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2009. gada oktobrī pēc Vaclava Havela ielūguma Sandra Kalniete piedalījās konferencē “DEMOCRACY AND FREEDOM IN A MULTIPOLAR WORLD”. Zemāk atskats uz vienu no diskusijām.
PLENARY PANEL 4: AFTER THE STORM? CAN WE DISCERN AND LEARN WHAT THE ECONOMIC CRISIS IS DISCLOSING ABOUT US?
Jan Švejnar, Professor of Business, Economics and Public Policy, University of Michigan, Chairman, CERGE-EI, USA/Czech Republic
Tomáš Sedláček, Chief Macroeconomic Strategist, ČSOB Bank, Czech Republic
Chao-shiuan Liu, Former Prime Minister, Taiwan
Sandra Kalniete, Member of the European Parliament, Former EU Commissioner, Latvia
Jorge Quiroga, Former President, Bolivia
André Glucksmann, Philosopher, France
Yegor Gaidar, Former Prime Minister, Russia
Vladimír Dlouhý, Economist, International Advisor of Goldman Sachs, Czech Republic
Tomáš Sedláček: Ladies and gentlemen, I have the privilege to welcome a very distinguished panel of guests tonight to debate a topic that is, perhaps, a little bit ahead of its time. I’m looking forward to seeing what kind of answers we will have to the question of whether the storm is now over. We might have very diverse opinions about whether the storm is yet to come or whether we had a storm, whether it was a storm, what a storm is, and so on. I have the honour to introduce Professor Švejnar, who will give the keynote speech to open the debate, and then we have other panellists from the crème de la crème of today’s economics. Many of them have either been in office from the beginning and through the maturity of the crisis and all of them have observed it from their individual standpoints. I have the honour to introduce the former Prime Minister of Taiwan, Professor Liu and Ms. Sandra Kalniete Member of the European Parliament and former EU Commissioner of Latvia. We have the former President of Bolivia, Jorge Quiroga, French philosopher André Glucksmann, former Prime Minister of Russia, Yegor Gaidar, and Vladimír Dlouhý, my colleague from the National Economic Council. Without any further delay, I ask Professor Švejnar to give his keynote address.
Jan Švejnar: Thank you very much. I was asked to be provocative and brief – so I’ll try to do that. I’ll start with the second part of the title of this session: What Is the Economic Crisis Disclosing about Us? In a few words: we were not prepared and we are not sure how to get out of it. That’s, I think, a fair statement in terms of where we are starting from. The first part of the question – is the storm really over? We don’t know. We are at the stage where the first wave of panic is over. It’s good that we are no longer where we were in February or March, when many people were really thinking that it was a free fall and we didn’t know how to pull out of it. We are obviously in the greatest global recession since the Great Depression of the 1930s. Our hope now is that we will not go any deeper; that we will not go through a major recession. Frankly, nobody really knows. We are not yet out of it, we are at some kind of bottom, but it’s not clear whether it is the very bottom. We’re all hoping that we’re coming out of it; the leading indicators now predict moderate optimism in the sense that we are hoping for some economic growth and further stabilization in the financial sectors. This is especially starting in the United States, where the financial sector caused the origins of the current crisis in its most brutal form.
There are some warning signs: we have some data indicating that the situation is improving; there are other data indicating that the situation is stable, but that the level of economic activity is low; some data are still indicating a worsening of the situation, such as the unemployment rate that’s rising in most of the leading economies. We really don’t know for sure whether the current economic crisis is really over. History in this area shows that very often there are situations where there is some growth and then there’s another decline. In that sense, it’s a problematic situation.
We still face significant deflationary pressures in many economies around the world, and so many of the policies are geared towards dealing with this very unusual problem as well. The stock markets – to the extent that they are forecasting anything – are very optimistic, perhaps, overly. So, there is a chance that this is a false start, or it could indeed be a major indication of a turnaround.
Going back to what history teaches us, the stock market indicators often go up and down a few times before they eventually resume growth and signal real recovery, so one has to be quite careful. From a broader standpoint, the most serious issue is the unemployment situation. Many of the advanced economies, after trying for a long time, managed to reduce it – Western Europe being a good example. Now the current recession is raising the rate of unemployment in many of these economies, the U.S. being a leading warning indicator where unemployment is heading towards 10%. From the economic standpoint; with 10% of the labour force unemployed, there is clearly a major underutilization of resources. We experience major psychological shocks. It’s a very painful process, and that’s despite the fact that in Europe we have a system that’s effective in mitigating the effect of recession on unemployment. It is a very serious situation.
What has the crisis revealed? I think that it is an overdue lesson in humility about our capability – we are fallible. It has shown us that in regional crises we can be quite effective in pulling the affected regions out of the crisis, be it the Asian Crisis or other crises in the world. But a global crisis, in which we are now, is much more complicated because there isn’t any significant part of the world economy that’s doing very well and is able to pull out the rest of us. It shows us that small countries such as the one that’s hosting this conference, the Czech Republic, have relatively limited options as to what they can do when there are these large shocks on an international scale.
We have also learnt that it’s not only individuals who are in some sense irrational and myopic in their behaviour but also institutions – it is public and private institutions which have succumbed and are susceptible to the same kind of myopia in terms of how they think and how they act on the global scene. The interesting thing is that the public in general is more educated than it used to be in the past. And yet, in some sense, people still choose to believe things that are too good to be true. We are way too optimistic in the way we approach things. Very often the media contribute to it as they try to play up things, to make them more interesting than they actually are.
Let me say a few words about the crisis and economic science – after all, the economists are the ones who should have predicted this. In a way, most of the elements of the crisis were known to economists for a long time, so it’s not that we, the economists, weren’t able to identify what happened. We knew, but we weren’t able to generate voices loud enough to warn about it. Now, there is some debate about this. There are those economists who are taking the blame and saying “we failed professionally”. There are the two-handed economists: on the one hand we say this, on the other hand, it’s that; there are different voices.
