Bracing the storm raging through US and Europe
Thursday, 16 October 2008
Syed Fattahul Alim
The world economy is experiencing a recessionary trend in the wake of the turmoil in the US financial market. In an era of globalisation, when all the major economies are deeply interconnected through intense financial transactions with one another, one cannot expect that the turmoil in the US financial market will be limited to only the other side of the Atlantic. In fact, the turmoil emanating from the credit crunch in the US housing market has spread like wildfire across the globe affecting major economies.
Meanwhile, the EU countries have also started to feel the heat as like in the USA, the major investment banks and other financial institutions are falling there like dominoes one after another. The British government has also announced its bail-out plan of £500 billion to save its banks and other financial institutions as did the USA beforehand by announcing its similar package of US$700 billion bailout plan for its falling financial market controlled by the Wall Street. In the face of this unprecedented crisis in the global financial market after the Second World War, the major economies of the world represented by what is known as the Group of Seven, or G-7, has expressed its solidarity to face the crisis together and that in this situation no country will try to gain any undue advantage at the expense of the other. Such move on the part of the major economies to restore public confidence in the global financial institutions is also unprecedented, given the fact that in the pre-Second Great War reality, the big economies lacked such kind of unity and camaraderie. But then the world economy was also not so deeply interconnected and interdependent as it is now.
Nevertheless, the Great Depression triggered by the US stock market crash on October 29 of 1929, also known as the Black Tuesday, did engulf the major economies of the world of that time. So, one cannot hope to escape the impact of the turbulence created in the US economy, which is also the biggest economy on earth, at a time when the world economy is more interconnected and interdependent than it was about eight decades back. So, it is not surprising that Germany, France and other 13 European nations have taken a plan to bail out their banking systems in line with the one the British prime minister Gordon Brown has taken to protect his country's banking system.
The unique demonstration of unity visible among the major global economies appears on the face of it to save their banks or, in other words, their financial systems. And it is also true that any collapse of their financial system also means the collapse of the dominant discourse of the present-day world economy, which is nothing but unfettered market capitalism. It is, therefore, natural that the sham façade of success that such economy had been demonstrating thus far has overreached itself. The culture of consumerism is but the modern version of the Charvak philosophy of ancient India (which would inspire its followers to live an affluent life even if that meant falling into debt). Modern consumerism is based on the unmitigated credit culture, where one can buy anything even if one does not possess the money necessary to buy those creature comforts. The banks and a host of others credit giving institutions are there to provide the loan to the willing consumer to buy whatever he or she wants to have-car, house, furniture, electronic gadgets, apparels, luxury goods, you name it. That is because the market is replete with goods, both tangible and intangible. And the intangible goods churning out of the financial industry in the form of various financial products are helping the consumers to possess the tangible goods like lands, houses and other products of the manufacturing industries.
In a word, it was the biggest economic bubble ever created on earth supported by the latest version of capitalism, the neo-liberal capitalism, has finally gone bust. Put differently, it is an implosion of the bubble, the dress rehearsal of which was staged in East and Southeast Asia in 1997 triggered by the collapse of the Thailand's currency baht. Also known as the IMF crisis, as the root cause of the crisis could be traced back to huge debt burden its economy had been smarting from, Thailand faced the first shock as it floated its baht and pegged it to the US dollar. The shockwave spread like tsunami to crash against the financial markets of other Asian economies like South Korea, Hong Kong, Indonesia, the Philippines, Malaysia, Laos and to a lesser extent the economies of China, India, Taiwan, Singapore, Brunei and Vietnam. But the new yet greater tsunami has rocked the foundations of the US economy and with it all other very big economies, which had so far been watching, controlling and lecturing the rest of the world from a vantage point. The big crisis is now finally at their own doorstep.
However, it is not a time to crow over the fall of the neo-liberal capitalism so evangelically advocated by the Western economies till yesterday. In fact, the storm that is at the moment sweeping across the western economies will ultimately engulf the entire world, because almost all the economies of the world are tagged to them and had been following their model to achieve quick success and prosperity. Geographical distance is no barrier for the storm to reach the shores of the economies lying afar.
