The New Nation - Internet Edition

Qazi Kholiquzzaman

Concerns and fears relating to national and global economic health began to heighten in the developed world and across the globe with the collapse, precipitated in September 2008, of the banking systems in the US, the UK, and other European countries. However, alarm bells had started ringing earlier in the year with Bear Stearns bank hitting the rocks in the US and Northern Rock bank in the UK. The US Federal Reserve provided financial backing to JP Morgan Chase to buy out Bear Stearns and the British government virtually nationalised the Northern Rock, determining that the adverse implications of their failure could spell major financial sector upheavals in the respective countries and beyond.

Several years earlier (in 2002), the economy of Argentina collapsed, which was studiously implementing the Washington Consensus and the dictates of the IMF and the World Bank. Even earlier, in 1997, a financial-economic meltdown occurred in East and South East Asian countries, which also implemented similar prescriptions. But no lessons were learnt from those failures.

That the neo-liberal policies were inherently flawed should have been evident from these examples. But, the western governments led by the US and the western controlled international financial institutions such as the IMF and the World Bank kept promoting the neo-liberal paradigm around the world as the best economic policy ever invented.

Quick realiaation that the state must act as the turmoil turned disastrous : With the collapse of the western banking systems in the later half of 2008, the realities as to the inherent flaws of the neo-liberal approach began to dawn on western governments, even on the Bush administration in the US, the epicentre of neo-liberal onslaught around the world. I shall discuss the responses undertaken by the western states to the unprecedented challenges arising from the collapse of neo-liberalism after a brief review of how the neo-liberal approach fell apart.

The Meltdown: Why and the Nature : In large part, the financial management, particularly the derivative market, was unregulated and characterised by lack of transparency, non-disclosure, and lack of accountability. Phenomenally high monetary incentives were provided to the chief executives and other functionaries of the banks and other financial institutions if they succeeded in expanding businesses. They went after ever expansion of credit and mortgage giving activities without regard to the risks involved. All this led to a 'greed culture' which pushed the various banks and financial institutions into the abyss of toxic assets, and that, in fact, was the trigger of the collapse of the financial systems. It is well known that the greed-driven unprecedented expansion of sub-prime mortgages in the housing sector in the US started the process of the meltdown. While the banks and mortgage institutions pursued expansion of their operations without taking into account the risks involved, their top executives and others were rewarded with millions of dollars of bonuses in recognition of the expansions recorded, regardless of how had these been achieved and what the consequences might be.

The risks associated with these murky mortgages and loans led to an unprecedentedly huge unregulated credit derivative market, the most important form of derivative being the credit default swap (CDS). The swaps ran through, from one bank or financial institution to another and so on within the US and in other countries, particularly in Europe and other developed countries given the existing inter-linkages among the involved banking systems.

As of June 2007, the notional value of the outstanding CDSs was US$42.6 trillion, up from US$28.9 trillion in December 2006. Then, there are other forms of derivatives as well as large-scale speculative short selling, all of which added to the vulnerabilities of the banking systems.

It is ironic that Alan Greenspan, the longest serving former chainman of the US Federal Reserve Bank and a deregulator per excellence, in his testimony to the US Congress as the financial meltdown was playing havoc, conceded a grave error in relation to his faith in deregulation and said 'he had too much faith in the self-correcting power of free market and had failed to anticipate the self-destructive power of wanton lending' and acknowledged that the banks and financial institutions have not protected the interests of their shareholders, for which neo-liberalalist greed at the top was responsible. Clearly, the greed of a few spelt disastrous financial and economic consequences for so many. These are forceful commentaries that forces of implosion are inherent in neoliberalism.

