More lessons from the global recession

Taking stock of the effect of the global crisis reveals shocking figures with respect to bank bail outs, and governments stimulus packages that have been used by rich countries to jump start their economies.

Taking stock of the effect of the global crisis reveals shocking figures with respect to bank bail outs, and governments stimulus packages that have been used by rich countries to jump start their economies.

Available research indicate that, today, more than US $ 10 trillion has been used to this end.

Of this, the UK (which has been hitherto the world’s financial center, and which has been hit hardest by the current crisis) has had to foot a stimulus package that is approximately 94% of GDP, a staggering figure by any standards.

This has mean that, on average each UK citizen will ‘contribute’ up to US $ 30,000 to this cause. USA on the other hand had to pay up to 24 % of her GDP in bank bail outs and stimulus packages, which translates to approximately US $ 10,000 ‘contribution’ by each American citizen.

The iron of these staggering figures is that, future generation among these countries will pay a price, for mistakes committed by their forefathers’ policy blunders.

For instance one of unregulated financial segment the derivatives market rose to US $ 60 trillion within a period of seven years, and yet one that is seen as the main cause of the world’s financial crisis /recession.

One major lesson that seem not to have been learnt is the fact that, where as trillions of dollars of tax payers’ money was being pumped in these economies by way of stimulus packages and bank bail outs, there is no tangible financial reforms that negates the possibility of another financial crisis happening. 

Financial regulation being put in place in western economies, and to some extent (if any!) in developing countries especially in Africa, is critical now and for future development of financial markets.

However, regulating a financial market without substantive reforms does not suffice. Globalisation of financial markets, has meant that, these markets are not only borderless, but also dynamic to the extent that, the players in these markets will always be a head of government bureaucrats in every rule of the market, including those these players set to suit their own interest, but which in turn endanger the common good of every one, including those not party to these markets.

What is crucial therefore is that, these financial markets will have to be reformed to ensure that, those financial products that expose the entire system to the systematic risks are checked, and in the extreme, relegated from such markets if they are not in accord with the common good.

 Thus for instance,  derivatives markets will certainly be a target of serious reforms if we are to avoid another financial crisis. Short of this (business as usual) will certainly breed another crisis.

It is a question of when, and not whether. Derivatives markets, which involve financial instruments originating from one country, but discounted/rediscounted to numerous players across the entire global financial system, which may not have similar regulatory regime, nor similar systematic risks, tend to give rise to toxic assets, the more they change hands.

It is in these markets, that many investors have lost their life savings while brokers in these have become billionaires in the process.

The Ponzi scheme(akin to pyramid scheme) of Mr Madoff that ripped investors in USA and in many other western countries of up to US $ 50 billion is a case in point.

There will be many more of these Madoffs in the financial system, unless this very system is reformed, and regulated. The two are not mutually exclusive.

Governments will have to reform these financial markets, for expecting them to reform themselves is but, simplistic. It is in these unreformed (opaque) financial markets that ‘smart’ financial players make supernormal profits, and expecting them to change such environment is unrealistic.

Developing Countries: off side?

As for developing countries especially in Africa, the journey to their financial development (leave alone lessons learnt or not learnt from the crisis), is long, unclear, and thus uncertain. 

A part from colonial out fits with a seemingly financial market, no policy measures have been put in place to evolve a viable financial system. Much as these countries have invested heavily in social infrastructure soft and hard, they have to build the same for the financial system.

Expecting weak private sector to do is, but over assumptiuos. Financial reforms including putting in place structures and financial systems is urgent.

This could be done under PPP (Public, Private Partnerships) and let on, the state will have to get out and leave the private sector to manage these systems under prudent state regulation.

Rwanda can do it.

The recent World Bank “2010 Doing Business Report” which ranked Rwanda as the world’s top reformer, is no mean achievement for a country that has had a tragic history, but refused to die.

To emerge this tops even amidst the current crisis is certainly a case study of not only very prudent economic governance, but also political governance under the leadership of President Paul Kagame, a man that has been a beacon of hope against the extreme form of hopelessness any country could ever endure.

This ranking has distinguished him among his peers as the BEST CEO of Rwanda Inc., that this country can ever have. His philosophy of running this country as a company has become a reality sooner than any one could ever anticipate.

However, in the same World Bank Report, finance scores very dismally across board. Penetration of banking in Africa remains low at 54% of the population (in Rwanda it is less than 20%).

African financial systems are small both in absolute terms and relative terms, the report adds. “Many African financial systems are smaller than a mid-sized bank in continental Europe, with total assets often less than US $ 1 billion”.

If an African economy is smaller in size than a medium sized European bank, tells a story of how far we need to go. It is not the size of the country that matters. It is the size of its economy. Period.

“Tinny” Rwanda as they call our country, needs to grow her economy for her to be big. Where as we can not change the size of our country, we can change that, of our economy.

We need to start with our financial system if we are to do so, for it is the engine for growth. This country has done most against all the odds, this is not impossible.

While other developing economies procrastinate on their financial reforms during this crisis, Rwanda can lead the pack. This should be a strategic objective of Rwanda Inc.

Ends

 

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