A year ago, the prospects for Emerging Economies (EE) looked very promising. There were concerns about the effect of a shallow recession in the United States, but the general perception was that Asia, the largest regional emerging market group, and Latin America, the second largest, as well as other regions were doing well. In a wishful way most thought they had ―decoupled‖ from the advanced economies, and wealth would grow with few restrictions. Surely, policies had been conducive to significant improvements in fiscal and external balances, with a few exceptions, and international reserves were at record levels. Policymakers felt comfortable. Commodity prices were expected to continue going up, foreign demand, including among emerging market economies, was strong and there was no serious worry about financing as creditworthiness was solid. Problems were hitting only the United States and a few other developed countries. Since then, the financial crisis which the world is suffering most likely has become the worst in the last fifty years. Some analysts consider that its intensity is equivalent to that of the Great Depression of 1929-33. That crisis was the worst of modern times, and reflected previous excesses and subsequent incompetence. Although the comparison with the Great Depression is an exaggeration unjustified by the facts, the damage caused to the world economy is enormous. The complex and wide-ranging interaction between the financial world and the real economy as a result of the present turbulence already has begun to have serious consequences for the emerging economies, and the prospects for a fast recovery are more remote by the day. Whereas the conditions in the financial markets have tended to stabilize from the unsustainable position of September-October of 2008, the real economy is weakening and the prospects for a recovery can only be envisaged for late 2009 or early 2010. In different ways, Emerging Economies were initially able to absorb the initial impact of the crisis on account of the considerable progress in recent years in consolidating economic performance. Nevertheless, this group of countries is experiencing mounting difficulties. The difficulties are significant in Asia and Latin America, but more so in Eastern Europe and Russia, as they were even more dependent on credit and high export prices respectively.

The previous sense of strength and invulnerability is now gone. Commodity prices have declined by about one half from their peak; demand for manufactured goods is declining sharply all over the world; stock market valuations have declined by about one half or more; and currencies in many emerging countries have depreciated, as capital flows reversed seeking to find a safe heaven. Governments were reasonably careful with their poli cies, but private enterprises held ―toxic‖ assets to an unexpectedly large extent, with serious effects for their own financial health as well as that of their countries. The loss of financial wealth is enormous, and the consequences for the economies of the world, will be unfortunately commensurate. The authorities and economic agents were initially taken by surprise by the collapse. Now they are responding to the challenges caused by the rapidly deteriorating external environment. However, there are serious economic and political stumbling blocks that may well cause the recovery to be costly and slow to consolidate. This paper reviews the origins of the current crisis and the impact on emerging market economies, but focuses mainly on Developing Asia, the NICs, and Latin America in the context of the global crisis. While the inclusion of Latin America may seem extemporaneous to some, it is fitting to include it as the region has a GDP of US$4.4 trillion, somewhat larger than that of China, and about 2/3 of that of developing Asia, which has a GDP of US$7 trillion, according to IMF data. No other region comes close to these two areas in terms of size, and common characteristics in terms of development. Furthermore per-capita income in Latin America is more than double that of Developing Asia both in current and PPP terms. The paper also discusses what can be realistically expected in the short and medium term, as financial volatility and recessionary forces may continue to prevail for a while.

The global financial crisis, brewing for a while, really started to show its effects in the middle of 2007 and into 2008. Around the world stock markets have fallen, large financial institutions have collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems. On the one hand many people are concerned that those responsible for the financial problems are the ones being bailed out, while on the other hand, a global financial meltdown will affect the livelihoods of almost everyone in an increasingly inter-connected world. The problem could have been avoided, if ideologues supporting the current economics models weren‘t so vocal, influential and inconsiderate of others‘ viewpoints and concerns.



Recent evolution of the world economic environment

Over the last decade, Asian countries were able to emerge from the serious crisis that had brought many of them down in the late 90s. Helped by the consistent growth of China, and to an increasing extent India, the Asia region witnessed a stellar performance. Con currently, after a period of low economic growth, persistent crises, and high volatility that extended through the 1990s, Latin America made a very strong recovery. Inflation declined; the fiscal accounts and monetary policy showed great strength; international trade boomed; poverty declined; and the external accounts were much sounder than they had been in decades. Within this overall positive picture, not all countries acted in a similarly prudent fashion. The limited initial impact of the financial crisis gave rise to a false sense of security that has now disappeared. The crisis is now in the open, as the impact on the balance of payments and on domestic activity becomes very serious. The adverse terms of trade effect will aggravate the situation, compounded by a massive loss in financial wealth. Economic growth in 2009 may decline by half among developing and emerging economies (Table 1). It is likely to be well below 1% in Latin America; a recession among the newly Industrialized countries of Asia (NICs); and much lower growth rates, even though still in the order of 5% in Emerging Asia, mainly on account of the resiliency of China, and to a lesser extent India. Of course, this is shocking for all the regions that had experienced very strong growth from 2002 onward. Under these conditions, policy makers will need to find a balance between the needs of economic stimulus and of financial stability.



These were financed by the surpluses of oil producing countries. these trends were further complicated by an increasingly integrated global trading and financial system which magnified and accelerated the transmission process. weak surveillance by the IMF and other multilateral organizations. The US. Global GDP rose at an average of about 5 percent a year. after a period of extraordinary growth but fraught with dangers that were not anticipated by most even a few months ago. and aggravated by weak and uncoordinated policy responses to the initial signs of trouble in the financial system – responses that. The most important factor behind the increasing imbalances was the emergence of growing imbalances among the main economies of the world. About three-fourths of this growth was attributable to a broad-based surge in the emerging and developing economies. the US dollar started to weaken in international markets and there were growing signs of impending problems. Inflation remained generally contained. embarked in consumption binge and a growing fiscal deficit. the value of financial assets rose sharply. as described in further detail below.Genesis of the Present Financial and Economic Crisis The reasons for the current crisis are complex. and commodities had reached new and sustainable heights. Concurrently. These imbalances grew rapidly. Prosperous stage that using an abused word. inadequate regulation and supervision of national financial systems and fragmentation of global regulation. China. As stated very precisely by Jack Boorman. its highest sustained rate since the early 1970s. entailed a new economic paradigm. For four years through the summer of 2007. the global economy boomed. and to a lesser extent Europe and Latin America. The value of financial and real assets was growing without a perceptible limit. 6 . even if with some upward pressures. as noted below. However. and are linked to the financial market deterioration of the last 20 months or so. but markets did not respond significantly before 2007. Japan. experienced growing external current account deficits. with low rates of savings. in many instances did more to shake confidence than to instill a sense that policy was up to the task of dealing with the banking system crisis and the impact on the real economy.