When the ever expanding sub-prime mortgages started going into default all around in the US, the mortgage-takers suffered from foreclosures of their properties and, as the housing market shrank, the banking systems involved were sapped of their lifeline, the cash. The banks and the mortgage companies were no longer able to extend credits due to liquidity shortages; and their share prices tumbled in the stock exchanges. The inter-bank lending virtually stopped partly due to non-availability of funds but also due to severe loss of trust in the sense that a borrowing bank-financial institution may not be able to repay the loan. The whole basis of neo-liberalist functioning of the banks and other financial institutions was shattered. Also, the ordinary savers in the banks such as small business owners, service-holders, and pensioners were threatened that they might not get their deposits back. Moreover, small businesses faced dim prospects in the face of non-availability of bank loans. Also, consumer spending tended to be adversely affected due to credit crunch on the one hand and job losses and uncertainties that appeared to be on the horizon, on the other. That meant that the financial sector turmoil threatened to translate into turmoil in the real economy. Recession, even depression, could not be ruled out.

In fact, the world's leading economies, viz. the US, the EU, and Japan are already in recession which is showing clear signs of worsening, despite swift government actions to get the financial systems back on track for properly conducting their legitimate businesses. Understandably, there are basic issues which remain to be addressed, and the mess created is not amenable to a quick fix. Industries and businesses are contracting or closing, with jobs vanishing in large numbers in these economies. Indeed, unemployment rate in the US has been rising steeply over the past months, reaching a 14-year high of 6.5% in October 2008. Further and steeper job cuts appear to be in the offing. In fact, world's three leading US auto-making industries, viz. General Motors, Chrysler, and Ford are collapsing and seeking government assistance to survive. In China also, many industries are contracting or closing down. Stock Exchanges in the developed countries as well as elsewhere continue to behave very erratically, with different share-price indices suffering losses one day and making some gains the next and so on unpredictably, around declining trends below the sharply lower levels to which they dipped in the initial days of the meltdown.

Although the US and British governments did not follow up, after Bear Stearns and Northern Rock were saved, in terms of actions to prevent further banking sector ailments, they responded quickly when widespread financial sector collapses started in September 2008. In the US, the government took over the mortgage giants Fannie Mae and Freddie Mac and injected huge amounts of cash into the insurance giant American International Group (AIG). After that the government undertook a US$700 billion financial sector rescue plan, money out of which is being funneled into the financial system. Moreover, things are changing fast, almost on a daily basis. More recently, the Citigroup also faced collapse with its stocks losing 60% of their value in one week; and on 24 November the US government (Treasury Department) agreed to bail it out by guaranteeing to buy up to US$306 billion worth of its bad loans and assets, and by injecting US$20 billion in cash into the bank (on top of US$25 billion infusion it received earlier as part of broader US banking-industry bailout). In exchange, the government will get an ownership stake in the Citigroup and the bank will have to follow certain agreed guidelines in extending credits and finances as well as in providing dividends and bonuses. This arrangement has been a negotiated agreement between the government and the Citigroup. On 25 November, The US Federal Reserve and the Treasury Department announced a plan to pump another US$ 8OO billion into consumer support programmes, involving purchase, from troubled financial institutions, of securities backed by consumer debts such as credit cards, car loans, and student loans (about US$200 billion); and purchase of mortgage backed assets from Fannie Mae, Freddie Mac and a few other mortgage firms (some US$500 billion); and purchase of direct debts issued by the firms just mentioned (US$l00 billion). These initiatives, it has been suggested, should facilitate flow of more money to the consumers than has so far happened. Once Barak Obama takes over as US President on 20 January 2009, it is very much on the cards that the role of the state in facing the unprecedented financial and economic challenges will be further strengthened. For one thing, the goal of creating 2.5 million jobs has already been announced.

The US government is broadly following the same model, of responding, as has been initiated in the UK, in order to stabilise and rejuvenate the collapsed financial system and minimise the adverse economic consequences of the system's failure. The three core elements of the UK plan are liquidity support, interbank lending guarantee, and recapitalisation of distressed banks. The methods of implementation include: buying up of bad loans and assets to provide cash to the concerned banks and financial institutions, providing loans to them to improve their liquidity, buying up shares to acquire ownership stakes in them, uncrating interbank loans, and guaranteeing up to a large extent individual savings in them. The beneficiary banks and other financial institutions are required to conduct their businesses within the framework of agreed principles, guidelines, and conditionalities. Also, the EU nations closely follow the UK-initiated approach to heal off financial meltdown. The visible hand of the state has now assumed a preeminent position, as dictated by the unprecedented challenges to be addressed, in the management of the financial systems and supporting the real economic sectors, even in the US of President Bush and other neo-con stalwarts in his administration.

