18 November 2008
opinion
Lagos — When a highly cerebral person like former Finance Minister and international consultant, Dr. Kalu Idika Kalu, writes to commend your column, it is trouble.
It imposes on you a standard below which you dread to fall. Trouble! But a much bigger trouble is blowing across the world.
I thank the over hundred people from around the world that wrote or called last week. I will do my best to keep a "well-researched and simple" column. I will also keep the promise to serve some fun from time to time, as I planned to do with a lighter side of the Obama miracle, until a sixth sense reminded me the column needs to catch up with a world in trouble.
There were two big bangs last week! The global financial crisis has refused to go away and world leaders had to hurry another Breton Woods meeting. As they met many more countries slid into recession. Trouble! No matter how hard Nigeria denies it, both bangs will have consequences on its economy and people.
The good news first! Yes, the world is in a hurry. How else do we explain the historic G-20 meeting in Washington DC over the weekend. Rather than wait one more month or so, to have President-elect Barrack Obama host the meeting, the rest of the world's developed economies and leading emerging economies chose to do business with a lame-duck President George Bush. They could not also wait to blend it with a similar meeting being planned by the United Nations.
Obama stayed away because as his aides explained, there couldn't be two US presidents at the meeting. In diplomatic circles in Europe there is a joke about the eagerness of European leaders to meet with Obama at the White House. It is cracked that on his arrival at the White House in January, Obama would find French President Sarkozy already waiting for him. Sarkozy was one of the European leaders, who pushed hard for the meeting, so why couldn't they wait for Obama? The meeting to hammer out global solutions to the on-going global financial crisis was so historic that it was dubbed Breton Woods - 2.
Save your breath if you are worried Nigeria was not invited to the meeting. The government has said we would be one of the world's leading economies by 2020, some 12 years away. I am amused because looking through the list of countries at the summit, I wonder if Nigeria would be able to displace any of them soon.
Participants at the Breton Woods -2 meeting were the US, Argentina, Australia, Brazil, Britain, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Spain and Turkey. Other than Spain, those countries - plus the European Union - make up the Group of 20 industrialized and developing economies, or G-20. The group accounts for over 85 percent of the global gross domestic product, which is a measure of the value of goods and services produced worldwide, and two-thirds of its population.
Breton Woods -1 was the 1944 meeting at which the World Bank and the International Monetary Fund were formed. In fact, it was held at The Mount Washington Hotel in Carroll, New Hampshire. But because it was near the Breton Woods ski area, the conference of Allied world leaders held towards the end of World War II at the hotel was called the Breton Woods Conference for want of a catchy name. The 44 countries that attended had been victims of brash monetary and fiscal policies in the 1930's and had come to realize international cooperation was necessary for a post-war economic agenda.
It is said quietly that the World was in a hurry with Breton Woods-2 perhaps because two of the key actors needed it desperately to improve their rating. Bush is leaving office with perhaps the lowest rating of any US president, and Prime Minister Gordon Brown needed it to strengthen his "bounce back", which UK polls said was running out of steam.
Nevertheless, the summit was a good beginning for global solutions. Highlights of its 5-page communiqué include:
- Agreement to work together to restore economic growth and reform the world's financial system.
- Vigorous efforts to stabilise the global financial system.
- Laying the foundation for reform to help ensure that a global crisis, such as this, does not happen again.
- Agreement to evaluate global accounting norms and the financing needs of international financial institutions.
- Agreement to draw up a list of financial institutions whose collapse would imperil the global financial system, but each country to act "as deemed appropriate to domestic conditions".
- Modernisation of both IMF and World Bank.
- Rejection of protectionism and not turning inward in times of financial uncertainty.
- Creation of "supervisory colleges" of financial regulators from many nations to better detect risky investing and other potential problems.
- The "use of fiscal measures" to energize individual countries' economies "as appropriate." The Federal Reserve and other central banks to order interest rate reductions to help cushion the economic fallout.
The summit gave the job of fleshing out details to finance ministers to be finished by the end of March for the next summit April 30. Obama would be the US President then. One thing was clear at the summit: Capitalism was not killed as feared.
