Network of Asian Social Democrats

by: Fawaz Abd Aziz

Roots and Spread of Financial Crisis

After the sub-prime mortgage crisis in the US first burst into the headlines of mainstream newspapers in June 2007[1], there have been two general categories of the many discussions that have taken place regarding the roots of the global financial – and now, economic – crisis, both of which views are important but do not usually get discussed together. It is crucial to see the importance of their interaction – the dynamics of one on the other – rather than either in isolation.

One view can be labeled the ‘temporary excess’ point of view which, to put it plainly, argues that greed leading to excessive risk-taking, lax regulations, excessive overzealous brokerage and rating agencies caused the crisis we have on our hands today. To resolve the crisis, therefore, efforts should be made to fix, ‘tweak’, and improve upon the technical aberrations of what is – to those who subscribe to this view – an otherwise perfect financial system. This view is not completely incorrect, though it is incomplete.

The other view, the ‘aggregate demand generation’ point of view believes there is as a root cause – a  systemic, structural flaw in the whole system of capitalist-driven finance that led to the global financial crisis. We believe that flaw lies in the problem of income inequality. As we shall see below, tackling the root, structural cause is of utmost importance if we are to prevent – or at least mitigate – future financial crises of the nature we are going through today. As Thomas I. Palley, the then-assistant director of public policy of AFL-CIO, put it when talking about yet another financial crisis that occurred in the US eight years ago:

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[1] The crisis in the financial sector was foreseen by a number of analysts – such as Jomo KS, others in the United Nations and International Monetary Fund, Nobel laureate Joseph Stiglitz and analysts such as Nouriel Roubini – and forgotten, whereas the structural crisis was warned about by many others – such labour rights advocates such as the International Labour Organisation and the AFL-CIO – and ignored.

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By: Walden Bello and Mara Baviera (Monthly Review, 8 July 2009)

In 2006–08, food shortages became a global reality, with the prices of commodities spiraling beyond the reach of vast numbers of people. International agencies were caught flatfooted, with the World Food Program warning that its rapidly diminishing food stocks might not be able to deal with the emergency.

Owing to surging prices of rice, wheat, and vegetable oils, the food import bills of the Least Developed Countries (LDCs) climbed by 37 percent from 2007 to 2008, from $17.9 million to $24.6 million, after having risen by 30 percent in 2006. By the end of 2008, the United Nations reported, “the annual food import basket in LDCs cost more than three times that of 2000, not because of the increased volume of food imports, but as the result of rising food prices.”1 These tumultuous developments added 75 million people to the ranks of the hungry and drove an estimated 125 million people in developing countries into extreme poverty.2

Alarmed by massive global demand, countries like China and Argentina resorted to imposing taxes or quotas on their rice and wheat exports to avert local shortages. Rice exports were simply banned in Cambodia, Egypt, India, Indonesia, and Viet Nam. South-South solidarity, fragile in the best of times, crumbled, becoming part of the collateral damage of the crisis.

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by Ivan Hadar (published in Jakarta Globe, July 29, 2009)

In 2007, the SBY-JK administration proclaimed its “1,000 Towers” plan, the provision of one million high-rise apartments, mostly in Jakarta and other large cities in Java, to address a growing housing crisis. According to official estimates, the demand for housing in Indonesia has reached at least 5.5 million units and will increase annually by approximately one million units. The towers were originally scheduled for completion this year, but by the end of 2008 only 86 towers had been built.

The official estimates of housing needs do not fully reflect the realities of the housing situation. Missing are the millions of families who are registered as owning a residence that does not meet eligibility standards. Many of these housing situations are a result of natural disasters.

In general, the housing crisis is marked by slum housing, including sheds and illegal shelters in river floodplains and under bridges, that has expanded and reached into most corners of large cities. The housing crisis is also marked by social-space inequalities resulting in the number of houses occupied exceeding the capacity, a very high housing density in certain regions, the unavailability of space for privacy, the loss of public space and recreation and housing locations that are at some distance from the workplace.

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by: Ivan Hadar (published in Jakarta Post, July 25, 2009)

Globally, every seven seconds a child under ten years old dies from hunger. Meanwhile, according to research released by the UN in 2008, some 826 million people around the world are permanently suffering severe malnutrition.

In Indonesia, news of malnutrition and deaths caused by starvation in several areas throughout the country has not only questioned our humanity, but has also shocked many of us because the cases have often occurred in rice or other staple food producing areas, or in big cities.

The agricultural sector, as one labor-intensive sector, has become victim to tariff policies such as the cutting of subsidies and imports of agricultural products. Such policies have impacted farmers and aggravated the development in that particular sector.

The growth sources focused solely on the consumptive and capital-intensive sectors. It is no surprise that there were times that every one percent growth was used to create between 300,000 and 400,000 job opportunities, and now can only create around 178,000 jobs. We are seeing more and more people falling into poverty.

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(from FES Occasional Paper No. 42)

Four principles guide the social democratic response:

• Solutions must be consistent with basic values of social justice and social solidarity as well as basic notions of fairness
• The bonds of social solidarity cross national boundaries; we cannot take actions to help ourselves at the expense of those in the developing world
• Solutions must reflect an understanding of the necessary balance between government and markets
• Respect for the basic principles of democratic due process, including full transparency.

There is by now a consensus that the current global financial crisis may well be the worst since the Great Depression. As solutions are proposed, there is strong pressure from Wall Street to make sure that their way of doing business is protected.  They don’t want to see finance suffer from too much regulation.

In times of crisis, we all have to pull together; sacrifices are asked of us all. But in a democracy, that does not mean silent ascension to whatever is proposed. The voices of Social Democrats and those who reject the free market mantra of the US, should be listened to as the debate about how to proceed moves forward. We must be allowed to help formulate the government responses to the crisis. There are stark differences of opinion as to the best way to proceed.

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