Lessons from the global recessions

Although it is too early to draw the conclusion that, the current global financial/recession crisis is over, (we are at the beginning of the end), a conclusion that can only be made if only we got the final assessment of the costs/impact of this to world economies.

Although it is too early to draw the conclusion that, the current global financial/recession crisis is over, (we are at the beginning of the end), a conclusion that can only be made if only we got the final assessment of the costs/impact of this to world economies.

This becomes even more intricate for since the collapse was a global phenomena, by the same token, no recovery can be said to have occurred if this is not global.

This is even more pertinent to developing countries which have faced the crisis by default. Such economies will have to contend with the ‘spill overs’ from western world’s economic recovery for them to release their own.

The issue of lessons being learnt by developing countries becomes academic, for these countries’ financial systems are in the first case not fully integrated with world financial systems.

This does not negate these from taking stock of what they can do to realize such integration, since the first and hard lesson they have leant (was an open secret) is that, their financial systems are to rudimental to affect rather than be affected by western financial systems.

If this lesson can only be learnt to the extent to which these countries can undertake serious financial reforms that would then ensure the development of their financial markets is enhanced, to a scale that, these can then participate (as opposed to being observers) in the international financial markets.

The only caveat is that, a financial system can not by any means be larger than the economy it is meant to serve. This therefore means undertaking ambitious reforms in our economies to ensure that they grow to such a pace as will demand the development of financial services.

This is not an impossible task if there is political will and willing to do so. Development of Rwanda in the last 15 years is a case of political will and willing to turn round an economy against all odds, and sends positive signals that, economic development demands visionary political managers. Period.

Models of Growth Re-Assessed.

A major lesson leant is that, export lead growth model of development will have to be re-assessed as countries that pursued this model have been hit most due to their expose to the external economies, themselves in turmoil.

Major exporters, be their of law materials, oil and oil products, manufactured and even services have had the demand for these diminished very fast, and with them, revenue to finance national budgets.

Balancing of export model of development with boosting of domestic consumption is emerging as the best option, not only during this crisis, but also in the foreseeable future.

Thus for instance China which saved an astounding 54% of her GDP where as USA was disavings during the same period. Chinese surplus (savings) as pointed in earlier articles, financed USA consumption, but this situation is now changing.

USA savings are growing fast of late, and China which had relied heavily on her exports to USA for major part of her growth, is now diversifying her exports to other developing countries.

The irony is: if USA spending which had stimulated global trade is diminishing as Americans save more, another major economy/economies must assume this role if global recovery is to be meaningful.

This adjustments can only be expected to arise from emerging economies of China, India, and Brazil, which through boosting of their local consumer demand, will need to import more, and this will may make up for a shortfall in American spending.

The other lessons learnt from the current global financial crisis is the lapse in the regulatory regimes of many countries most of which differed in content as in principle.

This therefore meant that, with globalization of finance at its peak, some regime were too relaxed to control actions of a number and sophistication of players in these financial markets.

The emerging regulatory regimes will have to be structured along similar lines. This will also change the roles of central banks so that in addition to ensuring price stability, the will have to ensure financial stability as well.

Financial stability in all segments of financial markets be their banks or non banking financial institutions, hedge funds or swaps, options or futures etc… This will require more capacity on the part of central banks, which will change from the traditional role of lenders of last resort to rulers of last resort, in all matters finance.

One reason behind the current financial crisis is that, many financial institutions under valued risks in the name of financial engineering and financial innovativeness.

CEOs of major banks were then paid huge bonuses and share options on account of generating abnormal revenues to their shareholders at the expense of future under valued risks.

Central banks will now have to monitor closely both individual institution’s risk exposure, as well as systematic risks in the entire financial system.

This is certainly no mean task for a central bank, especially in developing countries where these risks are compounded by political risks.

In a number of these developing countries, central banks are highly politicized that, management of such risks is going to be blurred by political influences.

This is a challenge and at the same time a lesson that economic managers in developing countries will have to address among others.

Ends

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