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Transcript
Current Debt Crisis: Causes in
Historical Perspective
Mah-Hui LIM
South Centre
Eurodad – Glopolis International
Conference 2013
Debt, Finance and Economic Crisis
Prague
June 3 – 5, 2013
1
Three Levels of Causes of Crisis
 Flaws in Theory & Method of Macro
Economics &Finance-Market Efficiency
Theory & Fallacy of Composition
 Deregulation, Practices and
Malpractices of Financial Industry
 Macro-economic structural causes –
 Current account imbalance
 Financial vs Real Economy imbalance
 Income/Wealth Imbalance
2
Economic Crisis and a Crisis of
Economics
 P Krugman in 2009 Lionel Robins
Memorial Lecture at LSE:
 Much of mainstream macroeconomic
theory in the past three decades have
been “useless at best and harmful at
worst”
3
Financial Industry- Minsky
 Financial fragility is determined by
margin of safety (banks’ ability to
meet liquidity demands) & ability of
borrowers to repay from cashflow
 As banks have moved from hedge
financing to speculative & Ponzi
financing – financial fragility &
instability increases
4
Frequency of Banking Crises –
1880s to 2009
5
Focus on 2 Structural Causes –
Financialization & Inequality
 Key to understanding long term
structural causes of Global Financial
Crisis is to examine the link between:
financialization, debt and inequality
Not an ordinary banking crisis
6
Inequality Preceded Great
Depression and GFC
7
Why Inequality related to
recent financial crisis
 2 measures of inequality:
 Gini index
 Wage share of GDP (vs capital share)
8
Declining Wage Share of GDP –
1970 to 2010
 Source: UNCTAD, TDR 2012 & CEIC
9
Globalization and Increasing
Inequality
 Growth has been accompanied by
growing inequality in most countries
 In 4 largest economies – US, Europe,
China, Japan - common phenomenon
of unrelenting pressure on labor
income despite rising productivity
10
Productivity Growth vs Wage
Growth
11
U.S. - Wages lagged behind
productivity
12
Wages – play two functions
 A cost component of production
 Also a component of aggregate
demand
 With neo-liberalism – labor flexibility
> labor loss of bargaining power, rise
of temporary – casual labor, wage
suppression > wage growth lagged
behind productivity and wage share
of GDP declining
13
Inequality & Underconsumption
 Decline of wage should suppress
household consumption, i.e., underconsumption (as in China)
 Under-consumption or drop in
aggregate demand can be counter
acted in 2 ways
 Increase in debt (as in the US)
 Increase in exports (as in China)
14
Enter Monsieur & Madam
Finance - Financialization
 US became a debt driven economy
 1960-2007
 US GDP rose 27x
 Total debt rose 64x to 350% of GDP
 Household debt rose 64x to reach 100%
of GDP in 2007, while real wages
stagnated or declined
 Debt bubble built up
15
U.S. - Growth of GDP (27x) and
Debt (64x) btw 1960 & 2007
16
Composition of USD total debt
GDP rose - 27x
Total Debt - 64x
Financial -490x
Household- 64x
Non Financial
Corp – 53x
Govt- 24x
17
Excess Savings of Rich Invested
in Risky Financial Products
 Most of income gains accrued to top
1% of households
 Propensity to consume of rich much
lower than the poor
 Excess savings chasing for high yields
and invested in risky assets (financial
innovation) > asset bubble
 BOTH BUBBLES IMPLODED 2007
18
Conclusion & Policy Implications
 Wage Repression + Financialization a
toxic mix results in financial crisis
 Policy Implications:
 Need finance to serve real economy
but NOT financialization which drives
speculation and bubbles
 Finance needs to be better regulated
because finance is an industry with
high negative externalities
19
Financial Regulation & Functional
Income redistribution
 Studies on contribution of finance to
growth is mixed – probably it’s a
inverted U shape – positive effect up
to a point and then becomes negative
 Need to address problem of inequality
 Can be ex-ante or ex-post
 Ex-ante – wages tied to productivity
growth over long run – cannot be less
or more without causing instability
20
Income redistribution
 Ex-post – government must have
fiscal policies to redistribute income
and enhance social safety nets
 Civil societies must push for all the
above
21
References
 Michael Lim Mah-Hui and Khor Hoe
Ee, “Inequality and Financial Crisis:
From Marx to Morgan Stanley” in
Development and Change, Volume 42
(1) January 2011.
 Michael Lim Mah-Hui & Lim Chin,
Nowhere to Hide: Great Financial
Crisis & Challenges for Asia, 2010.
Inst of SEAsian Studies, Singapore
22
IMF Working Paper 10/268
23
THANK YOU
24