Transcript Mah Hui Lim
Current Debt Crisis: Causes in Historical Perspective Mah-Hui LIM South Centre Eurodad – Glopolis International Conference 2013 Debt, Finance and Economic Crisis Prague June 3 – 5, 2013 1 Three Levels of Causes of Crisis Flaws in Theory & Method of Macro Economics &Finance-Market Efficiency Theory & Fallacy of Composition Deregulation, Practices and Malpractices of Financial Industry Macro-economic structural causes – Current account imbalance Financial vs Real Economy imbalance Income/Wealth Imbalance 2 Economic Crisis and a Crisis of Economics P Krugman in 2009 Lionel Robins Memorial Lecture at LSE: Much of mainstream macroeconomic theory in the past three decades have been “useless at best and harmful at worst” 3 Financial Industry- Minsky Financial fragility is determined by margin of safety (banks’ ability to meet liquidity demands) & ability of borrowers to repay from cashflow As banks have moved from hedge financing to speculative & Ponzi financing – financial fragility & instability increases 4 Frequency of Banking Crises – 1880s to 2009 5 Focus on 2 Structural Causes – Financialization & Inequality Key to understanding long term structural causes of Global Financial Crisis is to examine the link between: financialization, debt and inequality Not an ordinary banking crisis 6 Inequality Preceded Great Depression and GFC 7 Why Inequality related to recent financial crisis 2 measures of inequality: Gini index Wage share of GDP (vs capital share) 8 Declining Wage Share of GDP – 1970 to 2010 Source: UNCTAD, TDR 2012 & CEIC 9 Globalization and Increasing Inequality Growth has been accompanied by growing inequality in most countries In 4 largest economies – US, Europe, China, Japan - common phenomenon of unrelenting pressure on labor income despite rising productivity 10 Productivity Growth vs Wage Growth 11 U.S. - Wages lagged behind productivity 12 Wages – play two functions A cost component of production Also a component of aggregate demand With neo-liberalism – labor flexibility > labor loss of bargaining power, rise of temporary – casual labor, wage suppression > wage growth lagged behind productivity and wage share of GDP declining 13 Inequality & Underconsumption Decline of wage should suppress household consumption, i.e., underconsumption (as in China) Under-consumption or drop in aggregate demand can be counter acted in 2 ways Increase in debt (as in the US) Increase in exports (as in China) 14 Enter Monsieur & Madam Finance - Financialization US became a debt driven economy 1960-2007 US GDP rose 27x Total debt rose 64x to 350% of GDP Household debt rose 64x to reach 100% of GDP in 2007, while real wages stagnated or declined Debt bubble built up 15 U.S. - Growth of GDP (27x) and Debt (64x) btw 1960 & 2007 16 Composition of USD total debt GDP rose - 27x Total Debt - 64x Financial -490x Household- 64x Non Financial Corp – 53x Govt- 24x 17 Excess Savings of Rich Invested in Risky Financial Products Most of income gains accrued to top 1% of households Propensity to consume of rich much lower than the poor Excess savings chasing for high yields and invested in risky assets (financial innovation) > asset bubble BOTH BUBBLES IMPLODED 2007 18 Conclusion & Policy Implications Wage Repression + Financialization a toxic mix results in financial crisis Policy Implications: Need finance to serve real economy but NOT financialization which drives speculation and bubbles Finance needs to be better regulated because finance is an industry with high negative externalities 19 Financial Regulation & Functional Income redistribution Studies on contribution of finance to growth is mixed – probably it’s a inverted U shape – positive effect up to a point and then becomes negative Need to address problem of inequality Can be ex-ante or ex-post Ex-ante – wages tied to productivity growth over long run – cannot be less or more without causing instability 20 Income redistribution Ex-post – government must have fiscal policies to redistribute income and enhance social safety nets Civil societies must push for all the above 21 References Michael Lim Mah-Hui and Khor Hoe Ee, “Inequality and Financial Crisis: From Marx to Morgan Stanley” in Development and Change, Volume 42 (1) January 2011. Michael Lim Mah-Hui & Lim Chin, Nowhere to Hide: Great Financial Crisis & Challenges for Asia, 2010. Inst of SEAsian Studies, Singapore 22 IMF Working Paper 10/268 23 THANK YOU 24