Beyond Channels of Crisis Contagion

May 18, 2009 Editorial

Ever since it became apparent that the financial crisis in the developed world was not going to be contained, there has been talk of building a “firewall” to protect our economy.

President Jagdeo introduced the term into the discourse after a trip to China and New York last October 2008. Predicting that the crisis would spread like “wildfire” he promised to consult with local stakeholders in “throwing up a firewall”. He declared that he had already called for an urgent meeting of the heads of state of CARICOM to craft a “regional response”.

In a world that has been heavily integrated over the past two decades through intensified “globalisation”, building a “firewall” was never going to be easy. As a start, one would first have to at least identify the channels through which the contagion would spread and then work out strategies to counteract or ameliorate possible damage.

The President did a very good job at the first part of the task. He predicted that the crisis would not be confined to the financial sector but would spread to the real economy because of the inevitable drying up of credit that is the lifeblood of all businesses.

He called correctly the difficulties that RUSAL and Amaila Falls Hydropower would face in financing their projected projects. Noting the severe downturn in the US and Canada from where most of our remittances originate, he noted that we should expect a contraction in those funds in addition to “investment inflows”.

He was very realistic to concede that interest would wane in the developed countries on their commitments on climate change.

In the area of trade, he pointed out the expected pressure on prices of our commodities and noted especially the gloomy prospects for wood products.

He was a bit sanguine on the supposedly insular state of our banking system and interestingly took pains to inform that the insurance companies had “assured” him that they were also not affected. We now know that they were lying through their teeth.

CARICOM Heads met in November, tut-tutted a great deal, received a seminar on the crisis from the CDB in December and then in January, in the venerable tradition of bureaucrats, established a Task Force that was supposed to “fashion a short and medium strategy” by “end March/early April 09”.

This became “end of April”, then “May” and now its “June”. We do not know whether President Jagdeo has deferred his promised local consultations until he receives so that the CARICOM plan could be used as a base document, but we believe that he should wait no longer.

Once again CARICOM has demonstrated that it irrelevant. The best concrete suggestion it could come up with was to hope for increased International Financial Institutions’ contributions.

In this space we have already pointed out the disparity in which the IFI’s have approached the crisis in the more developed economies and their satellites compared to those in the third world. We would be naïve to expect anything from the IMF or World Bank out of the ordinary, notwithstanding the former’s touted trillion dollar pledged funding.

While we must certainly attempt to block the channels of contagion of this crisis, we believe that we must spend as much, if not more, time restructuring our economy through a more dirigiste industrial policy and emerge higher on the development curve than we entered the crisis.

What we have emphasised is the opening up of the administration’s policy space by the developed countries’ innovations away from their past prescriptions that they have been forced into by the crisis.

By “policy space”, we mean the government’s capacity to experiment with policies outside the range of those considered “acceptable” by the mandarins of the IFI’s.

Nationalisation of banks, propping up of manufacturing entities, tightening up of financial regulations, protecting industries, huge fiscal deficits are only some of the policies taken the powers-that-be that had excoriated such practices in the past. Let us take control of our economic destiny.

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Beyond Channels of Crisis Contagion

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