Global financial crisis forgotten too soon

The arrival of 2014 marks the sixth year since Lehman Brothers Investment Bank of the United States was declared bankrupt – marking the beginning of what became the global financial meltdown.

Lehman brothers was the first high profile victim of the burst in the housing bubble – the packaging of housing loans (many of dubious quality - sub-prime) into securities that were traded and kept outside the balance sheets of banks in order for bankers to earn their bonuses.

This party of housing bubble allowed the likes of Barclays Bank’s Investment arm, Morgan Stanley and the Bank of America to thrive making their gamblers wealthier.

More than 1000 millionaires were created in the City of London alone – the one square smile financial centre of gleaming skyscrapers in the metropolis – and luxury yachts were going like toys.

But when the bubble burst, poor tax payers were called upon to the rescue the sinking ships, literally at the cost of many lives.

If you are dealing in high-end real estate in the wealthy areas of Nairobi, or Luanda, Accra or Lagos today, 2008 might seem like a distant dream or in some ways, even a blessing.

The opposite is true for the working or lower middle class person living in Spain, Cyprus, Greece or Italy for who the nightmare cannot end soon enough.

Millions remain unemployed, homes have been repossessed and streets are regularly occupied by angry and hungry protesters left to pay for debts owed to mainly German and British banks and Russian Oligarchs.

When the financial crisis hit – and it did so following hikes in energy and food prices – the predictions about the cost to the global economy were dire – and a lot came true.

As banks began to crumble, scores of homes repossessed, unemployment exploded and panic set in, partly because of fear that the banking system was concealing more debt and junk bonds than they were willing to reveal, governments stepped in, and put in place the most unprecedented policies since the re-emergence of neoliberalism.

Banks and their liabilities were nationalised, the banking system around the world was flooded with paper money printed by Central banks of the United States, the United Kingdom, the EU and Japan (the Advanced Economies -AEs) in particular.

The UK pumped into their banking sector the equivalent of 90 per cent of their GDP, the US, 35 per cent of GDP and Germany, 25 per cent of GDP – all amounting to trillions of US dollars equivalent.

These were accompanied by drastic reduction of interest rates, a measure that both sought to stimulate new borrowing as well as gain export competitiveness.

The impact of the crisis and the measures put in place by the AEs to combat it had both immediate and enduring impacts on developing countries in general and Africa in particular.

One such impact was a sharp decline in economic growth in 2008/9 – largely due to a fall in primary commodity prices and capital outflows from countries with significant exposure to international banks.

The ILO estimated that the crisis put an additional three million people out of work and 28 million people into insecure work.

African Finance ministers claimed that the “crisis was sweeping away firms, mines, jobs, revenues and livelihoods” and threatening efforts to achieve the Millennium Development Goals.

The Economist Intelligence Unit (EIU) went one step further, forecasting civil chaos, and state fracture.

State fracture, of the type forecast by the EIU did indeed occur as regimes collapsed one after the other in North Africa from 2010 but for reasons that can at best be attributable to what Robert Wade of the United States calls “deep causes” – the structural character of the global economy shaped by neoliberalism and extreme greed that gave birth to financialisation, growing inequalities and political discontent.

Many of the impacts endure to date. Although economic growth rebounded quicker than the IMF projected, risks and fragilities associated with the crisis may have deepened in some respects.

Commodity prices flattened in 2013 and may remain so in 2014 due to the slowdown in economic growth in China and other emerging economies and continued crisis in the Eurozone.

Africa’s growth in 2014 is projected to be robust but below the pre-crisis peak. Although capital inflows rebounded in 2010 and increased significantly in 2012 due in particular to the easy money policies of the AEs, these are slowing down as less money is pumped in by central banks.

Moreover, capital inflows to Africa have been largely speculative and short-term looking for quick profits in the emerging equity markets, luxury real estate, mega city projects and natural resources extraction – all of which do little to create sustainable employment or narrow the current account deficits plaguing countries like Kenya, whilst contributing to building financial bubbles and widening inequalities.

Whereas larger developing countries are taking steps to manage these inflows by imposing market-based capital controls, countries like Kenya are dismantling any form of controls and threatening to liberalise capital movements even further.

As 2014 opens, the signs are that capital flows will become more volatile and more costly as the US roles back the pumping of money into the banking sector and money becomes less cheap.

With the global economy projected to grow only modestly, the Eurozone even more so and G20 countries slowing down, commodity prices will come under pressure.

Indebtedness will worsen in many African countries putting pressure on exchange rates. This picture contrasts with the euphoric expectation of our political leaders that foreign capital will flow in droves to “transform Africa’s economy” into an upper middle income one.

Abugre is the UN co-ordinator of Millennium Development Goals