There is a voice from the University of Chicago which always has a very clear view on these matters. Not everybody, but a group of people who argue that economists do very well predicting the predictable – and in some sense, they’ve done that. Then there are those things that are totally unpredictable. You know you can’t predict events that are stochastic – and this is a stochastic event. So economists are just fine; the profession is just fine: it did what it could do; and this event should be classified as a tsunami that you can’t predict.
You can choose where you are in the continuum. I lean towards admitting that human behaviour is very complicated – we can predict and understand significant parts of it, but there is certainly plenty of room for the economics profession to improve its understanding and help humanity by providing better early warnings.
I have a few interesting historical vignettes: in 1720, as many of you know, there was the ‘South Sea Bubble’ – a bit similar to the ‘dotcom bubble’ that we experienced during the last decade. One of the big players on the scene was Sir Isaac Newton, the inventor of calculus – modern mathematics. He was in charge of the Royal Mint, and warned everybody about the bubble and that they should not participate in it. Nobody headed his warnings. He finally decided that he was wrong, he bought in, and the bubble burst. He then said: “I can calculate the motions of the heavenly bodies, but not the madness of people.” Very appropriate. In 1929, just before the Great Depression, Irving Fisher, the leading economist of those days, lost both a fortune and his reputation as an economist in this particular area by predicting that share prices would not decrease. John Maynard Keynes himself in 1927 said: “we will not have any more crashes in our time.” Then, he was providing the major theories as to how to get around one. And there are more, which I will not delve into. I think we should be very cautious when betting on these general and long-term forecasts. Even the finest experts in the field can be wrong.
This crisis really started as a financial market crisis. In that sense it has been a financially-driven crisis. Financial markets are prone to and susceptible to these fads and bubbles, we just have to be aware of it and recognize this fact. The real value of the underlying assets is very difficult, if not impossible to predict. Human nature is such that it inflates these bubbles once they have started. It´s just the way it is. There is peer pressure; there is a certain type of management culture; there is cognitive dissonance, and particular cultures in financial markets. I think that it’s really important to realize that yes, we can analyze things to some extent, and understand them, but it is a limited understanding. We always need to take that into account.
What should we do at this point? We should, first of all, act quickly. I think that delayed responses are much less effective than immediate responses. In that sense, whether you agree or not with the philosophy behind the U.S. approach to the crisis – the good thing about it (I’m not saying it’s succeeding) is that it is trying to act in a decisive and quick way. The common feature that everybody agrees on is that we have insufficient demand – we have insufficient demand from the people, insufficient demand from enterprise. If the government steps, it should do so fast and very decisively.
At the international level, we need much more coordination than we’ve had so far; we need to put in place re-evaluation, risk measurement systems. In other words, we need to prepare ourselves to really take advantage of the early warnings. There were early warnings, they were not heeded, and they were not sufficiently developed. It’s time to learn from this.
Overall we should be more humble in the sense that we should pay more attention to the lessons provided by other fields of inquiry than just those that have an immediate bearing on this: economics, in particular, and finance should look into behavioural psychology, and experimental studies of various kinds. We should not exaggerate the predictive powers of our models and we should share this openness with the public at large.
Tomáš Sedláček: Thank you very much for opening the debate. I know that in history, there are a couple of great figures that knew the future – one of them was Master Yoda, the other one was Neo, and then we had a couple of prophets, but never an economist. Mr. Chao-shiuan Liu…
Chao-shiuan Liu: Thank you, Mr. Chairman. In September 2008, the U.S. subprime mortgage storm triggered the worst slump since World War II. As you know, Taiwan depends mainly on exports as the driving force for economic growth, so the domestic economy was severely affected. To be more exact, 70% of our growth came from international trade. In the first quarter of this year, the drop of foreign trade was by 45% – so this figure will tell you how severe it was. To counter the effects of the global financial crisis, our government actively stimulated a variety of economic revitalization measures which enabled the economy to inch its way up and move from a period of recession into a gradual recovery ahead of most Western countries. According to our estimates, Taiwan hit the bottom of the recession in the first quarter of this year when our economy growth rate stood at -10.1%. This is a historic record. However, it will swing back to a positive growth rate of 5.5% in the last quarter of this year. In 2010, our economic growth rate is expected to climb to a positive 3.9%.
I believe that Taiwan’s ability to withstand another financial tsunami and recover swiftly can be attributed to the government’s timely and quick adoption of a variety of revitalization measures. When the financial crisis swept upon us, we immediately set up a National Policy Response Team which acted quickly to propose a range of stimulus measures designed to minimize the adverse impact on our economy.
First of all, we reckoned that we had to begin by stabilizing our financial system as a prerequisite to civilizing our economy. Hence, in October last year, we announced a government guarantee of all domestic bank deposits, making us the first country in Asia to institute such a measure. Other countries resorted to pumping a massive amount of money into their banks to preserve financial stability: more than $300 billion in the United States, $18.2 billion U.S. in Germany, and £78.1 billion in the UK. Taiwan achieved the same effect without having to spend a Taiwan dollar. In addition, we launched the so-called Three Pillars of Support Policy involving government supporting banks, banks supporting business, and business supporting their workers to generate financial stability for the entire enterprise sector and its workforce.
Secondly, we concluded that we had to expand domestic demand as quickly as possible to make up the gap caused by the export shortage. The policies we adopted included a few interesting things: first of all, we issued consumption vouchers which were worth about 83.7 billion NT$, the equivalent of €1.78 billion. Secondly, we allocated about 500 billion NT$, which is equivalent to €10.6 billion to a four-year programme to expand investment in public works. Thirdly, we cut various taxes, including income tax, commodity tax, estate tax and gift tax. At the same time, we were concerned about the impact of the financial crisis on disadvantaged people and families, so we also introduced a number of employment promotion measures with subsidies and other provisions aimed at providing immediate relief for unemployed people and others in hardship. More than 870,000 people benefit from these measures.
