The Economic Impact of Engineered Crises

10 Aug, 2002

Upon reflection, it is becoming increasingly obvious that sound fiscal and financial management is generally not a strong forte of politicians; in terms of their skills sets neither in emerging nor in mature markets. The incalculable harm that politicians thus do to the national economies as a result of populism, grandstanding, due to media pressures etc. have never been adequately quantified. For instance, the current American administration is accused, in some quarters, of creating a huge war psychosis, ever since it pole vaulted in poll ratings, following its dramatic bombing of the faction-driven forces in Afghanistan and the anti-terrorism coalition, then forged globally. This leadership posture provided the U.S. President with an opportunity to overcome the effects of having been elected in a hung election; that he may well have been 'counted' out! When Bush and Al Gore finished in almost dead heat, and the former scampered through by a whisker; there was a need for such a steroid boost. Besides, all U.S. first term Presidents soon have their eyes firmly on winning a second term. The incumbent President therefore finds it imperative to keep his popularity and poll ratings high.

Few factors prove to be as unifying and binding a country together as a war effort. Unfortunately, war can be a weapon to rally all political adversaries as the proverbial "last refuge" . Whenever national security concerns stem from paranoia and the dark shadows of lurking and stark terrorism, then any political dissident can be painted as unpatriotic. Other issues (divisive and embarrassing) can be pushed under the carpet. Thus the economic skull duggery skeletons in the cupboard in the post (-Enron) mortem, that are emerging out of the wash or the mercurial switch from a surplus fiscal budget to deficit in the U.S. for two years because of the Republican spending binge, have all been raised and relegated lower in public and media attention at the altar of expediency and the national fervour arising from the war on terrorism and the escalation now envisaged to cover the Axis of Evil.

This is the context in which to view many of the so-called economic and financial crises that are patently engineered or exaggerated in different parts of the world by the politicians of the day to serve their parochial or partisan and petty ends. Their actions and sins of commission and omission are visited upon the populace. For example, look at the misfortune that the Brazilians have been subject to. Until a year back, under Cardosa, it was regarded as a reasonably well-run economy, albeit with a high foreign debt overhang of some US$ 250 billion ! Suddenly, Brazil has become a pariah country with a 'run' on its currency that has fallen by some 50%; with overseas credit practically drying up dramatically. This switch in the sentiment / mood globally and the ebb and flow of international capital and credit, have been exacerbated principally, by the rise in the political temperature, within the country. Once elections were announced, the incumbent party's official candidate started to slip in the ratings and the opposition left-wing candidate climbed in forecasts as the potential victor. All hell broke loose. Confidence among the creditors evaporated and credit became coy. The IMF then wafted in, as is its wont, with its heavy boots. It's every move and inaction became a subject of much media scrutiny and volatility in the bond and currency markets.

This is a vivid illustration of a classic man-made crisis i.e. a self-inflicted wound that may well prove to be grievous. As the largest economy in South America and touted as one of the top five potentially GDPs in the world, Brazil is now literally on its knees and sitting on a powder bag. Despite reasonable foreign exchange reserves of about US$ 20 billion, there is now a question mark over its ability to service its maturing debts. Yield on Brazilian debt paper in the secondary market has climbed to some 20%. Everybody is now talking of the endemic 'contagion' effect and putting Brazil in the same bracket as Uruguay and Argentina. In a sense, this crisis has become a bit of a self-fulfilling prophecy. Even a defensible economic performance and compliance with IMF criteria, year-after-year, in the last few years, have not helped Brazil; when it came to the crunch. The spectre of a left-wing candidate winning elections and running amuck, loomed large on the horizon and that was the trigger for a slide that few seem to help reverse. Even the US$ 30 billion IMF package may be too little, too late; as the damage has already been done.

Political shenanigans becoming death knell for the economies is a phenomena not limited to South America alone and can be seen even in the mature economies. In the United Kingdom, in the 1980s, the Pound dived in value overnight, when the politicians of the era chose to utter the wrong words. 'Foot in the mouth' disease of politicians is legendary; producing palpable market reactions.

