Lessons developing nation need to learn from the economic crisis

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    (Shafey Danish/Nvonews.com)

    A survey commissioned by the Bloomberg news agency found that at least one of every three investor believes that capitalism is in crisis, and that deep changes are needed to the system to make it survive. Even more pertinently, a whopping 7 or of every 10 people surveyed thought that the banks had too much power over the government. A majority of the participants agreed that income inequality is hurting western societies, and its economy, and that the government should intervene to right the balance.

    Ever since the economic crisis of 2007-2009, repeated calls have been made for a through overhaul of the capitalist system. With the economy still limping in the West, and the Eurozone in the midst of a debt crisis, these calls have only grown in number.

    In the US for example politics is divided between two starkly different visions of economy. There is the Republican vision which advocates unbridled capitalism for the few,  government help for big institutions when they fail, and tax breaks when the make profits, combined with a complete rollback of spending on the poor, and on social services like education and healthcare.

    Then there is the Democratic vision, which wants to put some checks on big institutions, especially banks, and extend benefits to the poor by taxing the rich.

    At the heart of this debate is tolerance (or not) of economic inequality. Now, people are saying that economic inequality is not just bad morally but also bad economically. “Capitalism is in crisis because there is a huge and growing disparity in income/wealth distribution in Western economies, and an equally divisive generational disparity,” said one poll participant Michael Derks, chief strategist for FXPro Financial Services.

    Others, like Lord Meghnad Desai, think it is not capitalism, but western capitalism that is in crisis. “There’s a crisis of western capitalism, which has gone geriatric. The dynamic capitalism, with its energy, innovation and sheer greed for growth has moved east,” he says.

    Income inequality was actually supposed to lessen with free market economics, the benefits was supposed to percolate down to the poor, while large gains were made at the top. It was supposed to help countries come of out of crisis, not be plunged into it. But the recession of 2007 and now the debt crisis in Eurozone has shaken the foundation of that orthodoxy. Capitalism, it seems, is neither good for the haves or for the have-nots. It brings crisis at the top, and penury at the bottom. There is no percolation happening. Understandably, the former reformers in eastern countries, who had long championed a capitalist model of economy as the cure of all evil, are now confused.

    A large part of the confusion, according to Changyong Rhee, chief economist at the Asian Development Bank, is because western governments have changed their tune so radically since Asia’s own financial crisis in 1997. At that time, the IMF, the vanguard of the capitalist system, the omniscient dictator to little countries begging for money, had pushed deregulation – another word for letting in western companies into their economies – tight monetary control, and austerity even in the teeth of recession, as the cure.

    Now, western countries are doing the very opposite. They are lowering credit rates and bailing out banks. “We feel bitter,” says Mr Rhee. “We wanted to do these interventionist policies, but we were prohibited. So what model should we follow now?” China, he says, took gradual market reform as its goal. “The question was: what was the right speed? Now they are asking whether the destination is right or not.”

    It is no wonder then that many have come to see free market as a façade for permission to rape defenseless economies, heaping insults all the while.  It is clear, that countries especially in the east, who had taken the western model as their lodestone, need to rethink their policy. Otherwise, even with years of reform, they might arrive at a destination where they did not want to be.