Taking the consumption vouchers I mentioned earlier, a lot of economists were uncertain about the effect. I consider this as a social part of the programme and in that respect it was extremely successful. To cut a long story short, what did we learn from this crisis? The financial crisis was a great opportunity to put the fabric of our national economy to the test with the crisis itself also acting as a turning point. During the crisis we realized for the first time how vulnerable our industry was – we depended too much on a very narrow range of products. The government had to change our policy drastically, and the crisis was the best time for our industrialists to accept such a change. Another thing the crisis taught us is that recovery from a global recession depends on all countries around the world being able to act in unison in implementing large-scale stimulus measures. Only when every economy does its best to manage its own crisis in a concerted manner can a global crisis be reduced, and the damage minimized to a manageable level.
Tomáš Sedláček: Thank you very much. Before I give the word to the others: do we live in a system that is sunshine-ready only? When trouble arises, do we need acute and immediate help from the politicians? Is this the system under which we live? Another question that I was thinking about: is growth a result of market capitalism or is it a sine qua non? What kind of a system is it if it can’t take a couple of decreases after seven years of very strong growth? Ms. Kalniete.
Sandra Kalniete: Just two days ago, I was taking part in the Friends of Europe Board meeting (this is a think-tank based in Brussels), and we were discussing the state of Europe today. The majority of all present were very much concerned about this and even asked: is Europe still a global player? If we look at the notes of the last G20 summit, we can see that the European Union as an entity was not present. As member states there were the European superpowers like Germany, France, Great Britain, Italy.
One of the impressions Europe gives nowadays is that at a time when Europeans need Europe more than ever, Europe is becoming a fragmented power. For instance, European Union authorities have no power to rescue transnational financial institutions across borders within Europe; they have to turn to national governments for rescue. The Monetary Union – the single European financial market – still has national financial supervision.
If we want to reflect on what exactly we have to do to overcome that fragmentation, de-nationalization tendency of common European policies and the national protectionism present in almost all European debates, then we have to look back to the very issue of the ‘union’ – to that magic formula that makes the European Union an ever closer union. How do we achieve this? First of all, we have to preserve and enforce the internal market. Being in the European Parliament, I see that this is not an easy task. In addition, the discussion on establishing a unified regulation and supervision of financial services is under way in Europe. However, there are also those who, with the recovery, are starting to lose the determination for reform. This I consider to be one of the most dangerous trends. Governments are not under pressure and banks are returning to their previous feeling that there is no urgency any more. There is urgency! And all those who are involved in economy, politics and industry know it.
What institutions and member states also have to do is to provide a roadmap – a clear roadmap. I would even expect to provide a fast-track to the Eurozone for new Member States. I know that this is the most diverging issue, but let’s ask: what do the Maastricht Criteria mean today when member states of the Monetary Union themselves are not able to fulfil them? I will tell you what the costs of the crisis for Latvia are. Latvia has cut 10% of its GDP since the end of year 2008, which means devaluation of national assets, national currency by different means. It means that 20 to 35% of the publicly employed have lost a part of their salaries; 10% of all people employed today are facing unemployment, 25% of them from the public sector; we are closing small schools, we are closing hospitals.
That’s why I’m asking: what does the principle of solidarity mean in the European Union? This crisis was not born in the Baltic States or in Eastern Europe – it was born across the Atlantic, and the echo travelled across to Europe. To provide more flexible criteria would mean a major input to the stabilisation of these small economies. It would stir our population out of its misery. Whenever I speak in public, I always appeal to people to try and understand how important it is. We have to look more to our common policies and prevent them from becoming national.
There is one common policy I would particularly like to mention: energy. Just recently the EU Council discussed the so-called security of gas supplies. It turned out that European Union countries love phrases; they are divided into two: those who want a common policy, and those who do not. If we do not have the common vision that neither Germany nor France are able to face and compete in the world on their own, then Europe will continue to be a fragmented power.
Tomáš Sedláček: Thank you very much. Perhaps we are also forgetting about the 10% GDP growth that you had in many previous years. But let’s move on from there.
Sandra Kalniete: I’m not saying we are blameless.
Tomáš Sedláček: Let me welcome a philosopher who will present a larger perspective, we look forward to it, André Glucksmann.
André Glucksmann: I was afraid that, as a philosopher, I would be out of place at this table. I thought I didn’t have the level of expertise of my friends here. Then, after giving it some thought, I reread the title of this panel: “Can we discern and learn what the economic crisis is disclosing about us?” And I decided it was a perfectly philosophical question.
Philosophy is defined as the knowledge of oneself; an example of this was given by Socrates, the founding father of philosophy, in the way he listened to myths and legends. On the legend of Typhon, the last Titan who wanted to destroy Olympus, he would say: “I look at it neither as a meteorological catalogue, nor as a work of literature, but as a mirror – a mirror of myself. And I ask: do I have the same rage inside me as Typhon had? Do I have the same desire to destroy?”
Faced with the present crisis – it is actually disclosing ‘us’. And that is a truly philosophical issue. Firstly, the crisis was a surprise – but this is logical because all crises are a surprise; had it not been so, it would not have occurred. This is very simple. But we have to ask ourselves: who do we blame for this? It is not simply our inability to foresee, I believe that this crisis is a reflection of a ‘mental crisis’, of a crisis inside all souls; and the proof of this is that the traditional spokespersons who have been commenting on crises for the last three hundred years, both in Europe and the U.S., are now silent. Think of the left-wing back in the 1930s – how much we wrote, how much we read, shouted and proclaimed in support of the left. This resulted in increasingly totalitarian, anti-capitalist revolutions. However, there were also right-wing theories which produced ‘black’ totalitarian revolutions: Germany was born out of this immense disapproval of capitalism which stood at the centre of the crisis. This has disappeared.
There are the believers, or men of religion, who say: Do you now see where greed has led you? But this does not mean rejecting capitalism. Capitalism, and political economy in general, have always implied living with people who are egoistic, vicious etc. It is precisely what free markets and democracy are about, because this is how such flaws are neutralised. This ‘religious criticism’, if you will, is eternal; it tried to ban capitalism before it was even born in the years before the Renaissance. The second type of criticism is the socio-ecological kind which says: we are in an era of commercialisation, of technology – everything is bad. We must put an end to it. What must we put an end to? Production? Trade? That is the new atheist religion which is extremely egoistic and limited to just the privileged few. And then there’s the reaction of economists themselves who said: these are the mistakes we have committed; we will never do it again. But the question is: why were these mistakes, which are now being put right, why were they not avoided? What were we thinking when we said: it’s over – all of the rules we introduced in the 1930s, such as the separation of clearing banks and investment banks, and others. Why were they not followed?
