There are important lessons for Asia in the financial catastrophe unfolding in Europe. The more the continent’s leaders run from pillar to post to avoid contagion, the more they expose governments’ inability to safeguard interests of the people, since they have come in direct clash with interests of giant financial institutions. The rush to ease credit markets in the wake of the 2008 crash has brought to light the importance of protecting big banks, since they are bundled together in a complicated web of toxic debt, and letting one fail (on the lines of Lehman Brothers) risks unleashing a financial domino effect that will bring down the biggest banks on both sides of the Atlantic.
To understand this phenomenon, it is important to analyse the compatibility of the electoral democratic system with modern forms of recession. Candidates bankroll campaigns by banking on donor largesse. And when Bush Jr’s treasury secretary Hank Paulson, a former Goldman Sachs CEO no less, takes the first steps in tackling the greatest recession in more than half a century, it is only natural for him to tilt bailout goodwill to erring banks as opposed to suffering people (who, incidentally, put their faith in banks when the latter’s moral hazard had not been exposed). Therefore, when crunch time came, decision makers in America, as well as in Europe, chose to save speculative financial institutions with taxpayer money at a time when the labour market started registering unprecedented stress.
This bent complicated the aftermath of the credit crisis, creating a wide cleavage between the working class and the much more affluent financial elite. The occupy wall street movement is a symptom of this very grievance. Instead of being saved from banker excesses, the middle income groups are being subjected to painful austerity, all this while big banks have reverted to milti-million-dollar bonuses that typified the excesses of the past.
In Asia, the mass of people around and under the poverty line is much larger than Europe and America, especially since the last couple of years have eroded the continent’s middle class mercilessly. Here, governments will not be able to justify propping up financial or even state institutions at the cost of the working class for too long. The phenomenon of people’s mobilisation in the storm triggered by the so-called Arab Spring ought to be another sobering moment for decision-makers.
In a way, Asia is ideally placed to correct much of the west’s mistakes as time comes for the continent to deal with its own downturn. The emerging markets are no longer the growth nirvana, high-yielding stories of two years ago. China is crashing, India is slowing, and the periphery is not much more stable either. Asian leaders stand at a crucial crossroads. Do they shore up bank reserves and protect the financial elite, as in the west? Or do they do a surprise about-turn and instead bolster the working class population? As regards the former, we have one example after another of strict austerity for the population amid unprecedented bailout relaxation for finance managers only deepening the abyss. Interestingly, despite the severity of the recession, we have yet to see a government posture in favour of the worker.
Perhaps Pakistan occupies a unique position at present. Its weak financial integration with the international economy spared it the worst of the recession’s hangovers. Yet its own mismanagement, policies that ironically favour the financial elite at the cost of the common man, has pushed it to the brink of collapse. Unable to move out of deepening stagflation, Islamabad should be among the first to stand conventional recession-response practice on its head. We have a large army of labour, numerous precious resources and large tracts of very fertile land. All that is needed is placing those that yield greatest value addition ahead of those that have been eating off the fat of the land for far too long.
If anything, the banking sector needs to be reminded of its core responsibility – ensuring credit markets are solvent. So far, while receiving official patronage, banks all around have been reluctant to do what they are supposed to do – lend. The present environment will test our leaders to the maximum.
The writer is Chief Manager, SME Bank, with 30 years’ banking experience
