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Tuesday, 21 April 2009

Let’s reinforce progress (Guest Blog - MS)

In the article entitled ‘Global financial crisis and a call for the return to mixed economy’ Dr. Mbita Chitala calls for Zambia to go back to being a ‘developmental’ and ‘interventionist’ state, with nationalization, protection and isolation. To be fair, he did not use the word ‘isolation’, but his arguments against globalization, foreign direct investment (FDI) and international financial institutions amount to that. Let’s start by examining his main points.

Cause of the financial crisis

Like many others, Mbita Chitala blames the current recession on capitalist ‘greed and selfishness’. But these failings are not confined to business persons. They are also common among civil servants and politicians. It is better to avoid emotive words and to recognize that self-interest is common to all human beings, and, as Adam Smith understood when he spoke of the ‘invisible hand’, is normally a very positive influence. After all, the most effective way to improve our own economic position is to serve the needs of others.

How did the ‘credit crunch’ come about? The problem originated from America’s Reinvestment Act of 1977, which was used by successive governments to gain popularity by putting pressure on banks to give high risk loans to homebuyers who did not meet the banks’ normal lending criteria. Congress was told that the government sponsored enterprises (GSEs) Freddie Mac and Fanny May would purchase the ‘subprime’ loans, and so rid them of non-market risks. These GSEs then ‘securitised’ the loans and sold huge quantities of these toxic packages on to the financial markets. This boosted house prices and encouraged more and more buying and risky lending, until eventually the bubble burst and caused widespread panic. The banks and the financial regulators were not blameless, but in essence the crisis was government created.

The Economist warned about this housing bubble three years ago, but without effect. As for an article on 2nd February 2009, where the magazine “idolised Karl Marx and put him on their front cover page with the question, What would Marx think?”, Dr. Chitala is misinformed. There was no such article, picture or caption.

Results of the global crisis

It is still too early to judge how long the global crisis will last or what its results will be. The fiscal stimulus which the G20 countries, led by the US and EU, have embarked upon has won general support, but the dangers of inflation caused by creating funds from nowhere may have been seriously underestimated.

Mbita Chitala’s warning that “the systemic crisis of capitalism is leading to a rapacious struggle for the earth’s resources” which could lead to “self-destructive apocalyptic wars” is wildly overblown. Wealth creation now depends less and less on physical resources. Human resources are vastly more important. Look around the world and you see that wealth depends primarily on education, institutions and entrepreneurship. Some of the world’s richest countries – for instance, Japan, Switzerland, Hong Kong, Singapore – have no physical resources at all. The great advantage of America, the capitalist HQ of the world, is undoubtedly its people.

A mixed economy?

Mbita Chitala would like Zambia to return to its former ‘mixed economy’, with extensive nationalization and government controls. How much sense would that make? Enterprises owned and managed by governments are hardly ever efficient, and Zambia’s experience of them has been disastrous. Of the few that still remain – Nitrogen Chemicals, Times of Zambia, ZAMTEL, ZESCO – none is or was successful. Let our government put its own house in order and learn to operate efficiently, with civil servants becoming genuine servants of the people, rather than extend inefficient and often corrupt hands into running more businesses.

Look around the world: wealth wherever it exists depends on free and competitive markets. Protection, which Mbita Chitala would bring back, means protection against the healthy influences of competition, trade and technology. Turning our back on globalization would be as sensible as declaring that the world is flat!

The way forward

How can Zambia come through the recession and reinforce the progress of recent years?

  1. By encouraging our local entrepreneurs and removing any unnecessary restrictions inhibiting their operation.
  2. By opening up fully to the beneficial influence of modern communications and international commerce, investment and ideas.
  3. By promoting education and knowledge of all kinds, especially in the fields of technology and business.
  4. By living within our means, restraining inflation and keeping taxes moderate.
  5. By opening up the rural areas and training our people in efficient farming methods.
  6. By fighting corruption.

Murray Sanderson (Guest Blogger)
Kitwe, Zambia

Disclaimer :  The views expressed above reflects the author's personal opinions. They do not represent the views or policies of any organisation with which the author may be affiliated.

