Open Economy: Why nations struggle to design their own economies

30 Aug, 2015 - 00:08 0 Views

The Sunday Mail

There are many ways to design an economy.

There is a Nordic model of welfare (Scandinavia), a centralised model of state capitalism (China), and highly financialised free market capitalism (Europe and North America).

In pockets around the world, brave and self-determining countries are challenging themselves to create models that fit their needs.

Whichever economic design a country decides to take up is usually dependent on its development stage and socio-economic values. In Zimbabwe, many express discontent with capitalism but fall short in being specific on exactly which model of capitalism they take exception to.

Granted, they should not be rushed.

I advise that we would all benefit from a steady process of elimination, providently disqualifying models that we do not favour.

Following such a path would enable us to work towards an informed preference of whatever model of capitalism we prefer for Zimbabwe.

Understanding capitalism depends on exposure and influence. That may be a function of either interactive, academic, or media streams that people are exposed to.

I will focus on the media which informs our most commonly held perceptions of capitalism; Western business news organisations.

Throughout the past week, the Chinese economy has been the focus across Western news organisations. Well, at least on casual perception it seemed to be. What is more precise is that the Chinese economy was only a backdrop to the concerns of financial markets.

Financial markets were shaken by the actions taken by Chinese authorities over the last two weeks.

As financial markets tend to do, ill-informed sentiment was much more influential than thorough analysis has. This resulted in sell-offs of Chinese stocks, a situation where investors pull out loads of money from a stock market.

A contagion effect was soon to follow with other foreign capital markets feeling the pinch, too. This was consistent with the belief that a slump in China means lower returns in other markets.

Unfortunately, this sequence of events was driven by investors’ impulsive reactions largely informed by panic and group think. This has become a recurrent scenario and it is exactly what is wrong with what I will call “financialised capitalism”.

Today, much of the global economy is controlled by Western investors active in capital markets.

While disproportionate, this composition was not initially harmful.

In fact, the rest of the world rightfully opened itself up to Western capital flows. In theory, this was supposed to be good for economies looking for finances to fund their economic development. Unfortunately, over the last few decades, Western capital has become extremely short-term oriented.

For instance, while the average holding time of a stock in global markets is seven months, in Western capital markets that average is only 22 seconds.

Some policy-makers in developing countries have complained about how footloose capital generates bubbles as it rushes in, only to cause crises when it suddenly retreats home.

Further disconcerting is that financial short-termism has been accompanied by a disparaging attitude towards economies that are managed differently from the ideals of Western investors.

This attitude is deeply planted in patronising, self-gratifying mindsets that are vaguely evident when following Western business news.

One has to be deeply perceptive to see it.

Coverage on China is a case in point.

Proper business journalism should have called out the detrimental investor conduct which is now pervasive in financial markets.

Momentary stock prices matter more than enterprise value; speculation disregards inquiry of economic fundamentals; and if mainstream business culture still allows for such idealism, the investment practice has divorced itself from humanistic concern — the kind which derives its understanding from occurrences in the real economy!

It would have been beneficial if investors looked to understand what is actually going on in China and the motivations behind recent policies.

Chinese authorities have grasped the need for structural changes to their economy.

There is an intentional effort to balance the economy from focusing on just the two cornerstones which were high exports and heavy investment into commercial and public infrastructure.

These have been successful in making China a competitive supply economy, and Western investors have profited immensely from these policies.

Chinese consumers, though, have not had adequate ascent in income to sustain this supply economy.

The story can be told through multiple narratives from the vacant business malls and commercial real estate across regions of the country, to the low rate of household savings.

China has to diversify its economy by promoting more middle-income opportunities.

That means a conscious structural change towards an innovation-based economy which will sustainably raise incomes of a growing skilled labour force.

Wisely, China has not waited for investors to kicks-tart its industries. That government’s five-year plan includes spending US$1,7 trillion on sectors including IT and green energy.

Western investors have not taken to this macro-economic analysis. Instead, according to narratives advanced by Western news organisations, China is culpable of causing panic in capital markets.

This is regardless of the fact that China actually achieved its planned half-year growth rate target of seven percent.

Impressions are meant to depict China as threatening further global slowdown; ignoring the fact, of course, that the Eurozone at the moment is really the grand laggard among major economies.

There’s hypocrisy in conveying China’s currency devaluation as mercantile or insensitive to the effects to the global economy.

Devaluation is a reasonable response to a falling demand for Chinese exports by depressed Western markets failing to stimulate their economies.

Moreover, a few months ago, the US federal reserve proclaimed that when making monetary decisions, it should not be held to expectations as the world’s central bank.

On the periphery of this argument, it is true that China’s recent moves have also affected Africa and so-called emerging markets.

To what extent is it China’s fault that African economies have not bothered to diversify so as to mitigate commodity dependence or Chinese investment?

My aim is not to launch a diatribe against Western financial investors.

Instead, I hope to illuminate how short-term financialised capitalism has become the self-preserving, disastrous epicentre of the global economy.

Not only does it fail to reflect on its own shortcomings, it is disparaging to alternative economic approaches.

It is financialised capitalism that was behind the Great Recession of 2007 and many lesser harmful recessions before then.

It has exacerbated inequality.

But such is the power of financial capitalism that it has bought governance of the global economy such as the IMF, European Central Bank and US policy-makers.

For several years now, it has paid to enforce the dominant economic theory of our time. Austerity is nothing more than a mechanism of expediting investor payback for national debt.

So the challenge now, as markets have shown with China, is that nations are unable to structure their own economies without being held in contempt of financialised capitalism.

Argentina, Greece, Ghana and India are just a few countries that have struggled against the pressures of financialised capitalism.

Policy-makers find it difficult to attend to their respective macro-economic fundamentals without being positioned as being at odds with the demands of short-term investors.

Of course, it would be naïve to say some of these countries do not make useless policy decisions which ruin their own economies.

That happens a lot.

We also cannot deny the important role that finance and capital markets have to play in economic development.

It is just unfortunate that short-term financial capitalism has elevated to be the greatest hindrance to nations trying to design their own economies.

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