Global financial crisis, are we ready to face?

 

	Interviewed by Dhaneshi Yatawara [email protected]
Prof. Jagath Wickramasinghe Senior Economist/Former Vice Chancellor Sri Jayawardenepura University	The world’s economy shook with the USA financial crisis recently. As each and every country is linked up with each other how are we supposed to minimize the impact?	Khabir Hashim  M.P., United National Party Pix - Iresha Waduge
Select proper policies to minimize the impact		Inflation can be more dangerous than terrorists
Our orientation should be towards rural economy		We should have our priorities right

What is this world economic crisis?

Prof. Jagath Wickramasinghe Senior Economist/Former Vice Chancellor Sri Jayawardenepura University

The current financial crisis which is brewing into a world economic recession is not caused either by oil or the food crisis though it has its contribution to speed the intensity of the current crisis. America as far back as in 1933 enacted a legislation called Glass-Steagall Act which enforced the separation of banks by business type to avoid conflict in interest. Under the Act a bank cannot offer investment, commercial banking and insurance services. However,this Act was replaced by Gramm-Leach-Billy Act of 1999 during the Clinton Administration. This replacement allowed the banks to engage in these activities simultaneously. This financial market deregulation that enabled Goldman and other investment banks to broker commodity contracts was signed in early 1990's.

After the new legislation the banks were able to work with mortgage origination companies to write loans to clients without proper collateral and then sell the loans to the investors. It is believed that the root cause for this crisis was the subprime mortgages. Subprime lending is the practice of making loans to borrowers who do not qualify for the market interest rates owing various risk factors. Over the years mortgage lenders were happy to lend to people who could not afford their mortgages owing to such deficiencies. When the bottom dropped out of the US economy and the key interest dropped to 1% on Government Policy the unregulated banking system went on a borrowing and lending spree. The Value of US subprime mortgages was estimated to be 1.3 trillion US$ in March 2007. Many people, specially new couples saw this as an advantage and went on happily borrowing money. The worst case hit those who took adjustable rate mortgages. Due to unprecedented financial leverages what had magnified profits during the housing boom now draws large losses after the bust. Subprime crisis led to series of other problems.

Housing price drop left consumers with less wealth, which pressurized consumption to cut down. Certain minority groups were worst effected. Home related crimes escalated. About 65,000 jobs, mainly in the financial sector were lost.

Khabir Hashim - M.P., United National Party

Soon after the world war, specially in the European countries more money needed to get printed. In the USA they went beyond the value of the gold reserve they had. Gold value at that time was 35 US$ per ounce. But in 1971 US was facing such high level of inflation that the existing system changed into the present flexible exchange rate. So there was a free flow.

Print any amount of money. The Bush administration pumped so much of money into the system, specially to the Iran, Iraq and Afghan wars. And with the change of banking systems loan interest rates dropped drastically. Hence people started happily borrowing money. There was enough money flowing into the economy more and more people started borrowing money in this backdrop.

Young couples who were trying to build their future found this very beneficial and many of them took loans at the very low rates. They were specially housing loans. And, in addition lots of people living in rented houses went for these loans to build their dream homes. People thought this was a positive result of the free market economy. What really happened was that the Government intervened and printed money. US Government started pumping money into mortgage institutes and young people started borrowing money.

But when the US economy started facing difficulties these lenders started increasing the loan rates. So the young people who borrowed money couldn't pay back. This continued as a chain reaction. The finance companies started facing problems, the second and third party supportive companies also started facing troubles. We see such crisis taking place all over the world. So when a Government start printing more money the notes won't worth a paper. At times metal value may be higher than the coin value. It's a very frightening situation. In the history it is stated that in France, when the country faced such crisis, the Central Bank authorities were guillotined. It is such a serious crime. Inflation can be so dangerous more than terrorists may be.

Do you expect a major negative impact on Sri Lankan economy?

Prof. Jagath Wickramasinghe Senior Economist/Former Vice Chancellor Sri Jayawardenepura University

The economic downfall world over will adversely affect our exports, foreign remittances etc. Imports will have some kind of benefit. More than that what we should learn from this drama is to see that adequate protective measures are in operation in the financial sector and leverage to make such stupid decisions as in America totally wadded. If the world's most developed country, both economically and technologically, America couldn't preempt ensuing disaster until some of the giants came to the brink of collapsing. A developing country should be extra careful. Along with the liberalization of the financial sector in America, here we too liberalized the banking sector.

I believe the exorbitant profits that area earned by our banking sector come from these ancillary activities.

