“The euphoria of speculators has spawned the anguish of entire peoples… Only decisive action by governments, especially in countries at the heart of the crisis, will be able to control the disorder that has spread through the world’s financial sector, with perverse impacts on the daily lives of millions of people. A dearth of rules favours adventurers and opportunists, to the detriment of real companies and workers.”
Using these words at the UN General Assembly on Sep-tember 23, Brazil’s President Luis Ignacio Lula da Silva, spoke for the many millions of individuals across the world who have viewed recent events in international markets with revulsion.
In doing so, he enunciated a widespread fear, which is that ever wealthier speculators, hedge funds and others manipulating everything from food and energy prices through to the fortunes of sound productive companies, are quite prepared to destroy livelihoods and whole nations in their relentless pursuit of personal gain.
His words came in response to an extraordinary period of market turmoil that has brought into question the future direction of globalisation, capitalism and in particular the US administration’s laissez-faire approach to the financial markets.
Although the US government subsequently found itself having to salvage what little economic credibility it had left through new controls in a massive and politically contentious bail-out package, its actions and the consequent response of others across the world spells the end of an era in which free unregulated markets have driven political thinking.
There is of course nothing wrong with enterprise, markets and the profit motive if moderated by ethics and social awareness. Profits buttress national economic growth, maintain employment, deliver the taxes that enable states to function and provide the wherewithal for social programmes.
However, the events of the last two weeks indicate what happens when the possession of capital and greed become ends in themselves and investment loses its relationship to productive enterprise and society.
What is alarming about the present crisis is the manner in which the actions of a very few have had the capacity to touch virtually everyone if as is now widely expected, market excess and supine governments have created the conditions for a global recession.
For the Caribbean the consequences are likley to be severe in both the short and medium term.
At its most obvious market turmoil and a rapid decline in economic growth in the region’s major markets will affect tourism, the industry that has become the driver of Caribbean growth. Although winter bookings are reported as strong, it is widely expected that the sector industry will reflect within months the downturn in economic fortunes.
Psychologically most consumers err on the side of caution when the economic and employment climate is uncertain. This plus increased food and energy prices, higher air fares, significant fluctuations in exchange rates seem set to make middle-income earners vacation closer to home or not at all.
At the same time the industry will find it increasingly difficult to raise capital to finance its development. The last decade has seen a boom in construction across the Caribbean as investors around the world have seen double opportunity in the Caribbean through the ever increasing value of real estate and the seemingly limitless increase in visitor arrivals. While most projects already on stream will continue to completion, it will become far more difficult to finance new projects as banks and others look ever more closely at the viability of projects and more particularly at the credit profile of those who promote them.
Much the same problem will apply to the financing of other investments as companies and financial institutions in the region and beyond limit their involvement to projects that have high and secure rates of return.
Other key drivers of Caribbean economic activity are also likely to suffer. Previous experience shows that as living costs increase and employment falls in North America and Europe the very significant sums that most Caribbean economies indirectly receive via remittances from family and friends abroad, will decrease.
Some governments will face problems financing debt or covering shortfalls in recurrent expenditure as private placings and bond issues become either more difficult to arrange or more expensive, increase. While a few like Trinidad and Jamaica will be able to withstand this through making use of their reserves, smaller states may have to choose between increasing taxation, turning to regional partners like Venezuela or cutting expenditure as they attempt to reduce their budget deficits.
As this happens it is probable that the Caribbean will fall ever lower in the priorities of Europe and North America. As developed economies contract, taxes increase and public expenditure is cut, the most likely consequence for the Caribbean is that development assistance will attenuate and be replaced by the already strong belief that future Caribbean development is for the private sector alone to finance.
But this is the detail. There are far greater forces now in play that suggest that the political and economic landscape that the Caribbean has operated in for the past twenty years is about to change beyond recognition.
If a long and deep global recession is to be avoided, governments and legislatures starting with the US will have little option other than to implement measures that show that they are in charge of events and are able to restore through credit and regulation the trust and confidence necessary for markets to begin to function again. Bigger government, government intervention and stronger regulation will be back on the agenda
After that it will be the innately conservative sovereign wealth funds that will pick up many of the best fire-sale opportunities and begin to redraw the economic map of the world and in so doing the locations of real power, while the US having lost its economic authority may well become a less potent influence on the global economy.
All of which points to the need for the Caribbean to engage in a perhaps painful debate about its thinking on ‘development,’ ask if there is any real future in its decades long addiction to official aid flows, and begin to consider new and sustainable economic approaches better suited to what are in truth relatively advantaged small states at the geographic heart of the Americas.
Previous columns can be found at www.caribbean-council.org
