Early in the week, the American house of representatives was reported having rejected the $ 700 billion bail out for the collapsing Wall Street. What is ironic here, as media reports indicated, is that majority of those who rejected the bailout were republican congressmen.
The bailout proposal had to be amended for the senate to have it approved. The early rejection of the proposal by the House of Representatives, is telling because most republicans are from the conservative right wing of American politics and by extension ‘economists’.
This is because politics is influenced by economics. This is what Marx called economic determinism. Thus, by initially rejecting the financial bailout, I believe they were in a way trying to reject the fact that hardnosed free enterprise economics was in retreat.
The absolute free market economics that is pursued by many on the right wing had failed in the long run. In proposing a financial bailout, the top echelons of American political and economic elite acknowledged one thing; that the state has got a direct role to play in the economy.
In simple terms, they are accepting that state intervention is crucial for business to survive and ultimately thrive. In a nutshell, the failure of financial institutions likes Washington Mutual and Lehman Brothers, symbols of the success of American free market economics, means that many people will loose their jobs and families will be deprived of livelihoods.
This failure has been ongoing since companies like Xerox went under a couple of years ago. In such circumstances, people yearn for change from the status quo. Hence, we are likely to see an increase in the support for Obama, whose profile and vision embodies the change people need.
In his much acclaimed book, ‘The Audacity of Hope’, he calls for greater government concern for the welfare of the people. For those who have always argued that the state has no business being in business, time has proved them wrong. What is likely to come forth is an increased role of government in many economies, in regulating business and more so in providing greater welfare for the citizenry.
The model of the Nordic countries, where government plays a big role in providing social welfare, comes into mind. Apparently, many economies have a lot to learn from the success that has been achieved in these countries like Norway, Denmark and Sweden. These are states with a social democratic political-economy. Their people rarely suffer from the vagaries of market failures.
This is one lesson that is going to be very important for developing countries like Rwanda. As most developing countries look for a model of development to pursue, they have to be mindful of the fact that not all systems are perfect. But at the same time, although the free market has been credited for creating big companies, they have reached a point where by they had to fail or look for governments to bail them out.
One other thing that has emerged from the failure of the American economy is the fallacy of huge CEO pay. Though, top notch CEO’s are paid obscene salaries, ostensibly out of the belief that it is important to recruit and reward top class talent, they have been left exposed by this failure, an in a way it is seen as one of the causes of the failure of corporate organizations in America.
This is a disease that has been slowly creeping up in African economies with companies hiring top level managers at obscene salaries, that do not translate into serious returns for the companies and the economy. Thus, developing countries have a lesson from this failure. They must understand the central role of the state in directing not only strategic areas of the economy, but also at times when necessary intervening in private enterprises for the greater good.