Now, we have to ‘enjoy’ the crisis to the full. It’s not a single crisis – we went through the financial to the economic and social crises. But we also had smaller crises before this one, and not all that small after all: for example the stock exchange crashes in 1987, in South-East Asia and in Russia in 1998 – they were not mere details. As for greed and employers, we had Enron, the banks in France made all sorts of silly mistakes – this sort of thing has been going on for a long time. How long? As long as globalization has. If we take the period between 1974 and 1980 as the starting point, we find that the crisis is a kind of ‘revelation” – not necessarily in the sense of discovering a new illness that has to be cured immediately because the crisis is not a case of influenza – the crisis is the capitalist movement itself. There have always been crises and there will be others.
What connects the crisis with globalization? I will tell you a short story. Those of you who know Molière and “Don Juan” may recall a dialogue between Don Juan, who has to go to the court, and his tailor, Mr. Dimanche, who says: “I will make you a suit, but you have to pay for the one that I made for you five years ago, four years ago, and three years ago, …,” To that Don Juan says: “If you do not make me my suit, I will not be able to go to the court, I will have no money to pay for all of your suits, not even the one you are about to make; it is in your own interest to make me one on credit.” Now, let us say that China is the tailor, and America – the whole world – living on loans, is Don Juan. The relationship between the industrialists and aristocrats has endured in Europe for over two centuries. This crisis is not over, and it will not alter the relationship between the creditor and the debtor – America lives off credit, but to the benefit of the Chinese! They are well aware of this: they buy America´s debt as the tailor in fact did make the new suit for the aristocrat.
And it is not necessarily negative – because the great event at the end of the 20th century was the entry of one billion people into the world market – Brazilians, Indians, Chinese and others, who used to have no hope for themselves or their children, and who lived in misery and endless revolutions. Fifty million Chinese could tell you something about it. The fact that this enormous number of people entered the world market – living in terrible conditions, but better than they had lived in before – is the basis for globalization. It is for this reason that the process will not stop, why there will be more loans, why we will continue to run the risk of those loans being misused.
If the quality of globalization to a humanist appears terrible beyond any doubt – yes, it is terrible that fifty million people were made jobless because of the crisis, but on the other hand, one billion people got out of absolute poverty, and that’s excellent. There is a negative side to this: why are we now being told that it was these or those technical details which could have been put right? Why were they not put right before?
We have Nobel Prize winners in economics – and one of them, with whom I do not always agree, said: “We were living in Panglossism.” By this he means Voltaire’s notion of optimism – that is the idea that the world is constantly improving. It is the theory of the end of history, the theory that risk in the financial and economic sector can be overcome, can be shared, and can be mitigated, because it will be ‘collectivised’. This idea forms the basis for the assumption that there will be no more crises – and it is this very idea that brought about the Great Depression in the 1930s. Similarly, when we say that Russia will become democratic, and will modernise, we are deceiving ourselves. When George Bush insists that Putin is a ‘good guy’ – he’s wrong. If we accept that the banks believe that everything is improving, that one can draw loans with a minimum of capital – again, it is the same over-optimism of Voltaire’s Candide. I believe the fundamental problem is this; at least since the fall of the Berlin Wall, but maybe even before then, we were living under the illusion that there is no evil, there are no risks, there are no challenges. This gave rise to Fukuyama’s “End of History”, but also to the post-modernistic ideas that there are no more big debates, big conflicts or big risks. It can also mean that nobody makes any fatal mistakes, that nobody steals from their neighbour anymore, that nobody misbehaves towards others – and then suddenly, it’s a huge surprise when we find that one gang wants to steal from another, etc.
I believe that a personal reform must be undertaken by each of us. Unless we do that, we will all keep on saying: “Yes, we can.” It’s not about “yes, we can”, it’s about “no, we should not!” We should not insist there are no risks, we should not insist that Georgia is just a small country that will only be better off if it goes back under the roof of a ‘new’ Soviet Union, and so on. We want to sleep well, but when we sleep well, not only can we have bad dreams, but we can also go mad. And our ‘traders’, who did not manage to withstand the excitement of “yes, we can, yes, we can!”, behaved as though they were on ‘drugs’. I only hope that our politicians will not make the same mistake, even if they do receive the Nobel Peace Prize, and only God knows why some of them did.
Tomáš Sedláček: Thank you very much. Can we take crises as a slap in the face for our belief in the religion of constant growth? The wealth of Don Juan was obviously artificial; it would be interesting to compute how much of our own wealth is artificial and debt induced. Let me give the word to another great personality that we have here with us today to get yet another picture from a premier politician. Mr. Gaidar.
Yegor Gaidar: Dear friends. I will be speaking about the economic consequences of the crisis, but, let me start with the subject of Georgia. I was the Prime Minister of Russia during the dissolution of the Soviet Union, which was more or less peaceful. It was an enormous achievement, considering the example of Yugoslavia. There were a few conflicts. Almost from the moment when the Soviet Union was peacefully dissolved, both South Ossetia and Abkhazia were practically independent, not controlled. My advice to the Georgian authorities was not to try to resolve the problem by force. I spoke about this, for instance, with Eduard Shevarnadze. I was told that he did not control the military. So, Georgia started two wars in Abkhazia and Southern Ossetia and lost both of them. When there was a decision to unilaterally accept the independence of Kosovo, I told my friends both in America and Europe that there would inevitably be a mess in Transcaucasia – not because it was my choice, but because I know how things are there. I can guarantee you a mess in Transcaucasia. When we do something unilaterally we think that we can explain it as a unique case which has no parallels. In these situations you are just not analyzing the situation correctly. It is not a unique case, and it, of course, had very negative consequences for the developments in Transcaucasia, Russia and the Russian-Western relationship.