However. this cancer spread throughout the financial industry. non-partisan oversight. well-respected members of Republican and Democratic administrations. This is simply not true and more importantly serves to grossly oversimplify a problem whose roots run deep and involve myriad actors and issues. some claim that deregulation is entirely to blame. mortgage brokers. In a time of crisis. which has now metastasized into the current financial crisis. an over-reliance on inaccurate risk assessment and a fractured regulatory system. the Federal Reserve Board. and consumers. Fannie Mae. The simple truth is that many share the blame. banks. We need a series of hearings that will focus on the root causes and how we can fix a system in order to avoid financial meltdowns in the future. Freddie Mac. Key players and institutions include Members of Congress. They were the central cancer of the mortgage market. There is no single issue or decision one can trace as a cause of the current financial crisis. the American people cannot afford the same old partisan finger pointing. and pointing to just one person or organization does a disservice to the American people. With the help of a loose monetary policy at the Federal Reserve. The current credit crisis is a complex phenomenon with its roots in a number of places involving a myriad of people and institutions. A few key elements are critical in understanding how we got to where we are today. rather it was multiple decisions and issues involving many actors over time that led us to where we are today. the major private sector credit rating agencies. we can point to organizations that contributed greatly to the problem and how their role was the catalyst for others to become involved and eventually fail. the Department of Housing and Urban Development (HUD). This minority staff analysis attempts to objectively explore the causes of the financial crisis we are in and how companies like Lehman Brothers and AIG contributed to this crisis. they need and deserve real. Fannie Mae and Freddie Mac fall into this category. the Securities and Exchange Commission (SEC).Causes of the Credit Crisis In the midst of the most serious financial crisis in a generation. 7 .

. 8 .

placing the total financial system of the future at a substantial risk. The motivations for Fannie Mae and Freddie Mac to gamble with taxpayer money on bad nonprime mortgage bets was not entirely a matter of good intentions gone awry. with Democrats viewing any attempt at curtailing their behavior as an attempt at curtailing affordable housing. These liabilities were equal to 32.8% of the total publiclyheld debt of the U. The size and growth of Fannie Mae and Freddie Mac leading up to their collapse were nothing short of astonishing. The transformation of Fannie Mae and Freddie Mac into the Affordable Housing Center was a laudable goal.6 trillion. Recent events have unfortunately proved him right. The politicization of Fannie Mae and Freddie Mac over the last decade seriously undermined the credibility of the organizations and prevented their restructuring and reform.64 trillion. but to push predatory subprime lending to unspeakable heights and to encourage questionable lending practices believing housing prices would continue to soar was beyond reason. Greed and corruption were unfortunately part of the equation as well. Government. which in 2005 stood at $4. Fannie and Freddie combined spent nearly $175 million lobbying Congress.51 trillion. and from 2000 to 2008 their employees contributed nearly $15 million to the campaigns of dozens of Members of Congress on key committees responsible for oversight of Fannie and Freddie. Between 1998 and 2008. and their outstanding liabilities grew 980% to $1. Fannie Mae and Freddie Mac grew more than 944% to $1. Those who opposed the restructuring of Fannie Mae and Freddie Mac were unwittingly helping to build a house of cards on risky mortgage backed securities. Federal Reserve Chairman Alan Greenspan was so concerned that he characterized the concentration of systemic risk inherent in the ever-growing portfolios of Fannie and Freddie as. 9 . From 1990 to 2005.S.By 2005.

10 ..

If we understand the initial cause of the cancer at Fannie and Freddie. AIG is somewhat different. Wachovia. and beyond. 11 . bad management decisions were made in thinking that the mortgagebacked securities and derivatives could be insured. AIG and the Challenges of Statistical Risk Modelling Lehman Brothers didn‘t cause this mess but it certainly jumped head first into trying to make money on securitizing mortgage-backed instruments. They followed on the heels of Fannie Mae and Freddie Mac and for precisely the same reasons. Countrywide.Lehman Brothers. trusting the rating agencies were accurate and that Fannie Mae and Freddie Mac couldn‘t possibly fail. Yet underlying its bad decisions was the same mistaken reliance on sophisticated but inaccurate computer models. then we can understand how it metastasized to Lehman Brothers.

mortgage brokers. The words regulation and deregulation are not absolute goods and evils.Regulation and the Credit Crisis Democrats are wrong in insisting that de-regulation is the primary cause of the financial crisis. They are political cant used to describe complex policy discussions that defy simplistic categorization. Government needs to design smart regulations that align the incentives of consumers. investment institutions. Deregulation is not the problem. lenders and borrowers to achieve stable and healthy markets. The problem is a lack of coherent regulatory oversight that has led mortgage brokers and lending institutions to write questionable loans and investment institutions to play fast and loose with other peoples money in purchasing bad mortgage-backed assets. The key to successfully regulating markets is not to either create more or less regulation in an unthinking way. 12 . nor are they meaningful policy prescriptions. and insurance companies all being overseen by different and often competing federal and state agencies. rather it is the fractured regulatory system that has banks.

13 .

the Republican Congress was swayed by this argument and codified it in law. Unfortunately.Credit Rating Agencies and the Practice of Rating Shopping Some firms that bundled subprime mortgages into securities were engaging in rating shopping picking and choosing among each of the three credit rating agencies in order to find the one willing to give their assets the most favorable their competitors. 14 . Rating agencies willing to inflate their ratings on subprime mortgage-backed securities lobbied Congress to prohibit notching . unrated assets .the downgrading of assets that incorporate risky. on the grounds this constituted an anti-competitive practice.

assets and past performance in repaying loans. Primary lenders evaluate borrowers ability to repay the mortgage based on an assessment of risk that combines such factors as income. Borrowers who fall in between prime and subprime standards who may not be able to fully document their income or provide traditional down payments are sometimes referred to as near-prime borrowers. They generally can apply only for Alternative-A (Alt-A) mortgages. These mortgages increased from only 9% of newly originated securitized mortgages in 2001 to 40% in 2006. thrifts. 15 . the borrower is refused a loan. rising from less than 5% of mortgage originations in 1994 to more than 20% in 2006. Prime mortgages are traditionally the gold standard and go to borrowers with good credit who make down payments and fully document their income and assets. mortgage companies. Subprime loans have existed for some time but really took off in popularity around 1995.Mortgage Markets: A Primer Prospective homebuyers apply for mortgages from primary market lenders such as banks. Starting in 2001. Borrowers with poor credit and/or uncertain income streams represent a higher risk of default for lenders and therefore receive subprime loans. If a borrower does not meet the minimum requirement. and online lenders. credit unions. subprime and near-prime mortgages increased dramatically as a proportion of the total mortgage market.