There is no reason for us in Bangladesh also to remain complacent. On the other hand, the government has to be very proactive and watchful about the developments in the Western world. True, the size of our economy is very small. Moreover, our financial market is so underdeveloped and small that we are yet to qualify for the level of transactions with the big banks and other financial institutions that might draw us into the meltdown the advanced economies are going through. So, the other day, the financial experts mainly from the central bank could so light-heartedly assure us that the storm in the West will not affect us. Since the commercial banks have no investment in the overseas financial institutions, neither has the central bank, except in government bonds of other countries, so our financial system is more or less safe from the turmoil of the Western world, they argued.
But the lack of substance of an economy, or more particularly, of its financial system, is no reason to be cheerful. Consider the prospects of our readymade garments (RMG) sector. The entire range of products of the RMG sector is exported to the EU and North American markets. Now what is the situation of the North American, especially the US market? It could be learnt that some 700 retail chain stores in the USA that dealt in major US apparel brand products, which outsourced their orders to the Bangladeshi garments factories have either closed their business or are planning to do so soon in the wake of the financial meltdown in US economy. Among those are the major companies like Gap, Talbots, Eddie Baur, Ann Taylor, Lane Bryant, Cache, Pacific Sun wear, Sharper Image, etc., to name but a few. Of the major buyers of Bangladesh-origin garments JC Penney is one. It has been learnt that it is also going to cut its foreign orders by half. Identical stories are coming from Ann Taylor, which is set to close its 117 stores across USA and the Eddie Baur, a large buyer of our RMG products, has already closed some of its chain stores. Gap, Talbots, Pacific Sun Wear and Cache, all big operators in chain stores business and who buy Bangladeshi garment products, are in the process of winding up many of their operations all across America.
The fall in consumer demand in the US market due to severe credit crunch is behind such closures of the retail chain operation there. But this is just the beginning of the bigger fall in the market demand there. What will happen to our RMG sector once the orders from the US market start to dwindle sharply? One may also witness similar developments in the European markets sooner than later.
Though some financial experts and economists think that the turmoil in the USA and Europe may not touch us in the short-term, still we need to be very cautious and keep our own house in order before it is, too, late. And the argument that our economy is too small to be affected by the big storm lashing the most advanced economies has a very serious weak point. For big economies have also the necessary strength to stand their ground longer than weaker ones. We, therefore, stand to lose both ways, if not on our guard.
The world economy is experiencing a recessionary trend in the wake of the turmoil in the US financial market. In an era of globalisation, when all the major economies are deeply interconnected through intense financial transactions with one another, one cannot expect that the turmoil in the US financial market will be limited to only the other side of the Atlantic. In fact, the turmoil emanating from the credit crunch in the US housing market has spread like wildfire across the globe affecting major economies.
Meanwhile, the EU countries have also started to feel the heat as like in the USA, the major investment banks and other financial institutions are falling there like dominoes one after another. The British government has also announced its bail-out plan of £500 billion to save its banks and other financial institutions as did the USA beforehand by announcing its similar package of US$700 billion bailout plan for its falling financial market controlled by the Wall Street. In the face of this unprecedented crisis in the global financial market after the Second World War, the major economies of the world represented by what is known as the Group of Seven, or G-7, has expressed its solidarity to face the crisis together and that in this situation no country will try to gain any undue advantage at the expense of the other. Such move on the part of the major economies to restore public confidence in the global financial institutions is also unprecedented, given the fact that in the pre-Second Great War reality, the big economies lacked such kind of unity and camaraderie. But then the world economy was also not so deeply interconnected and interdependent as it is now.
Nevertheless, the Great Depression triggered by the US stock market crash on October 29 of 1929, also known as the Black Tuesday, did engulf the major economies of the world of that time. So, one cannot hope to escape the impact of the turbulence created in the US economy, which is also the biggest economy on earth, at a time when the world economy is more interconnected and interdependent than it was about eight decades back. So, it is not surprising that Germany, France and other 13 European nations have taken a plan to bail out their banking systems in line with the one the British prime minister Gordon Brown has taken to protect his country's banking system.
