Malaysian economist Jomo argues that the central banks of the developed world created so much liquidity that they flooded developing countries’ economies with capital and now any financial hiccup could cause severe problems
GREG WILPERT: It’s The Real News Network and I’m Greg Wilpert, joining you from Baltimore.
The question of whether the U.S. and the world economy are heading towards another major financial crisis ten years after the global financial crisis of 2008 is an issue that we at The Real News have been exploring all month. Now, on this ten-year anniversary since the collapse of Lehman Brothers, the most recent story we did on this was a discussion between the economists Mark Weisbrot and Gerald Epstein. One of the big unresolved issues in these debates is where, more or less, a new global financial crisis might begin.
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Recently, some economists have been pointing to problems in the so-called emerging and developing economies, sometimes also known as the Third World or countries of the Global South. Joining me now to discuss this possibility that the next crisis could begin in the Global South is Jomo. Jomo joins us from Malaysia, where he holds the Chair in International Studies at the Institute of Strategic and International Studies. He’s the author of and editor of dozens of books on economics and frequently writes for the Inter Press Service, where he coauthored an article titled, “Another global financial crisis for developing countries?”
Thanks for joining us today, Jomo.
JOMO KWAME SUNDARAM: Most welcome. Pleasure to be here.
GREG WILPERT: So we have seen several important emerging and developing economies; such as Turkey, Argentina, India and Brazil, struggle with economic problems such as a sudden drop in their currencies. With the falling value of their currencies, these countries have a harder time of course to pay off their dollar-denominated debts, which could cause some of them to need a bailout. As a matter of fact, Argentina just received 57 billion dollars from the IMF for precisely this purpose. Why are these countries struggling with a declining value of their currencies all of a sudden?
JOMO KWAME SUNDARAM: Well, there are several reasons for the difficulties different economies are facing. I think no two economies are alike and the crises never repeat themselves completely. And we shouldn’t be looking for a repetition of previous crises, whether from the Lehman Brothers collapse and the factors preceding that, which were largely to do with the U.S. housing bubble. Or for that matter, the Asian crisis 21 years ago. Each crisis has its own characteristics and its own origins. The trigger for a crisis may be quite unrelated to the factors which eventually contribute to the spread and the depth of the crisis.
Emerging market economies have been in some difficulties since the crisis following the Lehman Brothers collapse, the so-called Great Recession. The world never really came up fully from the Great Recession. The U.S. Economy has done relatively better than European economies and the Japanese economy, for instance. And in emerging markets, the commodity producers did relatively well for a certain time. But we are now facing a range of issues. And what is particularly striking about recent developments is that some of the economies which are facing serious financial problems are not necessarily simply those which have been experiencing a sluggish growth.
In fact, some of the economies facing the most serious problems are those like Argentina, which have actually tried to play the game by Wall Street rules. The new regime in Argentina, for instance, went back on some of the achievements of the previous government and tried to strike a deal by playing to the rules basically established by finance capital. And yet they have not been spared from some of the difficulties which you describe. The southern cone of South America has been experiencing sluggish growth in recent years, partly because of the very serious conflicts which have been going on with the old elites coming back and displacing the new governments, which emerged around the beginning of the century.
In other parts of the world, the challenges are very different. The problems in Turkey, for instance, are of different nature altogether from those in Argentina. And we have seen, of course, with the so-called normalization of international monetary policies in the West, particularly beginning with the United States Federal Reserve policies, we have seen the beginnings of a shift of capital back from the emerging markets back to the U.S. And this is likely to continue, and it may even pick up in momentum. All this is likely to have very different consequences in many of these economies, which have enjoyed a flood, if you want to put it that way, of capital coming from abroad, especially due to the unconventional monetary policies practiced in the West.
This reversal of capital will have very, very serious consequences, which may be quite independent from the commodity-price phenomena which we have seen over recent years, especially from 2014 when petroleum prices collapsed, and with that, many primary commodity prices went down. Of course, this phenomena had been quite different for agricultural commodities as opposed mineral commodities. And there are very, very significant variations within the so-called Third World and the developing world. But nonetheless, I think it’s very important to recognize that while certain economies may be seen as sui generis, and problems which they have faced may not necessarily spread to their neighbors or to other parts of the world, crises in any of these economies could well trigger a domino effect affecting many other economies which are seen as similarly vulnerable.
GREG WILPERT: That’s actually something I wanted to ask next, is under what circumstances or scenarios could a crisis in one of these emerging markets get worse? And if that happens, how could this lead to another global financial or economic crisis? I mean, what exactly would be the process in which this domino would affect other economies?
JOMO KWAME SUNDARAM: Well, much of this will depend on the mechanisms by which crises begin and crises spread. So a crisis may well begin because of a particular government may be unable to fully service its debt obligations which is a possibility or corporations in a particular economy may not be able to fulfil their debt obligations. In either case in today’s world, either scenario could well trigger a crisis. Yet another possibility, of course, is the collapse of asset prices. Asset prices have gone up with the influx of capital in recent years. But with higher interest rates being available in the U.S. and elsewhere, the outflow of capital to such locations may well trigger a collapse and a bursting of these asset price bubbles.