For Russia, the crisis was mostly unexpected. Russia by 2008 had experienced ten years of quite dynamic economic growth of approximately 7%, meaning a growth in real revenues for the population of approximately 10%. The Russian élite was not prepared to accept the idea that our growth is strongly dependent on what happens in the global economy. It is dependent on commodity prices, and commodity prices strongly depend on global demand; 80% of Russian exports are oil, oil products, gas and metals – products with extremely volatile prices. Russia´s balance of payments, its budget, are strongly dependent on factors which nobody can predict, because nobody can predict the price of oil regardless of how many billions of dollars are invested to resolve this problem.
Secondly, there is the capital account. We know very well that generally in a transition in emerging markets, and especially in emerging markets which are dependent on commodity prices, you can have a strong shift of capital inflow or outflow. In 2008, we had a capital inflow of $72 billion U.S.; and the leadership of the Central Bank was trying to do something to push it down. I discussed the subject with my good friend in the leadership of the Central Bank in late spring of 2008. His perception was that we would reduce the inflow of capital from $82 billion U.S. to something like $25-30 billion U.S. In reality we got an outflow of capital of around $132 billion. The reaction of the authorities was a little bit late because there were discussions that “we will be a safe haven, the crisis will not touch us, it’s not about us.” Splendid! We would not do anything. We would not correct budgetary policy.
In August, September and October 2008, it was evident that all this was nonsense and that the crisis would radically change the environment for economic development in our country; that instead of a significant budgetary surplus we would have a budgetary deficit; instead of dynamic economic growth we would have a reduction in GDP. The reaction of our authorities was a little bit slow. I think it was delayed by approximately six to nine months, but, generally it was good. It was asymmetric to what was done by the countries with reserve currencies – and that made sense.
The countries which do have a reserve currency, like the United States or the European Union, have opportunities and obligations in the situation of this global economic crisis, which is probably the worst in the last eighty years. They can support the global demand – it’s their duty. They have to pay for their advantages. Countries without reserve currencies, like Russia, have another duty: to maintain financial stability, to keep hard currency reserves, not to allow radical destabilization of the exchange rate, to prevent a panic and a banking crisis. Those were the priorities of the Russian authorities from September last year.
That policy in some aspects succeeded: we increased rather than decreased interest rates, we radically cut down the exchange rate of the Rouble to both the Dollar and the Euro. We did not increase budgetary expenditure; we decreased at least some budgetary expenditure for investment projects. As a result, from January this year, we stopped losing hard currency reserves, which was very well received by the market. It fluctuated between 390 – 410 points. Of course, we have to pay for this, and the bill for the crisis is not pleasant: we have a serious deterioration of the situation on the labour market. Until 2008, there were no serious problems with unemployment in Russia – we were unable to spend the money in the budgets which we allocated for subsidies. Now unemployment is rapidly growing and starting to be a very serious social and political problem. Of course, we experienced a radical change in the dynamics of our GDP.
Now the most serious discussion in Russia, as in many other countries in the world, is on whether the crisis will be long or short. This is the billion dollar question! If you can persuade yourselves that the crisis is short, that the lowest point is behind us, then why not spend the money from the hard currency reserves to stimulate the economy? The problem is that nobody in the world knows the answer to this question. Maybe it will be short. Maybe it will not. There might be a second wave of the crisis. Are all the problems in the European banking system resolved? Do we understand how deep they are? What will happen with the fixed income instruments of the big corporations during the first quarter of next year? We may be confronted with a bubble in China. Who knows the answers to these questions? That means that we need to maintain our position of promoting conservative budgetary and monetary policies, that’s obvious.
One thing that was clearly demonstrated by the crisis is that we need to restructure the world’s financial infrastructure. In 2007 it seemed as if nobody needed the International Monetary Fund (IMF) – they were cutting personnel by the hundreds and thinking about how to feed those who were let go. It became evident during the crisis – and was declared by the G8 and G20 – that both the IMF and World Bank are radically decapitalized and do not have the ability to deal with the crisis. It would make sense to increase the capital of the IMF at least threefold. We need this type of organization especially in times of crisis. That also means that we need to reform this organization. The need to reform the IMF and the World Bank was discussed many times, but little was done. Everybody understands that IMF and World Bank were created by Americans and Europeans and are run by Americans and Europeans, no matter what is said officially. Both organisations were attuned to the realities of the middle and late forties, and the world economy of that time. It is absolutely not attuned to the realities of the 21st century when we face the radical increase of the roles of China and India in the world economy. We have a situation in which Belgium, whatever respect I may have for this splendid country, has a bigger representation in the IMF decision-making policies than India. This is strange and it’s difficult to explain to anybody. We need a stronger financial infrastructure, which will be perceived by the world as being their own organization, not an instrument of control of the Europeans and Americans. This is, from my point of view, an important lesson from this crisis.
Tomáš Sedláček: Thank you very much. We have a nice question. Now we know that in times of troubles there is always a bale-out and government guarantees, politicians have to run for help. What is the future of competition then? May I ask our next speaker, Vladimír Dlouhý, please.
Vladimír Dlouhý: Thank you very much, good evening. First of all, I would like to thank the organizers for inviting me onto this prestigious panel. Let me make two comments at the beginning. First, despite being an economist, I will try to look at the issue which is the topic of today’s panel from a slightly more general perspective. Secondly, I have an affiliation with Goldman Sachs and because Goldman Sachs is in the eye of the storm I just need to say that I’m speaking in a private capacity.
In the aftermath of the crisis, we heard very depressing, but quick conclusions that we must start to search for a new paradigm of how our societies should be set up, that capitalism has failed and greed has been unleashed, etc. In a nutshell, what happened?