and ultimately the total size of the loan. This meant that 16 . The riskiest loans even allow borrowers to pay no money down at all for 100% financing. it is generally related to the underlying interest rate in the macro economy) which then adjusts in the future by an amount determined by a pre-arranged formula. under certain macroeconomic conditions. However. the borrowers monthly payment will be larger. a borrower must repay.S. For example. There are different formulae used to determine the new mortgage rate on an ARM. in addition to being below the standard risk threshold lenders traditionally deemed creditworthy for mortgages. This is possible because the larger first mortgage means some lenders give borrowers a more favorable rate on the second mortgage. meaning the borrowers monthly payment will go down. The prevalence of ARMs as a percentage of the total mortgage market increased dramatically during the housing bubble. Negative amortization mortgages are even riskier. but in general one can think of these new rates as being related to the performance of the U. however. In 1984. the adjusted mortgage rate will be lower. increasing the monthly payment.a second mortgage to finance the down payment. Another option is to allow borrowers to take out a piggyback or silent second loan . However. adding the remaining interest to the loan principal and again increasing the payments and size of the loan.or zero-down payment mortgages permit borrowers who cannot afford the traditional 20% down payment on a house to still receive a loan. Instead some mortgages allow them to pay 10%. 61% of new conventional mortgages were ARMs. low. or even 3% of the purchase price of the home. ARMs offer a low introductory mortgage rate (the cost of borrowing money for a home loan. 5%. Adjustable rate mortgages (ARMs) are the most common of the alternative mortgages. allowing borrowers to pay less than the minimum monthly interest payment. for example.Subprime borrowers. from 12% in 2001 to 34% in 2004. Unlike other alternative mortgages. If interest rates go down during the introductory period of the ARM. Interest-only mortgages are another alternative type that allows borrowers to for a time pay back only interest and no principal. there are sound reasons for borrowers to take out ARMs. were increasingly taking advantage of so-called alternative mortgages that further increased the risk of default. High interest rates translate into high mortgage rates. If interest rates go up. this was a rational response to the very high interest rates at that time. economy. either the duration of the mortgage must be extended or the payments amortize the remaining principal balance over a shorter period of time.

however. as long as they were confident that housing prices would continue to rise. relatively low by historical standards.borrowers at that time were willing to bet that when their mortgage rates adjusted.and longterm interest rates during this period. yet ARMs remained very popular. they were likely to adjust downward due to falling interest rates. borrowers could get these mortgages at even lower costs and.S. 2001. However. however. Correspondingly. The persistence of nontraditional terms could be evidence that some borrowers intended to sell or refinance quickly . in addition to speculation. This was a sensible bet and one that turned out to be correct. relates in part to the abnormally wide disparity between short. Since ARMs tend to follow short-term rates. The continuing popularity of ARMs. economy following the attacks of September 11. In the words of a report by the Congressional Research Service. from 2004 to 2006. plan on refinancing before their ARMs adjusted upward. 17 . Low short-term rates until 2004 are only part of the puzzle. mortgage rates on 30-year fixed-rate mortgages were around 6%. By 2005 short-term interest rates were actually rising faster than long-term rates. interest rates were abnormally low because the Federal Reserve led by Chairman Alan Greenspan lowered rates dramatically to pump up the U. From 2001 to 2004. at least until about 2004. the report goes on to note that. By 2006 housing prices had started to slow significantly and yet introductory periods remained popular. Borrowers responding only to these macroeconomic conditions would have been wise to lock in these rates with a traditional 30-year fixed-rate indicator of speculative behavior.

Some other force was clearly at work.alternative mortgages were marketed as affordability products to lower income and less sophisticated borrowers during the housing boom. 18 .

Instead. the mortgage industry was mainly concentrated in urban centers. has contributed perhaps more than any other single factor to the growth of the subprime housing bubble from 2005 to 2007. or Fannie Mae. In response. In the process. Government created an incentive structure for Fannie and Freddie to facilitate the extension of risky nonprime and alternative mortgages to many borrowers with a questionable ability to pay these loans back. This increase in the funding available to mortgage lenders to lend was the goal behind the creation of Fannie Mae and Freddie Mac.S. leaving broad swaths of the country unable to afford home financing. with no federal funding by 1970. it can use the proceeds from the sale to make additional loans to other homebuyers. 19 . along with a healthy dose of unethical and corrupt behavior by the management of Fannie Mae and Freddie Mac. which in turn was the root cause of the current financial crisis. mortgage market. in the National Housing Act of 1934 as a purely public agency. After a number of legislative iterations. the U. Ultimately.The Role of Fannie Mae and Freddie Mac in Creating the Credit Crisis Successive Congresses and Administrations have used Fannie Mae and Freddie Mac as tools in service to a well-intentioned policy to increase the affordability of housing in the United States. primary lenders may choose to hold a mortgage until repayment or they may sell it to the secondary mortgage market. there was no national U. This. In the mortgage market. a government-sponsored enterprise (GSE). Fannie and Freddie may have purchased or guaranteed up to $1 trillion of risky nonprime mortgages. If the primary lender sells the mortgage. Congress created the Federal National Mortgage Association.S. Prior to the existence of the secondary mortgage market. Fannie Mae morphed into a private company.

Securitization was seen as perhaps the greatest financial innovation in the 20th century).encouraging people to take them up. all wanted in.Securitisation and Subprime crisis The sub prime crisis came about in a large part of financial instruments such as securitisation. Running out of whom to loan to. the riskier loans. the banker off loads the risk. thus off loading risky loans on to others (For banks. Collateralized Debt Obligations. (even more complex forms of securitization) spread the risk but were very complicated and often hid the bad loans. banks turned to the poor. With soaring profits. The security buyer gets regular payments from all those mortgages.  Banks borrowed even more money to lend out so they could create more securitization. Some banks didn‘t need to rely on savers as much then. others followed quickly. As BBC‘s former economic editor and presenter. but they are tied up for decades. Evan Davies noted in a documentary called ‗The City Uncovered with Evan Davis: Banks and How to Break Them (January 14. rating agencies were paid to rate these products (risking a conflict of interest) and invariably got good ratings. So they turned into securities.   Some banks even started to buy securities from others. Subprime and ― self-certified‖ loans (sometimes dubbed ―liar‘s loans‖) became popular. no one wanted bad news.    Some investment banks like Lehman Brothers git into mortgages.2008)‘. or CDOs. Rising house prices led lenders to think it wasn‘t too riski. especially in the US. millions can be made in money earning loans. the subprime. For Example. Starting in Wall Street. bad loans ment repossessing high-valued property. While things were good. 20 . even if it went beyond their expertise. bad loans would be the problem of whoever bought the securities. Where bank would pool their various loans into sellable assets. as long as they could borrow from banks and sell those loans on as securities. buying them in order to securitize them and then sell them on. Some banks loaned even more to have an excuse to securitize those loans.

and trading risk. etc without the right controls and management. selling. buying. not content with buying. Investment banks.High street banks got into a form of investment banking. got into home loans. 21 . selling and trading risk. mortgages.

