FINANCIAL CRISIS AND POVERTYFINANCIAL CRISIS AND POVERTY

““Speaking Frankly – Challenges for Latin Speaking Frankly – Challenges for Latin AmericaAmerica””

Peter KoenigDecember 3, 2008

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The Financial Crisis

• “you know what the big difference is between the Big Depression of 1929 and the onset of the one of today?”

• “In 1929 the bankers jumped from the windows committing suicide. Today they get a Golden Parachute for a soft landing.”

• This crisis is man-made. It is in no way a natural catastrophe – like a hurricane.

• Why?We are living in an economic system that is driven by debt,

speculation and greed.

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Debt…

• Today the world is run by a deregulated dollar. It has become ‘Fiat Money’

• It is just paper money. It turns into debt, since it has no longer the

backing of gold, silver or commodities –

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Specualtion…

• How serious can such a system be, if it is possible that the stock exchange wipes out almost $25 trillion in corporate values – almost twice the US GDP – in less than a month ?

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Greed…

• Speculation leads to billions of dollars in profit for the rich and powerful

• ExxonMobile 3rd Q record profits ever $14.8billion – 15% above previous record profit

• Yet Government gives it further tax breaks

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• According to the US General Accounting Office, the Government debt – is about $56 trillion (expected to increase to about 60 trillion by the end of 2008 calendar year)

• 4 x the US GDP of $ 13.5 trillion

The Government Debt…

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• The dollar is still reserve currency for most countries, especially developing countries – and the US debt is globalized - it is distributed around the world (China – US# 1 trillion, Japan – US$ 1 trillion ….)

• If the dollar collapses other countries’ reserves will be partially wiped out

• But - how long will the world continue to honor the dollar as its reserve currency?

• This question is for you to reflect on.

Why does the world get pneumonia when the US coughs?

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Poverty at home

• New Homeless people - tent cities

• Destitution / poverty - 15% - 20% hovering on poverty

• Wiped out pension funds, saving - for average citizen

• Rapidly growing unemployment - possibly up to 30%

• Food shortages – affordable food scarcer (1/3 US corn used for ethanol)

How does the crisis affect poverty at home and abroad?

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Poverty Abroad – Impact on Developing Countries

• Decline of remittances - could be > 50%– 2007 $180 billion to developing countries– 2007 ODA $92 billion– 2007 totla debt service of dev. countries

$142 billion– Negative flow $50 billion

How does the crisis affect poverty at home and abroad?

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Here is where the debt comes from….

• There is a lasting impact from long-term debt-promoting activities by WB, IMF, IDB and others

• The slogan at the entrance of the World Bank - “… A World without Poverty is our Dream”…

• But these agencies are producing poverty to keep it a dream

• In Africa, the average per capita income declined by US$ 200 between 1974 and 2000. (World Economic Forum)

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Instruments of WB, IMF, IDB…• Indebting: WB, IFM, IDB - others… • ….plus Leverage effect with private banks

• Privatization of public sector

• Free Trade – Exports (take away the best of a country, cheap)– Growth (In Peru 70% of the revered growth of 4%-6% goes to 1% of the population)

• Genetically Modified Organisms -GMO (don’t yield seeds)– Famine-Starvation - leading to 7.000 farmer suicides in India– 75% of increased famine due to agrofuel, acc. to WB and FAO – 1/3 of US grain stocks used for more profitable ethanol production

• Socio – Environment

• Global Warming

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Consequences for Developing Countries

• Less western Money available… probably a good thing…

• Less dependence and more autonomy

• Wrangling for favors – West (moslty US) vs. East (China and Russia)

• Creating new dependencies – for exploitation of natural resources

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For Hydrocarbon Producers…

• Faltering Western Economies need less energy

• Falling oil & gas prices (currently under US$ 50/barrel – 4 months ago US$ 150!)

• Fewer revenues for producers; and• Revenues in a falling currency –

the UDS Dollar….

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What can developing countries do?

• Urgent Satisfy local markets

• Important Education, education & education

• Third Identify comparative advantages (niche markets) for export – but NEVER at cost of local markets

• Most important Be careful in selecting money lenders (so-called ‘development assistance’) – Beware of world Bank, IMF, IDB – ‘don’t send fox to guard chicken coop’

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What can developing countries do? – Cont’d

• Developing countries, should call shots; they decide for what the loans are used and what lending conditions are acceptable – not the money lenders – Watch out for ‘strings attached’!

• Fourth – promote slow but independent and equitable growth – better than the traditional neoliberal dogma of rapid export growth – the gains of which are usually channeled to local elite and foreign lenders – with little or no benefits to the working poor.

• And finally - - Create alliances (economic and political) among developing countries – see South America (MercoSur, UnionSur, Banco sur – new political alliance of South America) – and other South-South alliances – G77…. etc.

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IMF New Emergency Rescue Fund

• Beware of new IMF, WB Rescue instruments: Collapse of economic system = Golden Nest

Egg for IMF, WB Special G20 Meeting in Washington mid-

November 08 called to re-activate IMF Emergency Fund

Fund currently US$200 billion – but IMF estimates requirements > US$ 1 trillion

Call on China, oil producers and other rich nations to replenish Emergency Fund

World Bank also will help with emergency loans

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IMF New Emergency Rescue Fund – Cont’d.

• IMF already granted / negotiating: Iceland - $ 2.1 billion Ukraine - $ 16.5 billion Hungary - $ 10 billion Pakistan - $ 7.6 billion… and … more to come….

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IMF New Emergency Rescue Fund – Con’t.

• IMF usual loan conditions: cutting government spending (in

some cases as much as 1% of GDP) Rising interest rates Result in further downturn of

recipient government’s economies

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IMF New Emergency Rescue Fund – Con’t.

• Put this in Context of US and other G8 economic stimulus which are exactly opposite: rise public spendingslashing interest rates - lessening

impact of recession

• Unequal standards favoring rich over poor – the norm for neoliberal economics

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Alternative Economic Systems

• > Keynesian capitalism – allowing some form of government intervention when needed

• > Social democratic capitalism (Western European Model) – government controls certain sectors, mostly social – government interventions in markets accepted when necessary – and

• > Neoliberal approach – free-for-all market dogma – no government intervention, no market regulations – current US dogma being spread around the world – and what brought about the current crisis

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Alternative Economic Systems – Cont’d.

• Given the collapse of the capitalist system as we know it – isn’t it high time to start thinking about possible alternatives to the current scheme?

• Inequity (income and asset distribution) in industrialized and developing countries is rampant – and growing

• The growth fetish: how much happier does a dollar more in the pockets of the rich make? – but in pocket of the poor it may make a difference…

• World societies have vital interest in more equitable world – less poverty = more peaceful world

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• Closing on positive note:There is hope – a light at the end of the tunnel: The only place in the Western World that has built up resistance to the neoliberal doctrine over last 10-15 years – by democratically electing governments by the people for the people – who are increasingly united in solidarity in South America.

CONGRATULATIONS !

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Thank you !!!