The Global Financial Crisis of 2008 exposed particular weaknesses in the global financial system, regulatory regimes and some government’s inability to effectively respond to the economic misery imposed on the global populace by the worst crisis since the Great Depression of the 1930s. The general global populace carry the burden of failures not of their own making, but of policy-makers caught napping at the wheel. Slow economic recovery in many economic jurisdictions, particularly the Euro-zone, can only mean a protracted misery for the millions of who lost their jobs and businesses that suffered during the crisis; and obvious repercussions on economic partners.
Leaders of the world’s twenty most powerful economies, the G20, met in London in 2009 at the height of this global financial mess. They proposed “the Global Plan for Recovery and Reform”, under which they all resolved to undertake “unprecedented and concerted fiscal expansion”. Their Keynesian approach to the global financial crisis was the right thing to do, given the need for public spending to stimulate global economic growth, generate jobs and resuscitate consumer demand.
In 2010, the G20 leaders again converged on Toronto, Canada, and again the common consensus was to “Sustain (economic) recovery … follow through on delivering existing stimulus plans, while working to create the conditions for robust private demand.” The Toronto G20 Declaration came amid deepening debt woes and growing threats of double-dip recession across Europe; largely (in my “expert” opinion) exacerbated by the Euro-zone’s nonsensical policy response to the crisis.
There has been growing fixation with “austerity” among Euro-zone leaders, especially Angela Merkel and David Cameron, who have — contrary to the Toronto G20 Declaration and the Global Plan for Recovery and Reform — pursued spending cuts. This increased drive to implement austerity measures was the source of contention between Obama and these European leaders who at the G20 Summit were proposing immediate deficit reduction, despite the immediate negative consequence to the global economic recovery effort posed by such proposals. Germany and the UK have pursued spending cuts at the time when Euro-zone economies are only growing at an average of 1%. Their policy response would only serve to hamper the coordination of global efforts to promote economic recovery. Even China is coming to the party and allowing devaluation of the Yuan.
The Nobel Laureate for Economics and former Chief Economist of the World Bank, Professor Joseph Stiglitz, has advised governments to focus on stimulus rather than austerity in order to encourage business spending. He said, “We have to get the economy going before firms are going to invest…There is an idea somehow that when the government cuts back, the private sector will get confidence and that will lead to more spending. The fact is that the households in America and many other places around the world are burdened by debt, and business is not going to spend as long as government and exports and consumers are not spending.”
The Obama administration, unlike its counterparts in Europe, announced massive stimulus packages which have assisted the US economy to recover from recent recession. In the fourth quarter of 2009 the US economy grew by a remarkable 5.7%, the fastest growth in more than six years.
Unemployment, which peaked at 101% in October 2009, also dropped to 9.5% in May 2010, although this is still high in terms of historical standards. However, growth estimates for 2010 have been revised down due to growing concerns about developments in other parts of the world, in particular the Euro-zone’s debt woes, which weigh heavily on the US recovery efforts. The IMF forecasts US growth at 3,3%, which is in line with the latest revised forecast of between 3 and 3,5% by the US Federal Reserve; but such forecasts can only be attainable if there is global collaborative effort on recovery.
Barack Obama has been under increased pressure to cut spending due to valid concerns about the US’s ballooning budget deficit. When delivering his speech at Suntory Hall in Tokyo, November 14, 2009, Obama said, “Now that we are on the brink of economic recovery, we must also ensure that it can be sustained…We simply cannot return to the same cycles of boom and bust that led us into a global recession. We cannot follow the same policies that led to such imbalanced growth. One of the important lessons this recession has taught us is the limits of depending primarily on American consumers and Asian exports to drive growth.”
However, the Obama administration has agreed to work to reduce the US fiscal deficit to 3% of GDP by 2015, in recognition of the urgency to balance the need for continued growth in the short term and fiscal sustainability in the medium term. Obama said, “The timeframe and the measures that have been adopted are consistent with our view that it is important for us to make sure that in the medium and long term, we’re paying attention to the big deficits and debts that we have out there. But we must recognize that our fiscal health tomorrow will rest in no small measure on our ability to create jobs and growth today.”
Germany and UK cannot, hile economic activity in their respective jurisdictions accelerated by 0.2% and 0.3% in the first quarter of 2010, insist on cutting spending. The immediate and urgent task should be stimulation of economic growth and creation of jobs. David Cameron may be buoyed by the latest release by the UK’s Office for National Statistics of unemployment figures — which dropped to 7.8% in the three months to May. But it is recognition of the fact that such improved unemployment data is not attributable to the Cameron administration’s fiscal policy implementation that should refocus them to the urgency of the now.
