in direct spending to keep citizens in their homes, but analysts and administration officials cautioned that it would not come close to halting the tidal wave of foreclosures, nor would it provide much help to millions of homeowners who are holding mortgages bigger than the market value of their houses. Around nine million families would be given the chance to reinforce mortgages under this plan, which has three components; the first would help homeowners who are still on their payments, but paying interest rates. Second component would assist four million people who are at risk of losing their homes. Third component would try to increase the credit available for mortgages in general by giving $200 billion of additional financial backing to the Federal National Mortgage Association and the Federal Home Mortgage Corporation. Generally speaking, housing mortgage crisis and financial crisis are interconnected; both of them are waiting solution.
By Mostafa Mabrouk
Economic Consultant, Ganope