The years 2003 to 2007 were definitely not a standard period in post-war economic development. There were too many peculiarities in the financial sector which was too leveraged with limited liability with all those deposit insurances implicitly guaranteed by taxpayers’ money and subject to inefficient regulation. The financial sector and people in the financial sector accepted more risk than social responsibility. All this combined with improper macroeconomic management of the large economies, either deficits as in the case of the U.S. or surpluses as in the case of China and other countries in Asia, obviously undermined the problem. After the bubbles burst, extremely difficult adjustments with rather strong social consequences followed all over the world. Then, after the collapse of Lehman Brothers in 2008, an immediate solution led to massive state interventions. Paradoxically, it led to banks getting even bigger, and to even bigger failures in many cases. The moral hazard seems to be even bigger than before the crisis. There was a substantial increase of deficits and debts as Ms. Kaliniete from the European Parliament reminded us. Today’s Eurozone countries are creating deficits and are anticipating debts that would have been unimaginable two years ago. Developed economies are faced with a retreat from stardom and emerging markets are on their way up.
So is the storm now over? Not yet, as we have heard from Jan and many other people. Only God knows whether this is going to be a w-shaped or u-shaped or prolonged U or a long L-shaped continuation. We are all, especially in Europe and in the United States, searching for exit strategies for both fiscal and monetary easing. At the same time, we do not yet see any clear propositions for long-term and systemic solutions yet. I just came from the annual IMF meeting, or the Bretton Woods Institution Annual Meeting in Istanbul. I came to the conclusion that the new industry that has been invented and developed quickly is an industry of talking about regulation and improvements in the banking sector. We talk and talk and talk. We organize conferences in the same way. Big shots in economic science travel to the same conferences and speak, and all the small shots in economic science like me come there to listen. We are not yet back to normality after the rather difficult period of 2003-2007. We are facing more downside risks as Yegor Gaidar mentioned.
We need a solution for the global imbalances. I’m convinced that the problem is more on the improper macroeconomic management, especially when it comes to the Fed’s monetary policy. I’m also convinced that in the long run, it is by solving the macroeconomic imbalances in today’s world that we will provide the final framework for getting out of this crisis. Here, I would like to disagree a little bit with Jan Švejnar. Maybe it was a question of formulation, because I heard Jan saying that we should help the emerging markets to get out of the crisis. I am afraid it is going to be the other way round. Emerging markets, BRICs (Brazil, Russia, India, China) – they will take us out of this crisis. At the same time, this is not a great depression and will not be a great depression – at least, this is a good conclusion.
Let me talk more generally: let’s have a look at some other facts over a longer period of time. Since the end of the 1970s and beginning of the ‘80s – the time of the so-called Reagan and Thatcher revolution, the period when globalization started: if we look at the long-term data, we must admit that there was a remarkable improvement in the standard of living for millions and millions of people in the emerging markets. There was a huge transfer at first mainly of simple production, but later on also of know-how and other things, especially to BRICs. This has been used very efficiently. Capitalism had provided not only in the past five, seven years, but over two or three decades the way out of poverty on an unprecedented scale. If you look at the Gini Coefficient, which is one of the standard measurements of inequality, there was a substantial improvement in the emerging markets and some worsening in the developed economies. Yes – especially in the last year – there was a tiny élite who were subject to entirely improper payments. Yes, this was a moral failure. Their returns hugely exceeded their contribution to the general value they added to our society. But something else happened in the societies of the developed economies especially in Europe, but, unfortunately, more and more in the United States as well. It is a different problem then the general globalization problems or the problem of payments for the élites.
Life in our part of the world is better than it has ever been, but what we observed, especially, in some parts of our societies, is an increased aggressiveness, even hatred towards our life and towards our system. Especially the younger generation, obviously not all of it, is mostly spoiled, too complacent, lazy, and simply, not working enough. Especially compared with the emerging markets. The intellectual élites in Europe, with a few remarkable exceptions, were almost always in opposition towards the Reagan-Thatcher revolution. Now they see the writing on the wall, and they believe that their time has come. We are all living in a world with what I am calling a welfare state mentality, and this is getting worse and worse. We all can see the anecdotal evidence, be it in Western Europe or be it in this country. We see it in the United States as well, that people are just expecting the government to take care of them. This was happening despite the crisis. I do not want to underestimate the fact that there is a social impact on some parts of the society which is very heavy and difficult to overcome and which is a consequence of our failures and the failures in the financial sector. Nevertheless, it is just a crisis, nothing more!
This crisis, I believe, has revealed the problems in the societies of developed economies. What have we learnt? In the narrow sense – in the economic sense, in finance, for me, at least, one of the most important lessons was that financial innovation will always be one step ahead of regulation – like it or not. Second: monetary policy failures equal self-inflicted wounds. Third: we were able to draw positive lessons from the Great Depression: there is no doubt about that. The performance of decision-makers and policymakers was nowhere near as bad as you might sometimes feel when you read the Financial Times, the Economist, Wall Street Journal or even the Czech press. Obviously, we need to draw a very strong lesson for the financial and banking sector to avoid a repetition of such a moral hazard again. Some of my colleagues have mentioned that the financial people, bankers, say that they will never allow it again. Be sure it will happen again. The only issue is to try to limit it and to regulate it as well as possible.
In a more general sense: do we really need radical change? Should we look for a new economic and political paradigm? My humble answer is: NO. Capitalism has proved once again all its virtues and vices, but it is and always will be the least evil way we can imagine to organize our society. I join Jan in his call for humbleness, especially in terms of the theory. Many people believe that economics are something like physics: that at sea-level water always boils at one hundred degrees centigrade. No. Economics is a social science. Probably the hardest of the social sciences, but it never will provide such an answer. It will be much more open and prone to risk, and we all, theoreticians, academicians in the financial sector, politicians, journalists – we should be more humble towards what we can expect from economic theory and from the conclusion which it provides for economic policies.
The second, more general conclusion: emerging markets, especially BRICs, made their success by making use of the very essence of capitalism itself, and because of that they will take over the future. My present belief is that within the next two decades, China is going to hit a substantial barrier, which will call into question its entire political setup. That moment has not arrived yet and I don’t think it will arrive in another ten, fifteen years. There is a danger that if we exaggerate, if we overstate the reaction, in regulation for instance, we will undermine the most precious attribute of capitalism, which is efficient allocation of resources. Here in Prague, twenty years after the collapse of Communism, we still very well remember the forty years when the role of capitalism had been diminished substantially.