Trying to reign in these facets of human nature seems like a tall order and in the meanwhile the costs are skyrocketing. experts such as economists and psychologists say that markets suffer from a few human frailties.Derivatives didn‘t cause this financial meltdown but they did accelerate it once the subprime mortgage collapsed. 22 . or better than the average and can make good decisions all the time). such as confirmation bias ( always looking for facts that support your view. because of the interlinked investments. Amongst other things. rather than just facts) and superiority bias ( the belief that one is better than the others. it is far from perfect. Despite the benefits of a market system. This will be very hard to do. as all have admitted for many years. Derivatives revolutionized the financial markets and mitigating risk.

The commodity bubble peaked in mid 2008. which eventually resulted in a drastic reshaping of the financial landscape.S. These developments badly shook confidence in global financial institutions and markets.Global Transmission of the Crisis The financial crisis that erupted in August 2007 after the collapse of the U. forced mergers. and public interventions in the United States and Western Europe. Most dramatically. In the second half of the year commodity prices declined by some 45%. intensifying solvency concerns triggered a cascading series of bankruptcies. that only decelerated by the end of the year. where experts expected a continuous increase in prices. investors moved to commodities. subprime mortgage market entered a tumultuous new phase in September 2008. with a subsequent collapse. When the real estate bubble busted in the US and Europe (the UK and Spain come to mind). in particular losses were large in the case of metals and oil (Chart 1). 23 .

Chart 1: Evolution of commodity Prices (2005=100) Source: IMF: Commodity Prices. . 24 .

starting with Britain. as former Nobel prize winner for Economics. The US House of Representatives initial rejected the package as a result. The crisis became so severe that after the failure and buyouts of major institutions. Bush was quick to say that buyi ng stakes in banks ―is not intended to take over the free market. Joseph Stiglitz. former Chief Economist of the World Bank and university professor at Columbia University. seen as a bailout for the culprits while the ordinary person would be left to pay for their folly. institutions and ideologues that pushed for the policies that caused the problems are found. The US resisted this approach at first. Eventually. This bailout package was controversial because it was unpopular with the public. the Bush Administration offered a $700 billion bailout plan for the US financial system. argued. the US capitulated and the Bush Administration announced that the US government would buy shares in troubled banks. Perhaps fearing an ideological backlash. but to preserve it. However. which could be part of a deeper root cause of the problem).The financial crisis and wealthy countries Many blame the greed of Wall Street for causing the problem in the first place because it is in the US that the most influential banks. sending shock waves around the world. the plan ―remains a very bad bill:‖ In Europe. but with add-ons to the bill to get the additional congressmen and women to accept the plan. This illustrates how serious this problem is for such an ardent follower of free market ideology to do this (although free market theories were not originally intended to be applied to finance.‖ Professor Ha -Joon Chang of 25 . It took a second attempt to pass the plan. as it goes against the rigid free market view the US has taken for a few decades now. or part-nationalize some failing banks to try and restore confidence. a number of nations decided to nationalize.

China seems to be contemplating more capitalist ideas. according to Bloomberg. according to the government. About $600bn is marked to buy up mortgage-backed securities while $200bn will be aimed at unfreezing the consumer credit market. not banks: ―The problem.‖ (Interestingly. could be one way to try and help insulate the country from some of the impacts of the global financial crisis. the total US bailout is $9. And that would restore the value of the mortgage-backed securities that are threatening the financial institutions [and] the crisis would be over. 26 . banks have still been reluctant to lend. former Assistant Secretary of the Treasury Department in the Reagan administration and a former associate editor of the Wall Street Journal.Cambridge University suggests that historically America has been more pragmatic about free markets than their recent ideological rhetoric suggests. Enough to pay off more than 90 percent of America‘s home mortgages (although this bailout barely helps homeowners).) Despite the large $700 billion US plan. is the defaulting mortgages. While the US move was eventually welcomed by many. while Europe and US consider more socialistlike policies. This also reflects how the crisis has spread from the financial markets to the ―real economy‖ and consumer spending.7 trillion. so the money should be directed at refinancing the mortgages and paying off the foreclosed ones. So there‘s no connection between the government‘s explanation of the crisis and its solution to the crisis. others echo Stieglitz‘s concern above. a charge by many in developing countries that rich countries are often quite protectionist themselves but demand free markets from others at all times. For example. By February 2009. This led to the US Fed announcing another $800 billion stimulus package at the end of November. to stimulate and develop its internal market. This. China hopes. such as some notion of land reform. Paul Craig Roberts also argues that the bailout should have been to help people with failing mortgages. and perhaps the sign of the times. such as some form of nationalization.

27 .

On the philosophical level.‖ ―How symbolic that Chinese astronauts take a spacewalk while the US Treasury Secretary is on his knees. October 1. the US is already stretched militarily. Dr Robin Niblett … argues that we should wait a bit before coming to a judgment and that structurally the United States is still strong. The BBC also asked if the US‘s superpower status was shaken by this financial crisis: The financial crisis is likely to diminish the status of the United States as the world‘s only superpower. BBC. On the practical level.‖ — Paul Reynolds. and is now stretched financially. it will be harder for it to argue in favor of its free market ideas. wrote in the London paper The Observer: ―Here is a historic geopoliti cal shift.A crisis signaling the decline of US’s superpower status? Even before this global financial crisis took hold. evidenced by its challenges in Iraq and Afghanistan. reaching back to the Second World War. in Afghanistan and Iraq. and its declining image in Europe. is over… The American free-market creed has self-destructed while countries that retained overall control of markets have been vindicated. in which the balance of power in the world is being altered irrevocably. The political philosopher John Gray. who recently retired as a professor at the London School of Economics. Asia and elsewhere. 28 . ―The era of American global leadership. some commentators were writing that the US was in decline. others argue that it may be too early to write of the US: The director of a leading British think-tank Chatham House. if its own markets have collapsed. Some see this as a pivotal moment. 2008 Yet. US superpower status is shaken.

