This paper says that the familiar nostrums on how to jumpstart problematic Western economies are probably not going to work because Europe’s relationship with Asia has moved from colonial and neocolonial to equal hence Europe could no longer exploit Asia. It says that in time Europe would discover a new economic theory that would be based on real competition and not exploitation of the masses. As for Africa it says that hopefully at some point black folk would start doing something to help themselves instead of live like helpless children who merely complain about their issues and do not attempt to solve them.
The Implications For Africa Of The Debate On How To Jumpstart Western Economies
(What Europe’s economic travails means for Africa)
Ozodi Thomas Osuji
In case you have not noticed, the entire Western world is going through economic difficulties. Western economies, that is, Britain, France, Germany, Austria, Belgium, Switzerland, Italy, Portugal, Spain, Greece, the Scandinavian or Nordic countries, the USA, Canada, Australia, New Zealand are having economic difficulties. They all are experiencing major downturns in their economic fortune. It is said that these difficulties began in 2007 but I would say that they have been coming for a long time.
We can define economic downturn in many ways. Usually, the indices folks look at in trying to determine whether an economy is growing or slowing down are such things as rate of annual economic growth, Gross Domestic Product, National Domestic Product, level of employment and unemployment, level of industrial activities, income per capita etc. At present, these indices are generally in negative territories in most Western countries.
Unemployment in the West currently hovers anywhere from 10 to 25% (the USA reports 8.1% unemployment; that is not true for many people have given up on the prospects of securing jobs and simply have stopped registering with unemployment offices hence are not counted as unemployed; I would say that the level of unemployment in the USA is right around 15% and 20% for African-American youths).
You can consult various economic indices to find out the rate of growth of the various Western economies in the last ten years. For our present purposes, the salient point is that there is economic downturn in the Western world. You may choose to call it recession or depression (generally, the term depression is reserved for situations where over 25% of the adult population is looking for jobs).
If an economy is in recession something has to be done to jumpstart it, and get it going. What is it that needs to be done? The answer to that question depends on one’s economic theory.
Pure capitalists would say that it is the nature of capitalist economies to grow and make mistakes and then correct themselves. As they see it, the market is always correcting whatever problems exist in the capitalist market. Governments should not rush in to fix anything; they should leave it to the invisible hands of the market, the forces of demand and supply to make the necessary adjustments in the economy and reallocate resources more efficiently.
As Adam Smith argued in the capitalist bible, Wealth of Nations, the forces of the market always work to guide resources to where they are best needed. The market makes sure that resources are distributed efficiently. Individuals pursue their self-interests and in doing so make rational choices as to what to buy. What they buy (demand) is produced by sellers (supply) and that way the economy allocates resources to where there is demand for them and in the process grows wealth for the nation. Do gooders’ efforts to plan the economy, to consciously allocate resources to certain sectors of the economy, pure laissez faire economists tell us do more harm than good. Just leave it to the market to correct its past mistakes.
For example, in the first decade of the twenty first century, the market was giving credit to those with poor credit history and those with little income. Those folks went and bought houses. Because too many people were buying houses the price of houses went up. A house that sold $200, 000 dollars only a few years ago now sold over $500, 000 dollars. Why? It is because the demand was so high that price of supply of houses had to go up. It does not mean that it cost more to build those houses; it just meant that too many buyers wanted houses. But those buyers were often poor risks.
A janitor bought a house for $500, 000 dollars and makes $1500 monthly payment on the mortgage. He thinks that he has such a good deal. But, wait; after the first three years the actual monthly mortgage kicks in and now he is supposed to pay $2500 a month! He makes slightly over $3000 dollars a month. So how is he going to pay his mortgage and still pay his other bills? He cannot. So he stops making his monthly mortgage payments. The creditor (bank etc.) forecloses on the house and he is kicked out by the county Sheriff. The house is now unoccupied. This happens everywhere.
Folks learn the lesson that they do not have to be janitors and buy $500, 000 houses for they simply do not have the monthly income to make the payments for them. Thus they demand houses that sell for $200, 000 dollars. In time real estate companies and developers begin to offer houses at the price that poor folks are able to pay. Additionally, they check folk’s credit history and do not give credit to those likely to default. This way the real estate market corrects itself.
The government does not have to do anything to correct the real estate market. This is neat, isn’t it? But the real world is seldom that neat, is it? Things are a bit more complicated than that, certain economists tell us. They tell us that given the complications involved the government has to intervene and do something about the real estate market and not wait for the market to correct its mistakes.
We do not need to explain all the bullshit that took place in the real estate market that led to the crash of the economy in 2008, I mean such things as credit default swaps; all we need to know is that the market had enormous problems and the question is what to do to correct them. Financial institutions who had transformed the housing industry into a casino betting on the prices of houses to go up but without paying attention to actual prices of houses had made enormous investments in real estate loans and the housing crash would lead to the loss of trillions of dollars. So what should we do?
