1. Understanding the Global Financial Logjam: Stemming Crises of Livelihoods in the Afro-Arab Region Centre for Human Environment Secretariat of the House of FederationAfro-Arab Parliamentarian Summit September 24, 2011, Sheraton Addis, Addis Ababa BT Costantinos, PhD Professor of Public Policy, School of Graduate Studies, Addis Ababa University costy@costantinos.net

2. Part IThe Impact of the Global Crises on The Afro-Arab Region How did it come and how bad is the crisis? Marxs critique of Capitalism The world of derivatives Financial Shenanigans, Greed and Capitalism Stemming the tide of the Impact of the Economic Crises Capitalism is not beyond improvement! With the US markets in crisis, the financial markets hit anew low. The rescues, bankruptcies and dizzying write-downssignal a reckoning for Wall Street wizards who engineered the credit crisis. The liquidity capacity of these markets wasoverwhelmed with the pattern of ever-lowering interest rates that arose from the tech stock bubble of the late 1990sJanuary 7, 2012 BT Costantinos, PhD Slide 2

3. A Century of crises and Marx The U.S. Sub-Prime Mortgage Crisis (2007-2009) US Dotcom bubble (2000) The Asian Financial Crisis (1997-1998) The Collapse of the Japanese Asset Price Bubble (1990s) The Latin American Debt Crisis (1980s) The 1973 Oil Crisis (1973-1975) The Great Depression (1929-1939) - Wall Street Crash in October 1929Marx argued that this alienation of human work (when labour itselfbecame a commodity) and surplus value are precisely the definingfeature of capitalism. Marx believed that this cycle of growth,collapse, and growth would be punctuated by increasingly severecrises. This can easily be applied to the current global situation,because alienation is still a challenge.But, some suggest that self-interest and the need to acquire capital isan inherent component of human behaviour, and is not caused bythe adoption of capitalism January 7, 2012 BT Costantinos, PhD Slide 3

4. The world of derivativesEconomists believe derivatives will allow more precise pricing offinancial risk and better risk management, while they concede thatwhen derivatives are misused, the leverage that is often an integralpart of them can have devastating consequences.The world of derivatives is peppered with brain-teaser lingo: a forward contract commits the user to buying or selling an asset at a specific price on a specific future; a future is a forward contract traded on an exchange; a swap is a contract by which two parties exchange the cash flow linked to a liability or an asset; an option is a contract that gives the buyer the right, but not the obligation, to sell or buy a particular asset at a particular price, on or before a specified date; an over-the-counter is a derivative that is not traded on an exchange but is purchased from, say, an investment bank; Exotics are derivatives that are complex, available in emerging economies Plain-vanilla derivatives, are typically exchange-traded, relate to developed economies and are comparatively uncomplicated.January 7, 2012 BT Costantinos, PhD Slide 4

5. The crises shook world-wideconfidence in the system resulting in declining global wealth

6. Global impact of the financial crisesStock market wealth declined by 40-60% in Dollar termsWorld bank, Morgan Stanley capital International Indexes, IFC/S&P

7. Investment demand fell sharply worldwideExport volumes and demand plummeted sharply

8. Does the Crunch affect the Afro-Arab World? Businessmen have always moaned about the excessive regulations and conservatism of Afro-Arab Region banks. Controls on foreign exchange often prevent them raising more money by investing in exciting financial instruments. Foreign ownership of banks is limited. Now, however, this very de-linkage from the Western financial system has turned out to Afro-Arab Regions advantage. Its banks have almost no exposure to the subprime market causing such havoc elsewhere in the world. No one doubts that Afro-Arab Region will feel the effects of the crisis eventually. As world trade contracts, so will the demand for Afro-Arab Regions oil and minerals, the main commodities behind its current boom and aid to imperilled Afro-Arab Region. There is a reasonable chance that Afro- Arab Region may survive the current world financial crisis less bruised and battered than some other parts of the world. The very factors that damaged the continent in the past may now be working in its favour January 7, 2012 BT Costantinos, PhD Slide 8