2008 29 . If it has less money.‖ he went on. India has huge internal contradictions. decline relative to who? China is in a desperate race for growth to feed its population and avert unrest in 15 to 20 years. it will have fewer forces.―America is still immensely attractive to skilled immigrants and is still capable of producing a Microsoft or a Google. US superpower status is shaken. ―And one must ask. Europe has usually proved unable to jump out of the doldrums as dynamically as the US. BBC. ―Even its debt can be overcome.‖ — Paul Reynolds. ―But the US must regain its financial footing and the extent to which it does so will also determine its military capacity. It has enormous resilience economically at a local and entrepreneurial level. October 1. Russia is not exactly a paper tiger but it is stretching its own limits with a new strategy built on a flimsy base.

Others needed rescuing. For example. public dissatisfaction at the way the government was handling the crisis meant the Iceland government fell A number of European countries have attempted different measures (as they seemed to have failed to come up with a united response).Europe and the financial crisis In Europe. some nations have stepped in to nationalize or in some way attempt to provide assurance for people. a number of major financial institutions failed. The plan is supposed to help restore consumer and business confidence. and promoting green technologies. The EU is also considering spending increases and tax cuts to be worth € 200 billion over two years. getting the banks lending again. economic problems have hit them hard. This may include guaranteeing 100% of people‘s savings or helping broker deals between large banks to ensure there isn‘t a failure. where the economy was very dependent on finance sector. In Iceland. In the end. The banking system virtually collapsed and the government had to borrow from the IMF and other neighbors to try and rescue the economy. 30 . Shore up employment.

However. which has suffered its own crisis in the 1990s also faces trouble now. A number of nations urged the US to provide meaningful assurances and bailout packages for the US economy. are the largest economies in Asia. India and China are the among the world‘s fastest growing nations and after Japan. China. Much of it is fueled by its domestic market. Many believed Asia was sufficiently decoupled from the Western financial systems. However. Japan 31 . While their banks seem more secure compared to their Western counterparts.Asia and the financial crisis Countries in Asia are increasingly worried about what is happening in the West. This lead to enormous investment in Western countries.1%. the speed at which it has dropped—the sharp slowdown—is what is concerning. even that has not been enough to shield it from the effect of the global financial crisis. China also has a growing crisis of unrest over job losses. mostly from the West. for example. Japan. similarly has also experienced a sharp slowdown and its growth is expected to slow down to 8% (still a good growth figure in normal conditions). Asia has had more exposure to problems stemming from the West. Although this is a very impressive growth figure even in good times. Many Asian countries have seen their stock markets suffer and currency values going on a downward trend. Both have poured billions into recovery packages. Asia has not had a subprime mortgage crisis like many nations in the West have. Many Asian nations have witnessed rapid growth and wealth creation in recent years. there was increased foreign investment in Asia. this crisis has shown that in an increasingly inter-connected world means there are always knock-on effects and as a result. and a slowdown in wealthy countries means increased chances of a slowdown in Asia and the risk of job losses and associated problems such as social unrest. In addition. it is very dependent on exports. as that would have a knock-on effect of reassuring foreign investors and helping ease concerns in other parts of the world. However. From 2007 to 2008 India‘s economy grew by a whopping 9%. and it is expected that in data will show that by March 2009 that India‘s growth will have slowed quickly to 7. Asian products and services are also global.

a well respected Chinese academic) notes ―Relatively speaking. for years. however. maybe because they see an opportunity in this crisis.‖ For example. Asian leaders had called for ―effective and comprehensive reform of the international monetary and financial systems. While the Western mainstream media has often hyped up a ―threat‖ posed by a growing China. This is very significant because Asian and other developing countries have often been treated as second-class citizens when it comes to international trade.S. economically. Japan‘s industrial production fell by so exposed that in January alone. Asian countries are potentially trying to flex their muscle. the financial crisis could mean the US is less influential than before. finance and investment talks. one of the Chinese state-controlled media outlets demanded that ―We want the U. as IPS also noted in the same report. ―And we want America to lower its protectionist barriers allowing an easier access to its markets for Chinese and other developing countries‘ goods. this coordinated response is dependent on the entry of Asia‘s emerging economies into global policy-setting institutions. This time however. China is a country with scarce capital funds and it is hardly the time for us to export these funds and pour them into a country profuse with capital like the U. which at the moment mostly affects the rich West. as Inter Press Service (IPS) reported. A side-story of the emerging Chinese superpower versus the declining US superpower will be interesting to watch. the biggest monthly drop since their records began. Similar calls by other developing countries and civil society around the world. Towards the end of October 2008. It would of course be too early to see China somehow using this opportunity to decimate the US.S. as it has its own internal issues. to give up its veto power at the International Monetary Fund and European countries to give up some more of their voting rights in order to make room for emerging and developing countries. have come to no avail. the World Bank‘s chief economist (Lin Yifu.‖ Whether this will happen is hard to know. However.‖ 32 . This time. a major meeting between the EU and a number of Asian nations resulted in a joint statement pledging a coordinated response to the global financial crisis.‖ They also added.

33 .Asian nations are mulling over the creation of an alternative Asia foreign exchange fund. but market shocks are making some Asian countries nervous and it is not clear if all will be able to commit. too. which would be good for other developing regions. What seems to be emerging is that Asian nations may have an opportunity to demand more fairness in the international arena.

34 .International Response The national rescue operations have been followed by major swap transactions between the Federal Reserve of the US and a number of other central banks of industrialized economies. over-represented Europe and others will need to accept the realities of the new world and shift their voting power to the ―new‖ countries. In the past. again to support the currencies of those countries in the face of continued pressures in foreign exchange markets at least through end-2008. and Russia. newly industrialized economies. for countries seen as generally good performers. and make IFIs more relevant. And conditions would be fewer and more targeted than in the past.7 The creation of the G-20 Summits is another noteworthy development. Mexico and Argentina. Mexico. access to the International Financial Institutions has also become imperative. the important group formed by the largest advanced economies. The IMF has already indicated that it will show greater lending flexibility and can mobilize significant resources. The IMF would now provide assistance on the basis of fewer conditions. Korea. Up to now. in order to provide sufficient liquidity in response to a steady demand for US dollars. many decisions had been taken at the level of the G-7/G-8. Korea. More recently. India. any borrowing had to be based on what was seen as burdensome conditions. this was extended to the Central Banks of Brazil. Brazil. and Singapore. With high financing requirements. including China. However. at the ministerial level. This forum reflects better the growing importance of the emerging world and may also open the door to a more representative governance system at the international financial institutions (IFIs). South Africa. and in Latin America. It follows a group formed in the 1990s to discuss international financial issues. The G-20 includes the G-8 and the largest emerging.