Khabir Hashim - M.P., United National Party

We cannot get isolated from the rest of the world. We cannot take away the plug that connects us to the world. If one tries to do so then it is stupidity. Be it today or ancient time, we can't live in isolation. Even during the time of our ancient kings time we had free trade zones. So there is an impact on us. There is no doubt about it. But saying that we cannot put our problems into that account. Most of problems we face are home-grown issues.

The Financial management and economic system is wrong. In my point of view Central Bank is highly politicized. The financial mission has gone wrong for trying to work according to the agendas of politicians. There is a lot of wastage of money in the country. So the impact is not directly from the international crisis.

Are we at a 'no'return' state?

Prof. Jagath Wickramasinghe Senior Economist/Former Vice Chancellor Sri Jayawardenepura University

No, not exactly. We have to choose the correct policies. We have lot of space to avoid the hard effects of the impact. There is always light at the end of a tunnel.

Khabir Hashim - M.P., United National Party

No, I don't think so. I don't think we are a banana republic. We can minimize the impact, if we cut down the financial wastage. The Central Bank must first protect the country's economy.

How can we, as a country, save our economy from these drastic changes?

Prof. Jagath Wickramasinghe Senior Economist/Former Vice Chancellor Sri Jayawardenepura University

Truly there is no way that we can avoid the impact. But there are so many ways to minimize the economic impact. Proper policies should be selected. Let us learn a lesson from the stupid decisions made by American politicians and bureaucrats and be proactive. Our orientation should be towards rural economy. But we should not pool all the resources in the periphery to the centre.

Khabir Hashim - M.P., United National Party

We need to get our priorities correct. If not, we will have to face an economic meltdown. The world crisis need not hit us. Some countries are devaluing their currencies to become more competitive. But I'm not saying devaluation is the only solution. At times it can hurt us more. So we must control inflation. We need to strengthen the export products because our economy depends so much on it.

How about the impact on other neighbouring countries?

Prof. Jagath Wickramasinghe Senior Economist/Former Vice Chancellor Sri Jayawardenepura University

Well, South Asian countries are feeling the impact. The world recession will affect India as well since they also depend on exports. Even Indian leaders have mentioned this to media during the last few days. But they have diverted their economic policies. India might have the strength to stand against this. But Bangladesh, Pakistan, Bhutan are facing worse conditions. I think Japan has been facing the recession for some time now.

Countries like Thaiwan will definitely feel the impact strongly.

Khabir Hashim - M.P., United National Party

We can see many countries absorbing the impact very practically. Take Singapore or Bangladesh. They are holding the economy very successfully. They were able to keep the inflation rate at 10%. Malaysia is also doing well. And see our next door India. They have made themselves competitive in order to become more successful.

Can we carry on our development work without any hindrance and how?

Prof. Jagath Wickramasinghe Senior Economist/Former Vice Chancellor Sri Jayawardenepura University

We need a national policy on fuel consumption. Since the price oscillated we need to be extra cautious. Considering the exports, we need to analyze individual products and give incentives accordingly. Government has already done on tea. It should continue. The remedy should not be generalized.

Khabir Hashim - M.P., United National Party

Of course we can. This is all about commitment. Sacrifice to the country. It all should start from the top. We must cut down the unnecessary wastages. Then, whatever the economic crisis we face, we can go on with our development work.

Do you believe that people can contribute to cushion this impact?

Prof. Jagath Wickramasinghe Senior Economist/Former Vice Chancellor Sri Jayawardenepura University

There are lots of things. Consumption patterns need to be changed like cutting down use of wheat flour products. It is a matter of changing our attitudes. We must try to implement conservation methods. We are importing Kurakkan - isn't this is a shame? Effectively using private vehicles for transport is another aspect.

Khabir Hashim - M.P., United National Party

What can the people do? They have already made their sacrifice. We need a good management system. Even with a war we can get out of this if we have a proper management. We should not make stupid mistakes.

Promoting local products - will this lessen the impact?

Prof. Jagath Wickramasinghe Senior Economist/Former Vice Chancellor Sri Jayawardenepura University

Definitely. And most importantly we need to change the strategies of agriculture. For example minimize the use of chemicals as weedicides, pesticides, fertilizer etc. in agriculture since these are side products of oil refinery. We have a very good set of indigenous activities which can be improved.

Khabir Hashim - M.P., United National Party

Local production sector need to be strengthened. Government should look at long term programs to level up the local production. These are home grown problems. But our local products need to be strengthened to be competitive. If we fail to be competitive how can we be successful in the export market? The Government needs to intervene at the correct time.