The unique demonstration of unity visible among the major global economies appears on the face of it to save their banks or, in other words, their financial systems. And it is also true that any collapse of their financial system also means the collapse of the dominant discourse of the present-day world economy, which is nothing but unfettered market capitalism. It is, therefore, natural that the sham façade of success that such economy had been demonstrating thus far has overreached itself. The culture of consumerism is but the modern version of the Charvak philosophy of ancient India (which would inspire its followers to live an affluent life even if that meant falling into debt). Modern consumerism is based on the unmitigated credit culture, where one can buy anything even if one does not possess the money necessary to buy those creature comforts. The banks and a host of others credit giving institutions are there to provide the loan to the willing consumer to buy whatever he or she wants to have-car, house, furniture, electronic gadgets, apparels, luxury goods, you name it. That is because the market is replete with goods, both tangible and intangible. And the intangible goods churning out of the financial industry in the form of various financial products are helping the consumers to possess the tangible goods like lands, houses and other products of the manufacturing industries.
In a word, it was the biggest economic bubble ever created on earth supported by the latest version of capitalism, the neo-liberal capitalism, has finally gone bust. Put differently, it is an implosion of the bubble, the dress rehearsal of which was staged in East and Southeast Asia in 1997 triggered by the collapse of the Thailand's currency baht. Also known as the IMF crisis, as the root cause of the crisis could be traced back to huge debt burden its economy had been smarting from, Thailand faced the first shock as it floated its baht and pegged it to the US dollar. The shockwave spread like tsunami to crash against the financial markets of other Asian economies like South Korea, Hong Kong, Indonesia, the Philippines, Malaysia, Laos and to a lesser extent the economies of China, India, Taiwan, Singapore, Brunei and Vietnam. But the new yet greater tsunami has rocked the foundations of the US economy and with it all other very big economies, which had so far been watching, controlling and lecturing the rest of the world from a vantage point. The big crisis is now finally at their own doorstep.
However, it is not a time to crow over the fall of the neo-liberal capitalism so evangelically advocated by the Western economies till yesterday. In fact, the storm that is at the moment sweeping across the western economies will ultimately engulf the entire world, because almost all the economies of the world are tagged to them and had been following their model to achieve quick success and prosperity. Geographical distance is no barrier for the storm to reach the shores of the economies lying afar.
There is no reason for us in Bangladesh also to remain complacent. On the other hand, the government has to be very proactive and watchful about the developments in the Western world. True, the size of our economy is very small. Moreover, our financial market is so underdeveloped and small that we are yet to qualify for the level of transactions with the big banks and other financial institutions that might draw us into the meltdown the advanced economies are going through. So, the other day, the financial experts mainly from the central bank could so light-heartedly assure us that the storm in the West will not affect us. Since the commercial banks have no investment in the overseas financial institutions, neither has the central bank, except in government bonds of other countries, so our financial system is more or less safe from the turmoil of the Western world, they argued.
But the lack of substance of an economy, or more particularly, of its financial system, is no reason to be cheerful. Consider the prospects of our readymade garments (RMG) sector. The entire range of products of the RMG sector is exported to the EU and North American markets. Now what is the situation of the North American, especially the US market? It could be learnt that some 700 retail chain stores in the USA that dealt in major US apparel brand products, which outsourced their orders to the Bangladeshi garments factories have either closed their business or are planning to do so soon in the wake of the financial meltdown in US economy. Among those are the major companies like Gap, Talbots, Eddie Baur, Ann Taylor, Lane Bryant, Cache, Pacific Sun wear, Sharper Image, etc., to name but a few. Of the major buyers of Bangladesh-origin garments JC Penney is one. It has been learnt that it is also going to cut its foreign orders by half. Identical stories are coming from Ann Taylor, which is set to close its 117 stores across USA and the Eddie Baur, a large buyer of our RMG products, has already closed some of its chain stores. Gap, Talbots, Pacific Sun Wear and Cache, all big operators in chain stores business and who buy Bangladeshi garment products, are in the process of winding up many of their operations all across America.
The fall in consumer demand in the US market due to severe credit crunch is behind such closures of the retail chain operation there. But this is just the beginning of the bigger fall in the market demand there. What will happen to our RMG sector once the orders from the US market start to dwindle sharply? One may also witness similar developments in the European markets sooner than later.
Though some financial experts and economists think that the turmoil in the USA and Europe may not touch us in the short-term, still we need to be very cautious and keep our own house in order before it is, too, late. And the argument that our economy is too small to be affected by the big storm lashing the most advanced economies has a very serious weak point. For big economies have also the necessary strength to stand their ground longer than weaker ones. We, therefore, stand to lose both ways, if not on our guard.