Rescue the financial industry, give them trillions of dollars and forget the mistakes they made? Alternatively, let them lose their investments for if your judgment is poor you ought to pay a price for it.
If Wall Street was not rescued to the tune of trillions of dollars some say that it would have crashed and that we would have entered real depression, not mere recession with 10% unemployment; we would today be looking at 25% unemployment.
So what should we do in the situation we found ourselves in? It is here that folks accepted economic theories come into play. Pure capitalists do not have any problem with the economy crashing. Let it crash and eventually pick itself up and correct its mistakes. But others say that that would mean depression; just think of 25% unemployment and the suffering that it would engender in the land.
Those who want to do something to correct the mistakes of the market generally have several options. Let us briefly explain these options.
Monetary Policy. Here, the central banks of nations play games with the commercial banks that borrow money from them. Commercial banks borrow money from central banks. Central banks charge them interest rate on their borrowing. If the interest rate is low they would be able to borrow more money and lend more money to the public at low interest rates. This would stimulate demand for borrowing by the public from financial institutions. The result would be more economic activity as folks borrow money, invest in their businesses or spend on consumer goods (which lead to production of those goods).
Lowered interest rates by central banks are supposed to lead to high economic activity. In this light, central banks lowered their interest rates (the US Federal Reserve lowered its interest’s rate to near zero).
On the other hand, if the economy is heated up and there is too much demand for goods and services there is a risk of inflation (high prices of goods and services). Central banks then lend money to commercial banks at a higher rate. These mean that commercial banks would charge more to lend to the public. This means that the public would borrow less. There would be less money circulating in the economy and demand for goods and services would go down. With reduced demand, hopefully, the prices of goods and services would come down and curtail incipient inflation.
Now, suppose that the government lowers the (prime) interest rate to zero and yet the level of borrowing is not high enough meaning that economic activity is either flat or regressing? In that situation employment would either remain where it was or go down. Economic activity would go down (from low demand for goods and services).
Central banks do other things, such as sell and buy their countries’ currencies and other countries’ currencies in their possession, regulate commercial banks (such as demand certain level of capitalization). We do not need to get into the details of all the activities of central banks. You get the point; monetary policy may or may not correct whatever ails the economy.
Fiscal Policy: Another way to get a handle on the economy is through fiscal policy (government’s taxation policies and public expenditures in general). Governments do tax people. Government can raise or lower taxes (individual, corporate, sales and property taxes). If the taxes are lowered the idea is that folks and businesses would pay less tax; they would have more money in their hands. With more money they would buy more things. Buying more things stimulates demand of goods and services and businesses feel the need to produce more goods and services to meet increased demand. Thus, economic activity picks up.
As businesses produce more they hire more people and unemployment goes down. As more and more people are now working more and more people pay taxes so that even though they are paying lower taxes the total revenue from taxes go up and the government collects more money than it would have collected if it had raised taxes. This is the idea, anyway.
On the other hand, taxes could be raised. If taxes are raised more money is taken away from the people (and from businesses). The people and businesses would have less money to spend. They would demand less goods and services. This would force businesses to sell less. Selling less they make less profit and start shutting down production. Decreased demand leads to closing up of businesses and the result is the laying off of workers thus increasing unemployment.
Generally, people have different approaches to taxation policy. Conservatives tend to favor lower taxes on individuals and businesses. Indeed, certain libertarians would there are no taxes at all (and only God knows how they would finance the military that they love so much).
In the USA the Republican Party has a solution for everything that ails the US economy: reduce or eliminate taxes, especially for the wealthy. The idea is that if you lower taxes (especially for the wealthy) they would have more money and thus buy stocks and bonds (which means giving money to businesses and with which businesses invests in capital and human resources).
Reduce taxes, the Republicans harangue us, and you generate increased business activities and that would lead to a growing economy where folks are employed and pay the low taxes that governments supposedly need to generate the revenue they need to perform the only function conservatives think governments ought to perform: pay for the military, police, courts, judges, prisons. If you really want to stimulate the economy then reduce taxes to zero.
Liberals generally want to increase the role of government in our lives. They want to use the power of government to provide services to the people. Services cost money. Education costs money. Health insurance costs money. Thus, liberals want to increases taxes and public expenditures. They say that if they increase taxes they pull in more revenue. With more revenue they can then provide more services (pay police, fire fighters, teachers, government workers etc.). Those receiving such jobs have money to spend and their spending stimulates the depressed economy as businesses produce goods and services to meet the increased demand.
I hope that the above over simplified explanations of monetary and fiscal policies helps you understand the instruments available to governments in dealing with problematic economies. Now, let us see what is going on in the Western world.