9. Impact of the global crises Increase in the number of poor due to changes in food prices (since December 2005) Global Food Prices 2008 Food prices in 2009 Lower bound estimate Upper bound estimate Lower bound estimate Upper bound estimate 24,000,000 26,000,000 21,000,000 22,000,000Source: World Bank, Global Income Distribution DynamicsNote: Lower bound estimate assumes low-income farm laborers work for low-income farm owners. Upper boundestimate assumes low-income farm laborers work for rich farmers. Poverty line is 1.25 (2005) dollars per day Decline in Tourism Declines overall ODA Multilateral, bilateral, NGOs Proprietary and open knowledge investment flows decline Capital outflows Portfolio investment plummets, bonds and stocks are held, Short term credit provided by foreign to local banks ceases de-leveraging of banks; exchange rate falls at unprecedented rate

10. Net capital inflows: developing nations Dramatic Decrease Increasing trend

11. Corruption and Foreign Aid:January 7, 2012 BT Costantinos, PhD Slide 11

12. Pricing, quantity, and Social impact of a Binding Price Ceiling Non-binding price ceilingThis is the principle that the market price rises or falls to the level atwhich the quantity of a good people are willing to supply is equal tothe quantity that other people want to buy. Nevertheless, sometimesgovernments for political reasons or for reasons of equity may wishto over-ride that principle. When they do, the outcome ispredictable. Hence, our ability to predict what will happen whengovernments try to control supply and demand shows the power andusefulness of supply and demand analysis itself. January 7, 2012 BT Costantinos, PhD Slide 12

13. Part II Stemming the tide of the Impact of the Economic Crises in Afro-ArabRegion, Advancing Human Development, and Protecting Human Security A system needs to be designed where participants cannot threaten the safety of the economy. The swaps market, often involvingindividually tailored contracts, has virtually no regulation. To assess risks building up in the system, regulators should demand more transparency as oversight of different types of securities needs to be more consistent. ACCA Lecture - BT Costantinos, January 7, 2012 PhD Slide 13

14. Chinas hunger for African exports 3500 3000 1 9 9 9 =1 00 China & The 2500 2000 Afro-Arab 1500 1000 500 Region 0 Soy abean s Cr u del oil Min er als 1 999 2001 2003 2005 2007China has become the source of billions for Afro- Arab Region and one of the voices for the poor nations and the Regions most audacious financier. The China ExIm bank has facilitatedloans to the tune $10 billion to the Region, albeit, on more commercial terms.. January 7, 2012 BT Costantinos, PhD Slide 14

15. Is developmentalism the way forward? Proponents of a strong developmental state in Afro-Arab Region assert that reforms neo-liberal market reforms pushed by the Washington Consensus have failed to generate the kind of growth they sought in Afro-Arab Region. Hence strong developmental states are the way forward, as they in any way endanger the reforms of good governance because only those that were home-grown ever had a chance of success. On the other hand, there exit current schools of thought that organisational adaptation to political emergencies is part of public policy. It is an ad hoc process -- rather than societal convergence, the emerging system is adapted to the process of co-evolutionary and separate development that systemic crisis in Afro-Arab Region has given rise to - developmentalism that is hooked to the umbilical cord of international charity and thus the incorporation of aid in national development. January 7, 2012 BT Costantinos, PhD Slide 15

16. Governance issues in Developmental States Governments recognises that strengthening State Independent Institutions capacity will have major knock-on effects for all Legislature other areas of development and poverty reduction Judiciary agenda. Ombudsman A key distinction, which runs through much of the Human Rights history of political theory: Developmentalists emphasise Auditor General the stewardship/ guardianship while neo-classical Inspector General economists augur its guiding functions guiding/steering Justice system responsibilities of the state on the other. GOVERNANCE is the conscious management of regimes Anti-corruption with the aim of enhancing the effectiveness of political Attorney General authority and applied realm of politics, in which CSOs political actors seek mechanisms to convert Professional political preferences into managing society. It Associations involves improvements in the technical competence and Media efficiency of the public sector as well as measures to make public policy more accountable, transparent, and predictable to society at large. January 7, 2012 BT Costantinos, PhD Slide 16

17. Requisites for economic governance1. The first requisite of good economic Finance governance is the spirit of Legislation tolerance. It requires that political Political Ownership Governance of structure and policy differences are resolved finance in a spirit of respect for the views of institutions others, more specifically, citizens.;2. The spirit of tolerance is enhanced Policy and if there is a proper recognition of Strategy the right and responsibility of Structure and Economic citizens and entrepreneurs - right of Governance Process association and expression for collective action;3. Diffusion of power is achieved Purposeful through the establishment of mobilization Social Safety nets independent institutions for the Social Corporate Social performance of state functions; Governance Responsibility January 7, 2012 BT Costantinos, PhD Slide 17