South Africa’s economy was primarily rescued by massive spending on infrastructure by government in preparation for the FIFA 2010 World Cup. That has largely managed to keep the economy afloat. Going forward, it is rather clear that austerity is not anywhere in the ANC government’s radar.
Wasteful expenditure and unrepentant plundering of state resources appear to be Zumanomics and — with all fairness to Jacob Zuma – that would naturally have been inspired by the Keynesian Theory.
South Africa faces worsening unemployment crisis and deep poverty levels despite the economy expanding by 4.6% in the first quarter of 2010.
Estimates suggest that about 50%of the population live below the poverty line, while unemployment is at 25%. The income inequality gap also continues to grow. The trouble here is that Zuma went to the G20 Summit in Toronto and preached about the need for the developed world to give attention to Africa, while having no medium and long-term economic strategy for his own country. The developed world has the urgency of addressing their own economic problems and for an African leader at this time of the crisis to preach “Africa” is misguided and ill-timed.
Our problems as a country appear to be more structural; yet there seem to be no concerted effort on part of government to address these pressing and urgent issues. Universities cannot continue churning out graduates whose skills and qualifications are not demanded by the economy. Short-term measures by government to address unemployment and poverty are geared towards creating temporary employment for “unskilled” labour, while unemployed graduates continue to thaw in the sun in townships. There is no direct alignment of tertiary curriculum and the dictates of the economy. Until government wakes up and addresses these pressing issues our economic recovery and growth cannot be sustainable.
The economic troubles of Europe and US have a direct bearing on our own economic destiny. Without economic foresight and leadership, which we lack as a country, there is less hope for the immediate future, unless of course you are a politically connected tenderpreneur like a certain Minister of Communications. Since Obama came into office, it has been easy to point out what he has been busy with in office, for example, passing the health-care bill, Wall street reform bill, economic recovery efforts. I would be hard-pressed to tell you what Zuma has achieved and been busy with since assuming the presidency, besides jumping from one scandal to another!
@Sentletse
I enjoy your blogs!
Whilst your conclusion seems a bit gloomy, one would be hard pressed to find factual evideece to refute it.
President Zuma once admitted to “not understanding at all” all the MacroEeconomic graphs and forecasts that Trevor Manuel used to present to cabinet.
Whether Trevor himself did is also moot, given his lack of a BCom, or any degree for that matter (he has a Diploma in Civil Engineering from that world famous Ivy League institution of learning Pentech)
I doubt whether Zuma understands the problem – forget about proposing a solution!
The USA’s “recovery” is artificial and will be short-lived.
The current level of budget and trade deficits is unsustainable.
The massive liquidity injection has to cause price inflation and Dollar devaluation in the medium and long-term.
Government’s cannot “spend” their way out of a recession by printing money, as during recessions, governement’s “income” from various taxes reduces considerably.
Issueing treasury bills until they reach junk bond status is not going to solve the problem.
At the end of the day, your mother was right – don’t spend more than you earn, and save for a rainy day.
Like individuals and businesses, governments that do not follow that sage advice end up in the dwang!
PS Ask any Zimbabwean what happens to the value of the currency when government spending continues to far outstrip government revenue, and money supply and velocity in circulation is out of kilter with real demand.
The ANC was so lucky it came to power in a growth period, it will now be serverly tested.
I have no doubt that in 10 years from now the period 2008 to 2016 will be known as the second great depression. The last depression had 4 major rallies. We have had 1 – 2009.
Note some writers claim that the bear market started in 2000 – Elliot wave theory.
Watch out for wars, this is going to get nasty.
Whilst I do believe that public spending can in some cases be beneficial, I do think that in the majority of cases it is not. Thus austerity measures are, in general, better than spending measures. This I think is particularly true of SA.
Economic recovery will not happen until the debt situation has improved. Only then will people have money left to start purchasing again. Granted, reductions in salaries and employment will delay debt repayment and thus recovery.
The danger with Keynesian spending is that as a country borrows more money, the cost of borrowing generally also increases. In the event that the borrowed money is wasted, as often happens with public spending, not only will there be no recovery, but also a giant pile of debt further hampering recovery.
The money being spent on the interest repayments of the giant pile of debt, likely to foreign creditors, could then have been used to prop up the economy.
Since it was governmental mismanagement that led us to the current situation, I do not think they have the capability to foster a recovery by spending money wisely. Only the account balances of a few “comrades” will recover, at tax payer expense of course. It is also convenient for the incumbents since it delays “the day of reckoning” making it the problem of “the next guy”. True leaders choose austerity, pop stars wannabes spend.
If you like gambling go ahead, let them spend. The odds, in my opinion, are against success.
Your post is a bit all over the show – touching on many different aspects.
