Global economic crisis: collapse or revival

Global economic crisis: collapse or revival
# 23 December 2008 11:26 (UTC +04:00)
The manifestation of systemic crisis is largely driven by the inability to manage the so-called subjective profits derived from ballooning of the assets through the PR-campaigns aimed at increasing the quotation of shares in the stock markets.
We can call this a difference between the economic pattern and subjective reality. It is clear that stocks are an important instrument to draw relatively cheap money to the real economy. A market has its own laws: all of the improvements should be in the framework of the overall development of the company. That is to say, business development should influence the well-being of all participants in this process, including employees and workers. But in fact, everything is not in the way they are supposed to be: managers used to “skim the cream off” the proceeds and use how they want, leaving wages at the same level. Meanwhile, the middle class of the population did not want to live worse than what the economic fairness promises. Therefore, they compensated for the costs through funds from the financial sector, converting money into goods. The financial sector reacted instantly. Once there is a demand for particular goods, there should be a lot of goods of this type. In this case, the State lost control over the financial market. The number of sellers of money rose dramatically. This process involved large financial corporations too. This process was driven fast by a mortgage lending which was also widespread in a number of CIS countries (Russia, Ukraine, Kazakhstan). Liberal U.S. and European legislators enacted laws that allow more and more money flows into the financial sector. The U.S. leadership often resorted to fill the budget through dollar issues. As a result of failure to compare the laws of a modern marketplace with real trends, the state and business were running into more debt. For example, external debt exceeded $10 trillion in the U.S. in November, 2007 while the private sector debt jumped to nearly $30 trillion.
As at the end of 2007, the difference between an average American family’s income and spending was in a deficit ratio of one to two. Virtually, every consumer held up to 10 credit cards from different banks. The high purchasing power allowed consuming twice as much as the productive capacity of the United States and EU developed countries.
In parallel, trends developed such a way on the world that the OPEC countries that are major suppliers of oil decided not to sell their product at a low price. They developed a mechanism of regulating oil prices by reducing and increasing production.
In doing so, OPEC skillfully capitalized on the situation related to military operations in Iraq and Afghanistan, as well as the increasing energy needs of the third world countries. This led to subjective repeated increases in oil prices and, consequently, in other energy sources, that boosted per unit cost of product for consumers and increased population’s spending.
These circumstances created unequal conditions for producers of goods and services in developed countries and counterparties in the third world where there was cheap workforce and relatively soft taxation. This paved the way for the expansion of capital of developed countries, especially the U.S. towards the progressively developing third world countries, mostly to China. Large companies partially downsized, transferring the basic productive capacity to developing countries. This resulted in an outflow of money from developed countries, leaving behind a financial starvation.
As to the Fed, it is by itself a think tank to create a virtual financial pyramid of the world economy. With the development of electronic settlement, as well as the existing partial reservation banking system, one dollar turns into nine virtual (electronic) dollars, which is regular money in the real sector of the economy even though these assets are not secured. Therefore, today you can only take only about 4% of the money supply by hand in the U.S.
The soap bubble continued to distend until the abovementioned expansion of the U.S. capital to the USSR countries and the third world where the electronic system of settling in the consumer sector was underdeveloped. Then, the scheme of bubble ballooning breached and the banking sector started to have trouble with money for the normal rhythm of development.
All these circumstances meant that when the air balloon burst, the difference between real assets and virtual value of large companies rapidly declined, which led to the fall of the securities market.
Managers tried to cover up the difference to avoid falling stock quotes. The government facing its own financial problems in connection with military operations didn’t find spare time to think of the financial sector.
It is known that it is not so easily to mask financial problems for long time because everything hidden will be exposed sooner or latter. In the second half of 2007 spread rumors that some major U.S. banks were suffering a lack of lending to the private sector that repeatedly led to minor unrest in the securities market.
But in early January 2008, the crack became apparent in the financial sector (report about Citigroup).
Turmoil went deep into almost all exchanges in the securities market, resulting in the fall of the Dow Jones by 2,2%, Nasdaq Composite by 2,45% and Standard & Poor’s by 2.51%.
The crisis took a kickstart!
The chronology of the evolution of the crisis is known to all, but one thing should be dwelled on: The crisis first began with financial problems of individual companies, then switched to the securities market, then broke out as a world financial crisis and a crisis of consumer confidence. Now, the crisis has passed to the production of goods and services (the U.S. loses 10 000 jobs a day).
Next, the impact will reach the consumer market. Of the former Soviet Union, the crisis will hit Kazakhstan, Ukraine, Tajikistan, Russia, the Baltic countries, Georgia and Armenia.
In 2009, oil prices will not rise above $50 a barrel. Everything will depend on the market of China and other third world countries.
The price of basic consumer goods will surge. If the world community fails curb the crisis, then it will turn into a crisis of national trust in their government. In other words, the scenario is crisis - recession - depression. The consequences could be very awful. Crime and street riots will increase. Old dormant social and ethnic problems will worsen. Chaos will emerge in the international relations that will lead to a reorientation of the economic and political constituents in the global economy. There will be a need for monetary reform in the United States. The dollar will lose its dominant role as a world currency. In these conditions, much will depend on what course in foreign and domestic policies the new U.S. administration will pursue.
And what are the developed countries doing to overcome the crisis? They are acting in a ways that you must supply it if the market does not have enough money No matter how it is down - a tax cut, tax rebate, central banks’ lowering discount rates, reduction of VAT rates, distribution of large and cheap loans to banks and insurance companies.
The U.S. Federal Reserve announced free distribution of the money, lowering the discount rate to nearly zero.
In doing this, the Federal Reserve declared the start of monetary reform in the U.S. (following the principle: let’s rapidly pay off all debts, and then make the dollar default).