Obviously, the Bush administration was forced to undertake state interventions on a large-scale (including acquiring ownership stakes in companies, providing guidelines for business behaviour, and demand stimulation) in the absence of any other feasible option. Even without the financial sector meltdown, the US economy was getting into increasingly serious difficulties as a consequence of huge and rising extemal debt (which amounted to US$13.7 trillion of June 2008, about the same as the total US GDP) and increasing costs of Iraq and Afghanistan wars.

The US faced a similar situation back in the 1970's as a consequence of Vietnam war and rising trade deficits. At that time the US managed to avoid restructuring its own economy by imposing large-scale restructuring and adjustments on other economies around the world. The methodo logy devised for the purpose, which came to be known as the Washington Consensus, was developed by the World Bank and the IMF in collaboration with and at the behest of the US Treasury Department and implemented with support from other developed countries. The purpose of the US in particular had been to commandeer savings from around the world to sustain its own economy, without making

unpopular structural and policy adjustments to its own economy in the face of the above mentioned severe problems. A basic mechanism used was to remove statutory controls over movement of capital within and across nations; and the key concepts were deregulation, privatization, and globalization. Countries around the world were persuaded, cajoled, even forced, using threat of no assistance for non-compliance if required, to undertake the stipulated structural adjustments and board the neo-liberal train. Obviously, deregulation was pursued in the US and other developed countries as well, allowing neo-liberalism to flourish.

But, this time around, there was no such option. Therefore, largescale state actions became absolutely necessary. It emerges that one US war (Vietnam) was an important reason behind the push for neo-liberalism to flourish and another two (Iraq and Afghanistan) have hastened, although it was inevitable anyway, its disintegration.

The British government in its turn agreed to buy a majority stake (about 57%) in the country's largest bank, the Royal Bank of Scotland, and a minority stake (about 44%) in Lloyds TSP and HBOS Banks. The government also took steps to nationalise the financial institution, Bradford and Bingley. For the purposes of guaranteeing private loans, buying up toxic assets, providing loans, and underwriting inter-bank loans, and so on, the British government has committed a total of between £450 and £500 billion. The beneficiary banks and other financial institutions will. be managed under terms and conditions agreed with the government relating to operations, top management remunerations, and transparency and accountability.

Clearly, the banking system in the UK has to a large extent come under the purview of the state in terms of a combination of ownership of shares, participation in management, and overall regulation. In addition, on 24 November 2008, the British government announced billions of pound sterling worth of tax cuts (£20 billion) and in government spending to stimulate consumer spending and revitalize the British economy.

There has emerged a new phenomenon in that an internationally coordinated approach to managing the unprecedented global financial and economic challenges has been mounted. First, the EU, the US, and other members of G-7 came together and agreed to an action plan, aspects of which have been outlined above. Soon afterwards, larger and emerging developing economies were brought into the process through a G-20 meeting held in Washington on 15 November 2008. Some of the outcomes relevant to the presea.t exercise are mentioned below.

In addition to actions taken by the western governments to stabilize and rejuvenate financial systems, there is also a broad agreement to use fiscal measures to stimulate demand, which is reflected in some of the actions (highlighted above) taken by the US and British governments to boost consumer spending and confidence. In the above mentioned G-20 meeting, the actions taken by the developed countries, as outlined above, have been endorsed and it has also been agreed to implement reforms to strengthen regulatory regimes in order to avoid future crises. Although regulation is primarily a national activity and the responsibility is with the national regulators, it has also been agreed that intemational cooperation among national regulators is essential to strengthen international standards and promote and protect the international financial stability. The use of fiscal measures to stimulate demands has also been endorsed. Another agreement reached is to provide assistance to the affected developing countries. Indeed, it has been agreed to do whatever it takes to get the economies moving everywhere.

It has also been agreed in the G-20 meeting "the Bretton Woods institutions must be comprehensively reformed as to more adequately reflect changing world economy and be more responsive to future challenges. Emerging and developing economies should have greater voice and representation in these institutions."

