dr. shayo on global banking crisis

Global Banking Crisis,

How Can We Fix our Own……

We have spent a lot of time, trying to finger the villain in the banking crisis, and there is still, plenty of blame to go around; however, the root cause of banking turmoil was structural imbalance in the growth model of the global economy over the last two decades. And for defenders of globalization as a progressive force, it is a big problem.

A model, which essentially developed with the liberalization of the Chinese, and Indian, economies in the late eighties and early 90s, has produced unprecedented global growth and greatly contributed to poverty reduction effort. It has also developed a serious weakness at its centre, and unless we address that weakness, any other counter-recessionary strategy is palliative at best. That’s why as my contribution to Mashaka’s view analysis, I am obliged to start with a general point, in regards to economic reform governance.

There is a sense in which a crisis can focus your mind. And although this may sound odd, the better things get, the greater the temptation will be, to slip back into thinking that the status quo ante was sustainable, or only needs a few tweaks here and there.

We see this in the financial services industry, where buying out government equity states seems to be tempting some banks to think that the events of 2008, which can now be put behind, like an unfortunate memory. This, despite the fact that there are huge amounts of bad debt still on bank books, and Western banks are still relatively lightly capitalized, and asset prices are still potentially volatile.

There is, without a doubt, an immediate regulatory and professional reform agenda required. New capitalization rules, new remuneration structures, new rules for trading, new forms for spending public money in derivatives that keeps them in clearing houses or exchanges, so that we know what risk is going where, and how the market prices them. Nations including my beloved country –Tanzania- need to do this outside their domestic silos that characterize national regulation.

My point is that, nations including Tanzania must not let the first signs of health in equity markets, and real economies lull it back into complacency. I know, voters, shareholders, bank customers, and genuine politicians and not politicians cum-businessmen, are unhappy and want change, and that is both good and bad because unhappiness is never the ideal state for policy making.
The same risk applies to the even bigger problem of the imbalances at the centre of the global economy; In fact the risk is bigger because the problem is that much tougher to solve. And most people barely register that it does exist, without forget that some have no clue of its existence simply because they are not informed.

Reduced to its crudest form, the decade long problem reached its climax, and spilled over as the credit was too cheap in the developed world. The surpluses that built behind export-led growth models in the emerging world contributed to record financial flows, pushing down interest rates here, and across the developed world. That encouraged investors to look for riskier and riskier investments in order to increase their yield. It also encouraged people to buy assets such as houses they couldn’t afford or go for huge loans from people who shouldn’t have lent them the money in the first place. Massive debts were sold around the world, and I hope you know the rest.

While consumers and governments in the US, and the UK are working hard to repair their balance sheets, one may wonder what our politicians are thinking on how to get out of this vicious cycle as 75% of our budget is externally financed. The UK and other western world are rebalancing somewhat away of what I can describe as imported capital, with crystal clear stimulus plans rooted in the recognition to keep on developing its skills base and its productive capacity.

Tanzania is facing similar challenges, although in her own way and level. Tanzania need to save more, invest more on areas that will enable job creation and skills that market need and strategize to export more added value products than raw material. This is one of the motivations that the next elected government has to bank on. John Mashaka once reminded us of how agriculture is vital for Tanzania. At whatever cost, if Tanzania is to have bright future, need to invest in the skill base and infrastructure that underwrites its export competitiveness.

At the moment, the precise detail of this process may matter less than the simple problem it represents, but would like to remind my fellow Tanzanians that the frequent failure of national on lending initiative to build sustainable local credit market stem in part from lack of clarity as to what element credit market should possess.

Stability of Tanzanian economy is the sum of sovereign national macroeconomic policies on interest rates, currency levels, domestic spending and creating demand. There is no mechanism to mediate between these policies or enforce action that would counter systemic risk, in financial markets or at the general level of the national economy. My tip? Nobody was asleep at the wheel of globalization, because there is no wheel to speak of.
Free market true-believers may resist my line of thinking, but the only way to preserve a national growth model based on the huge benefits of dynamic markets is more and better financial regulation and better national governance. I think in the context of what is happening around the globe, Tanzania need to wisely make use of its gifted resources and depoliticise the external sources of funds.

Given the obvious dissatisfaction in emerging economies with the status quo, Tanzania need to think quickly and imaginatively and on how to tackle issues like tax havens and tax evasion, as also refuse to be “shamba la bibi” and instead create incentive based approach to businesses for to pay taxes accordingly. A detailed account (issues on 19th June 2009) on tax evasion, tax avoidance and tax expenditures in developing countries prepared for DFID shows that developing countries lose US-$ 285 billion per year due to tax evasion in the domestic shadow economy. Is this trend familiar in Tanzania? Revenue losses suffered by developing countries including Tanzania due to corporate profit shifting range between approximately $35 billion and $ 160 billion per year.

My point is investors need to pay taxes accordingly. Offering text books to schools, or two or three computer PCs or desks to school isn’t as much as necessary. That should be the work of local authorities. We need investors to pay tax, perhaps this could reduce our dependency from budget support and avoid petty problems where an investor can convince his/her country to halt paying promised development funds specifically I am referring recent Finland saga and an investor in Tanga region.

Tanzania needs much greater coordination of financial regulation, ensuring that market participants are not able to trade off one regulatory jurisdiction against another. There will be cries that this is putting the competitiveness of national sectors at risk in the short term, and that’s not something that we should dismiss out of hand.

The G20 leaders who met recently have taken the first steps down this road. Tanzania under the leadership of President Kikwete, has shown real leadership and I am proud of that. But just to state the problem in these simple terms, is to make it clear how seriously the task will test our collective commitment in the next 2010 government, whose election is now a topic of discussion within religious circles. In nut shell, Tanzania need bold leaders who will have the interest of their country at heart and not the other way round.

I know it will get harder and harder to create a national climate of change, because agreeing any transfers of resources and setting aside the so called “corrupt” group/individual(s) of elected leaders, will require a general perception that the national feeling is balanced. I know shuffling and shake-up “rice” and “husks” will be quite of a challenge to President Jakaya Kikwete. I also believe however, that, he is planning a next move that will leave a legacy in Tanzanian history; a calculated move meant for the future generations to attain their aspirations.

Wherever we are, be it within or outside our borders, as Tanzanians, we must value and love one other, under the umbrella of national brotherhood, and above all must think like internationalists. A crisis like the credit crunch erodes the confidence of ordinary people in country such as Tanzania and when we fail to address the mistakes we put ourselves at risk, politically and practically.

Mungu ibariki Tanzania
Hildebrand shayo
shayohill@yahoo.co.uk