Thursday, October 15th 2009 was a day of good news. The FT print version headlined “JP Morgan profits lift the Dow”, as JPM posted a net income of 3.6 billion US $ in the three months leading up to September (online article of similar contents). Goldman Sachs posted earnings of nearly as much, as the DOW soared above 10,000.
A good time to be unemployed (for the wealthy)
Meanwhile, the preparatory discussions for Germany’s new coalition government brought an improvement for Germany’s unemployed. If the new government goes forth with its plans, unemployed people will be allowed up to 750 Euros savings per year of age (up from currently only 250) – that means, for instance, if you’re 30 years old and lose your job, you’ll be allowed 22,500 Euros on your bank account and still receive minimum social security cheques (Hartz IV). Sadly, however, according to local radio station WDR5 last night, only 0.2 per cent of currently unemployed people will benefit. It seems appropriate, therefore, to call the move mere “social cosmetics”, as the Frankfurter Rundschau did.
Probably the best financial news of the day was that the top 23 financial institutions in the USA (alone) will pay out 140 billion US $ in bonuses this year, as the Wall Street Jounal reported – the biggest round of bonuses ever. And that’s among a significantly reduced population of bankers compared to 2007. Goldman Sachs is paying out 743,112 Dollars per employee, on average.
Thursday, October 15th 2009 was also a day of bad news, however, though reported by fewer. At least, the left-leaning German newspaper “die tageszeitung” (taz) framed the good news above in a shocking fashion by underscoring it with pictures of starving Ethiopians.
Yes, there is a famine going on in Ethiopia. Again. And it’s a slow burner, so it hardly makes the news. And Ethiopia isn’t the only country suffering.
According to the British Daily Telegraph, five years ago about 15 per cent of people in the developing world were undernourished, today the figure is nearing 20 per cent. The Democratic Republic of Congo’s score on the World Hunger Index has risen (that is, worsened) by 53 per cent between 1990 and 2009, Burundi’s by20 per cent (taz).
You may ask, what does any of this have to do with the Wall Street bonuses? Isn’t the taz’s juxtaposition merely polemical? Hardly, I would argue. The taz’s front page is absolutely appropriate, because the recent fortunes of the financial sector have a lot to do with the misfortunes of the “Third World”. Let me explain.
Bonuses beat aid budgets, year after year
Before I briefly sketch out some of the mechanisms, a quick figure: In 2005, the world saw the greatest amount of official development aid flows ever (and ever since), 106.5 billion US $, about 40 billion more than usual. Yet, a large part was debt relief concluded at the G8 summit in Gleneagles, not an actual financial transfer. 2005 was also the year after the Indian Ocean tsunami. From 2006 to 2009, financial sector bonuses in the USA alone have trumped world aid budgets each year.
Of course, the objection would be correct that two sets of numbers prove nothing at all. Bonuses and hunger are just two emblematic phenomena for the world we live in, yet they are both instances of the same fundamental inequities in wealth and income which deny billions of people the decent lives which they could have. There are more mechanisms that link these phenomena than may be apparent at first sight.
Commodity speculation creates hunger
For one, the current world hunger epidemic is due to rising world food prices. As Nobel Prize laureate economist Amartya Sen discovered in his research on famines, they are rarely if ever caused by an absolute decline in food production. The question is rather one of relatively distributed entitlements to food and capabilities to access food. When commodity traders in rich countries became increasingly interested in buying and selling agricultural products, beginning in the early 2000’s, prices skyrocketed, decreasing the poor’s already meagre relative entitlement.
While the prices have gone down somewhat, though not to pre-2000 levels, the incomes of many poor people have fallen since the beginning of the economic crisis. Faced with rising food and fuel prices, they were forced to accumulate debt during. The combination of these factors has pushed many precarious household budgets over the edge into overindebtedness and starvation.
Development budgets axed
Yet, as commodity speculation now diminishes (or at least has appeared to do so until recently), the grip may be loosening slightly. A more lasting, and potentially more devastating, effect of the great bubble of the 2000’s will likely be a long-term reduction in Official Development Assistance (ODA). Occasional musings about the ineffectiveness of aid as a development tool aside, in the short and medium term many very poor countries and their inhabitants are completely dependent on aid for food security, a minimum of education and healthcare, and control of AIDS. A reduction in ODA would bring rising death rates, the spread of epidemics and further underdevelopment (as a process, not a state).
The unprecedented levels of sovereign debt that proved necessary to halt the autophagy (self-digestion) of the financial sector in the wake of the 2007 sub-prime mortgage debacle have reduced the fiscal future of many states to mere speculation, especially in the medium-run. Development budgets will be among those first in line to suffer, as they already have in some places; especially where they are allocated as a percentage of GDP, as is the case in the Netherlands.