So any of this could happen. Looking back 21 years to the Asian crisis, there were significant debt problems, sovereign debt problems, with Thailand and Indonesia for instance. But other economies in the neighborhood, such as Malaysia and the Philippines also experienced a panic-driven flight of capital from these economies. So you may not necessarily be especially vulnerable in terms of what some economists might refer to as the economic fundamentals, but nonetheless you may still be prone to crisis simply by being in the wrong neighborhood or vulnerable in other regards.
GREG WILPERT: So let’s turn to the causes of the problems in the developing world. You point to these unorthodox or uncommon mechanisms that the central banks imposed. I mean, I assume you’re mainly referring to the quantitative easing as it was called, where trillions of dollars were created out of thin air in order to introduce liquidity and also to have interest rates at zero, even in some cases below zero. And to that this created a lot of, I guess, financial liquidity around the world. But I’m wondering, what could central banks at that time, in order to get the world and different countries out of the crisis of 2008, what could they have done differently so that we wouldn’t be stuck in the situation we’re in now?
JOMO KWAME SUNDARAM: The problem is that central banks are generally very, very reluctant to play the role they should be playing as sort of a party pooper. You might remember the colorful image described over a couple of decades ago, that the role of central banks should take away the punch bowl when things are really going in the party. And this is precisely what … there is a reluctance by central banks to be counter-cyclical, which is precisely what they need to be. Authorities, both using monetary policy as well as fiscal policy, should generally be counter-cyclical.
So when you have a boom which may well contribute to a bubble, the idea is really not to allow the bubble to grow excessively. But to do so would be considered to be against the market. And so central banks, especially so-called independent central banks, are very reluctant to do so. And there are a great number of powerful interests in many economies, especially in the so-called emerging market economies, who are complicit, and are very, very reluctant to allow their own authorities to play this very important and essential counter-cyclical role.
GREG WILPERT: So if a new crisis breaks out because of the problems in developing countries, could it be worse than last time? And if so, why, and what would need to be done to get out of the mess this time around?
JOMO KWAME SUNDARAM: Well, the crisis of a decade ago really began because of the housing bubble. But because of what were politely termed collateralized debt securities, the other banks all over the world, which were holding those securities, basically got into serious trouble. I seriously do not expect that scenario to repeat itself, or for that matter the scenario from 21 years ago with the Asian crisis. Each crisis usually has something very novel, something very different about it. And it’s very difficult to predict the triggers for a new crisis. Nor is it possible for us to predict with any degree of certainty the vulnerability.
I think it is generally agreed that sovereign debt has begun to grow once again, and corporate debt is huge. And very interestingly, in many economies, the push towards greater so-called financial inclusion has also meant that household debt has increased. In Korea for example, about over a decade ago there was a problem with so-called credit card debt. And that has been addressed. But in other economies, there have been very few efforts, for example, to rein in household and personal debt. So it’s very difficult to predict the trigger and to measure the extent of vulnerability.
And the cause of these crises is often very unpredictable as well, because a lot of it has to do with what is politely termed confidence and investor confidence. And unfortunately, in crisis situations, there tends to be panic. People rush for the door. They often get out of particular markets which they see as especially vulnerable. And it’s not possible, in my view, to predict the cause of any crisis with any degree of certainty. I certainly think that even those who pointed out- and there were relatively few, people like Dean Baker and others- who pointed out the vulnerability of the American economy over a decade ago, none of them would have been able to predict the exact cause of that particular crisis and its full ramifications.
So the financial crisis, of course, was addressed partly towards the end of the Bush administration and the beginning of the Obama administration in particular ways, which then had knock-on effects in terms of the effects on the real economy. And the initial fiscal effort in the U.S. And in other parts of the world paid off. But all too soon, financial interests began to assert themselves once again, especially after their rescue, and began to insist that the fiscal effort be cut back and reversed. So at the very moment when the so-called green shoots of recovery were beginning to emerge, they were kind of nipped in the bud, so to speak, by austerity measures which were subsequently followed up by the unconventional monetary policies, including what you described as quantitative easing.
But quantitative easing was probably the most significant unconventional monetary measures. But there were a number of accompanying monetary measures which were significant. Now how this whole crisis following the Lehman played itself out in different parts of the world, of course, was a very complex story. And again, we have many different stories to tell about, for example, what happened in the Netherlands, where the government, for example, came in and virtually nationalized almost the entire banking system, which is again, quite different from what happened in other economies. And in the developing world as well, there was a great deal of variation.
So it’s very difficult to sum it all up in one single narrative. But I would be very, very hesitant to do to actually put my finger on what might be the trigger for a new crisis. And certainly, I think we can identify certain vulnerabilities and we should warn about the vulnerabilities. But it’s very difficult to be very sure ahead of the fact of how exactly a crisis will play itself out.
GREG WILPERT: Okay, well we’re going to have to leave it there. And I hope we can have you on again to dig into some of these issues. I was speaking to Jomo, Chair in International Studies at the Institute of Strategic and International Studies in Malaysia. Thanks again, Jomo, for having joined us today.
JOMO KWAME SUNDARAM: You are most welcome. Thank you for having me.
GREG WILPERT: And thank you for joining The Real News Network.