I believe that growth is the result of the efficient allocation of resources plus the cultivating of long-term growth is achieved by factors like education, innovation, technology and all those kinds of things. I do not want to sound like a staunch defender of capitalism and I don’t want to sound like somebody who defends the huge mistakes and moral failures of the recent past. I just would like to remind everybody who lives through the anecdotal evidence of a cheap trip to the sea, a cheap mobile phone, a cheap computer. All this is now a part of the minimim standard of living, and people require these to be paid for them in the minimum wage. This is something which is unbelievably different compared to twenty years ago.
If we allow European societies to continue to slide and if U.S. society starts to slide as well into this welfare mentality threat, I am afraid that we are doomed to failure. This does not have to happen because this is not the Great Depression and this is not the ultimate failure of capitalism. We don’t need to search for another paradigm. Thank you.
Tomáš Sedláček: Thank you very much for such a clear answer to the question. I always like to say that we have to look at it from the perspective of cycles. When we criticize the downturn, we also have to consider the upturn. Whatever we blame for the crisis, be it human egoism or be it misregulation by the Fed, we have to blame the very same institution for the growth that we had seen before. The Czech Republic has grown by 48% in real terms in the last seven years. If we now fall 4-5% it’s still a good deal. Let’s have our last contribution from President Quiroga.
Jorge Quiroga: I think this crisis is a great paradox in that it followed a 2003-2008 bonanza economic period. The paradox lies in the fact that that bonanza was unleashed by Chinese capitalism and it came to an end, or at least a standstill as a result of what could be called U.S. socialism or at least massive U.S. state intervention. I think that is something worth pondering. I’ll make points on the following: Bonanza and the crisis – I think you can analyze a crisis and think that that is normal. I would submit that part of the bonanza, at least for the developing world that we had before the crisis, was beyond the norm. Second: the regional effects. Third: what I would learn and what suggestions I would make.
Firstly, the 2003-2008 period, at least for Latin America, for many countries in Africa and for many of the world’s developing countries, was the best five-year period ever in terms of economic development. It was triggered by this combination of hundreds of million of Chinese and others coming into the globalized market. We benefited from their demand for copper, cement, aluminium, soya beans, chicken, beef, etc. Secondly, the Asian crisis of the ‘90s left some scars that made a lot of those countries go for devalued exchange rates, accumulation of reserves and export-driven models. The third thing that happened was the lack of financial regulation in the U.S. that was close to a swindle, if you ask me. That’s been happening over the last ten years. I will not go into all the details, but investment banks and commercial banks used to have a wall. That was broken. Every commercial bank could be an investment bank. Then they invested in financial assets. They could leverage not 1:12, like a bank lending money to people, but 1:30, 1:35. Housing agencies in the U.S. could leverage 1:100. I used to be a finance minister, and I remember the IMF officials would torture us if we didn’t have our banks in Latin America or in Russia at 8% capital ratio. I wonder where those people were when it came to housing agencies and the subprime markets they created, or the credit derivatives, which are basically bets on the market.
Swaps that were also bets, were designed by a Chinese mathematician – David X. Li. He designed this formula, it took off, and everybody bought it. I said once that this was a ‘casino’, and I must apologize to casinos. Any time you manage people’s money you’ve got to have reserves. A bank has to have reserves for withdrawals. Insurance companies have to have reserves for somebody getting sick or somebody dying. Casinos have to have reserves in case you get lucky and win at blackjack. With credit default swaps you could issue $60 trillion worth of financial assets without any capital and no reserves behind it. I think that is the combination of liquidity and financial “innovation” that created this world. Niall Ferguson called this ‘Chimerica’ (China and America). It sounded too good to be true. One country, the U.S., consumes everything – flat screen TVs, microwaves, refrigerators. The other one manufactures everything: China. One runs up huge debts, the other one saves. One has lower inflation; the other one has an overvalued or devalued exchange rate. One has six hundred banks created for housing (the U.S. over the past five years), the other one has hundreds of factories. The Chinese were the tailors, the makers of the goods and services that were put into U.S. houses with subprime markets. That created a bonanza.
If you went to Latin America, it was the best of all worlds: very high exports, high mobility. Our people came to Spain to work in the housing boom or to the U.S. There were high credit flows and high tourism. Between 2003 and 2008 Latin America quadrupled its exports, tripled mobility, doubled credit flow and tourism revenues. This was based on a foundation that was not sustainable in the long-term – this Chimerica foundation. If on top of an unsustainable foundation you put not a twelve-storey building, like the banking regulations should have, but a thirty-storey building or one hundred-storey building, then you have the crisis that we had.
Speaking of Eastern Europe, there are some countries that to me resemble the Argentina crisis. Massive amounts of debt on a currency that is not yours, trying to keep up with the peg that may not be sustainable. We lived through that in Argentina. It is very painful to get out unless you offer more rapid integration into the EU. Argentina didn’t have that, you have it here. I am afraid if you don’t use it, it may be more painful.
What have we learnt from this? For the developed countries: – they don’t invite me to G7 finance ministers’ meetings, but if they did – clearly this is not just a ‘flat tyre’; this is almost like an engine breakdown, and a new model needs to be developed. Part of that new model is that the dollar will weaken. I have just been in the U.S., and everybody there complains about the weak dollar. But if you want to balance U.S. and China, when the U.S. economy is 70% based on consumption and almost half of China’s economy on exports – that is not sustainable. Part of rebalancing the world would involve some type of currency that would be determined by Chinese central bankers. Real financial regulation. 8% ratios with all assets. In my judgement, credit rating agencies were complicit with a lot of what happened. If they get paid by the emitter or the issuers of financial instruments, they tend to go with the flow. If somebody paid us to tell them how good-looking they are, if they paid us enough, we’d say “yes, Brad Pitt, Angelina Jolie – they look good.” That’s what happened with credit rating agencies. I don’t know where the solution is. Do you make them public, do you pay them by different means?