First of all, of course, what sort of confidence can one have on such a statement to eventually materialise? If the developed countries really want to follow through, it is possible that an attempt will be made to incorporate some of the larger and more powerful emerging and developing nations into the fold, but the large majority of the world's nations, which are smaller and economically and in other respects weaker, may remain neglected. I would strongly argue that it is absolutely necessary that the restructuring of the Bretton Woods institutions must be formulated and implemented with full participation of all UN members, ensuring proper reflection of the legitimate voices of all the nations in the policy-making and management of the restructured institutions.

It is important that any reform of these institutions start from the basic notion that they must not push or cajole countries to pursue the path of unfettered free markets, or, indeed, any other dogma. Rather, they must extend assistance to developing countries on the basis of the latter's own agendas formulated on the basis of their own realities and the needs and aspirations of their own people. These institutions must not be allowed to be in the driver's seat in relation to policy making in respect of any aspect of the assistance receiving countries. They must not be allowed to use the conditionality of not providing assistance if their perspectives are not embraced. Their mandate will be to assist, not lead.

The lessons and the advent of another economic: Order The recent developments involving commitments of the state regarding the management of the recent financial meltdown, ensuring future national and international financial stability, and creating conditions for the real economies to move forward benefiting all participants, as outlined above, are a clear testimony that neo-liberalism is in tatters. Indeed, history has not ended. Neo-liberalism has, in fact, imploded and a new history has begun to shape up.

They are those who, including Alan Greenspan, have compared the global financial meltdown with tsunami. But, this comparison is misplaced, even misleading. Tsunami is a natural phenomenon and, given current knowledge, cannot be prevented. It is the huge tidal wave caused by a submarine earthquake, landslide, or volcanic eruption. A tsunami cannot be predicted, except perhaps only a few hours in advance. On the other hand, the current global financial meltdown has resulted from a particular policy regime pursued as a dogma over the past several decades. There have been indications over the years that the paradigm would run into serious troubles. Indeed, that unfettered capitalism would lead to such a debacle had been suggested by many economists and other observers. They have been calling for balanced roles of the state and the market to replace the ongoing neo-liberal unregulated free market. Among the economists, two names stand out: Nobel Laureates Joseph Stiglitz and Paul Krugman.

They had been consistently and forcefully expressing their articulated dissenting voices, calling attention to the likely disastrous consequences of the neo-liberal paradigm, which the world is now witnessing. Also, there are politicians in the US and the UK, among other observers, who have been expressing similar opinions. Clearly, therefore, the disaster has stricken as a result of the deeply flawed and inherently implosion-prone neo-liberalism pursued over several decades. The tsunami comparison is, in fact, a denial of this long-evolving prognosis and the option that existed for avoiding the disastrous financial and economic consequences by changing course decisively and adequately when time remained.

In 'another world economic order', as indicated earlier in this paper, market will still play an important, even crucial role; but it will function under effective state regulatory regimes. The idea of minimalist state must be abandoned; rather the state and the private sector will perform balanced roles. In the socio-economic arena, the state will perform regulatory responsibilities and will ensure equitable access of the downtrodden to social and livelihood-related services. The state will also create conducive political, legal, and socio-economic environment for all citizens to live and work with full human dignity. Transparency, accountability and effectiveness must be the guiding principles of the functioning of the state. The private sector will be mainly responsible for production and distribution of goods and services in both real and financial sectors but will observe proper business ethics and operate within the prevailing relevant legal and regulatory frameworks.

The poor are too weak and, therefore, it is necessary for the State to assist them to fulfil their socio-economic-political legitimate needs and it has now been seen that the state had to corne forward to clean up the mess created by unbridled capitalism. It is, therefore, essential that the state be equipped to play the strategic role, as indicated above, that only the state can play; and it is in that context that the private sectors can best evolve for the benefit of all concerned.

However, a framework of private-public partnership design defined in terms of responsibilities, guidelines and rules of business that is suited to a particular country should be developed through a process of democratic dialogue involving all stakeholders.