tempered by the much lower but growing ratios for China (31%) and India (12%) which were clearly dominated by domestic developments. It may be the case that they will experience a significant short term loss. and with the understanding that the losses. trade volumes are expected to decline for the first time in many years—as a minimum by 3% according to IMF estimates. Latin America which had become much more open in the 1990s. recorded an average ratio of Exports to GDP of 71% for the period 2002-07. even if large. Under these conditions. may be more dependent on a few commodities. 35 . and benefitted more from global prosperity. Over the last quarter century the volume of world trade had grown at an average rate of 6%. More significantly. as is being observed in Taiwan Province and in Korea. However this should be viewed in a broader light. but to some extent also some real depreciation of their currencies. The impact will be very different in various areas of the world. registered a stable ratio of exports to GDP of 21% notwithstanding the impact of a strong real appreciation. which have become highly integrated with the rest of the world. The NICs. But this is taking place from the vantage point of much higher gains in the past.Impact of crisis on trade of goods and services. or about double the rate of world output. with a marked transformational impact. thus justifying protectionism. it would be easy to suggest that the countries that have been most open to international trade may be subject to the greatest shock on account of reduced world demand. will be temporary. Asian exports have grown at a rate of 10% and those of Latin America and the Caribbean by some 7%. the more open traders may benefit from a more flexible productive structure that allows them to adjust more efficiently. More closed economies. Developing Asia recorded a ratio of 55%. In Asia the ratio of exports to GDP reflected increased volumes of trade. Countries that opened more vigorously to trade grew the fastest. and will have more difficulty in correcting imbalances as their domestic economies may find a lower productive base to provide for their imports. as export volumes increased significantly over the period. adjusted for their size8. remmitace and tourism and FDI Developments in Trade of Goods and Services As part of the significant slowdown/decline in world activity.

India. arguably the most dynamic segment of international tourism. Remittances amounted to some US$280 billion in 2008 (some 2% of GDP of the receiving countries). with adverse consequences for the well being of many millions of households among developing countries. With emerging economies. The prospects for 2009 are equally dire. and US$70 billion to Latin America. Maldives. and some countries in South America. Receipts from tourists are also a significant source of income. The merits of increased mobility of large numbers of workers to well-paying jobs in prosperous destinations may be subject to debate. they are highly sensitive to economic conditions in the countries of employment. 36 . for the first time in a quarter century. 9 However. Central America and the Caribbean. tourism from the richer countries has fallen and will continue to do so. Tourism is another area of concern. These flows have been very stable. However. the impact of the consequent remittances to their home countries have helped increase prosperity and reduce poverty. Even though transportation costs are declining. and the Middle East.Remittances and Tourism Two other areas that can be expected to show the impact of the slowdown are remittances and services. particularly in Asia and Latin America. Remittances over the last fifteen years have become a major channel of prosperity. and acted as a countercyclical force in the receiving countries. Mexico and the Philippines being the largest recipients of workers‘ remittances. like tourism. India and some other countries in South and South East Asia. with near US$110 billion to Asia. also entering into recession the prospects for this segment of economic activity look particularly grim for the near future. and Mexico. remittances started to fall in 2008. Europe. With many emigrants working in the US. particularly for Thailand.

37 .

While total FDI directed to developed countries retained the lion‘s share of the total inflows (70% of the total). (Table 2) Also. This will complicate economic management. In the end. as they became increasingly important investors. the countries of the CSIS and of Eastern and Central Europe began to receive increasing flows. with sharp declines both in Asia and Latin America. Net flows are projected to decline by 80% from their 2007 peak for Emerging Asia. and these flows fell sharply in the second half of the year reflecting the financial crisis. both Asia and Latin America became increasingly important. By early 2008 capital flows to developing countries had started to slow down. 38 . table# 2 presents the cumulative inflows and outflows of FDI and portfolio investments for Developing Asia and Latin America for the period 1998-2007. The information is particularly interesting as it shows the large sums of capital outflows from Emerging Economies. The Institute of International Finance estimates that net private flows to emerging economies declined from a record US$930 billion in 2007 to below US$470 billion in 2008 and to projected flows of only US$165 billion in 2009. FDI stocks and flows grew at a very fast rate in recent years.10 As an illustration of the size of inflows and outflows.Foreign Direct Investment Foreign Direct Investment (FDI) will also suffer in the short run. Most interesting was the change in the composition of these flows. and rapidly evolving capital markets. and by 75% for Latin America. as countries deal with weakening external accounts. which allowed for a sharp increase in available capital within the private sector. cumulative flows for the year were only about one half of those registered in 2007. reflecting both the emergence of new countries as origin and destination of capital flows. and resulting in a decline in lending by International Financial Institutions or IFIs. as opposed to the previous experience when these outflows reflected capital flight. even with some volatility in the case of Latin America.

The world‘s largest insurance and financial services company. which were encouraging borrowing beyond people‘s means. hedge funds may have been signalling an underlying weakness with banks. The market for credit default swaps market (a derivative on insurance on when a business defaults). driving down their prices. or 33%.5 trillion. The total amounts that government have spent on bailouts have skyrocketed. exceeding the entire world economies output of $50 trillion by summer 2008. and so did AIG. Furthermore . The UK and other European countries have also spent some $2 trillion on rescues and bailout packages. Assets were plummeting in value so lenders wanted to take their money back. Some countries temporarily banned shorting on banks. 39 . AIG alone had credit default swaps of around $400 billion at that time. In the recent crisis they were criticized for shorting on banks. the governments of the wealthiest nations in the world have resorted to extensive bail-out and rescue packages for the remaining large banks and financial institutions. It was also poorly regulated. many of AIG‘s credit default swaps were mortgages. A lot of exposure with little regulation. More is expected Many banks were taking on huge risks increasing their exposure to problems.7 trillion in bailout packages and plans. From a world credit loss of $2. no secure retail funding.8 trillion in October 2009. US taxpayers alone will spend some $9. $14. was enormous. The trade in these swaps created a whole web of interlinked dependencies: a chain only as strong as the weakest link. Some investment banks were sitting on the riskiest loans that other investors did not want. such as risk or actual significant loss could spread quickly. of the value of the world‘s companies has been wiped out by this crisis. Any problem. But some investment banks had little in deposits. confidence fell quickly.When people did eventually start to see problems. which of course went downhill. On the other hand more it continued the more they could profit. In some regards. so some collapsed quickly and dramatically of criticism for betting n the things going badly. for example. Others have been bought out by their competition at low prices and in other cases.The scale of the crisis: trillions in taxpayer bailouts The extent of the problems has been so severe that some of the world‘s largest financial institutions have collapsed. according to Bloomberg.