(1) Regarding the stimulus – The Keynesian model is flawed. Government cannot stimulate the economy it can only redistribute economic resources or print money. The GDP = C + I + G is were the nonsense starts.
If you want failing enterprises to be propped up, increased prices, increased government debt, regime uncertainty and more economic inefficiencies – vote stimulus.
Pick a link and reconsider:
http://www.youtube.com/watch?v=6Av-LCoVcXQ
http://cafehayek.com/2010/07/stimulating-thoughts.html
http://mises.org/daily/4482
http://mises.org/daily/3310
(2) If you believe Keyensian policies worked/helped during the 1930 depression – well that is simply not true:
hhttp://www.independent.org/newsroom/article.asp?
id=2377ttp://cafehayek.com/2009/09/6520.html
http://en.wikipedia.org/wiki/America's_Great_Depression
(3)The success of the current stimulus package is also highly debatable. A lot of the money has already been spend with no real results. Not to even talk of the long term effects of the stimulus combined with a war in Afghanistan and Obamacare…
http://econlog.econlib.org/archives/2010/07/the_stimulus_wo.html#
(4) The less said about Paul Krugman & Joseph Stiglitz the better.
http://krugman-in-wonderland.blogspot.com/
(5) We don’t yet have all the figures for the WC infrastructure spending (long term) – so conclusions is premature. We lost jobs remember…wait until the hangover starts to kick in.
Voila! You said it.
Well, Mr COPE you are unable to deal with that mickey mouse called shikota and yet you preaching to JZ a man who managed to beat your dalai lama(Thabo Mbeki) with his descendents armed with degrees, becauseJZ is street smart. One might hate the player but we will defend him were injustices are taking place. Lastly, please do me a favor and stop your half cent knowledge to yourself.
Pussyfooting around the issue is a government speciality. Government always looks for the lost car keys under the streetlight when they know they lost it in the dark alley around the corner while doing their bit for the drug habit of the local prostitute. They built a hellova lot of white elephant stadiums, gave fifa a golden handshake and subverted South African law to a multi-national instead of investing in the people of Mzanzi. They nailed us without as much as a “by your leave, Madam”, and now, they want us to grin and bear it. Expletive them. China has 50 and 100 year planning horizons, we in Mzanzi? – the next crisis,I agree dude. Total lack of leadership and focus
@Sentletse, China didn’t devalued her yuan, she was supposed to be letting it float a little bit. China is the cause of the recession because she had her yuan pegged to the dollar and pay her workers pennies. China is holding all of these dollars and not buying anything with them and has caused the recession in the world. China has wipe out manufacturing in SA and this is why there is no jobs in that country. This country should pegged their rand to the yuan like China was doing with the US.
Zuma’s doing nothing, but then again, neither did Mbeki or Mandela. Doing nothing is the ANC’s preferred form of inactivity.
You post touches on many different things:
(1) Stimulus / Keynesian economics:
The government can only redistribute resources and print money. If you want to prop up failing enterprises, inflation, high deficits, higher prices, higher taxes, more government borrowing, less investment/savings, more inefficiency, another credit bubble – vote stimulus.
See:
http://www.youtube.com/watch?v=VoxDyC7y7PM
http://cafehayek.com/2010/07/stimulating-thoughts.html
The stimulus is taking ordinary peoples money and giving it to bureaucrats to spend. Keynesian want government to decide what to do with your money, want you to spend more on consumer goods instead of saving/investing. Amounts to stealing from your pocket and giving it to politicians most favourite interest group – yes bank bailouts, investment houses, fat government programs etc.
The economics behind it is straightforward:
http://mises.org/daily/3535
(2) Did it work during the great depression? No, that is nonsense…
http://www.econlib.org/library/Enc/GreatDepression.html
http://en.wikipedia.org/wiki/America's_Great_Depression
(3) In terms of it working – not really:
http://online.wsj.com/article/SB10001424052748704751304575079260144504040.html?mod=djemEditorialPage_h
(4) WC 2010 Spending – Too early to tell.
In fact you can use the same reasoning contained in the article above. It depends on how valuable all the government spending it – some is (highways, infrastructures etc) other not (stadiums, gov graft etc) – all have serious long terms consequences.
(5) Zumanomics:
ANC policies (holy cows) make it impossible for SA to grow more than 2-3% – simple as that.
Meant to say – depends on how “valuable” all the government spending IS – not all of it was money well spend in the bigger picture.
@Lehlohonolo, that was a dumb statement you made about Sentletse because you didn’t understand what he was talking about in his article on the economy of SA. I thought that the article was very good and Mr. Sentletse touched on an issue that’s important and that is the economic problems in the world. In his article, he shows how austerity measure would impact SA economy and I though that was an important issue.