I think there are changes that need to happen to prevent the recurrence of financial inventions coming on-line. From a developing country standpoint we need more integration, not less, including in the Eurozone, including free trade agreements. I think we need to be protected from protectionism, be it commercial, labour, financial, exchange rate, and all kinds that are going around. We need integration to take care of the part of the population that is vulnerable. We have many cash transfer programmes to poorer families in developing countries. Those programmes need to be kept up and worked on.
Thirdly, long-term oil dependency creates booms and busts and makes things very unsustainable. I think the point that was being made by Sandra Kalniete about energy is critical. I can also tell you that the crisis hurt, but I can tell you that before the crisis, Central American countries that all import food and energy were in dire straits. We all export food or energy or both in South America. If you don’t, and the barrel price was a hundred and forty and wheat and grain were sky-high, it created all types of other difficult problems. A green world with renewable energy is needed. Since we in Bolivia have half of the lithium in the world, more lithium batteries for cars would be nice.
Finally, drugs. We, in Latin America have learned: the crises need cushions, and the cushions come from informality, mobility, migration – which is not available now – or criminality. Drug production has often been a conduit by which you absorb young populations in the midst of a crisis without job creation. That needs to be looked at differently. It’s not the subject here, but I think drugs are basically an exchange. Drugs and thugs wear cash and guns – that’s always been the swap. When it happens in Colombia and Bolivia, people don’t care very much. It is happening now on the U.S.-Mexico border. The U.S.’ gun policies are incomprehensible to me. I think it has to do with the fact that people were armed against the British long way back, but I don’t think the British are coming back to take over the U.S..
From a developing country’s standpoint, as a response to this crisis, it is critical that we strengthen and deepen integration, trade agreements, that banks that help us (the World Bank) take care of vulnerable populations, getting away from oil dependency with renewable energy, and fighting drugs. Obama gave an iPod music player to the queen of England. If I was invited to talk to Mr. Obama, Mr. Sarkozy, Ms. Merkel, Lula and all the rest, I would give them an I.P.O.D: Integration, Population, Oil dependency, fighting Drugs. But the I.P.O.D. wouldn’t be 3G or 4G, it would have to be 20G, that’s better than G7. I think that if we worked on that and found a recipe, we would make progress.
Tomáš Sedláček: It’s a pity that we are running out of time, because finally we have a little controversy: we have the little detailed change as Vladimír Dlouhý was saying: this is like a flat tyre problem, if I got it right – you don’t need to change the engine. Jorge Quiroga was advocating that we need a systemic change of our system. Let me ask something because I can – yes, I can. How many of you think that the crisis is a reason to do a systemic change and how many of you think that this is a just flat tyre that we need to change, but we don’t really need a different paradigm or a different system. Is that a legitimate question?
Jorge Quiroga: It’s a major engine damage, but I didn’t say let’s get a different car. I did talk about the engine breaking down, but the car can still keep on going. I don’t want to get into the Chavez car and fall behind.
Vladimír Dlouhý: Now, this is a Latin American politician. It was a very dangerous question.
Jan Švejnar: I think Mr. Quiroga is producing engines and that’s why he’s arguing that.
Tomáš Sedláček: Ok, the car is still running.
Jorge Quiroga: I think that we just need a faster engine.
Tomáš Sedláček: Let’s just see how many of you think that this is a fine-tuning, change of oil, flat tyre, change of gasoline problem, and how many of you think we need a new engine in terms of paradigmatic change, which needs actually to go down into theoretical economics and reshape the very basis of it? So how many of you think that it’s a flat tyre problem? (the audience is raising hands) How many of you think that this is a systemic, more metaphysical problem? (the audience is raising hands) Good, so, at least, we got some controversy. Do you have some final remarks?
André Glucksmann: When you say ‘change the car’, or ‘or replace a tyre’ – the error in this question is that you are forgetting about the driver: it is the driver that must be changed.
Tomáš Sedláček: The system – it might just be running on automatic. If there is somebody driving it, then, I think, we’re ok.
André Glucksmann: The system can never ‘drive itself’. When we look at renaissance paintings, how do we see the bourgeoisie depicted there? He is the one who is weighing his coins to find out whether they are real and not faked. There must be some people – not necessarily bourgeois, but certainly people weighing affairs to find out whether we are not being told rubbish, cheated, or whether it is something positive that we are dealing with. They are the ‘drivers’ – not one driver, but drivers. There used to be people checking the coins for any fakes. What we have been seeing lately are capitalists, ministers of finance, numbers of experts, who do not ‘weigh the coins’, who do not look closely at what kind of investments, shares they are dealing with.
Jan Švejnar: Is it not the officials from the International Monetary Fund performing the role of the ‘bourgeoisie’?
André Glucksmann: You are very optimistic!
Vladimír Dlouhý: It’s not only a flat tyre problem, it’s more difficult, I admit. But it’s not about changing the whole car. We are in a deep crisis; there hasn’t been such a crisis since the Great Depression, despite the fact that this is not a great depression.
What I’m warning about are improper, amateurish attempts to improve the engine. One of the most experienced bankers I have ever met – and I will not tell his name – I’ve just listened to him at a conference in Switzerland, where he described the financial sector as a very complicated Swiss watch. Not only one which shows the time, but also the phases of the Moon and God knows what. Such a Swiss watch is composed of probably several hundreds of pieces. Each piece fits into the other pieces, and if you move just one piece wrongly, the whole watch is probably going to collapse.
There is a fear inside the financial sector that improper, even well-meant improvement might lead to much deeper damage. I am aware that this sector, where I have worked for the past twelve years, went through a period when it accepted much higher risk than was socially responsible and accepted much higher payments than it contributed in terms of added value. There is no doubt about that, but this is not a reason why we should put our finger into the complicated Swiss watch and completely destroy the functioning of the whole mechanism.
Tomáš Sedláček: Thank you very much. And whether we need to change the tyre, the car or use more bikes, I leave to you to decide, and I thank you very much for your active participation.