Also, it is crucially important that the proposed socio-economic development process must be integrated with environmental protection imperatives in order to meet the challenges arising from the accelerating climate change. In other words, the issues of climate change and socio-economic development must be properly specified and addressed in an integrated fashion to promote sustainable development.

Implications of global meltdown for Bangladesh : Since capital account in Bangladesh has not rightly been liberalised and the banking system in Bangladesh is not integrated with the international banking system in any major way, Bangladesh has not been affected by the international financial meltdown.

But, the recession that is on stream in the developed world (including in the US, the EU and Japan) and appears to be worsening may create difficulties for Bangladesh. If (and there is hope, backed by wide-scale state action, in most of the leading developed countries) the recession does not become deep and does not last beyond 2009, the implications for Bangladesh will likely be negligible.

On the other hand, if the recession takes a greater toll in the developed economies and continues for several years, the impact on the world economy including Bangladesh can be severe.

Bangladesh must carefully and constantly watch and analyse the developments in the world economy, particularly in the developed countries and the developing countries with which the country has significant economic relationships, and make policy and other adjustments as may be required in order to minimise the possible adverse economic impacts and make the best use of any opportunities that may open up.

The main areas through which the recent and unfolding developments in the world economy, particularly in the developed economies, may be transmitted to Bangladesh include export and import, remittance, foreign aid (loans and grants) and foreign direct investment (FDI)

Export and import : The overwhelmingly large export sector of Bangladesh is garments and knitwear (RMG). This sector has expanded fast over the years and has always been very resilient. It keeps significantly growing at the present time as well (a growth rate of about 45% achieved during July-September 2008), facilitated by cost advantages and perseverance and because the competing countries such as China are moving on to higher value products so that some of the orders for the lower-end products vacated by those countries have been coming to Bangladesh.

The country's overall export earnings (US$4.4 billion) in the first quarter of 2008-09 are in line with the target set for the fiscal year (US$16.4 billion). In the event of a mild and short-lived (say for about one year) recession in the developed world and no significant reduction in the developing world growth, Bangladesh's exports are unlikely to be adversely affected much. But, the likely depressing international prices of Bangladesh's exports are an important cause for concern, which will become more serious in the event of a deep and prolonged recession in the developed world and significantly reduced growth in the developing world.

But, if the recession in the US, the European countries and elsewhere becomes severe and prolonged, Bangladesh must better watch out for possible difficulties in the international markets for the country's exports and take whatever action is necessary to keep the export sectors performing as well as possible. For one, thing, the flow of funds to the exporting industries should be facilitated through reduction of cost of funds (particularly the rate of interest) to strengthen the abilities of the industries to realise their potentials in the face of difficulties. Also, banking services to the industries should be improved to help them perform expeditiously. At the same time, it is important that legitimate benefits are ensured for all stakeholders including the workers so that the industries can function smoothly and efficiently without distractions.

Bangladesh may be hurt in another way. A possibility had been emerging for Bangladesh to secure increasing entry into software services market in developed countries, particularly the US and European countries. But, in the event of deep and prolonged recession in those countries, the prospect in this regard is bleak and may evaporate, as the companies in those countries requiring such services will face difficulties, cutbacks, even bankruptcies. Also, in a long and deep recession, foreign direct investment (FDI) flow into Bangladesh, which is small anyway, may be further squeezed as the companies restructure and remodel their investment programmes as a consequence of reductions in their investment funds.

Oil price has now declined by about two-thirds compared to a few months back-to around US$50 from around US$150 a barrel of crude oil; and prices of metal and various commodities have also dipped sharply. As an upshot, import costs of Bangladesh should fall, which is obviously beneficial to the country. To the extent, declining costs apply to machinery, petroleum products, raw materials, and intermediate products, the benefit is clear and unambiguous. But, in so far as finished consumer goods and services are concerned, which compete with Bangladesh's domestic products, cheaper imports will adversely affect domestic production. It is essential, therefore, that the international price movements of the relevant importables should be regularly watched and analysed and necessary steps taken to maximise benefits and minimise adverse impacts.