In Europe and North America the debate is: what should be done to get us out of the economic quagmire we are experiencing.
Conservatives have their usual nostrum: let the market correct its mistakes; for example, let the auto industry collapse; do not help it and from its ashes a more efficient auto industry would rise (or other means of transportation would emerge); let wall street collapse; let the real estate industry collapse; in short, do not prevent depression; let it play itself out.
In so far as conservatives want to do something at all, they want to reduce taxes and, hopefully, through them increase aggregate demand.
Liberals want to stimulate the economy by pumping money into the market. How do they get that money since generally governments get their money from the people’s taxes and if too many people are not working they are not paying taxes hence there is less government revenue. So, how do liberals plan to obtain their money with which they stimulate the economy? They borrow it.
So far the USA has been borrowing from those who have the money. It has borrowed from rich Americans who buy its bonds (treasury bills) and foreigners who have surplus money to buy US bonds. As we talk, the USA owes as much money as its GDP (about $17 trillion dollars). You get the idea: borrow the money and use it to do something that generates demand (as some say, until the Ponzi house of cards collapses).
For example, if you borrow billions of dollars and used them to build roads, bridges, tunnels, rail lines etc. you would hire people and provide them with jobs. Those would buy stuff from supermarkets and would pay their mortgages etc. They would increase their demands of goods and services and what John Maynard Keynes called multiplier effect would lead to the economy improving its activity. That is to say that you can stimulate the economy out of depression and recession by borrowing and spending (or taxing and spending, as conservatives derisively call liberals).
This is where Europe and North America is today. The conservative governments of David Cameron, Nicholas Sarkozy, and Angela Merkel present the usual conservative panacea. They initiated a whole bunch of austerity measures (cutting social services, closing certain government programs, reducing or eliminating aid to women with dependent children, reducing money for education, charging money for education rather than providing it for free or subsidized price etc. reducing health coverage and social security for elderly folks).
As many conservatives see it, the only proper function for government is to provide national security, so cut all the social welfare programs and let the people live on the streets and eat the cake that Marie Antoinette’s promised them (before her head was cut off in 1789 French Revolution...we are about to witness the chopping off of the necks of rich Westerners when the masses have had enough exploitation and rise up in revolutions to correct the social inequity that currently characterize Western countries).
These austerity measures mean that the people are pinched and are hurting. In Greece, Portugal and Spain where the European Union has imposed tough fiscal austerities as a condition for lending those near bankrupt nations' money the people are seeing reduction in their living standards. Those countries are seeing their safety nets eliminated and the poor are reverting to living like the poor in third world countries. These countries now have millions of homeless folks slushing all over the place. Go under freeway overpasses and you see folks living under them. White men are now living like black men at Ajagunle, Lagos, Nigeria.
Apparently, the French do not want to be reduced to third world living standards and have thrown out their austerity mouthing playboy President, Mr. Sarkozy.
The election returns in Greece show unhappiness with the government that negotiated austerities with the European Union led by Angela Merkel and Nicholas Sarkozy.
Who knows if the British would also rise up in anger and throw out David Cameroon? How about the Americans? Would they elect the Wall Street wizard who bought poorly performing businesses, fired unionized workers and replaced them with non-unionized low wage workers so as to reduce cost of labor and production, turn profit and then sell off the businesses he supposedly turned around? The man made millions of dollars from rendering many Americans unemployed and homeless.
Are Americans going to elect this cold blooded capitalist or would they retain the clueless Obama who does not know what sound economic policy is even if it hits him in the face (as Paul Krugman says, spend massively on public works and don’t just give pretty speeches)? We shall see.
I do not believe that monetary and fiscal policies would heal what ails the West. The West has deep structural issues that it must address before it turns things around.
Western economies were based on colonial and then neocolonial relationships with third world folks. The West exploited resources in Africa and Asia. When it gave Asia and Africa so-called independence it embarked on neocolonial relationship with them.
The center (West) did not buy raw materials from the periphery (Africa, Asia) at the real market prices.
Consider cocoa, coffee, rubber, palm oil, palm kernel, cotton and other materials the West bought from third world countries. The West bought those at a stipend so that African workers lived like slaves whereas the West was able to provide decent living standards for its middle class (who would otherwise be poor folk).
If the West bought raw material from Asia and Africa at real equilibrium price Africans would today be living a little better than they are living and the West would be closer to Africans in living standards.
Asians have, more or less, liberated themselves from the economic stranglehold of Europe. Europe is no longer carting Asian raw materials to Europe. The center is no longer stealing from the Asian periphery. Japan, China, Korea, Taiwan, Singapore (even India, Malaysia and Indonesia) is now, more or less, industrialized.
Industrialized Asia is now able to manufacture and sell goods at a lower price than European industries. This means that Asians sell more goods and Europeans sell less goods.