5 comments:

  1. This comment has been removed by the author.

    ReplyDelete
  2. Murray,

    How did the ‘credit crunch’ come about? The problem originated from America’s Reinvestment Act of 1977, which was used by successive governments to gain popularity by putting pressure on banks to give high risk loans to homebuyers who did not meet the banks’ normal lending criteria.
    I respectfully but completely disagree. The real origin of the credit crunch itself, is in Alan Greenspan's decision to keep interest rates artificially low for a prolonged period of time, starting in 1992. This lead to a massive expansion of credit, to the point where M3 is no longer even published.

    The reason he had a need to do that was that the disastrous laissez-faire, free trade, deregulation policies of the Reagan/Bush and Bush/Quayle administrations. Policies he himself supported, and saw no reason to challenge. This was the asset stripping, corporate raiding, junk bond, savings and loans era of Reaganomics, which resulted in massive joblosses and was accompanied by cuts in social spending.

    This depressed incomes (while giving all kinds of breaks to corporate capital), and incomes did not come back after the Crash of '87 and the subsequent recession. In fact, these policies were expanded during the 1990s, with corporate downsizing, 'rightsizing', outsourcing, and finally offshoring of complete companies to low wage countries. Labour arbitrage, disguised as 'increased efficiency'.

    The very same dynamic that caused the Roaring Twenties and the Crash of '29, except that this time around, no one believed in letting the markets destroy the economy while they were in the process of finding their equilibrium. Which is what lead to the Great Depression.

    It was this replacement of real incomes with credit, that both kept the Crash of '87 from being followed by another Great Depression, but set up the hot air economy of the 1990s and 2000s.

    The remedy is very obvious - bring back real wages, which means, bring back manufacturing. Re-unionise. End NAFTA, GATT, and the other corporate free trade policies.

    Localism, not isolationism. If everyone produces for local markets, and governments create demand through works projects, we will end up with a much healthier economy, and one much less vulnerable to external shocks.

    Enterprises owned and managed by governments are hardly ever efficient, and Zambia’s experience of them has been disastrous.
    Not if you look at infrastructure, both physical and social.

    Indeni may let people know it's still there by occasionally breaking down or grinding the country to a halt through maintenance, but the reason is, that it is there. There has been no second Indeni built, even though in theory, there is a market for it. In 17 years of neoliberal rule, there has been no single other fuel refinery built. The free market has not filled the gap.

    The present crop of politicians were all educated free of charge, something their parents would never have been able to afford on their own - and a good thing it is too. But since introduction of fees, making education conditional on the ability to pay, how many thousands of children now go without an education at all? Is this the efficiency of the free market at work?

    How many millions of dollars in salaries are not going to be earned in these children's lifetimes, because they did not receive education free of charge? How much taxes on those missed out on earnings are not going to be collected?

    Again, the free market did not step in, even though it has had 18 years to do so.

    So I'll take government inefficiency in service provision over the complete absense of these services, any day.

    Look around the world: wealth wherever it exists depends on free and competitive markets. Protection, which Mbita Chitala would bring back, means protection against the healthy influences of competition, trade and technology.
    Protection of national markets in no way excludes competition within those markets. There is no reason why protection of domestic producers would have to mean state or private monopolies.

    In fact, break up existing state monopolies, and allow competition. Whether that breakup is by region (for instance a utilities company in every district has the right to do business within 5 or more neighboring districts), or whether that is by business function or business division.

    Let Zambian companies compete against eachother within Zambia. That way, there is competition and innovation, while the money recirculates within the economy.

    What is more, no country has ever developed any industry, without protecting those infant industries. In fact even today, knowledge industries depend on copyright protection, and their degree of success depends on the degree to which they can protect those copyrights (Microsoft comes to mind) - so much for completely free trade. Obviousy MSFT serves a global audience, but there are many industries that serve local markets - farmers, for instance, who should be protected from international competition. Including dumping practices under the disguise of 'food aid'.