40 .Hence the eventual bailout (now some $150 billion) of AIG by the US government to prevent them failing.

‖ Kanaga Raja.The effect of this. increasingly restrictive monetary policies in a number of countries. The downturn after four years of relatively fast growth is due to a number of factors: the global fallout from the financial crisis in the United States. we are seeing more and more countries around the world being affected by this rather profound and persistent negative effects from the reversal of housing booms in various countries. say UNCTAD. that ― The global economy is teetering on the brink of recession. Risks to South. Economic Outlook Gloomy.The fallout from the collapse of the US mortgage market and the reversal of the housing boom in various important countries has turned out to be more profound and persistent than expected in 2007 and beginning of 2008. the United Nation‘s Conference on Trade and Development says in its Trade and Development Report 2008 is. 2008 41 . Third World Network. soaring commodity prices. and stock market volatility. as summarized by the Third World Network. September 4. As more and more evidence is gathered and as the lag effects are showing up. the bursting of the housing bubbles in the US and in other large economies.

42 .

A Crisis so severe. (It should be noted that during the debilitating Asian financial crisis in the late 1990s. and hence lives. There seems to be little sympathy—and even growing resentment—for workers in the financial sector. the encouragement such practices have given in the past. bringing the rates of the local currencies far below their real economic levels. is what has angered so many people. Some governments have moved to make it harder to manipulate the markets by shorting during the financial crisis blaming them for worsening an already bad situation. governments have tried to increase or fully guarantee depositors‘ savings. for example. In other cases. as they are seen as having gambled with other people‘s money. without success that currency speculators— operating through hedge funds or through the currency operations of commercial banks and other financial institutions—were attacking their currencies through short selling and in doing so. blaming it on their own economic mismanagement instead. Asian nations affected by short-selling complained. Although in raw dollar terms the huge pay rises and bonuses are small compared to the magnitude of the problem. 43 . banks have been nationalized (socializing profits as well as costs. when they complained to the Western governments and International Monetary Fund (IMF). those responsible are bailed out Some of the bail-outs have also been accompanied with charges of hypocrisy due to the appearance of ―socializing the costs while privatizing the profits.‖ The bail-outs appear to help the financial institutions that got into trouble (many of whom pushed for the kind of lax policies that allowed this to happen in the first place). smaller businesses and poorer people rarely have such options for bail out and rescue when they find themselves in crisis. potentially. as well as the type of culture it creates. However. In a number of European countries. they dismissed the claims of the Asian governments. while getting fat bonuses and pay rises for it in the past.) In the meanwhile.) Other governments have moved to try and reassure investors and savers that their money is safe.

44 .

A crisis so severe. For any recent home buyers. For example. With an increasingly inter-connected world. the value of their homes are likely to fall in value leaving them in negative equity. things like a credit crunch can ripple through the entire economy. or remortgaging could become expensive. Many industrialized nations are sliding into recession if they are not already there. People may find their mortgages harder to pay. many sectors may find the credit crunch and higher costs of borrowing will lead to job cuts. The real economy in many countries is already feeling the effects. but potentially everyone. 45 . it is not just the wealthy that will suffer. As people will cut back on consumption to try and weather this economic storm. yet other businesses will struggle to survive leading to further fears of job losses. banks with little confidence to lend may lend with higher interest rates. the rest suffer too There is the argument that when the larger banks show signs of crisis. In the wider economy.

(Sivaraman. the foreign exchange reserves of the country has depleted by around $57 billion to $253 billion for the week ended October 31. But if the remittances dry up and FII takes flight. if our foreign exchange reserves depletes and trade deficit keeps increasing at the present rate. 2008) 3. and participatory-notes. Impact on stock market The immediate impact of the US financial crisis has been felt when India‘s stock market started falling. 250. The Sensex lost 1000 points on that day before regaining 200 points. Impact on India’s trade The trade deficit is reaching at alarming proportions. On 10 October. in India.Global Meltdown and its Impact on the Indian Economy Impacts of the US Financial Crisis on India Though in the beginning Indian official denied the impact of US meltdown affecting the Indian economy but later the government had to acknowledge the fact that US financial crisis will have some impact on the Indian economy. the current deficit is at around $10 billion. FII investment and so on. This huge withdrawal from the India‘s stock market was mainly by Foreign Institutional Investors (FIIs). The US meltdown which shook the world had little impact on India. Unlike in US where capitalism rules. 2. then we may head for another 1991 crisis like situation.000 crores was wiped out on a single day bourses of the India‘s share market. market is closely regulated by the government. NRI deposits. Perhaps this has saved Indian economy from being swayed over instantly. 1. Further. Rs. Because of worker‘s remitt ances. an intraday loss of 200 points. Impact on India’s export 46 . because of India‘s strong fundamental and less exposure of Indian financial sector with the global financial market.

Impact on India’s handloom sector. creating widespread unemployment in this sector (Chandran. Exchange rate depreciation With the outflow of FIIs. while imports grew by $6. IT-BPO sector The overall Indian IT-BPO revenue aggregate is expected to grow by over 33 per cent and reach $64 billion by the end of current fiscal year (FY200).9 per cent in November 2008.5 billion. India‘s rupee depreciated approximately by 20 per cent against US dollar and stood at Rs.000 artisans employed in jewellery industry have lost their jobs as a result of the global economic meltdown. Indian exports fell by 9.1billion to $21. showed that exports had dropped to $1. gems and jewellery have been hit hard because of the slump in the demand in the US and Europe. Around 50. Indian tourism sector is badly affected as the number of tourist flowing from Europe and USA has decreased sharply. Manufacturing sectors like leather. Official statistics released on the first day of the New Year. Further India enjoys trade surplus with USA and about 15 per cent of its total export in 2006-07 was directed toward USA. creating panic among the importers. handloom and tourism sectors.5 billion in November this fiscal year. 5. when the impact of declining consumer demand in the US and other major global market. Indian exports have run into difficult times. the crisis had affected the Rs. (Sivaraman. 2008) from $12.7 billion a year ago.6 per cent in 2007-08. with negative growth for the second month. 47 . jewelry export and tourism Again reduction in demand in the OECD countries affected the Indian gems and jewellery industry. 49 per dollar at some point. Over the same period. 3000 crores handloom industry and volume of handloom exports dropped by 4. Further. 4. 6. 2008).With the US and several European countries slipping under the full blown recession. running and widening monthly trade deficit over $10 billions. since October. textile. With the global economy still experiencing the meltdown.