As Europeans sell fewer goods they have less money to prop up their people in middle class standards; their people descend to poverty.
Africa is the sick man of the world. Africans, for some reasons, have refused to embark on industrialization. I know all the usual excuses given for this malady but am not buying any of them.
Nigeria could have used its oil resources to develop its economy and today ought to be at the level of South Korea. But, instead, Nigerians have an income per capita of a dollar a day. Nigerian leaders have become thieves and live to steal money from the only source of revenue the country has: oil.
The incredibly dumb leaders of Nigeria place all their eggs in one basket, oil revenue knowing or should know that all that needs to happen is for the West to discover alternative energy and all that oil from the Niger Delta become useless. One would think that by now Nigeria would have diversified her economy if only to prevent collapse when oil is gone.
Today, Nigeria is as poor, if not poorer, than she was in the 1970s! Nigeria has become the empire of thieves and as we all know nothing good comes from thieves.
Given the economic stagnation of the West what should Nigeria do? Continue being corruption haven and hope that somehow nonexistent gods would improve the people’s lives? Have over 50% unemployment (that is more than depression level economy) and continue laughing as the happiest people in the world?
Clearly, adults need to take over the government of Nigeria and industrialize the country. Mr. Good luck Jonathan is a clueless child; he does not know what to do about Nigeria’s myriad problems. He simply does not have the intellectual capability to solve Nigeria’s problems and one does not expect him to even try. He will warm the bench at Aso Rock and nothing would change.
One hopes that at some point real leaders, such as Mohammed Buhari, would emerge in Nigeria and undertake to transform that bedlam to a human civilization. As of now one is not even bothering with Nigeria for it is useless to try.
So, what does Europe and North America need to do to turn things around? I honestly do not know. I do know that Obama and Romney (what they represent, that is) are not the solution; they are part of the problem.
I think that that whereas France’s Francois Hollande (that is, attempt at socialist solution) may try that Europe’s fate may not improve that much.
I do not, however, cry for Europe. Europeans are adults; they know that they are at a cross roads, at a fork in the road. Their old ways of doing things would no longer work.
For five hundred years (1500-2000) Europe exploited the rest of the world; Europe’s economy was not based on real free enterprise.
Asia has liberated itself from Europe’s exploitation and by and by the morons pretending to govern Nigeria will liberate themselves.
What all these mean is that Europe can no longer predicate its wealth on the back of Asians (and eventually Africans).
As Karl Marx and V. I. Lenin would say, Western capitalists can no longer buy off their poor by exploiting the rest of the world; the West had exploited third world countries, got some money and used that money to help its poor live middle class life style. American janitors drive Cadillac’s...that way the poor things were given the impression that they are well to do hence support the system that exploited them; they were given false consciousness of their class situation. Now that they are no longer going to be bought off and would be poor may be they would seek the restructuring of their economy.
I think that the poor in the West will go through loads of pain and out of it would emerge with a new economic theory with which they would solve their problems.
Europe is at one of those times in its history where genius emerges and blazes a new economic trail. New Economic thinkers will emerge in Europe and North America to lead their people to a new promised land, one not based on exploiting third world people. Until that happens I do not see real solution in the horizon for the West. Europe would keep muddling through.
The feckless Obama would keep making his empty speeches (make empty promises that he does not have the guts to stand up like a man and fight for and when Republicans say jump he asks: high high) and get reelected but at some point in the future real thinkers would emerge and solve America’s economic problems. Those real thinkers are not going to be the liberals and conservatives we know today. What they will be I do not know.
As for Nigeria, as I said before, may be the country needs to crash and the people suffer massively, many of them die and from that situation they would become real men who tried to overcome the fear that disposes them to permit their criminal leaders steal all their money; they would rise up and fight their thieving leaders and insist on clean governments; fight and if needs be die fighting for clean government.
Things will fall apart and from the collapse may be African men with brains, not air, in their heads would start solving Africa’s problems and stop blaming the white man for all that is wrong with Africa.
I hope that this essay, written in response to yesterday’s election of Francois Hollande in France, helps the reader to begin thinking about what needs to be done to solve the economic challenges facing Africa and translating his thoughts to actions.
· For the fun of it consider what is really going on in the West. There is an electronic revolution going on. But unlike other industrial revolutions in the past this new revolution does not translate to jobs for the masses. The person who came up with the software that powers a new electronic gismo makes tons of money. Mark Zukerman wrote a program that started Facebook. He made loads of money. But that does not mean that thousands of jobs are created by his company. Even where electronic products are produced, since they do not require sophisticated skills to produce them the owners of capital manufacture them in Asia where labor is dirt cheap and make a killing and in the meantime many Americans are unable to find jobs. Is this what they taught you in economics and business schools or what? The West is embarking on unchartered economic territories; old economic solutions are now the problems!