    Turning our back on globalization would be as sensible as declaring that the world is flat!
    I understand that freetraders are going through a culture shock right now.

    If 3 years ago, I would have said that major banks in the USA were going to be state owned, would anyone have believed it?

    The Second Great Depression is a wakeup call to everyone who believes in supply side economics. This system has failed - not a little, but massively.

    The banking system has collapsed, the housing markets have collapsed, consumer spending has collapsed in a series of deflated bubbles, and frankly, we will be lucky if there is no mass starvation from unaffordable foodprices, and/or the collapse of major currencies.

    Are we going to have to wait for pictures of mass starvation before supply siders are going to admit that perhaps free trade was not such a good idea?

    Already in the US, farmers have difficulty in buying goods like fertilizer and fuel. Right now, there is massive deflation as supply side economics driven overproduction (see the car market and the housing market) has made goods available way beyond what anyone can afford to buy.

    (This is supply side economics at work. Benefiting corporate capital leads to oversupply of goods and services, and an undermining of demand (wages). The proper sequence would be to raise incomes, to raise demand for goods and services, and let entrepreneurs follow that demand. Right now, we're left with massive oversupply of goods. Works projects, business incubators, an agrarian revolution - that is the way forward.)

    At some point, stocks will have been either destroyed and producers will have gone bust (creating an even greater drag on incomes). When that happens so many producers will go out of business, that goods themselves will become scarce, and we can see massive inflation. That will make fuel and fertilizer almost unaffordable, with disastrous consequences for the production of real world goods like food.

    Already right now, food banks are stretched to the max. (Youtube: Food Bank Problems)

    Then, deregulation has left the banks with $192 trillion or more of derivatives - more than the GDP of the entire global economy.

    In conclusion, this is not a 'credit crunch', this is not a temporary setback. Neoliberal economics has caused a massive economic collapse that will take years to unwind.

    Just think of Zambia - has the takeover of the mines by foreign companies, and world record copper prices, lead to an increase in wealth for ordinary citizens? Has it lead to higher levels of education, social services or healthcare? Has it lead to lower unemployment, or reduced the number of people living on $1,- per day?

    I would say not. The corporations have had a field day expropriating Zambia's resources, and now we're on our own, because there have been no preconditions for re-investment, using local suppliers, anything that would create a multiplier effect from Zambia's main economic resource. There has been nothing but the theft from the Zambian people - theft of their resources, and theft of their labour through casualisation and bad labour conditions because of unenforced labour laws - a defacto deregulation of the labour market.

    It is time for Social Democracy, which is not a return to UNIP's one party state - the political conditions are completely different today than they were even in 1991, let alone the 1980s. There are no external military threats left (South Africa, Rhodesia) that would justify secrecy and an emphasis on national security to defer democracy.

    The challenges today are economic.


    The way forward

    How can Zambia come through the recession and reinforce the progress of recent years?

    By encouraging our local entrepreneurs and removing any unnecessary restrictions inhibiting their operation.
    By opening up fully to the beneficial influence of modern communications and international commerce, investment and ideas.

    By promoting education and knowledge of all kinds, especially in the fields of technology and business.

    By living within our means, restraining inflation and keeping taxes moderate.

    By opening up the rural areas and training our people in efficient farming methods.

    By fighting corruption.

    That is so UNIP-ist. :) Universal healthcare and education? Done that already - until the freetraders decided that people who couldn't afford it would have to afford it 'somehow'.

    Fighting corruption - good stuff, but pretty self evident. Who likes corruption? There are ways to reduce corruption, by reducing the opportunity for corruption - fewer rules and red tape. Efficient government, not necessarily smaller government. Decentralisation. Add to that a reduction of the number of ministries and an increased role for local government. The more subsidiarity the better.

    Opening up the rural areas and teaching people *organic* farming methods - on a commercial scale - I completely agree. In fact, that is the way forward for food security, unemployment reduction, raising incomes. All good stuff.

