Business

Tuesday August 25, 2009

Are global political leaders being honest?

By DR MOHD NAZARI ISMAIL


ON May 24, Robert Zoellick, president of the World Bank, issued a warning that the current global economic crisis could very well lead to serious social upheavals.

He is highly concerned with the increasing levels of unemployment in many countries worldwide, especially in Eastern Europe where some countries are registering double-digit decline in their economies.

Zoellick is not alone in having this worry. Many others share his worry. However, that it is being highlighted by such an important figure is very significant.

This is especially when political leaders in many countries are trying to reassure their voters that the worst may already be over and that they are going to see an upward economic trend in the not-too-distant future.

Obviously, Zoellick, unlike politicians in many countries, is genuinely concerned about the future welfare of people. He is, therefore, asking governments to formulate appropriate policies in preparation for this impending grave and gloomy scenario.

Many political leaders, on the other hand, are more concerned over their short-term political positions rather than with the long-term welfare of their societies. As a result, they tend to underplay the seriousness of the future economic and unemployment scenarios, fearing that it may negatively affect the perception of the public towards themselves.

To be fair, the reason politicians behave in this manner is largely due to the expectations of the voters, who are more concerned with their own short-term well-being than the long-term welfare of their societies.

In their minds, the bottom line is that politicians must be able to guarantee job security so that they can continue to have money in their pockets and bread on their dinner tables.

In other words, their main demand of their political leaders is that they must be able to keep the economic engine moving regardless of what is going on in the world economy.

As a result, governments worldwide are busy formulating economic stimulus packages despite the fact many of them are actually financially strapped and simply cannot afford them.

Take the case of Britain, one of the countries worst affected by the current financial crisis. The advanced financial system and practices of Britain made it possible for the country’s financial sector to grow relatively faster than others. But an advanced financial system is a double-edged sword.

Economic growth that results from such an advanced system also brings with it a high level of indebtedness. In Britain, the debt-to-gross domestic product (GDP) ratio was recently estimated to be around 67%.

However, due to the policy of the British government, which wants to spend itself out of the crisis, the country may need to sell £220bil worth of bonds. Budget deficit next year may rise to £175bil or 12.4% of GDP and the overall debt to GDP may rise to 100%.

Largely as a result of this likely scenario, the rating agency Standard & Poor’s has lowered its debt outlook for Britain from “stable” to “negative”, thereby increasing the country’s costs of borrowing.

According to many economists, Britain is in danger of becoming a bankrupt country in the manner of Iceland if its policymakers are not careful.

However, politicians in Britain have little choice if they want to remain in office till the next general election. The current crisis is causing a rapid increase in unemployment. Hundreds of thousands have lost jobs and millions of families are suffering from reduced income. For those still holding jobs, there is a high degree of uncertainty as to whether their jobs are really safe.

During this difficult time, voters pin their hopes on the government, thinking, falsely of course, that it can take the necessary measures to improve their job security.

The politicians themselves, for fear of being voted out of office, are reluctant to admit the reality that, in this respect, they are actually quite powerless.

What makes it worse is that opposition politicians are also making false promises that they can do a better job at securing voters’ future.

Under the circumstance, it is therefore not surprising that governments worldwide are unable to resist from behaving irresponsibly and indulging in policies that are extremely risky in the context of the long-term future of their countries.

Stimulus packages in their billions are announced to reassure the voters that the governments are doing their best to ensure that their countries’ economies are not heading for the doldrums. In reality they are just playing for time by staking the welfare of future generations.

The present generation is being hoodwinked into thinking that measures being undertaken to solve the crisis do not have risks or costs.

In the case of Britain, only the most educated are aware of the magnitude of these risks. But sadly they will never be able to change the direction of policy-making because the short-term position of political leaders is not determined by this small group of educated people but rather by the ignorant masses.

Sadly, this scenario holds true for many other countries.

But the saddest aspect of the current crisis is the failure by all to recognise the fact that all the measures being undertaken, even if they temporarily succeed in slowing down economic decline, will not prevent a similar type of crisis from happening again.

Moreover, such a crisis will likely be on a much bigger scale, just as the current crisis is proving to be much bigger than the great depression of the 1930s.

As long as the overall system remains, we all will inexorably lurch towards economic and financial destruction with all the attending consequences.

  • Dr Mohd Nazari Ismail is a professor at the Faculty of Business and Accountancy, Universiti Malaya. His latest book is “The Globalization Debate”, published by University of Malaya Press.

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