18. Consultative Council on Fiscal Affairs (CCFA) CCFA should be set-up as the highest authority for consideration of socio-economic policy analysis, formulation, and management in relation to economic activities reflective of long-term policy objectives. While ministries and district administrations formulate their respective plans, the CCFA will undertake real time analysis of the challenges facing the economy from a global perspective. The CCFA will be constituted from citizens of all walks of life with a potential for international advisory services by think tanks and renowned development practitioners addressing issues of abject poverty and economic and financial management. Slide 18 January 7, 2012 BT Costantinos, PhD

19. Policy options for Afro-Arab Region Civic and parliamentary oversight committees, especially in the area of public accounts, Creating a metric civil service for rebuilding public confidence in the state and the market Optimizing state involvement in the economy, streamlining government, limiting discretionary decision-making to reduce opportunity for corruption, eliminate state monopolies, economic distortions which facilitate it Reviewing the quality of training and education Non-inflationary sources of finance and sound FDI climate (telecom, power, transport, etc) Conditional cash transfers, investments in labor- intensive infrastructure Finance management reforms Founding independent human quality development think tanks - investment in human qualities. Slide 19 January 7, 2012 BT Costantinos, PhD

20. Sovereign Wealth Funds and potential for investing them in AfricaCountry Fund Billions $UAE ADIA 712.4 Forex reserves ($Millions)Saudi SAM 439.1Kuwait KIA 202.8 Saudi Arabia 456,200Qatar QIA 85 Libya 107,300 Iraq 45,680Libya LIA 70 Nigeria 43,360Algeria RRF 56.7 Egypt 27,812Iran OSF 23 Morocco 23,638Bahrain MHC 9.1 Kuwait 22,420Oman SGRF 8.2 Qatar 22,410Saudi Arabia PIF 5.3 Tunisia 7,804Nigeria ECA 0.5 January 7, 2012 BT Costantinos, PhD Slide 20

21. Assets under management of SWFsincreased to $4.7 trillion in July 2011, There is an additional $6.8 trillion held in other sovereign investment vehicles, pension reserve funds, development funds, state-owned corporations funds $7.7 trillion in other official foreign exchange reserves. Countries with SWFs funded by commodities exports, primarily oil and gas exports, totalled $2.7 trillion at the end of 2010. Non-commodity SWFs totalled $1.5 trillion. Part of this huge sums are Afro-Arab resources and more that are FROZEN in the hands of Western banks could have been invested in Africa. January 7, 2012 21 BT Costantinos, PhD Slide

22. Democratic regime change: Rules and institutions Rules Constitutional rules Legislated Rules Administrative Rules Institutionalisation of rules Impartial and independent electoral bodies are vital; The Bill of Rights, entrenched in the Constitution, must be respected to the letter. An independent judiciary (in theory and practice) is the last hope against tyranny. Political parties are vehicles through which democracy is practised. They must show respsonsibility that goes Slide 22 with the mandate. BT Costantinos, PhD January 7, 2012

23. Political rules and institutionsDemocratisation requires a plural set of organisations which promote and protect rules of peaceful political participation and competition. Together, democratic institutions (plural organisations plus rules ofaccountability) ensure control of thestate executive. The relative strengthof organisations determines the rules of the game installed. January 7, 2012 BT Costantinos, PhD Slide 23

24. Strategic approaches in mainstreaming a Rights-based Approach to Recovery Rights-based enquiry and situation analysis Evaluation Policy & Strategic analysis andManaging strategic Strategic Framework Information Rules and Institutional Sustained Arrangements Implementation of Mainstreaming operational Activities Plans RBA local level decentralised management Strong systematic campaigns must be launched with a communication strategy developed to include public relations to enlighten society, social marketing of new ideas and cultures and enabling negotiations, and advocacy. January 7, 2012 BT Costantinos, PhD Slide 24

25. Thank You BT Costantinos, PhD Professor of Public Policy, School of Graduate Studies, Addis Ababa University costy@costantinos.netJanuary 7, 2012 BT Costantinos, PhD Slide 25