Now, the bad news: The Eurozone, including the large, advanced economies of Europe, has slid into recession. The robust German economy has, so has the world's second largest economy, Japan. The US may be playing politics about it but experts say recession has arrived its shores.
Keeping it simple, recession means a decline in the economy of the country over a period of time, usually two quarters. Although it is a shallow and shorter cycle than a depression, its effects are painful. They include reduced sales, job losses, unemployment, less bank lending, deflation, debt pile up for individuals and companies, bankruptcies and stock market crash. Companies have to lay off people because of lack of business and that makes people decrease spending even more.
According to the European Commission, Euro-zone manufacturing activity sank to record lows in October, with output, new orders and the number of purchases falling at the steepest rate in 11 years. Retail sales also fell in September by 0.2 percent from August, and by 1.6 percent compared to September 2007. New-car registrations, a major indicator of economic health, have fallen in Germany, France, Spain and the UK. European companies also cut jobs at the fastest rate since January 2002. Stocks of finished goods awaiting sale reached a record high. Unemployment in Britain is set to reach 7.1 percent, according to the EC, which predicts that the UK will be the worst-hit economy in Europe.
In the US, unemployment rate has risen to its highest level since 1994 after employers cut 240,000 jobs in October. Employment has fallen by 1.2 million in the first 10 months, mostly in the automobile industry. Over half of the decrease has occurred in the last three months. Retail sales have slumped and family debts are piling up. US phone giant AT&T said it was now disconnecting a growing number of home phone and broadband customers for failing to pay their bills.
According to Barack Obama, the US is experiencing the highest unemployment and insurance claims since 9/11. You see why I said what he needs now is prayers and not hypocritical celebration?
And how does recession in these countries affect Nigeria? Simple. Depressed economies of importing countries mean less demand of crude oil. And prices have to move in the same direction. Down. The Presidency has said the price slump is causing a delay in the presentation of the 2009 budget to the national assembly. The country's cash cow is sick.
With the recession, many Nigerians abroad are going to face hard times, including the loss of jobs. It means funds expatriation, which has been a major forex inflow to Nigeria will dwindle. Double trouble for the budget.
Nigerians who depend on their relations overseas may have to tighten their belts, and of course, this is not the right time to go job-hunting overseas.
And as many African leaders have observed, foreign aid as well and foreign direct investment will shrink.
Trouble! That should perhaps be the name of the financial hurricane ravaging the world.
Soludo's Vision
Professor Chukwuma Soludo has enemies like the rest of us. That is natural. What also comes to him naturally is brilliance. My friend Simon Kolawole is a very witty guy. See the way he concurred my observation of Soludo: 'If you say the first class he made at first degree was a fluke, be reminded that he made distinction at the Masters and Doctorate degree levels.' I know too that Soludo is a visionary leader, and I will show you an example.
At the THISDAY Townhall meeting on the global financial crisis in Abuja last month, he said: "There is a collective action problem. We need coordinated, collaborative response from around the world but the global financial architecture hasn't yet evolved to that point. Whereas the crisis is now a global one, there is a total absence of a global governance infrastructure to coordinate response.
What you have now is collective action problem to a point that you even have some free riders. Some are hoping that some others will take the hard choice, take the hard steps to rescue the world economy and they will free ride from the process. But I think more than anything else, this crisis is going to force the world to think long and hard about evolving a new global financial architecture that will coordinate much more effectively especially even more instruments for reinforcements and monitoring. I am not quite sure the Breton Woods institutions (World Bank, IMF) as currently structured can effectively do that job."
Now, 44 days later, hear the news: "Prof. Chukwuma Soludo, has been appointed to a high-level task force being set up by the United Nations to examine the possible reform of the global financial system, including the International Monetary Fund (IMF) and the World Bank, in the wake of the current economic turmoil.
United Nations General Assembly President Miguel Descoto, who announced the composition of the task force, said Joseph Stiglitz, a former Chief Economist at the World Bank and winner of Nobel Prize for Economics, will chair the panel known as the Commission of Experts on Reforms of the International Monetary and Financial System. The task force will suggest steps that member states can take to secure a more stable global economic order".
I rest my case!
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