Several EU countries, particularly those hardest hit by the crisis, have attempted to reduce their contributions to EU development funding. Ireland already cut its own aid budget by 22 percent between October 2008 and April 2009, and further cuts appear likely. Similar cuts have been suggested in the UK, supported by conservative media in favour of re-directing funds to the domestic (deserving) poor. Sweden, thus far one of the few countries to have surpassed the official target of 0.7 per cent of GDP, has announced reductions, too, and has already axed its funding for research cooperation with developing countries by nearly 20 per cent. Only Norway, already a global leader in its commitment to development, is increasing its aid funding slightly.
“The balance has been disturbed”
If those aren’t gloomy enough medium and long term prospects, consider climate change. While overall world food production has risen, many African and Asian countries have seen their farming prospects reduced as they are struck by ever more erratic and harmful weather patterns. As “Die Zeit” reported two weeks ago, even relatively affluent farmers on the Indian subcontinent are being driven into destitution by the changing climate. Zeit interviewee Azad Singh – owner of a motorcycle, 1.4 hectares land and a water buffalo, and thereby not particularly poor by local standards – senses that “something isn’t right”. His own crops have failed this year due to the unprecedentedly late Monsoon, forcing him into debt. Several of his neighbours have committed suicide in the past years. And groundwater levels are sinking.
Meanwhile, the Horn of Africa is suffering from a succession of droughts. According to the taz, Somalia and Kenya are now experiencing droughts of the kind which would hit each generation once in a lifetime every two to three years.
“We’ve cut down trees, built diesel motors and factories instead. The balance has been disturbed.” – Azad Singh, Indian farmer
But should the world’s poor take the responsibility for climate change? No serious scientist today would dispute that climate change hinges on the economies of the affluent industrialised countries and their related CO2 emissions. Concretely, a large part of the last boom of the financial markets (and therefore, the bonuses in question) was based on oil markets, oil-producing companies and oil-related industries (not to mention the greenhouse gas emissions of business flights, private jets, yachts, SUVs…). Thus, the poor pay dearly for the incomes of production for the global upper class through the destruction of their natural environment and the agriculture which bases on it.
Compared to this, it may seem marginal to mention the revenue-generating nature of civil wars in the developing world. But defense stocks have been termed “the NASDAQ of the decade”, while most weapons (and very few of the expensive ones) used in armed conflicts from Colombia to Somalia and Afghanistan are locally produced. Arms embargoes are ineffective, as used and new weapons still manage to find their way into conflict zones. Since demand remains bouyant, the defense sector has been an outperformer on the stock market for many years.
The Spade Defense Index, which includes among many others the six main US weapons manufacturers as well as many smaller contractor firms, has routinely beaten the S&P 500 in the eight years since 2000. Its value nearly doubled from 2004 to 2007, falling sharply only since the beginning of the credit crunch and a bit further after the presidential election victory of Barack Obama. The defense and homeland security market represents nearly 5 per cent of US GDP, and most companies active in this sector are listed on financial markets. They are among the most heavily traded.
A failure of transnational governance?
One may argue that this atrocious combination of global poverty and localised wealth-appropriation is a failure of transnational governance. And I can hardly disagree. I would, however, hold that it is also at least partly a product of transnational governance processes, the outlines of which I can only briefly sketch here.
Through the (at least) partial responsibility of World Bank for the 1908s third world debt crisis, and the hollowing-out of developmental states in its wake under IMF-designed structural adjustment plans, two major international institutions have helped to set the stage for the modern phenomenon of underdevelopment. What’s more, the dismantling of floodgates in the international financial system hinged on international bodies such as the WTO for sponsorship and implementation. In Europe, it is not the individual states but the EU which decides upon the agricultural tariffs which deny many farmers outside its borders a decent living.
Private standard-setting in the international arena helped establish IFRS methodology as the global standard in accounting practices – Sigrid Quack and Sebastian Botzem have blogged here about the harmful role of fair-value accounting in the production of the current crisis.
Is the crisis deep enough?
The question which follows is whether transnational governance can contribute to the solution of the problem. And here my tentative answer is at best a “maybe”, however followed by the clarification,”how else?”. Clearly, the world faces such grave problems on a global scale that only transnational solutions can lead to any real progress. Yet current solutions don’t look up to scratch. The development industry, for instance, is focusing too much of its attention on revenue-generating options such as microcredit, which fail to address the structural inequities in the economic system. Small loans to farmers and artisans, laudable and fruitful as they may be in individual cases, won’t stop climate change, halt arms imports or prevent speculation on food prices. Small isn’t necessarily beautiful when you’re facing big issues.
As the recent G-20 meeting in Pittsburgh shows, there may be a common recognition among the world’s elites that there are global problems which threaten everyone, but it is impossible currently to achieve any consensus as to how to solve them (see Ostrom’s Nobel Prize). This year’s record-breaking bonuses are a slap in the face of those countries which sought to effectively limit them (rather than issue vague “guidelines”), and they are a warning to all other countries that the crisis just might not be deep enough, yet.