Your analysis is accurate. Cutting spending is quite likely to intensify the depression. However, this is particularly because the spending cuts are going to be on social services; that is, money tending to go to the lower levels of society where money is actually spent. Hence it will depress demand, which is already depressed.
The problem with increased spending is that it does not necessarily boost demand. The West went on a spending binge in 2009, but virtually all the money went to the rich (financial institutions) and as a result there was no Keynesian impact at all. South Africa is not quite so bad, but the trouble is that we are increasing spending to the middle class rather than to the working class (because the middle class is unionised and the working class is not) and therefore spending under Zuma is also skewed. The collapse of employment in the last year has further exaggerated this. So we do seem to be facing trouble.
Incidentally, the ANC did not take office in good times. Not only was there a horrible internal economic crisis caused by De Klerk’s spending binge, but the ANC then had to face the Asian crisis, the Russian crisis, the Argentinian crisis, the dot-com crisis and the 9/11 crisis. It handled affairs pretty well before 2005 or so, in my judgement. (Trotskyites disagree, of course, sometimes validly.)
As I understand it, you can’t merrily embark on stimulus packages by printing money (avoiding technical discussions about inflation etc), you need to get it from somewhere. either from taxes or borrowing. You can’t really tax the poor suffering citizens in this climate any more so you must borrow – something the Greeks, Irish, the English and Japanese (200% of GDP?!) have become very good at. Unfortunately you need to pay this money back, and the interest starts to eat up your future revenue.
The chinese have merrily bought up these government bonds, to the point where they hold around 30% of all American govt bonds. Basically they have the US by the balls. There is no easy answer to this – basically these countries have been living beyond their means riding on the back of dodgy economics for too long, and ultimately they need to tighten their belts and start living more like the rest of the world – smaller houses and cars, less steak and more potato. If we want to continue growing we need to cosy up to the BRIC countries.
In SA we don’t have a problem with the amount of resources at our disposal, but rather the allocation of resources – the execution.
People that ask for more government intervention in the economy always seem to see it as a self evident truth. They always say how keynes is great, and rattle off some percetages of how we currently have problems that need to be addressed. Never do they say why or how Keynesianism will work.
It seems to me that it doesn’t.
http://mises.org/daily/4482
Sentletse you probably have no idea what economic foresight you expect. You’re just playing to the gallery of fellow Zuma haters. Which president on earth or economic professor for that matter,understands all the intricacies of economics. Even the “BIG CHIEF” had a myriad of Harvard trained economists advising him at great cost to the tax payer with very little returns. Indeed there was a modicum of success, people like Bulelani Ngcuka, Saki Macozoma, Smuts Ngonyama, Sam Shilowa became rich, thanks to the economic foresight of the former president. I mention these individuals because most of them had links with public entities, like Eskom, Transnet, Telkom, IDC before the metamorphosised into BEEzismen.
Sentletse,
There is no “recovery”. What has happened is that the public, through the government, has been forced to borrow more and more money from their futures, to pay for stuff now, in order to “create jobs”. For most, the pain has been delayed, not eliminated.
The idea of positive or constructive debt is that you spend now on investments that will allow you to be more productive in the future and therefore earn more – thus you offset the cost of credit, and are better off for the debt. Many of the projects that have propped up developing economies such as ourselves (and particularly China) are truly productive investments, however in developed economies, there is limited scope for large-scale forced spending that will be productive. When we are forced to prop up the financial system by spending purely to create jobs, we are stealing resources from our future, and merely delaying (and exacerbating) the problem. When bankruptcy is a real threat, there is no choice but to employ “austerity measures” to stabilise the system and create an environment in which the private sector can start to grow once again. Just as an individual cannot live for long beyond his means, if a country cannot grow its means to fit its lifestyle, it must adapt its lifestyle to its means.
As for US employment numbers, they are not as simple as reading percentages. It is a complex subject all on its own, but suffice to say it is usually quite misleading.
Sentletse, the criticism of the ANC as a ruling party is accepted but it should not end there. You also need to tell us how does the opposition MPs justify their salaries and perks. What value does COPE MPs give to the taxpayers who pay their salaries. What economic foresight is coming from COPE, aren’t they paid to provide alternatives?
Havelock, I’m with you. If government is to spend our tax money it must be carefully spent on income producing, productive assets and then to create an environment in which productive competitive business can flourish. It seems to me that BIG and stadiums do not fall into this category. Our new power stations, possibly with kickbacks to the ruling party and marginally competent, hasty procurement policies (I’ve been associated with one) are borderline. Given our failures in foreign policy (Zim refugees) education, healthcare and policing as well as corrupt government policy they haven’t done too well in creating a healthy business climate.
Will in end in tears? Quite possibly.