an increase of about 375000 professionals over the previous year. 48 . Due to global recession. but the crisis is still causing mayhem all over the world. whereas the inflow of foreign direct investment (FDI) doubled from $7. FIIs made withdrawal of $ employment to reach nearly 2 million. 7. FII and FDI The contagious financial meltdown eroded a large chunk of money from the Indian stock market. However. which will definitely impact the Indian corporate sector.3 billion in 2008 (April-September). Though the Indian economy would be able to withstand the crisis without any major difficulty.5biilion in 2007-08 to $19. Indian firms could adversely be affected. So the meltdown in the US will definitely impact IT sector. if Fortune 500 hundred companies slash their IT budgets. the money eroded will hardly influence the performance real sector in India. Further. This crisis also shows the failure of capitalist market economy. Conclusion From the above argument it can be noted down that the ‗Financial or Subprime Crisis‘ was the shear consequences of ‗greed‘ and to make ‗too much profit‘ on the part of Wall Street Firms and Investment Banks. IT sectors derives about 75 per cent of their revenues from US and IT-ITES (Information Technology Enabled Services) contributes about 5.5 per cent towards India‘s total export.5 billion.

this is still not that much and this crisis shows that more is needed in a more deeper and meaningful way. If history is any indicator. sometimes (incorrectly) equating calls for regulation with protectionsim. it was decided that rich countries at the IMF would give in 3 percent of the votes. 2 percent went to emerging countries and 1 percent to other developing countries. to tighten lax oversight of markets. Spain. The calls for regulation have typically been to make companies more transparent and ensure the financial mess created 49 . And tensions. Developing countries also got more assurances about increased say at international financial institutions through promises of reform at the IMF and World Bank. Like France.Reform and Resistance Will any of these changes occur in an effective way? In recent months these institutions have warmed to changes in these areas. The call to resist protectionism has been a prime concern from the Bush Administration. sees this as US retaliation for the country withdrawing its troops from Iraq. Those who benefit from a system are less likely to be receptive to change. But others argued that the meeting outcome seemed more vague than concrete and only these principles seemed to have been agreed without anything more concrete. This will be hard to predict. to resist protectionism. or want to steer change in a direction that will be good for them. in April 2008. a meeting of the G20 (G7 plus some developing nations) sees Spain (the world‘s 8th largest economy) missing out of eithe r classification. even amongst the more powerful nations are already showing. the US has not invited Spain to a financial crisis summit for mid-November. The eventual outcome of the G20 meeting seemed mixed. it wants to see in-depth reform of the global financial system and focuses on IMF reform as well as giving more representation to emerging nations. however. They also agreed to meet at the end of March 2009 to follow up. power and greed politics always ruin good ideas. For example. and to revive stalled negotiations for a new global trade pact. but that may not mean good for everyone. For example. They agreed to use government spending to fight a spreading recession. As the world‘s eight largest economy and home to 2 of the world‘s top 16 banks. It has full EU support for being present at this meeting as well as support from a number of Latin American countries. However.

Critics argue that the G20 can never tackle this agenda alone. As the Bretton Woods Project noted. November 27. president of the UN General Assembly said: ―Only full participation within a truly representative framework will restore the confidence of citizens in our governments and financial institutions. were never going to be able to reach a consensus on deeper reforms within the few weeks taken to prepare the summit. the G20 had little time to effect much and could not do it alone. The promise of rearchitecting the global financial system more fundamentally seemed to wither away slightly. the more democratic alternative was the Doha conference on financing for development meeting at the end of November in Doha. The APEC trading bloc. As Miguel D‘Escoto. Nonetheless. for example. any way: G20 governments. at least for industrialized nations. so as a group. APEC nations have agreed to resist protectionist measures.‖ He continued. represents almost half of all world trade. Bretton Woods Project. History has shown that once economies mature they benefit from less protectionist measures (but also shows that nations on early stages of development may also benefit from it). Most member states are generally industrialized. Paul Krugman suggests that protectionism may be necessary for a while as these are not normal conditions where the case for protectionism may be on weaker grounds. 2008 Hardly mentioned in the mainstream media by comparison.‖ — International economic architecture: cleaning up the mess?. swept off their feet by the financial crisis. 50 .can be avoided in the future. will be crucial for much of the world. however. Reform of the IMF and World Bank. ―Solutions must involve all countries in a democratic process. Whether that actually happens and to what extent those with power are willing to truly share power is something that we will find out in the course of the next year. other regions around the world agree that generally free trade is desirable over protectionist policies.

Slowly. Democracy Comes to World Institutions. the Doha conference also resulted in weak pledges and disappointment. is worse. — John Vandaele. Inter Press Service. Perhaps partly because of lack of mainstream media attention. held by the United Nations General Assembly. The most powerful international institutions tend to have the worst democratic credentials: the power distribution among countries is more unequal. More generally. October 27. and hence democratic control. and the transparency. it is perhaps only at a time of crisis that more fundamental rethinking of the entire economic system can be entertained. history also shows us that power shifts. 2008 Although history often shows that those with agendas of power tend to win out. as Vandaele also finds. A financial crisis of this proportion may signify the beginnings of such a shift. And so. 51 .Qatar.

Some have been writing for many years that while the current economic ideology is flawed. Even mainstream media. Stephen Marglin. a more compassionate capitalism. and will be able to lobby governments. Others argue that capitalism is so flawed it needs complete doing away with. given he is held up as the leading figure of the economic ideology they promote: ― Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price. for example. at length. a warning from Adam Smith. notes how throughout recent decades. debate will increase in the mainstream. especially when it brings immense wealth and power. Harvard professor of economics. It may be that during periods of crisis such as now. Those with power and money are less likely to agree to a radical change in economics where their power and influence are going to diminish. the political spectrum and thinking on economics has narrowed. What seems clear is that at least for a while. Others may yet argue that the bailouts by large government will distort the markets even more (encouraging bad practices by the big institutions) and rather than more regulation. It is perhaps ironic to quote. This will also attract ideologues of different shades. regardless of whether it is good for everyone or not. but capitalism nonetheless. They say 52 . the time comes to rethink economics in some way. it only needs minor tweaking to correct it and make it work for everyone. produce compelling ads and do whatever it takes to maintain options that ensure they benefit. an even freer form of capitalism is needed. usually quite supportive of the dominant neoliberal economic ideology entertains thoughts that economic policies and ideas need rethinking. limiting the ideas and policy options available. people do not want to hear of criticisms of the forms of economics they benefit from.Rethinking economics? During periods of boom. and thereby lessening the sale of their good both at home and abroad. leading to both wider discussion but also more entrenched views.

nothing concerning the bad effects of high profits. They complain only of those of other people. They are silent with regard to the pernicious effects of their own gains. 53 .

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