    Keeping taxes moderate. I don't know if they are moderate now. They are not for wage earners. They should be higher for the mines, of course. A better result will come from getting bank lending rates into at least single digits like inflation. No legitimate business can borrow with double digit interest rates. At least for productive businesses (agriculture, manufacturing) there should be low or no-rate interest rates. (For instance, Islamic banking allows for no interest to be charged, only a share of the profits. You would borrow $1 million plus 10%, and would have to pay back $1.1 million total. You would never have to pay back more than that.)

    I will add forcing FDI to use local SMEs as suppliers to maximize the multiplier effect on the Zambian economy. Whether they already exist, or whether they would have to train them up themselves.

    However, the Zambian state must benefit from mining. Whether that is through higher and more efficiently collected taxes; hiring mine management companies to exploit new mines at a small fee, and using reserves of raw materials to bolster the currency and create money without borrowing or creating inflation.

    But Zambia needs to use the mining sector to capitalize other economic sectors, so the government does not depend on borrowing or 'donor aid'.


    On localism on a small scale:

    Locally Grown
    A Service Sector and IT oriented incubator in Jordan:

    Technology and Business Incubation - Amman, Jordan
    Local governent extension offices could serve the same role for farmers.

    ReplyDelete
  3. Let me comment on Mr. K's main points.

    1.Alan Greenspan’s decision to keep interest rates artificially low was indeed a major cause of the credit crunch. But it was not the origin: pushing the banks into ‘subprime’ lending started much earlier.

    2.Why was no privately owned refinery built to compete with Indeni? For two reasons:
    a) Zambia;s market is hardly large enough to justify one refinery, let alone two.
    b) Free competition with a government owned refinery would be a pipe-dream.

    3.On education Mr. K wonders why “the free market did not step in.” How about private schools and colleges? Why do parents who can afford it often prefer to pay for their children’s education, either at home or abroad? Believers in free markets do not say that people should be forced to pay for education, only that competition between free-of-charge government institutions and profit-seeking private institutions should be allowed, as it is in Zambia.

    4.“Protection of national markets in no way excludes competition within those markets.” Agreed. But local competition is not enough. Domestic industries rarely grow up until they have to compete against foreign industries, which must compete in order to export, and so have to be highly efficient and cost-conscious. Moreover, local consumers, are entitled to quality and variety at affordable prices.

    5.“No country has ever developed any industry without protecting those infant industries.” How about Hong Kong?
    Copyright ‘protection’ for a limited period has a different purpose. Without it few inventors would be adequately motivated.

    6.“Has the takeover of the mines led to lower unemployment?” Yes, ZCCM was about to collapse.

    ReplyDelete
  4. Murray,

    1.Alan Greenspan’s decision to keep interest rates artificially low was indeed a major cause of the credit crunch. But it was not the origin: pushing the banks into ‘subprime’ lending started much earlier.

    So did deregulation, which did away with the barrier between investment and savings.

    2.Why was no privately owned refinery built to compete with Indeni? For two reasons:
    a) Zambia;s market is hardly large enough to justify one refinery, let alone two.


    Well that is a perfect example of free market failure and why there is a need for government parastatals. The same as with education.

    Importing fuel makes Zambia only more vulnerable.

    b) Free competition with a government owned refinery would be a pipe-dream.

    In theory. However, if fuel prices are so high, that is a market opportunity that is still not being taken up.

    And it is not the only market failure, of course.


    3.On education Mr. K wonders why “the free market did not step in.” How about private schools and colleges?

    They are only available to parents who can afford them. Just educating the already rich is not acceptable.

    There are thousands of children wandering the streets who should be in school. Obviously, the 'free market' has failed them. It has also failed the thousands of children who do not pass these attrition exams.

    And the teachers are there to be hired. Again, free market failure to step in and take over the government's functions.

    The free market does not fail when people with money can afford to send their children to private institutions, it fails when hundreds of thousands of poor parents cannot afford to send their children to school at all.

    Then, there is the fact that free market initiatives are always going to be piecemeal, with someone over here creating an initiative, and people somewhere else going without. No one except the government can create universal education.


