When State regularisation becomes the solution

As the current financial crisis subsides (at least technically) economists (as pointed out in the previous article) have coined the likely post-financial crisis economic panorama- “state capitalism”.

As the current financial crisis subsides (at least technically) economists (as pointed out in the previous article) have coined the likely post-financial crisis economic panorama- “state capitalism”.

This ‘new economic order’, is likely to replace the fundamental capitalism espoused by USA and most Western European economies for centuries now, and which had been preached like ‘economic survival gospel’ to all economies; if they were to grow and develop.

Although capitalism in itself is a good economic philosophy, and has no doubt brought huge benefits to economies that embraced it, for it is consistent with, and is in accord with economic man/woman (pursuit of self interest) it nevertheless becomes flawed when it takes a fundamentalistic face, like any other philosophy taken that far.

That we are witnessing the consequences of fundamentalistic capitalism is not surprising in self. What is surprising is the time it took to release that, pursuits of self interest especially in matters of finance, has a limit beyond which every one’s interests are at stake.

Thus, the financial engineering that took many forms and shapes and seen such financial products as derivatives, and hedge funds (estimated at over $ 2 trillion)  whose dynamism is difficult to comprehend even by an average post-grad student, leave alone government bureaucrats, were to hit global financial systems, and hard.

What is interesting is that, even when every sector of global financial systems are in a mess, hedge fund companies are among a few institutions that are doing pretty  well (posting impressive returns) against the odds.

This is so because hedge funds are sophisticated and use complex investment strategies than those used by mainstream financial institutions to make profits.

However, many questions abound as to why western policy makers were not able to regulate these complex financial instruments that are blamed for the current financial crisis.

They are three perusable reasons to this. First, senior politicians in western economies have interests in these, either directly, or through their proxy companies and as such, all they did was in their interest. And if this is not high level corruption on the part of western political elite, one wonders what it is.

Secondly, these institutions are ‘king makers’ in the sense that they form powerful lobby machinery that determines/influences who holds power and who does not. Going against their interest therefore becomes anathema.

Thirdly, though remote, is the fact that, the sophistication of financial engineering in western economies went beyond the comprehension/understanding of western regulatory bureaucrats.

And in the name of innovativeness, these institutions were left on their own to make dubious profits (in London which controls 80% of world hedge funds, these contribute 10 billion pounds or around US $ 17 billion in taxes). 

A combination of these and other factors has nurtured fundamental capitalism (that spread from finance to other sectors and back) of the scale the burst of which has wrecked havoc to the entire global economy.

State Capitalism

Development literature has held the state as the cardinal agent of development for ages, a role it served well, albeit with many constraints stemming mainly from conflict of interest between powerful individuals within the state; as an all in all.

Of late however, the emerging schools of thought (after the current fatal blow to capitalism) has it that, capitalism as economic philosophy has to be moderated.

This moderation brings in the two players – the state on one hand, and the market forces on the other (no longer free at will) to interact so as to ensure efficient allocation of resources in the economy.

Although this emerging philosophy is gaining acceptance, and is being advocated for by even adherents of fundamental capitalism, through many policy pronouncements eg USA’s Oboma’s health reforms; Russia, China, India, and Brazil, which have embraced this philosophy for sometime, seems to be reversing the gears of capitalism; and at an alarming rate.

Russia, which has been hit very hard by the global financial crisis, has had to refinance, and or bail out most of her companies so as to keep her economy afloat.

Here, major companies such as Gazprom (which supplies most of Western Europe gas) is, like many other firms, a state enterprise.

Massive bail outs have retaken firms which had hitherto been in private hands.  The same is true with Petro-China which controls the entire petroleum market of China.

China has had to bail out a number of private companies, in essence taking ownership of the same. These are companies seen so strategic that, if left to the free market, they will jeopardize not only these economies’ development, but also their security.

Available research indicates that, 75% of the petroleum industry is controlled by the sate for both economic and security reasons.

These same countries also control huge financial reserves in form of sovereign wealth funds (SWF) to the tune of 14 trillion; reserves that are seen as strategic for economic and security reasons.

These are finances that, in the ‘new’ development paradigm may define our financial landscape. In Western economies, state take overs has been massive.

Royal Bank of Scotland (one of the four major British Banks) is state entity with over 90% holding. US has bailed a number of her own, taking ownership in these, by so doing.

France which has pursued state capitalism model of development, had to bail out its own recently, eg BNP Paribas, (her largest bank by market value). All this is about state capitalism, in all its true colours.

An Idea whose time has come

For us in developing countries and especially in Africa, state capitalism is an idea whose time has come given current economic realities.

The ideals of free markets and the state, acting in harmony to direct resource allocation should be embraced, and fast.

There should be no conflict, nor confusion in this, as the bottom line is; to enhance the development of the real economy.

This is even more pertinent in our country where the nascent private sector (main agent in free markets) is either too weak to make an impact to the economy, or absent altogether.

Under these conditions, the state as the main agent of resource allocator is fundamental, and can not be delegated nor relegated.

The history of the development of western economies attest to this model. Private sector was allowed to take over the role of state only recently (owing to state induced market imperfections), and was heightened by Thatcherite (form UK Prime Minister’s extreme liberalization policies) economics (that spread fast to other western economies) which removed the state in most economic activities, under the guise that, the state was ‘a bad business entity’, and that the private sector was better placed to do business.

Whereas, this is absolutely true; an economy, like a sporting acting activity has many players. There has to be a referee. In the absence of the referee, the game turns chaotic, and all players lose.

But the major loser in case of an economy; is the government, for it is the custodian of the economy, for, and on behalf of every citizen.

As we move into the ‘State Capitalism’, the question is: who will regulate the State? The interests of powerful individuals will certainly conflict with common good, so much so that, this will lead to an even worse crisis.

When this happens, another economic model will have to be found. This has been the history of human development.

Ends

 

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