It is true that, currently, there are credible central bank governors, such as Eddie George and Greenspan (or earlier, when Germany had a string of strong Bundesbank presidents such as Tietmeyer), who command respect in the markets. As a result, the market nerves can get calmed and reassured; whenever they intervened and pronounced policy measures. Of course, if the central bank governors do not enjoy full remit and independence, their clout is compromised in perceptions and reality. Traditionally, the Bank of England (BOE)'s Governor's eyebrow-raising was regarded as a frown by the banking community to fret upon. However, in reality BOE does not enjoy the autonomy that some around the world do as the UK Treasury's limit still runs over BOE.

Therefore, what is needed throughout the world, be it in the emerging or mature economies, is a good working relationship between the political bosses and the professional executives in public service. This can ensure that the economy is insulated from the politicians' personal agenda. This can also be achieved in an apolitical or bipartisan way (as the Americans would call it) by building up good consensus within the political fraternity The political novices and populists and their diarrhoea of words ought to be limited to non-economic and non-emotive issues. If such a clear-cut demarcation is not achieved, then there is bound to be needlessly periodic volatility in the world markets; with seriously damaging consequences. Of course, it is difficult to take away the economy from the politicians and those arm-chair liberals from around the world, who swear by democracy for everybody else would be loathe to structural changes in the Western style democratic framework. Ultimately, neither they, nor the politicians, nor those that are powerful, in a country, end up paying the price for their actions and words. Much misery and suffering is inflicted lower down on hapless citizens, who have a harrowing time in terms of inflation, unemployment and penury. That is the conundrum that will prove to be a critical challenge in all polities.

More recently, the U.S. threats against the Axis of Evil (AOE), tilting its windmills against Iran, North Korea and Iraq, while leaving an unresolved conflict in Palestine, are all instances of how little 'statesmanship' is in evidence. In the second half of the last century and in this Millennium, we have seen ephemeral politics dominating overwhelmingly; as compared to the veterans of the past, many of whom transcended petty political considerations. Power did not go to their heads ! There was a vision, leadership, sacrifice and a much more informed and compassionate outlook on the affairs of the world. That is clearly missing in the main now. In spite of the cessation of Cold War and the collapse of communism, we have so many conflicts in different regions that the fire in the belly keeps burning and the arms build-up escalates to unreasonable levels. It is difficult to see how these endless engineered, man-made crises are ever going to allow for a more peaceful, economic environment; except mercifully, in some parts of Western Europe such as Scandinavia.

No prevarication or appeasement of terror is being advocated and one cannot compromise or countenance violence or factors that engender it. But equally, there appears to be a deliberate war-mongering and planning; based on fire power and air supremacy. Unless the issues are sufficiently well-evaluated and debated, one might find that they do not carry the non-partisan support across the international spectrum. 'Desert Storm' was one thing and the 'Afghan coalition' is another, as they broadly had U.N. and other multilateral endorsement, across the various continents. But today a chorus of experienced, senior civilian and military personnel (field marshals and foreign policy analysts) are questioning the current Anglo-American exercises (such as the Ark Royal's recent move to the Mediterranean). Preparations for an assault would appear to be at an advanced stage and one only hopes that all these do not result in a starkly negative impact on the global economy; already teetering on near-recession and in a tailspin. That denouement would end up hurting the very people of the world, that such initiatives are sought to protect in the long term.

Elsewhere too, politics and ego rule the roost in rational economies and this tragedy that has been unfolding from the middle of the last Century, underlines the need and responsibility for the sole super power (i.e. USA) to set the tone and be much more compassionate and caring to provide leadership and 'statesmanship' of the highest calibre. Until that happens, the economies around the world are going to face recurring crises, much of our own making. Blame-game does not help; as these are not natural calamities or droughts but self-inflicted wounds. Healing is the only answer and will have been tended with care and support.

(The author (sureshk@emiratesbank.ae) is a General Manager in Emirates Bank Group. The views expressed in this article are not necessarily shared by the Bank.)

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