Remittances : The remittance receipt sector has also been clearly very resilient; but of late there have been signs of a slack in the remittance inflow. This may be because, fearing likely job losses, Bangladeshis working abroad are more careful in using their moneys, including remittance to Bangladesh. Job losses have been already occurring on a wide-scale in the US and other developed countries, although still mostly at the level of skilled/semi-skilled workers. But, that may also spill over to unskilled categories, partly because of linkage effect and partly because of slowdown in consumer spending leading to contraction in the demand for even lower end services.

In the Middle East, with the oil prices having recently tumbled, there may be cutbacks in various planned development projects and programmes in the regional countries, particularly if such low oil prices persist or fall further, which is likely in the event of a deep and prolonged recession in the developed world. That would imply adverse impact on employment including unskilled and semi-skilled jobs in which large segments of Bangladeshi workers in those countries are engaged. It has to be remembered that well over two-thirds of the total annual remittance received by Bangladesh comes from the Middle Eastern countries. Apart from possible job losses, new recruitment from Bangladesh may be adversely affected, restricting additional remittance opportunities. Our embassies in the concerned countries must carefully evaluate the unfolding situations in their respective countries on a regular basis and, in the event of difficulties emerging, take all possible diplomatic steps to safeguard and enhance the interest of Bangladeshi workers there.

However, the currently prevailing rather low oil prices are a significant reprieve for Bangladesh, insofar as the country meets most of its need for petroleum products through importation. But, there is a lot of volatility concerning international oil prices. Hence, the behaviour of oil prices in the international markets must be kept under constant review and timely actions taken to derive maximum benefit and minimize possible losses over time.

Foreign assistance : Clearly, the 'donor' countries are facing major economic turmoil. But, Bangladesh receives a relatively small annual total amount of foreign assistance in loans and grants, which is around US$1.5 billion.

Hence, it can be reasonably expected that Bangladesh will not face an unusual cutback in foreign assistance. In this context, it may be noted that a commitment has been included in the recent Washington G-20 declaration to "help emerging and developing economies gain access to finance in current difficult financial conditions, including through liquidity facilities and programme support."

It has also been agreed to encourage the World Bank and other multilateral development banks to support the development agendas of such countries.

On the whole, there may be some difficulties, but I do not expect a major setback with respect to foreign assistance to Bangladesh. The story may be different, however, if the developed world goes into a deep and prolonged recession. The Government of Bangladesh must surely remain constantly watchful in this regard, with its negotiating machinery active and forward-looking and keeping in sharp view the needs of the country. Also, improved productive utilisation of remittances should reduce dependence on foreign assistance.

Indeed, at this time of unprecedented challenges faced by the world economy, all key stakeholders in Bangladesh in relation to economic management, including the government, the banking system, and the industrial and business sectors must work in true partnership to protect the national economy from possible major external shocks and expand its opportunities and perfonnance.

It emerges from the above analysis that if the recession in the developed world is mild and short, Bangladesh should not suffer much adverse impact.

If, on the other hand, the recession is deep and prolonged in the developed world and economic growth in the developing world considerably slows down, Bangladesh will face very difficult extemal conditions to contend with and will likely suffer as a consequence.

The possible setback can, however, be minimised if the developments in the world economy, particularly in the developed world and other countries such as the Middle East with which Bangladesh has significant economic relationships, are regularly reviewed and analysed and necessary actions are taken firmly and in time to ride over the difficulties arising.

Looking Forward : The debate, relating to the World Bank projection of a sharp decline in Bangladesh's exports and GDP growth rates for 200809, that has over past few days occupied a lot of time of various people including high govemment officials and may continue for a while more, is a wasteful distraction. Volatilities and uncertainties in the coming months and beyond surrounding global financial and economic systems are sure to be so great and their implications for Bangladesh are so unclear that any quantitatively specific projection about export and GDP growth rates for 2008/09 are bound to be unreliable and can be misleading; moreso when, for example, the GDP growth rate for 2008/09 is projected by World Bank to be a specific number (4.8%), down from 6.5% projected by the Government of Bangladesh. The World Bank projection, therefore, has inevitably