Practice shows that most of this money goes to risk management of companies in crisis.
Russia immediately raised stabilization fund of $568 billion, China - $1.74 trillion. U.S., Japan - $1.28 trillion.
Saudi Arabia’s Stability Fund is $890 billion. Azerbaijan’s reserve fund is just over $17 billion, representing $2 200 per capita. For comparison, in China the figure is $1 260.
This money is intended for insurance risks. The State is the guarantor to its citizens and uses the reserve to regulate the market in the case of extreme necessity.
Why didn’t the companies do when they afforded? The world has undergone at least two similar crises for the past 10 years. It is high time to learn business, to establish stability funds to cover risks.
And where are the people? What are the citizens of your country doing in the anti-crisis program? It is clear that all these are indirectly related to people whose lives are insured by insurance companies, whose deposits are located in these banks. And guaranteeing the deposits are not the hopped-for help. And if one does not have any deposits, this is very difficult for him. Today, more than half the world’s population falls under this category.
Only in the USA, there are about 10 million unemployed people, only 30% of whom receive unemployment benefits.
The money that is thrown to address the crisis will return after a few years, bringing great challenges that can not be curbed even in 5-10 years. Rather than addressing the causes of the crisis, they are simply masking the symptoms.
We can say that the market economy has been exhausted and no longer acceptable to the modern world. A different model of global economic governance is needed. This new model should give the primary role to the State which shall undertake a greater responsibility before its citizens. Why are companies of social significance to society nationalized as one of the most effective ways during the crisis? Practice shows that if the state does not participate in the management of the private sector of the economy, the concentration of money occurs in a relatively small portion of this sector. This is a subjective factor, but very inhibitory to the economic growth. The economy is one-sided, and owners invest their money only in the projects with high profitability and quick return. But those projects which have social significance in any state remain unfulfilled for many years.
For example, projects related to agriculture, rural infrastructure, raw material supply for the food industry that ensure food security of the country…
Meanwhile, all these projects are vital for everyone who lives in the rural areas. Support from the government in the form of donations provides some incentive, but does not solve the problem. A large portion of this money goes to unfocused use.
I think that the state should not promote the irresponsibility of private business lay leaders, but punish them, shifting social role onto the shoulders of professionals, minimizing the proportion of these business to a minimum, ensuring the financial security of the businesses, but retaining their right to redeem a state-owned stake they learn how to manage business.
Azerbaijan has experience in this regard. Actually, it should be noted that Azerbaijan has all chances to take some dividends from the world financial crisis for its own economy because our country is not so much dependent on the world financial system yet. The government was very wise a few years ago when it prioritized the development of non-oil sector. This yields positive results now, so do major infrastructure projects which the country has been implementing over recent years. These projects now can be very useful for supporting the development plans for the real economy.
So, what is the top priority for the Azerbaijani economy amid the global economic crisis? It should be noted that some of the following plans has already been launched by the country’s leadership.
a) To minimize dependence on the dollar so as to reduce the risk originating from external factors. A question arises here: what to do with petrodollars? The petrodollars or a portion of this can be directed to the payment of goods purchased by companies engaged in foreign economic activities. Thus, this will allow incite this important area of the economy in a world crisis. It also requires the purchase of technological equipment to ensure our food security;
b) The state should help repay the international debt of major companies by nationalizing these companies because their bankruptcy can create social problems in society. Refinancing is ineffective. It is needed to buy these debts at some discount because the global crisis has created favorable conditions for this step. Resuscitation of these companies will lead to the rehabilitation of the economic environment at home;
c) to open up domestic economic reserves of the republic by restoring and enhancing the agro-industrial capacity. This requires the following:
- Implementation of agro-industrial infrastructure projects aimed at providing the industry with the necessary energy, water, road infrastructure, warehouses for the storage of fruit and vegetable crops, etc.;
- Reanimation and inclusion of free land reserves into agriculture;
- Strengthening of the state control on the use of farmlands;
- Creation of a strong base for the development of livestock industry, given that the country has a large potential workforce in this sector (after the collapse of the Soviet, a large number of livestock farmers were left without work). This portion of the population are most socially unsecured;
- Establishment of the state monopoly on raw materials for food production. In the first instance, on crops which are the basis of livelihoods of people and take the first place as a socially significant direction in the economy. In this case, the State may harvest the raw material at its storage facilities and make use of them. Subsidies which the state pays to grain producers are 50% of the efficiency of the desired result. But if the money is paid to producers for each tonne of grain as additional payments upon delivery of grain, the efficiency would reach 100%;
- The establishment of public joint stock company in different regions of the country on the basis of the most advanced technology for the production of foodstuffs and consumer goods in line with international standards (a platform for the WTO accession). This process may include the private sector which can engage in projects with their own funds as a shareholder. Subsequently, the state will be able to sell its share to private shareholders. Similarly, the State may partially nationalize the old enterprises with outdated equipment;
g) The continuation of efforts to stimulate small and medium-sized businesses in a crisis with additional financial injections;
e) The development of anti-crisis plan of action to provide targeted assistance to socially vulnerable people;
e) Subsidizing and promotion of financial injections in healthcare and education.
By providing tax rebate, customs benefits and other incentives to large companies for their sponsoring projects aimed at developing industries in the provinces;
g) The development of plans to establish free economic zones in the light of worldwide experience by stimulating the production of medicines and food. Identify priority projects related to high technology.
Thus, a set of measures to implement the anti-crisis program will allow Azerbaijan not only avoid the serious consequences of global crisis, but also gain significant benefits and push up its economy to the level of world standards.

Kocheri Hasanov, Director of the Center for Strategic Analysis at Azpromo,
Director of Bizim Vətən (Our Motherland) Information Center