    4.“Protection of national markets in no way excludes competition within those markets.” Agreed. But local competition is not enough. Domestic industries rarely grow up until they have to compete against foreign industries, which must compete in order to export, and so have to be highly efficient and cost-conscious.

    Well let's have national competition first.

    You have noted that it is hard for a free market company to compete against a government parastatal. However, the same can be said for a Zambian startup, competing against a multinational corporation which gets massive government support from a developed world government and it's taxpayers. A multinational which could have a bigger market cap than Zambia's GDP.

    How is any Zambian company going to compete against Shoprite, or BT or Total?

    What is more, how many have succeeded so far? Again, free market failure.


    Moreover, local consumers, are entitled to quality and variety at affordable prices.

    They are even more entitled to the jobs that would pay for those products. When you import a product and pay for it, you are also exporting the jobs that went to create that product.

    What is the point of having low priced goods, if you don't have a job to pay for it? Remember that this free market economy has done nothing to reduce the number of people living on less than $1,- per day.

    It has not increased employment, and it has not raised wages, and in fact reduced total incomes through the inflation that came out of the privatisation of the mines.

    5.“No country has ever developed any industry without protecting those infant industries.” How about Hong Kong?
    Copyright ‘protection’ for a limited period has a different purpose. Without it few inventors would be adequately motivated.
    Right, but the point is that copyright protection is a restriction of free trade. It literally limits who can benefit from a certain product or invention, by prohibiting others from selling it or making a product that is too similar to it.

    Hong Kong is a tiny city state without natural resources and only human capital to work with. How about Taiwan, China, Japan and Korea? They have lots of parastatals, and it hasn't harmed their economies at all.

    Japan would never have created it's auto industry without restrictions on foreign automakers setting up shop in Japan itself, or government intervention. Most companies in Taiwan are parastatals.

    If we're going to use examples, let's at least use examples of countries with that have a land mass. :)

    When it comes down to it, Hong Kong and Singapore and not countries, but sovereign cities. They are defacto free ports, not countries with resources tens of thousands of miles of roads.

    And, even Hong Kong has protection for it's farmers, even though it has to import 80% of it's food from communist China, richest city in Asia or not.


    6.“Has the takeover of the mines led to lower unemployment?” Yes, ZCCM was about to collapse.

    But the mines were never about creating employment. They were about capitalizing other sectors of the economy so economic diversification could become a reality.

    Jobs are far more effectively created in agriculture than in mining.

    Zambia has a workforce of about 5 million, and yet there are only 58,000 jobs in the entire mining industry.

    I could create 10 times that many jobs by putting $100 million into agriculture.

    So the idea that mining is there to create jobs is really a nonstarter.

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  5. I’ll leave it to readers of the blog to judge between the points I made in replying to Mr. K’s comments on my article and his later responses.

    However, there is one further aspect which requires attention. It concerns Mr. K’s hostility to markets, which reveals a misunderstanding of their nature and functioning. He talks of “letting the markets destroy the economy”. Economies are commonly restrained, or even destroyed, by government regulation, as happens with communist regimes. Competitive markets are by nature positive and creative - except in macroeconomic situations, which can provoke panic! It is monopolies (whether created by government or business), and other kinds of regulation, which commonly frustrate economic development.

    With regard to Indeni, if a refinery is not built for lack of a market big enough to justify it, that does not indicate ‘market failure’, but market common sense. Indeni was required by considerations of security at the time of UDI. But that situation is long gone, and what was once a benefit is now a burden, as was recently pointed out by the World Bank.

    As regards education, the fact that Zambia has hundreds of thousands of poorly educated or uneducated children does not indicate ‘market failure’. When people are either unable or unwilling to pay for certain goods or services that is not the fault of the market, which can only respond to economic opportunities.

    Markets, like everything else, have limitations. Limitation is not the same as failure. Believers in markets do deny that governments have vital functions. For example, to provide public security is not a function of markets, but of governments. If security is lacking, we should not blame markets, any more than we blame governments for lack of food and clothing. However, governments need to be controlled, while markets, in general, need freedom to compete. There are of course also areas where market regulation is required.

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