World Economic Crisis 2009

World economic crisis: Why is it an intellectual crisis and not just a financial mess?

Dr Thaksin Shinawatra’s address to the Foreign Correspondents Club, Hong Kong, 12 March 2009 :

The straw that broke the camel’s back was certainly the “irrational exuberance” of the financial wizards and the Rip Van Winkle-like slumber of their supposed regulators. But we will be missing the terrible point if we believe, as many obviously do, that the clever agility of the money movers was the only or major cause of the current crisis.

For a few of us involved in policymaking, the root causes became obvious in 1997. The revelation was not the result of some esoteric academic research. We were jolted and shocked by the onslaught of what was conveniently called the Asian financial crisis. There was nothing peculiarly Asian about it. All Asian countries, save North Korea, had been following “the Washington consensus” with varying degrees of success. The more successful ones got hit.

Washington’s mantra was and, I am afraid, is “ free markets. Period.” Markets freed from any kind of regulation would by themselves bring about boundless prosperity to all and sundry.

I grew up in a country that benefitted substantially from agreeing to be anti-communist during the Indochina war. The elite among my compatriots continued to believe that all will be well if we could just be charming hosts to whoever wanted to do business with us. Any proposal from America or Japan must be good because, after all, they were the engines of growth for the whole world. All ideas from abroad were unquestioningly accepted and implemented. It did not matter that we were being sucked into global demand and supply chains for goods, services and money from which we will not be able to extricate ourselves even in the worst of times. We had no say in how these chains were being manipulated. We had to float along with the flow or be branded nationalist and uncompetitive. To nurture our own inherent strengths was considered unfashionable.

The velocity of circulation of money and assorted paper generated from financial centres multiplied day by day. Booms and bursts were the natural order of things. If you, especially the farmers and industrial workers, were burst for no good domestic economic reason, it was because you were not nimble enough to sense the flow of paper between distant markets.

The 1997 crisis made us think: How can we rebuild our lives in ways that made sense to us and in ways over which we can gradually aspire to have some degree of control? The result of that sustained thinking was the first manifesto of the political party that I founded. It identified areas where we Thais could have a comparative advantage in producing for and servicing the world and proposed to apply development assistance to those areas. The idea was not to close the borders and be self-sufficient, though we could accomplish that without great pain as we are blessed with a fertile soil. But our choice was not to withdraw from the world but to make it a better and more stable place for all. I am glad to report that my successor in government is by and large sticking to our original plan though, for obvious reasons, he has chosen to call it by different names.

The intellectual crisis facing the world now was summarized by Tony Blair, the former British Prime Minister, the other day: “Ask the experts what to do, and the most honest reply is ‘I don’t know’.”

This state of affairs, and state of mind, are the results of a refusal to face reality and to think in terms of the real economy.

American and Japanese prosperity was built on lessons those nations learnt from the industrial revolution in Europe, and the cultivation of their ability to mass produce what the world needed, with incremental improvements in quality and variety as they went along. The innovations in quality and variety were possible because the best minds in America and Japan were then engaged in that task. But no longer. The brightest from American, European and Japanese universities in the past three decades went into financial services, some of them just servicing just each other. Their creativity was confined to designing paper that promised returns at an ever-rising angle of 45 degrees. If anyone questioned the sustainability of such schemes, he was shot down by accusations of being restrictive, anti-globalization and anti-progress.

No one can set the clock back and withdraw from the globalized economy now. But what the globalized economy needs is globalized regulation which no one dares to talk about as that could be taken to mean challenging the American leadership of the world economy. The Chinese certainly have the historical experience and now the economic wherewithal to propose ways to break the mould. But they will not – for the practical political purpose of not wanting to be seen to be competing with America for leadership. They only wish to complement.

While the US and Europe are working through their intellectual crisis – finding ways to do something more than create paper, develop new products and services which the world needs and which the Chinese and Indians cannot produce at lower cost – we in the rest of Asia, and the world, still have to survive.

We have to do what we can with resources that we have. Our resources are not meagre. Our peoples are much better educated now than ever before. Our workers have not had the comfort of enjoying long-term job security doing the same thing day in and day out, like the American auto or steel workers. We can retrain them easily without subsidizing managers who have run out ideas. Our agribusinesses have reached a stage where they can improve their quality and variety on their own steam to cater efficiently to different pallets in numerous markets. The village industries can be turned into small- and medium-scale enterprises like those of Italy that have survived countless crises. Creative economies need not be the monopoly of Europeans. Employment creation can be a function of wealth creation.

All this, of course, needs targeted development assistance, which we can provide. Our reserves are not insignificant. But no country will dare to use all of it for national development for fear of run on its currency. This is where structured Asian Bonds that I have been advocating come into play. If China and Japan were to take the lead, in partnership with some other countries with surpluses, we can finance our future development with confidence.

This does not mean that Asia and the rest of the developing world are without governance issues. We will have to reaffirm our faith in democracy. For, as Amartya Sen’s research showed, only democracy can help us on a long-term basis to prevent starvation. Only a balanced development where the poor and the less able are not ignored can guarantee long-term stability.

It was wonderful to learn that a communist party in Asia was able, with Chinese sensibility as the major invisible element, to produce and save enough to subsidize the world’s greatest power consumption. Now, it is time for China to expand wealth creation opportunities by using its national savings to fund opportunities for the rest of the masses. Reducing its savings but building structures to facilitate qualitative changes in the living standards of the rest of the country is not a bad idea. By so doing China will reduce social and political pressures on the party and also reduce trade pressures from the US.

The current downturn is so severe that we may not be able to completely avoid rescuing certain vital enterprises. We will be intellectually honest and not hesitate to use the n word. When our governments take a stake in an enterprise, they should not flinch from stipulating that the new money cannot be used to pay bonuses to managers who have made losses for their companies.

Intellectual honesty has to be applied across the board.

The world economy will never settle down so long as the majority of economists think the size of the economy is the foremost factor in determining viability of the economy. At this point of global reality, the ability to pay for one’s debt is the key. Not the size. Size will help as long as the size is in synch with the ability to repay debt.

Assuming that the world banking crisis is resolved, what will the new strong or subsidized banks do? What will they finance? Finance mass production of sameness? World’s harbours are full of containers loaded with mass-produced goods. Produce more of the same? Will the Chinese workers now go on producing the steel and cars that the Americans cannot sell? The world’s intellectuals have to accept that there are limits to growth of mass production. Certain production has to be internalized – to take advantage of the creativity of the country or region or city. To take advantage of local skills and availability of other local products. Only such skill-oriented, innovation-prone production can be sustained over a long period of time. The trick is in identifying such products and services and financing them in a viable way.

America does have the diverse range of intellectual power needed to create products and services whose perceived value will break the price barriers. Its technological ability is so varied and high-end that, if applied in a concerted way, it can break the barriers. The world needs efficient and inexpensive solar cells which only American technology might be able to produce. The world needs new technologies and services to protect the environment which only American scientists might be capable of delivering.

When America starts delivering these new technologies and products, it is going to force Asia and the rest of the world to upgrade their production processes and services. This will be the virtuous circle that American intellect can create. They just have to accept that the world’s future need not be determined in Wall Street and that products and services that are linked to employment and the environment and which generate a net income are worthy of their attention.

Real economy does matter. Paper trading is useful only when regulated.

Sooner the greatest minds in the US accept this the better it will be for all of us.

Dr Thaksin Shinawatra

Chairman of the Building a Better Future Foundation

and the longest-serving democratically-

elected Prime Minister of Thailand.